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| 8-K - FORM 8-K - HOME LOAN SERVICING SOLUTIONS, LTD. | d483297d8k.htm |
 Investor Presentation
February 2013
Exhibit 99.1 |
 2
FORWARD-LOOKING STATEMENT:
This presentation contains forward-looking statements that involve substantial
risks and uncertainties. All statements, other than statements of historical
facts, included in this presentation, including, without limitation,
statements regarding the assumptions we make about our business and economic model, our
dividend policy, including expected yields, business strategy and other plans and
objectives for our future operations, are forward looking statements. These
forward-looking statements are subject to inherent risks and
uncertainties in predicting future results and conditions that could cause the actual results to differ
materially from those projected in these forward-looking statements. We have
included important factors in the cautionary statements made in our Annual
Report on Form 10-K, particularly under the headings “Risk
Factors”
and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” that we believe could cause actual results or
events to differ materially from those expressed or implied by the forward
looking statements that we make in this presentation. In light of the significant uncertainties in
these forward-looking statements, you should not regard these statements as a
representation or warranty by us or any other person that we will achieve
our objectives and plans in any specified time frame, or at all. Unless
required by law, we undertake no obligation to publicly update or revise any forward-looking
statements to reflect new information or future events or otherwise.
NON-GAAP MEASURES:
In addition to financial measures prepared in accordance with generally accepted
accounting principles (“GAAP”), this presentation also contains
references to cash generated available for distribution, servicing revenue
and servicing expense, which are non-GAAP performance measures. We
believe these non-GAAP performance measures may provide additional
meaningful comparisons between current results and results in prior periods.
Non-GAAP performance measures should be viewed in addition to, and not as an
alternative for, the Company’s reported results under accounting principles
generally accepted in the United States. |
 Leadership Team
William C. Erbey
Chairman of the Board
John P. Van Vlack
President and Director
James E. Lauter
Chief Financial Officer
Richard Delgado
Treasurer
Michael J. McElroy
General Counsel
Bryon E. Stevens
Investor Relations & Capital Markets
3 |
 4
HLSS Overview
HLSS is an independent acquirer of high-quality Mortgage Servicing
Assets Mortgage servicing advances
Fees from servicing non-agency mortgage loans (Rights to MSRs)
Objective is to generate a stable, recurring, fee-based earnings stream
Low
fixed
infrastructure
costs
given
all
key
servicing
functions
outsourced
to
Ocwen
Equity
market
capitalization
has
grown
from
~$200
million
at
IPO
in
March
2012
to
$1.2 billion today
Follow-on offerings in September ($250MM) and December ($500MM)
Business
Growth Plan
Remaining Ocwen portfolio of $140 billion UPB available for purchase using
excess cash or future equity raises
Ability to close purchases simultaneous to funding prevents earnings drag
and dilution
WKSI eligibility will simplify future offerings
Value
Proposition
HLSS’
assets represent a 5% first-priority claim against residential real
estate $3.6 billion of assets collateralized by $79.4 billion UPB of loans
serviced 7.0%
annualized
dividend
yield
1
Opportunity to invest in consolidating market largely inaccessible to investors
Unique business model with limited correlation to the economy
1
Based
on
the
closing
share
price
of
$22.17
per
share
on
February
7,
2013. |
 5
Mortgage Servicing
Back office for non-agency mortgage
market
Receives payments from homeowner
Distributes payments to loan owner
Advance payments for delinquent
borrowers (Servicing Advances)
Repaid from borrower payments and
liquidation proceeds
Paid fixed fee (MSR Asset)
No exposure to mortgage credit losses
Borrower
Borrower
Borrower
Borrower
Borrower
Monthly P&I
+Liquidation Proceeds
Monthly P&I
+ Liquidation Proceeds
–
Servicing Fees
–
Advances Repaid
New
Repaid
Servicing
Advances
Servicer
Bond Holders |
 6
~95%
decline
in
real
estate
value
would
be
required
to
impair
HLSS’
assets
Minimal credit risk due to
over collateralization
Advances recovered at
“top-of-the-waterfall”
from loan proceeds
If loan proceeds are ever
insufficient, recovery is
from collections on other
loans in RMBS trust
Assets
Are
a
5%
First-Priority
Claim
$79.4 Billion
UPB
$75.8 Billion
$3.6 Billion
95.5%
Downside
Protection
HLSS Assets |
 7
Limited Valuation Risk
Cash &
Reserves
$183.4
Ended year with Total Assets of $3.6 billion
92% of assets are Servicing Advances or
Cash which are carried at par and have no
valuation risk
8% of assets have a stable valuation
history
Rights to MSRs represent the present
value of future servicing fees, less
expenses
No correlation between prepayment
speed and interest rates on non-
agency mortgages
No change in servicing asset valuations
December 31, 2012
($ in Millions)
1
Rights to
MSRs
$303.7
Servicing
Advances
$3,098.2
Total Assets
$3,585.3
100%
Servicing Advances & Cash
$3,281.6
92%
MSRs
303.7
8%
Reserves
associated
with
the
Advance
Financing
Facility
1 |
 8
Stable Revenue and Expenses
Predictable Revenue Stream
Known Expense Structure
Hedged Interest Rate Exposure
Stability of assets results in predictable earnings
Revenues based on asset value
Contractual annual revenue based on UPB
Expenses based on asset value
Sub-servicing fees paid to Ocwen also based on UPB
Ocwen bears operational risk and servicing cost volatility
MSR amortization is expected to remain stable
Interest rate exposure hedged through 60 month interest rate swaps
|
 9
22 bps
Subservicing
Fee paid to
Ocwen
16 bps
Incentive Fee
6 bps
Base Fee
~73%
Downside
Protection
~27%
Base Fee
HLSS’
largest expense
can be reduced by up to
~73% to stabilize earnings
Protects against higher
interest expense if
Servicing Advances
increase
HLSS benefits from lower
interest expense if
Servicing Advances
decrease
Subservicing Fee Adjusts to
Support Targeted Yield
Amounts
based
on
50bps
servicing
fee
earned
and
28
bps
retained
fee
in
Q4
2012.
The
incentive
fee
is
the
servicing
fee
minus
the
base
fee
and
the
retained
fee.
Incentive
fee
establishes
an
effective
floor
on
yield
while
maintaining
upside
potential |
 10
Ocwen Contract Ties Servicing
Fees to Advance Ratio
Scheduled step-downs in the retained fee and advance ratio
3.65%
3.38%
3.17%
3.01%
2.86%
2.66%
2.49%
2.38%
3.90%
1.75%
2.50%
3.25%
4.00%
20.0
22.0
24.0
26.0
28.0
Retained Fee
Target Advance Ratio
Actual Advance Ratio
3.87%
Retained fees are servicing fees net of subservicing expenses paid to Ocwen
Average decreased from 29.8 to 27.9 bps in Q4 due to scheduled step-downs and portfolio
additions
Ocwen’s incentive fee was reduced by $1.0 million in Q4 due to the advance ratio overrun
27.9
27.1
26.1
25.5
24.7
24.0
23.2
22.7
22.2 |
 11
Improved Financing Terms
On January 22, 2013, completed the
issuance of $650 million of one-year, $350
million of three-year and $150 million of
five-year fixed rate term notes secured by
servicing advance receivables
Weighted average spread over
LIBOR of 0.94% is down from a
1.55% spread on similar notes in
the last ABS note issuance
Reduced financing costs on existing VFN
capacity from a weighted average spread
over LIBOR of 2.32% to 1.95%
Longer Note Maturites
1
Lower Effective Interest Rate
1
1
Pro forma estimate based on borrowing at 12/31/2012
2
Assumes 2013-T2 issuance on 01/01/13 and VFN repricing
3
Maximum borrowing capacity |
 12
$60.60
$14.35
27.08
11.55
6.36
1.26
Servicing
revenue
Subservicing
fees
Interest
expense
Amortization of
MSRs
Operating
expenses and
other
GAAP
Net Income
Components of Income
Incentive
Results for the fourth quarter include a $0.03 per share impact due to a lower
amortization rate of 13.3% versus the 15.0% benchmark
rate Earnings exceeded dividends declared during the quarter by $0.6
million Fourth Quarter 2012 Earnings
2
($ in Millions)
Base
Basis points
per UPB¹
(Annualized):
1
Calculated using average UPB for 4Q 2012
2
Operating expenses and taxes, net of interest income and related party
revenue Retained Fee
50 bps
22 bps
10 bps
5 bps
1 bps
12 bps
28
bps |
 13
$14.35
$34.85
$21.11
6.36
11.35
2.79
13.74
Net Income
Amortization of
MSRs
Decrease in
advance
haircut
Changes in
other assets /
liabilities
Cash generated
available for
distribution
Dividends
declared
Cash
available for
reinvestment
Cash generated available for distribution is 2.5x dividend declared during Q4
Cash available for reinvestment of $21.1 million allows HLSS to replenish and grow
its servicing portfolio through additional purchases from Ocwen
1
($ in Millions)
Fourth Quarter 2012 Cash Flow
Components of Cash Flow
2.5x Dividend
Coverage
1
Servicing advances decreased by $86.6 million freeing up cash “haircut” component of
financing |
 14
$13.67
$15.76
2.06
0.44
0.42
0.01
September
2012
Follow-on
Offering
Net Income
Dividends
Hedge
Revaluation
December
2012
Accretive Follow-on Offering
Issuance
of
shares
at
$19.00
adds
$2.06
to
HLSS’
book
value
per
share
Remaining change in Net Book Value per share is explained by earnings in excess of
dividends declared and a change in value of the interest rate swaps
No change in book value per share is attributable to the valuation of servicing
assets Net Book Value per share
`1
1
Reflects
the
monthly
dividend
of
$0.11,
$0.12
and
$0.12
per
share
declared
and
paid
for
October,
November
and
December,
respectively. |
 15
Equity and Debt Yields
Note: Earnings yields based on annualized per-share earnings guidance of $0.325 (Q1 earnings
transcript), $0.325 (Q2 earnings transcript), $0.385 (Q3 earnings transcript) and $0.405
(11/15/2012 press release); calculation at a given date contains most recent guidance divided by the
share price. Q4 earnings yield point based on annualized per-share earnings of $0.44
divided by the 2/7/2013 share price of $22.17. Debt
yields based on the most recent, 3-year BBB-rated servicing advance securitization at each respective date.
Prospective purchasers should not place undue reliance on expectations or guidance shown above, and
the presentation of guidance and results from prior periods should not be regarded as a
representation that similar or better results will be achieved in future periods. |
 16
Investment Highlights
Attractive risk-adjusted returns relative to other yield oriented
investments 7.0%
annualized
dividend
yield
1
based
on
current
share
price
23 times over-collateralization virtually eliminates credit risk
Asset
composition
–
92%
servicing
advances
and
cash
–
mitigates
valuation
risk
Profits
purchased
up
front
–
targeted
return
not
dependent
on
asset
appreciation
or
valuations
Ocwen retains all operating risk under an incentive contract designed to stabilize
HLSS earnings Solid downside protection with limited exposure to a down
economy but opportunity to increase dividend in an improving economy with
rising interest rates Cash flow in excess of dividend used to replenish and
increase asset base in accretive flow transactions
High Quality Assets
Stable Earnings Stream
Large Positive Alpha
1
Based
on
the
closing
share
price
of
$22.17
per
share
on
February
7,
2013. |