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Walter Investment Management Corp (WAC)
September 11, 2012 10:30 am ET
Whitney K. Finch - Vice President of Investor Relations
Mark J. O'Brien - Chairman and Chief Executive Officer
Denmar John Dixon - Vice Chairman, Executive Vice President and Director
Keith Anderson - President of Green Tree
Patricia L. Cook - Executive Vice President of Business Development
Kevin Barker - Compass Point Research & Trading, LLC, Research Division
Whitney K. Finch
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For those of you joining us on the webcast, your agendas and presentations are available online. For those of you in the room, let me orient you quickly to the materials that you've received. You have today's agenda, the bios of today's speakers and a printed deck of presentation. On the agenda, please note that we plan to take a brief break following Mark Atencio's presentation. During that time, those of you joining us on the webcast will hear some music. When we reconvene for presentations, we will, of course, rejoin you at that time.
I'd like to cover some of today's logistics for you. We plan to start lunch at 11:30 and we'll be eating in here in the presentation room in order to handle any additional Q&A that we may have. I'd ask that you hold your questions for the Q&A session following the management presentation. Please make sure you have a microphone in hand prior to asking your question to ensure that those participants joining us on the webcast have an opportunity to hear your question. At this time please mute all iPhones, BlackBerries and iPads so as not to disturb anyone around you or distract any of our presenters this morning.
Before we begin, I will remind you that some of today's presentations may contain forward-looking statements. Please refer to the slide titled Legal Disclaimers and our SEC report for information about forward-looking statements and factors that could cause actual results to differ materially from our forward-looking statements.
Additionally, some of our presentation contain non-GAAP financial measures. Information about these non-GAAP financial measures, including reconciliations to GAAP can be found in your materials, in our SEC report. So with those housekeeping items out of the way, ladies and gentlemen, it's my privilege to introduce to you to our CEO and Chairman, Mark O'Brien.
Mark J. O'Brien
Thank you, Whitney, and good morning, everybody. I think you'll enjoy today's presentation. We enjoyed dinner last night and certainly thank you for coming. Many of you in the course of the last couple of years have requested that we have one of these sessions and so we're having it. I think when you hear the various presentations today, you will understand the enthusiasm and the passion that the people, the executives in the company that do all the daily work, the passion they have for the business and it'll be clear to you the chiefly the reason that we are successful. We're really very pleased with the transformation, which has occurred in our company. We started a little over 3 years ago as a capital-intensive REIT. We have transformed ourselves into a, basically, a fee-for-service capital-efficient company with a very blue-chip customer base and we've added to that portfolio, with our recent announcement of Mark Helm's company, Reverse Mortgage, and I think you will certainly enjoy that presentation.
When I think back to late 2010 and early 2011, when we were still a REIT, it was pretty clear to us that there was a secular and cyclical change going on in the industry. The cyclical piece of that change was going to be of a shorter life than the secular change. And we were grappling with how we could participate in that and it was clear to us that those changes were going to dramatically change the landscape, particularly the credit-sensitive borrowers. It was clear to us that the cyclical change, the value of the damage collateral, the collateral going down in the housing sector was making a material difference. And people like us and Green Tree who had experience dealing with these matters were going to feel much better than those that did not and we would add a lot of value to the portfolio. What we have discovered as we've got into this in a very deep fashion is that it is a very big pig and a very large snake. So it is going to take a while for all of this to happen. I don't think any of us knows how long, but I think we're looking at, at least probably 3 years for all of this to occur. The secular piece of this, I think, has been made clear in that pretty much universal acknowledgment in the industry that the traditional players that were geared up to collect and remit payments didn't have a clue nor the desire to deal with collateral or the mortgagors which is what we do and we do it very well. When you add to that the regulatory compliance issues that have made the business even more complex, you pretty quickly get a picture of why so many of the traditional, larger servicers want to exit the business.
One of the natural results of those activities is that those of us who want to remain in the business and grow are the beneficiaries of those who want to escape and get out. So the growth in our portfolio, has pretty clearly produced some very attractive financial results. Our cash flows have been stable and strong. Over the course of the last 18 months, we've reduced our debt by almost $90 million over $3 a share. Our EBITDA has gone from 3.9% to about 3.2%. So we continue to do well and our EBITDA continues to grow. So that when we look at the ratios going out of that, they continue to improve. The wonderful slide here that I think we all enjoy but I have to remind myself that this is a point in time, but it's a very happy point in time for us and those of you who have been participating with us for some time. We don't see any reason to think that that's going to change dramatically. In fact, we see enough opportunity, I think, in front of us to continue to do very well.
Today you're going to hear from Keith and Brian and Tom on the servicing side of the business, the regulatory side of the business. You'll also hear from Mark Atencio, he sees our clients and our client management business. And I think you'll find that fairly interesting. All of you, I'm sure have had a chance to talk to Denmar. If you don't maybe you haven't had a chance to talk back to Denmar, but I'm sure Denmar has spoken with you. And if you've done that, you'll know that we've been pretty close to some capital partners as we try and sort out how we're going to continue to participate in the MSR sales that I think are continuing to gen up.
You'll also hear from Patty Cook who leads our business development effort. She has maintained a pipeline that's solidly in the $300 billion range, about 1/3 of which we think will be subservicing, another 1/3 MSRs, and another 1/3 some combination of those 2. As you listen to her, she will obviously have to protect those things that we think give us clear advantages. But it's a very, very compelling story. You'll also, I think, get the sense for a unique skill that she brings to that task and that is the relationships that she, and therefore, we have been able to build with our clients and customers over the years. This is, I think -- we are viewed as a strategic partner with many of our biggest clients. That is not an accident. There's tremendous amount of work and diligence that goes into that. As you can imagine, last year when Green Tree transferred to something north of 400,000 accounts, it wasn't just that it was done, it was done well. And that wasn't lost on our clients and counterparties. That's a massive undertaking, particularly if you own the credit and all 400,000 of those people now have to make their payments to a different place and understand the different protocols that, that entails. So that is an -- we have an opportunity that others don't have and that is to build on our past successes. Not only did they/we do those transfers seamlessly. I think it was a clear demonstration that our ability to take large transfers, large numbers of clients over a very short period of time. And if you're the counterparty and you're thinking about dramatically reducing your servicing business, it's not lost on you that you want a counterparty, us, or somebody very much like us that can get this stuff done and get it done well quickly and easily.
You will also hear from Marc Helm, who is the President of Reverse, of our reverse business that we just acquired, on how he sees that business. It's -- clearly, the reverse business, is different than the forward business. And as you listen to him and hear him describe the business, you will understand, I think, the opportunity that we see going forward there. I will also spend some time today on Landmark and our ARM business, our deficiency business. I think Tom, are you going to cover that?
Mark J. O'Brien
Tom will cover that. That's an interesting business, it has been quite profitable for us. When you think about the business model that we've put out consistently now over -- well over 1 year, 1.5 years, the spoke and the wheel idea that the servicing drives it and we have all these ancillary businesses. The deficiency business is a natural offshoot to that. Many of our clients, I think, were reluctant to engage in that. It's a difficult business when you come up short after you've sold off the collateral in foreclosure. But there's still a debt remaining. And the creditor's entitled to some recovery on that. So we've spent -- invested some time and some money over the last 1.5 years building out an agency model. We believe that model will add to the profitability of the company.
So with that, what I summarize -- what I think is the opportunity today and what we'd like for you all to take away is that we are in a growing business that has tremendous upside in the near term. I suspect that if the pundits are right, we may be on the tail-end of the cyclical change that's going on but we are by no means through the secular change that's driving a lot of this. I think we've got a best-in-class platform and I know we have a best-in-class group of executives. So as we go through this presentation, the principal has told us that we will do a Q&A at the end. If you have a question that you just can't stand not to ask of any of the presenters, go ahead and do it. I'd ask you to hold it right at a minimum or we will all be at the principal's office after school and that won't be very much fun. So with that I will turn it over to Denmar who I think will take you through -- I don't think, I know, he will take you through the strategic opportunities that are in front of us and then we will get down to the heavy list things about how we run the business. Thank you.
Denmar John Dixon
Thanks, Mark, and thanks again for everybody taking the time to be here. We're very happy that we could do it for you. As Mark mentioned, Whitney asked me to be crisp and that's difficult for me, but I'll do my best. I think I've got maybe the task to kick this off where we really think about -- let's talk a little bit about the strategy so that you get that in a simplified way, if you will, and then I'll walk through kind of where I see things today. One of the questions as you would expect, we get everywhere we go is, "Things are interesting now, where are you, 3, 5, 7 years out?" And I think we're trying to do a better job of drawing that picture for you, if you will, and giving you our view of where we are today and where we'll be on a go-forward basis.
So I think just starting with the strategy. I think the best strategies that I've ever seen over time in my career are those that are simple and you can execute on. And ours, I think makes hits on both of those tenets. It's very simple in that, what we have is an incredibly powerful core to the business, which is the Specialty Servicing business. The Green Tree platform, their history, Walter's history, our experience in the business is really the core competency that we're driving the business from. We identified, as Mark mentioned, a secular change that was coming. I think it's come a little bit bigger and faster than even we saw. But that's a good miss on our part. And we put ourselves in front of it with a platform that directly speaks to that opportunity. So when you think about the tenets of how we grow this business over time, the first bullet is really what we live by in today's world because there's a lot going on. We need to maximize our opportunities that are currently presented in the market and the good news is there are many. But we do that, not only in a today vision for what we're after, but positioning the company for sustainable growth in the future. And I think that's the question we need to spend a little bit more time on with you to get everyone comfortable on where we end up over time.
Dynamic sector, you have to be able to adapt, you have to be fleet of foot, you have to have a great platform and a great management team. And I think we've got those basic tenets, and we're working very hard to capitalize on those opportunities that are in front of us. So the strategy is simple, really leverage the core. We can grow the core organically, our subservicing business, purchased MSR, originations will be a growing piece of replenishment of the base. You heard us talk about flow agreements that are coming, et cetera. So we are always focused on growing the core because that's the base leverage in the business.
Growing around the core on the ancillary type businesses where we've extended our deficiency business, we are extending that product, is really all about leveraging the core. So where we can we find an ancillary business to the core that we can drive better than market returns because we've got leverage in the 1 million accounts or the client base or some of the core competencies that come with the basic platform. Instead of reaching out to a business where we don't have leverage or can't earn an above market type return, let's stay around the core and leverage the opportunity in the return.
And lastly, in today's market, there are strategic opportunities. Those could be around the core, around the ancillary businesses but probably more opportunities that are a little bigger, a little more upside in the them, maybe a little more risk. But the strategic opportunities are presenting themselves today and will continue to present themselves over time. Do we switch?
So let me step back. The strategy is pretty basic on how we're attacking the market. We worked on this slide to try and do a clear job of where we think we are today and where we think the market goes over time. And Mark made a statement that I think is very, very important and addresses the question, when we are on the road just recently, we heard a couple of times, wow there's been a nice little run in the sector, have we missed it? The answer is, you didn't miss it, you probably in inning 2 or 3 so you're just getting in on the front end.
So think about the time frames, and I'll give you this disclaimer, these years are not meant to be specific or my prediction by year. I'm just trying to give you an idea of how we see the timeline unfolding. The first, obviously that get the ball rolling, is the period of market disruption, right? Severe economic impact downturn, portfolios rollover, poor performance, the servicing model proves to be broken, the regulators step in, capital becomes an issue. So all the catalysts you've heard us speak about before really cranked up late '07 into '08, '09, it's still ongoing. There's disruption in the market as we speak today and I think that tapers some as we're coming to the end of the period but we're still in the period where there's market disruption. The market is not peeled. There are still surprises. There's still downside risk to the market. So we see the first phase having been the catalyst and it's playing out in maybe the later innings but we're still in the market that has significant disruption from what I would say would be a steady state base.
Where we're really playing today at Walter is in what I like to call the aggregation phase. Mark mentioned the big pig in the long snake, I think that's true. We're early in that. It kind of kicked in late '09, early '10. It built this year. Last year was a big year. This year is going to be a bigger year, I think. You can see some of the public deals enter into the market. In this phase, it's all about us taking advantage of the massive servicing transfers that are going to happen and growing our portfolio substantially and in a stairstep fashion, not in a percent growth per year basis. I think the opportunities are much bigger than that given the type of transactions that are out in the market today, both subservicing and MSR. So in this aggregation phase, which again I think, extends for many years, several years on a go-forward basis, it's all about us building the base servicing business to a high level. It will put us in a position where we've got a very large book of business with a lot of free cash flow that will be kicked off over time, which sets us up for really where we do end up through, what I'd term, the transition phase. So think about right now it's all about growing the business on a stairstep basis. We are early into that. I think we're, again, inning 2, 3, 4 maybe. We've got the middle innings and I think the final innings are going to show some fireworks at the same time just given the overall size of the opportunity, which is in the trillions.
Moving forward, think about the transition phase. It's in the early, maybe inning 1 now. So we're starting to figure out what the market may look like. We're starting to think about how we transition into a sustainable model. I think the earliest evidence of that coming is the flow agreements. We've had some of the big depositories declare what's core and noncore to them. They've declared they want to outsource certain of this business. So these are the early signs that we're starting to be able to transition to a market that over time will be very sustainable and still a high growth market for the specialty servicers, if you will. So think about flow agreements. They kind of kicked in on a delinquency flow basis or are kicking in as we speak. They are also kicking in now on a new origination phase as you've heard some of those announced. We have a lot to go in the transition phase and to figure out as the whole market is redefined, where do the GSEs go? Private label, does it return? Originations, we think will be more specialized and we will play a role in those. So I think as we think about the business, we're growing through the aggregation at a rapid pace now, and at the same time, transitioning to a model that's extendable and sustainable into the future as the secular shifts kick in. The large depositories are going to outsource noncore business over time, private label securities, in my view, will come back over time, have to come back into the market. The investors that are buying those securities are not going to stand forward the old model, they're going to want a model where their assets is the owner of the credit or first of all some of the credit are protected and that means getting them or having the mechanism to get them, if not, starting with the specialty servicer transitioning to a specialty servicer. So we see all of those shifts really taking us into a phase where as the market normalizes, we see it normalizing to our favor where we'll have more share and sustainable growth.
So in the here now, I think it's worth just touching quickly on how we're capitalizing on the opportunity today. Patty is going to take you through in more detail, business development and the pipeline, et cetera. But the pipeline is a solid $300 billion actively today and that's business that we are prosecuting as we speak in different phases. We still believe the $1 trillion, $1.5 trillion assets are expected to move in the next several years. I think some of our competitors are out with larger numbers. It's possible that they're right. If I had to bet, maybe over under, I'm on the over. So I think we tend to be a little conservative, $1 trillion, $1.5 trillion, I think that number could be bigger. So the pipeline is huge. It's here. It's now. It's actually accelerating from what we saw in the first part of the year, and we expect it to continue for quite some time. I think that some of the headlines in the sector, in the transfer may fade over the next year or so. The actual work to get the assets transferred and in the right hands and for the big depositories to finish the work they want to do is multiple years. It's not the next year or so. You won't be able to move that kind of volume in that time. Make them out of the headlines but it's still going to be a great opportunity for us.