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Edited Transcript of WAC earnings conference call or presentation 14-Mar-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Walter Investment Management Corp Earnings Call- Pre-recorded

TAMPA Mar 14, 2017 (Thomson StreetEvents) -- Edited Transcript of Walter Investment Management Corp earnings conference call or presentation Tuesday, March 14, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary Tillett

Walter Investment Management Corp. - EVP & CFO

* Anthony Renzi

Walter Investment Management Corp. - CEO & President

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Walter Investment Management Corp. full-year and fourth-quarter 2016 financial results presentation playback. (Operator Instructions). I would now like to introduce your host for today's conference, Gary Tillett. You may begin.

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Gary Tillett, Walter Investment Management Corp. - EVP & CFO [2]

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Thank you, operator. Good morning and thank you for joining us for Walter Investment Management Corp.'s earnings conference call for the quarter and year ended December 31, 2016. This call was pre-recorded and will be archived on our website for at least 30 days.

This morning we will discuss earnings for the quarter and year ended December 31, 2016 as well as our current business outlook. Let me remind you that comments on the call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on the Company's current expectations and involve risks and uncertainties that could cause actual results to differ materially from those in the statements.

Please refer to our SEC filings for a full discussion of the risk factors that may affect any forward-looking statements. Except for any obligation to disclose material information under federal securities laws, we undertake no obligation to release publicly any revisions to forward-looking statements to reflect events or circumstances after this conference call.

We will discuss non-GAAP financial measures during the call. These non-GAAP measures are reconciled to GAAP in the tables attached to the earnings press release we issued earlier today and the presentation accompanying this call. We believe that these measures provide investors useful information about our business trends. However, our non-GAAP measures do not replace and are not superior to GAAP measures.

Joining me for today's call is Walter Investment's CEO, Anthony Renzi. I will now turn the call over to Tony.

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Anthony Renzi, Walter Investment Management Corp. - CEO & President [3]

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Thank you, Gary, and good morning, everyone. From day one after I joined the Company last September my focus has been on getting back to solid operating fundamentals by assessing the people, processes, technology and operating locations that are in place and putting together a plan that will put our Company on firmer footing and prepared for the future.

I want to be clear that performance we saw during the fourth quarter and full year of 2016 is not acceptable to myself, our leadership team, our associates and the Walter Board of Directors. Every day when we come to work my team and I focus on the things that need to get done to make improvements to our business. Let's quickly touch on the financial results for the quarter and the year, which Gary will speak to in more detail shortly.

In the fourth quarter of 2016 we reported a GAAP net loss of $22.2 million or $0.61 per share. While these results include significant non-cash income items related to changes to inputs and assumptions related to valuation of financial assets, they were more than offset by costs associated with process improvement initiatives and our default servicing operations and a significant increase to our valuation allowance for the net deferred tax assets.

Our adjusted fourth-quarter loss was $40.1 million or $1.10 per share and our adjusted EBITDA was $43.3 million. For full-year 2016 we reported a GAAP loss of $529.2 million or $14.71 per share. The full-year results include after-tax non-cash charges of $202 million for goodwill and intangible asset impairments, non-cash reductions of $141 million for changes in inputs and assumptions related to the valuation of financial assets, and a $38.5 million valuation allowance recorded on deferred tax assets.

Our adjusted full-year loss was $81.4 million after-tax or $2.26 a share. And our adjusted EBITDA was $322.9 million. These results also include disappointing operating performance in our Ditech servicing business and continued losses in our Reverse segment. Gary will expand on the results later in the call.

After assessing 2016 performance across the Walter organization, which included a material weakness in the default servicing division of Ditech regarding controls in process, it is clear that our fourth-quarter and full-year losses reflect a variety of challenges that included inadequate planning, control focus and execution. Coupled with the macroeconomic conditions of a changing business environment, all of these issues have been detrimental to our overall performance.

Our top priority now and through 2017 is to ensure that we have the right management in the right places and that we as a team implement capabilities to enhance our lending and servicing channels, improve our control environment through consolidation and integration, implement emerging technologies and install key performance standards that hold me and my team accountable for the results every day we come to work.

First, we are continuing to build an engaged and motivated workforce by adding new leaders that are focused on improving results. We recently added Kim Gibson as Senior Vice President of [Default] Servicing Operations. Kim has over 20 years of operational experience across a variety of servicing businesses including default servicing. She has experience with large and complex financial operations hailing from GE, Citigroup and ABN AMRO, and a solid background of reengineering, lean process improvements and Six Sigma certification.

Kim will report to me directly and will lead the default servicing organization to help find creative solutions to help our customers remain in their homes while working to streamline and simplify our operations. We will keenly focus on default servicing operational processes, technologies and procedures and across the broader [Walter] organization we continue to evaluate how to consolidate and integrate our business and operations to make things simple, nimble and focused. This is a key element in further developing our culture and creating a high-performing team across the organization.

Second, Walter is a highly leveraged Company in relation to our ability to service our debt and, on a relative basis, in comparison to our peers. We depend upon ongoing access to the loan markets and the capital markets on commercially satisfactory terms to finance our business on a daily basis and we would also need access to those markets to refinance our corporate debt.

We have engaged Weil, Gotschal & Manges LLP and Houlihan Lokey as our debt restructuring advisors and we have been reviewing a number of potential actions we may take to reduce our leverage. Our bulk MSR sale transactions and ongoing flow agreement with New Residential Mortgage LLC are examples of how we are managing operational risk and working to reduce our exposure to interest-rate risk. We continue to subservice the MSRs we have sold to NRM which aligns with our fee-for-service model.

And third, we are taking steps to improve performance through business decisions that will help position us for the future. In an effort to help management focus on the strategic direction of our business, we are in the process of establishing a core and legacy framework. Our core business will represent the Ditech brand, our lending channels and our primary mortgage servicing platform. We plan to invest and grow our core business by creating broader brand awareness, digital capabilities and servicing partnerships.

Our legacy assets will represent nonstrategic operations and assets, locations and portfolios. For example, we recently exited our Reverse Mortgage origination business so we could focus on improving our Reverse Mortgage Servicing operation.

The core and legacy initiatives are a process that we will continue to develop throughout 2017.

Across the Walter organization difficult decisions are being made to change the business. In the Ditech servicing platform our Net Promoter Scores and other external measures of the customer experience recently placed the Ditech servicing platform at the bottom of our peer group. This performance is simply unacceptable.

Customer satisfaction and advocacy play a major role in our ability to retain customers and replenish our portfolio. Improvements in our customer scores are critical to future growth and profitability for both our own portfolio and our fee-based, subservicing businesses.

In our lending area we plan to add more sophisticated outbound and new customer acquisition capabilities. We are also putting in place new processes to reduce consumer lending cycle times. These changes are being made in an effort to help accelerate our mortgage pipeline and provide customers with an improved closing experience.

Lastly, I would like to reinforce the commitment of our Board of Directors in making the necessary changes. In January I was pleased to join the Walter Board of Directors along with Neal Goldman, managing member of Sage Capital Investments, and Michael Bhaskaran, Chief Supply Chain Officer of Staples.

As stated by our Board Chairman, George Awad, these additions will provide expertise and fresh perspectives as we reengineer Walter. At every level of the organization we are unified in our commitment to improving our results. With that I will ask Gary to cover our financial and operating results for the business. Gary.

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Gary Tillett, Walter Investment Management Corp. - EVP & CFO [4]

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Thanks, Tony. As Tony mentioned, we are extremely disappointed with our overall financial results for the quarter and the year. While originations continue to deliver earnings with margins at expected levels, the other operating segments continue to have a negative effect on consolidated results. The servicing segment continues to disappoint as we incurred elevated expense levels that offset the impacts of our cost reduction initiatives and the Reverse segment continues to incur losses as we manage the defaults in the pre-IDL book.

Despite positive net fair value marks of $97 million after tax on a consolidated basis, we incurred a GAAP loss of $22.2 million during the quarter. This loss included a lower-than-expected tax benefit of $38.5 million as a result of the valuation allowance, cost, associated with our transformation efforts in the form of consulting fees of $14.6 million after-tax, a goodwill write-off of $8.2 million after-tax and significant charges in the default servicing areas of both the reservicing and Reverse segments.

We increased our valuation allowance against our net deferred tax asset by $38.5 million during the quarter reflecting management's best estimate at the present time under GAAP guidelines for probability of recovery. The goodwill write-off resulted from our re-forecasting of the ARM business results, which included removing the assumption for new business given changes and market availability of these types of assets and our inability to acquire additional charge-off portfolios.

After considering this impairment charge the ARM reporting unit no longer has goodwill. I will expand on other charges mentioned previously as I walk through the segments. Adjusted EBITDA for the quarter was $43.3 million and adjusted loss after tax was $40.1 million or $1.10 per share.

The servicing segment continues to transition to more of a fee for service business reducing the interest rate risk to the Company as we sold MSRs. During the quarter WCO completed the sale of substantially all of WCOs MSRs to NRM and Ditech completed the related sale to NRM of approximately 10 billion UPB of base mortgage servicing rights related to WCO excess servicing spread assets. Ditech expects to continue to subservice the MSRs sold by each of WCO and Ditech NRM.

Upon completion of the various 2016 NRM transactions subservicing now comprises of 49% of our servicing portfolio. As of December 31, 2016 the servicing segment serviced approximately 1.9 million accounts with a UPB of $225.8 billion. The servicing segment delivered $23.1 million of adjusted EBITDA and an adjusted EBITDA margin of 4 basis points during the fourth quarter of 2016 and incurred an adjusted loss of $47.3 million.

Revenues have declined as a percentage of average UPB service as compared to the prior year. Additionally, higher costs were still being incurred as we continue to improve our technology and streamline processes and incur additional accruals for loss contingencies and related legal expenses. The results were also negatively impacted by control weaknesses in default servicing that were identified during the fourth quarter.

A substantial portion of the additions to the provision for uncollectible advances resulted from these control weaknesses. We have plans to remediate these control deficiencies during 2017, including the addition of new leadership to provide improved oversight of operating functions impacted by this control weakness. We also continue to incur excessive legal costs related to litigation matters.

As mentioned in my comments in the third quarter, I am often asked to provide more insight into the profitability of our servicing portfolio given the transition of our book to a more heavily weighted subservicing mix. As previously indicated, we have various subservicing portfolios of both prime and credit sensitive product and we believe the subservicing contracts we have recently entered into for prime product are consistent with market rates.

As we execute to simplify the business and evolve to a higher subservicing portfolio mix we will seek to provide additional information on subservicing metrics in the future.

Let's not turn to the origination segment. Originations had pull through adjusted lock volumes of $4.9 billion in UPB in the fourth quarter, a decrease of 11% as compared to the prior year quarter. Consumer lending pull through adjusted lock volumes decreased to $1.8 billion in the current quarter as compared to $1.9 billion in the prior year quarter.

Additionally, there was a channel mix shift to higher margin consumer channel which partially drove the favorable 99 basis points direct margin in the current quarter, an increase of 36 basis points as compared to the prior year quarter.

The combined direct margin of 99 basis points for the quarter was comprised of 42 basis points of direct margin in a correspondent channel, an increase of 9 basis points compared to the prior year quarter, and 171 basis points of direct margin in the consumer channel, an increase of 74 basis points as compared to the prior year quarter primarily due to increased gain on sales.

The hotel channel was reentered in Q3 of 2016 and generated $146.2 million of pull through adjusted lock volumes for the year. This channel will enable us to expand our customer base (inaudible) as well as provide reasonable return margins. The recapture rate in the current quarter was 19%, which remains lower than our expectations. Even with a changing mix of the book to correspondent and wholesale production we are focused on continuing to improve our recapture performance.

The Reverse Mortgage segment recorded $39.6 million of GAAP pretax losses, $15.2 million of adjusted loss and $13.4 million of negative EBITDA during the fourth quarter of 2016. The segment continues to be impacted by the drag of the ongoing cost of managing the pre-IDL product caused by high default rates.

While we improved our expense base in the fourth quarter by executing on efficiency initiatives, results were negatively impacted by her revisions to the curtailment reserve. The increases to the curtailment liability and corresponding expense were primarily due to revisions to assumptions for this estimate as the number of new misses were in line with our expectations and not significant.

After careful consideration of the probabilities of turning the reverse originations business profitable in the foreseeable future, management decided to exit this business. The continued investment in reverse originations was not justified given our recent experience, the size of the market, our limited market share and the extended time required for cash profits to emerge with the tail fundings.

All reverse origination channels were discontinued by the end of January 2017. We will continue to fulfill reverse loans in our originations pipeline and will also fund undrawn amounts available to borrowers of reverse loans we have made. We are still evaluating options for our remaining Reverse business including the possibility of selling some or all of its assets or pursuing alternative solutions to improve the business.

As Tony indicated, our senior leadership team is very focused on improving the operating results for the Company. While we expect to continue incurring costs associated with the transformation of the business during 2017, we have a clear goal of returning the Company to profitability on an adjusted earnings basis as soon as possible, which will further position the core business for growth in the future.

Finally, I would like to remind you of a point that we made in our last quarter's earnings discussion. Based upon recent guidance by the SEC with respect to non-GAAP metrics, Walter revised its adjusted earnings loss calculations for all periods presented to remove the step-up depreciation and amortization and the step-up amortization of subservicing rights adjustments. I will now turn the call back to Tony for a quick wrap-up. Tony.

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Anthony Renzi, Walter Investment Management Corp. - CEO & President [5]

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Thank you, Gary. As I discussed at the beginning of the call, although we are unhappy with the stated performance of the Company, my team and I come to work every day to focus on the things that need to get done to make improvements to our business and better position Walter for the future. Thank you.

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Operator [6]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.