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Ocwen Financial Corp (OCN) Q1 2024 Earnings Call Transcript Highlights: Strategic Moves and ...

GuruFocus Research
·4 min read

  • Adjusted Pretax Income: $14 million

  • Annualized Adjusted Return on Equity: 13.8%

  • GAAP Net Income: $30 million

  • Diluted Earnings Per Share: $3.74

  • Book Value Per Share: $56

  • Subservicing Additions: $19 billion for the quarter

  • Total Liquidity: $219 million at quarter end

  • Corporate Debt Repurchases: $47 million

Release Date: May 02, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

  • Ocwen Financial Corp reported adjusted pretax income of $14 million and an annualized adjusted return on equity of 13.8%, showing improvement both sequentially and year-over-year.

  • GAAP net income was $30 million, or $3.74 per diluted share, marking the highest level in six quarters, driven by improved performance in servicing and originations.

  • The company successfully exceeded its deleveraging objectives for the quarter, with corporate debt repurchases of $47 million.

  • Ocwen Financial Corp continues to grow its subservicing portfolio, with $19 billion of subservicing additions for the quarter and a 4% increase in quarter-end subservicing UPB versus the prior year.

  • The company is executing a capital-light growth strategy, focusing on subservicing to reduce capital demands and enhance returns, supported by a scalable technology-enabled global operating platform.

Negative Points

  • Total liquidity at quarter end was $219 million, below year-end 2020 three's level, reflecting capital allocation to debt retirement.

  • The average servicing UPB for the first quarter was below the prior year due to the timing of additions and runoff.

  • Third party estimates for industry volume have been revised lower, reflecting expectations that interest rates will remain high for longer, potentially impacting future growth.

  • While the company is diversifying its business and reducing exposure to advances, the high interest rate environment continues to pose challenges for the originations segment.

  • Despite improvements, the originations segment is not currently a material earnings contributor, which could limit overall earnings growth potential in a persistently high interest rate environment.

Q & A Highlights

Q: Can you walk through where your MSR hedges are, especially with the move up in rates now in the second quarter? A: (Sean O'Neil, CFO) We maintain a high hedge coverage ratio, operating in the 90 to 110 range as of the end of April. This approach mitigates both upward and downward impacts of interest rate moves. The gains in MSR fair value net of hedge were primarily driven by a strong market with high demand, leading our external valuation experts to take a slightly higher view of the valuation of both Ginnie Mae and the GSE MSRs.

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Q: Regarding capital allocation, with growth now focused on the subservicing side, could more earnings go towards debt repurchase, fueling earnings growth more efficiently through subservicing? A: (Glen Messina, CEO) Yes, our plan is to grow our subservicing portfolio while maintaining our total owned MSR UPB in the $115 billion to $135 billion range. Excess liquidity from operating activities will be used to deleverage and derisk our balance sheet.

Q: Can you provide details on the target under 3.9 times debt-to-equity ratio and expectations for debt reduction by the end of the year? A: (Glen Messina, CEO) Our primary objective is to first break through the 3.9 to 1 debt-to-equity ratio. As we work with financial advisors and get more informed about potential refinancing of our corporate debt, we will be able to specify the exact amount of capital needed for debt reduction.

Q: Regarding the $6 billion of MSR sales above book value, can you share the expected cash generation from these sales for potential debt paydowns? A: (Sean O'Neil, CFO) We haven't disclosed specific trade details, but typically, sales from Ginnie's and GSEs generate different cash amounts. The cash generated is available for deleveraging debt. Details on transactions will be provided as they close.

Q: What is driving the current MSR sales, and what should we expect as a realized gain from these sales? A: (Glen Messina, CEO) The sales are primarily driven by economics; the bids received are far in excess of our modeled long-term economic value for these MSRs. This not only demonstrates the accuracy of our MSR mark but also creates capital and liquidity to support our debt refinancing efforts.

Q: How do the cost efficiencies discussed factor into the fair value mark of the MSR? A: (Glen Messina, CEO) Our valuation expert uses market-based assumptions to value the MSR. Our specific cost to serve does not escalate the price; it comes through the P&L in day-to-day operations. If we can service loans at a cost lower than what's modeled, we achieve accretive operating earnings.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.