Ocwen Financial Corp
Ocwen Financial Corp A Valuation Perspective August 20, 2014 CONFIDENTIAL: DO NOT CIRCULATE WITHOUT EXPRESS PREMISSION FROM MARQUIS RESEARCH, LLC. THIS PRESENTATION HAS BEEN PREPARED EXCLUSIVELY FOR CLIENTS AND SUBSCRIBERS OF THE SPECIAL SITUATIONS MONITOR – SEE OUR DISCLAIMER AT THE END OF THE PRESENTATION.
Table of Contents Topic Company profile Ocwen business lines Recent acquisitions Loans Serviced Unpaid principal balance Servicing Revenues Mix-Change Non-Performing Loans Revenue Per UPB Rising Expense Ratio Pretax income as a percentage of UPB Service quality Servicing business “in irons” Sum-of-parts valuation Sum of parts valuation Summary
8/20/2014
Slide # 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Topic Appendix Prepayment speed MSR – fair value 3/31/14 MSR – fair value 6/31/14 Price-to-book value ratio Valuation waterfall Stock price performance Income statement Balance sheet summary Cash flow summary Important statistics SSM Disclaimer
Special Situations Monitor (Confidential)
Slide # 18 19 20 21 22 23 24 25 26 27 28 29
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Company Profile Ticker Symbol: OCN (NYSE) Business: Mortgage Servicing & Lending Established: 1988 Revenue (2013): $2B Pretax Income (2013): $335M Market Capitalization: $3.5B or $26.00 per share Book Value (6/30/14): $1.9B or $13.92 per share Head Quarter: Atlanta, GA Employees: 10,800
8/20/2014
Special Situations Monitor (Confidential)
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Ocwen has Two Business Lines But is Mainly a Servicer Mortgage Servicing 90% of revenue & pretax Income Established in 1998 Top 5 mortgage servicer Strength: Distressed Loans Earns fees based upon % of UPB Low cost leader Low tax rate Loans serviced in 2013: 2.8M Unpaid Principal Balance: $435B
8/20/2014
Lending / Origination 10% of revenue & pretax Income Established in 2012 Tiny player in large industry Originates & sells loans; retains MSR Commodity Business We see no competitive advantage 2013 Production: $7.7B 66% via Correspondent channel
Special Situations Monitor (Confidential)
4
Pace of Acquisitions Accelerated in the Past Three Years Loans Acquired
Unpaid Principal Bal ($UPB)
Asset
38,000
6,900,000,000
HomeEq
Platform
134,000
22,400,000,000
September 2011
Litton
Platform
245,000
38,600,000,000
April 2012
Saxon
Asset
132,000
22,200,000,000
April 2012
JP Morgan
Asset
41,200
8,100,000,000
June 2012
Bank of America
Asset
51,000
10,100,000,000
December 2012
Homeward
Platform
421,000
77,000,000,000
February 2013
ResCap
Platform
1,740,000
183,100,000,000
Apr-Aug 2013
Ally
Asset
466,900
87,500,000,000
Aug 2013-Mar 2014
OneWest
Asset
299,000
69,000,000,000
December 2013
Greenpoint
Asset
31,400
6,300,000,000
3,599,500
531,200,000,000
Date
Counterparty
Acquisition Type
May 2010
Saxon
September 2010
Total
8/20/2014
Special Situations Monitor (Confidential)
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Due to Acquisitions, Loans Serviced Skyrocketed Average # of Loans & RE Serviced 3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
-
8/20/2014
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UPB skyrocketed Average UPB & REO Serviced 500,000,000 450,000,000 400,000,000 350,000,000 300,000,000 250,000,000 200,000,000 150,000,000 100,000,000
50,000,000 -
8/20/2014
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And Servicing Revenue Skyrocketed 600,000
Servicing and Sub-Servicing Revenue 500,000
400,000
300,000
200,000
100,000
-
8/20/2014
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However, Ocwen’s Mix Changed Profoundly 35%
Non-Performing Loans & REO as a % of UPB 30%
25%
20%
15%
10%
5%
0%
8/20/2014
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Mix Has Lower Revenue per UPB.. 0.25%
Servicing Revenue as % of Average UPB 0.21%0.21% 0.20% 0.19%
0.20% 0.19%
0.17%0.18% 0.17%
0.17%
0.15% 0.15% 0.14% 0.14%0.14% 0.14%0.14%0.14% 0.14% 0.13% 0.12%
0.15%
0.11% 0.11%0.11%0.11% 0.11%0.11%
0.10%
0.05%
0.00%
Q2-14
Q1-14
Q4-13
Q3-13
Q2-13
Q1-13
Q4-12
Q3-12
Special Situations Monitor (Confidential)
Q2-12
Q1-12
Q4-11
Q3-11
Q2-11
Q1-11
Q4-10
Q3-10
Q2-10
Q1-10
Q4-09
Q3-09
Q2-09
Q1-09
Q4-08
Q3-08
Q2-08
Q1-08
8/20/2014
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.. Has Increased its Expense Ratio .. 120%
Operating Expenses as a % of Total Revenues 98%
100%
80% 71%
69%
69% 62%
64%
63%
67%
65%
64% 59%
60%
60%
58%
56%
54%
51%
61%
63% 62%
52%
47% 40%
37%
40%
41% 40% 42%
20%
0%
8/20/2014
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..And Significantly Lowered Income as % of UPB 0.080%
Pretax Income % of UPB 0.067%
0.064% 0.061% 0.057%
0.063% 0.058%
0.060%
0.060%
0.058%
0.054% 0.048% 0.045%
0.040%
0.037% 0.030% 0.025% 0.020%
0.020% 0.016%
0.018%
0.027% 0.019% 0.018% 0.015%
0.019% 0.017%
0.007% 0.000%
-0.009% -0.020%
-0.040%
8/20/2014
-0.034%
Special Situations Monitor (Confidential)
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Rapid Growth = Service Quality Concerns “On 19 March 2012, we downgraded to SQ2- from SQ2 our service quality (SQ) assessment on Ocwen Loan Servicing.. The downgrade and the review for downgrade were due to concerns related to the rapid growth of Ocwen’s servicing portfolio and the challenges it faces in integrating the acquired servicing platforms and managing the additional distressed loan portfolios.” (Moody’s Investor Service, August 17, 2012) “Given the rapid growth of its servicing portfolio, Moody's Investors Service analysts are reviewing for downgrade the quality of Ocwen Loan Servicing's primary servicing and special servicing of subprime residential mortgage loans.” (National Mortgage News, January 23, 2014) Ocwen has been criticized for its heavy reliance on offshore employees. In 2012, according to the Wall Street Journal, Fannie Mae expressed concerns about “whether proper controls [could] be enforced with call centers in foreign jurisdictions,” which could complicate the safeguarding of private financial information (Berthelsen and Johnson 2012). 8/20/2014
Special Situations Monitor (Confidential)
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To Make Things Worse Servicing is now “In Irons” • • • • • • • • •
Large banks have been sellers of MSRs, especially sub-prime Acquisitions been OCN’s only growth driver OCN’s origination business too small to matter here Large-sized UPB sales are largely done Regulators have, for now, frozen OCN’s ability to acquire MSR Fannie/Freddie/Ginnie may be reluctant to do business Private banks may be concerned as OCN has grown too fast Runoffs – Loan lifespan averages seven years One positive offset for MSR could be rising rates in future
8/20/2014
Special Situations Monitor (Confidential)
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Ocwen: Sum-Of-Parts Valuation Servicing : Fair value (FV) of the MSR portfolio + Origination: FV of loans held for sale plus franchise value for the origination business; typically 0.5%-1.5% of loans originated; valuation range channel-dependent + FV for the remaining assets like cash, premises, equipment, receivables etc. minus FV of the liabilities.
8/20/2014
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Ocwen: Sum-Of-Parts Valuation Servicing : $2.4B ($2B LoCom BV + $390M bump per OCN management) + Origination: $160M (2% of total 2013 originated loan volume) + Net FV for the remaining assets: $145M = Total Ocwen Value: $2.695B Or $19.60 per share
8/20/2014
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Summary 1. Ocwen grew exponentially via acquisitions over the past three years. 2. As a result, investors pushed its P/BV ratio from 0.3x in 2008 to 4.3x in 2013 anticipating that growth will continue at historical pace. 3. Avenues of growth are now quite limited and Ocwen is probably in the worst position versus peers to expand servicing assets. 4. Ocwen’s origination business is too small to make a dent. 5. Due to mix change, revenue and profitability metrics have deteriorated and future costs and capital requirements will increase due to compliance and regulation. These are not “one-time” issues. 6. Sum-of-Parts valuation gets us to a fair value of ~$20 per share, significantly lower than current stock price.
8/20/2014
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Appendix 1. Ocwen MSR Prepayment Speed 2. Company presentation slide 3/31/14 3. Company presentation slide 6/30/14 4. Price-to-Book value Chart 5. P/BV waterfall 6. OCN stock price chart 7. 5-year income statement 8. 5-year balance sheet summary 9. 5-year cash flows 10. Important statistics 8/20/2014
Special Situations Monitor (Confidential)
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Prepayment Speed: Average: 17%; Median 15% 30%
Average Prepayment Speed 25%
20%
15%
10%
5%
0%
8/20/2014
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MSR Fair Value 3/31/14:
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MSR Fair Value 6/30/14:
8/20/2014
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Ocwen: Price / Reported Book Value 5.0 4.3
4.5
4.2
4.0 3.4
3.5 3.0
3.3
3.2 2.8
2.5
2.2
2.0
1.8
1.5
1.3
1.3
1.1 1.0
0.5
3.6
0.7 0.3
0.4
0.4
0.8
1.3
1.2 1.0
1.4
1.5
1.4
1.4
1.1
0.6
-
8/20/2014
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P/BV Multiples & Implied Stock Price BookValue 2,000,000,000 2,100,000,000 2,200,000,000 2,300,000,000 2,400,000,000 2,500,000,000
BookValue 1,500,000,000 1,600,000,000 1,700,000,000 1,800,000,000 1,900,000,000 2,000,000,000 8/20/2014
$ $ $ $ $ $
1.0 14.90 15.65 16.39 17.14 17.88 18.63
1.0 -42% -39% -37% -34% -31% -28%
$ $ $ $ $ $
1.1 16.39 17.21 18.03 18.85 19.67 20.49
1.1 -37% -33% -30% -27% -24% -21%
$ $ $ $ $ $
Price/Book Vaue 1.2 1.3 17.88 $ 19.37 $ 18.77 $ 20.34 $ 19.67 $ 21.31 $ 20.56 $ 22.28 $ 21.46 $ 23.25 $ 22.35 $ 24.21 $
1.4 20.86 21.90 22.95 23.99 25.03 26.08
Price/Book Vaue 1.2 1.3 -31% -25% -27% -21% -24% -18% -20% -14% -17% -10% -14% -6%
1.4 -19% -15% -11% -7% -3% 1%
Special Situations Monitor (Confidential)
$ $ $ $ $ $
1.5 22.35 23.47 24.59 25.70 26.82 27.94
1.5 -14% -9% -5% -1% 4% 8%
$ $ $ $ $ $
1.6 23.84 25.03 26.23 27.42 28.61 29.80
1.6 -8% -3% 1% 6% 11% 15% 23
8/20/2014 Special Situations Monitor (Confidential) 6/3/2014
4/3/2014
2/3/2014
12/3/2013
10/3/2013
8/3/2013
6/3/2013
4/3/2013
2/3/2013
12/3/2012
10/3/2012
8/3/2012
6/3/2012
4/3/2012
2/3/2012
12/3/2011
10/3/2011
8/3/2011
6/3/2011
4/3/2011
2/3/2011
12/3/2010
10/3/2010
8/3/2010
6/3/2010
4/3/2010
2/3/2010
12/3/2009
10/3/2009
8/3/2009
Stock Performance
$70.00
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
$0.00
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Income Statement Income Statement Servicing/Sub-Servicing Fees Gain (Loss) from Loans Held for Sale Other Total Revenue Less: Operating Expenses OpEx % EBIT Interest Expense Other Pretax Income Income taxes Net Income Non-controlling interests Preferred dividends Net Income to OCN shareholders FD EPS FD Shares Outstanding
8/20/2014
2008 368,026 124,102 492,128 323,355 66% 168,773 (86,574) (51,217) 30,982 12,006 18,976 41 19,017 0.30 62,935
2009 264,467 116,261 380,728 235,654 62% 145,074 (62,954) 11,141 93,261 96,110 (2,849) 25 (2,824) (0.04) 78,252
2010 321,699 38,682 360,381 236,474 66% 123,907 (85,923) 1,170 39,154 5,545 33,609 (8) 33,601 0.31 107,483
Special Situations Monitor (Confidential)
2011 458,838 (2) 37,055 495,891 239,547 48% 256,344 (132,770) (579) 122,995 44,672 78,323 8 78,331 0.70 111,856
2012 804,421 215 40,581 845,217 363,921 43% 481,296 (223,455) (333) 257,508 76,585 180,923 (145) 180,778 1.31 138,521
2013 1,825,375 105,424 93,020 2,023,819 1,305,458 65% 718,361 (412,842) 29,704 335,223 41,074 294,149 (12,020) 282,129 2.02 139,801
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Balance Sheet Summary Balance Sheet - Summary Cash Loans Held for Sale MSR Intangibles Premises Other Total Assets
2008 201,025 49,918 139,500 46,227 12,926 1,787,504 2,237,100
2009 90,919 33,197 117,802 3,325 1,524,107 1,769,350
2010 128,523 25,803 193,985 12,810 5,475 2,487,473 2,854,069
2011 144,909 20,633 293,152 78,432 7,350 4,134,121 4,678,597
2012 220,130 426,480 761,925 371,083 37,536 3,854,728 5,671,882
2013 178,512 1,184,678 2,069,381 416,558 53,786 3,970,855 7,873,770
Total Liabilities/Min Interest Equity Total Liab & Equity
1,627,459 609,641 2,237,100
903,487 865,863 1,769,350
2,016,592 904,817 2,921,409
3,393,846 1,343,311 4,737,157
3,907,088 1,764,794 5,671,882
6,017,087 1,856,683 7,873,770
Balance Sheet - Common Size Cash Loans Held for Sale MSR Intangibles Premises Other Total Assets
2008 9% 2% 6% 2% 1% 80% 100%
2009 5% 2% 7% 0% 0% 86% 100%
2010 4% 1% 7% 0% 0% 85% 98%
2011 3% 0% 6% 2% 0% 87% 99%
2012 4% 8% 13% 7% 1% 68% 100%
2013 2% 15% 26% 5% 1% 50% 100%
Total Liabilities/Min Interest Equity Total Liab & Equity
73% 27% 100%
51% 49% 100%
69% 31% 100%
72% 28% 100%
69% 31% 100%
76% 24% 100%
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Cash Flow Summary Cash Flow (Summary) CFO Acquisitions CapEx Other investing activities Net stock buyback Net Borrowings Other Net Cash Flow Beg Cash Balance Ending Cash Balance
8/20/2014
2008 123,091 (5,709) 46,149 (3,832) (73,038) 121 86,782 114,243 201,025
2009 2010 206,646 727,544 (1,167,122) (3,700) (3,821) 539 (532,763) 327,487 3,146 (642,354) 1,013,050 1,276 (3,157) (110,106) 36,877 201,025 90,919 90,919 127,796
Special Situations Monitor (Confidential)
2011 982,145 (2,646,700) (3,822) (4,596) 355,928 1,345,007 (11,524) 16,438 127,796 144,234
2012 1,815,854 (524,213) (19,217) 806,300 6,005 (1,990,183) (18,650) 75,896 144,234 220,130
2013 867,163 (2,294,169) (28,915) (91,894) (215,601) 1,705,669 16,129 (41,618) 220,130 178,512
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Important Statistics Important Statistics Average loans & RE Serviced Average UPB & REO Serviced Total UPB & REO Serviced Servicing Rev/ Avg UPB & REO Pretax Income as % of UPB Average Prepayment Speed (CPR) Non-Performing % Tot UPB Pretax ROA Pretax ROE
8/20/2014
2008 2009 2010 2011 2012 2013 373,416 308,571 479,165 531,402 762,654 2,620,901 46,193,422 41,093,085 59,637,040 81,260,594 118,806,196 415,728,949 40,171,532 49,980,077 73,886,391 102,199,222 203,665,716 464,651,332 0.80% 0.64% 0.54% 0.56% 0.68% 0.44% 0.067% 0.227% 0.066% 0.151% 0.217% 0.081% 25.0% 19.4% 12.7% 14.4% 14.7% 16.9% 24.3% 25.6% 27.3% 27.9% 23.5% 14.5% 2.8% 4.7% 1.7% 3.2% 4.9% 4.9% 10.2% 12.6% 4.4% 10.9% 16.6% 18.5%
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8/20/2014
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Table of Contents Topic Company profile Ocwen business lines Recent acquisitions Loans Serviced Unpaid principal balance Servicing Revenues Mix-Change Non-Performing Loans Revenue Per UPB Rising Expense Ratio Pretax income as a percentage of UPB Service quality Servicing business “in irons” Sum-of-parts valuation Sum of parts valuation Summary
8/20/2014
Slide # 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Topic Appendix Prepayment speed MSR – fair value 3/31/14 MSR – fair value 6/31/14 Price-to-book value ratio Valuation waterfall Stock price performance Income statement Balance sheet summary Cash flow summary Important statistics SSM Disclaimer
Special Situations Monitor (Confidential)
Slide # 18 19 20 21 22 23 24 25 26 27 28 29
2
Company Profile Ticker Symbol: OCN (NYSE) Business: Mortgage Servicing & Lending Established: 1988 Revenue (2013): $2B Pretax Income (2013): $335M Market Capitalization: $3.5B or $26.00 per share Book Value (6/30/14): $1.9B or $13.92 per share Head Quarter: Atlanta, GA Employees: 10,800
8/20/2014
Special Situations Monitor (Confidential)
3
Ocwen has Two Business Lines But is Mainly a Servicer Mortgage Servicing 90% of revenue & pretax Income Established in 1998 Top 5 mortgage servicer Strength: Distressed Loans Earns fees based upon % of UPB Low cost leader Low tax rate Loans serviced in 2013: 2.8M Unpaid Principal Balance: $435B
8/20/2014
Lending / Origination 10% of revenue & pretax Income Established in 2012 Tiny player in large industry Originates & sells loans; retains MSR Commodity Business We see no competitive advantage 2013 Production: $7.7B 66% via Correspondent channel
Special Situations Monitor (Confidential)
4
Pace of Acquisitions Accelerated in the Past Three Years Loans Acquired
Unpaid Principal Bal ($UPB)
Asset
38,000
6,900,000,000
HomeEq
Platform
134,000
22,400,000,000
September 2011
Litton
Platform
245,000
38,600,000,000
April 2012
Saxon
Asset
132,000
22,200,000,000
April 2012
JP Morgan
Asset
41,200
8,100,000,000
June 2012
Bank of America
Asset
51,000
10,100,000,000
December 2012
Homeward
Platform
421,000
77,000,000,000
February 2013
ResCap
Platform
1,740,000
183,100,000,000
Apr-Aug 2013
Ally
Asset
466,900
87,500,000,000
Aug 2013-Mar 2014
OneWest
Asset
299,000
69,000,000,000
December 2013
Greenpoint
Asset
31,400
6,300,000,000
3,599,500
531,200,000,000
Date
Counterparty
Acquisition Type
May 2010
Saxon
September 2010
Total
8/20/2014
Special Situations Monitor (Confidential)
5
Due to Acquisitions, Loans Serviced Skyrocketed Average # of Loans & RE Serviced 3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
-
8/20/2014
Special Situations Monitor (Confidential)
6
UPB skyrocketed Average UPB & REO Serviced 500,000,000 450,000,000 400,000,000 350,000,000 300,000,000 250,000,000 200,000,000 150,000,000 100,000,000
50,000,000 -
8/20/2014
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7
And Servicing Revenue Skyrocketed 600,000
Servicing and Sub-Servicing Revenue 500,000
400,000
300,000
200,000
100,000
-
8/20/2014
Special Situations Monitor (Confidential)
8
However, Ocwen’s Mix Changed Profoundly 35%
Non-Performing Loans & REO as a % of UPB 30%
25%
20%
15%
10%
5%
0%
8/20/2014
Special Situations Monitor (Confidential)
9
Mix Has Lower Revenue per UPB.. 0.25%
Servicing Revenue as % of Average UPB 0.21%0.21% 0.20% 0.19%
0.20% 0.19%
0.17%0.18% 0.17%
0.17%
0.15% 0.15% 0.14% 0.14%0.14% 0.14%0.14%0.14% 0.14% 0.13% 0.12%
0.15%
0.11% 0.11%0.11%0.11% 0.11%0.11%
0.10%
0.05%
0.00%
Q2-14
Q1-14
Q4-13
Q3-13
Q2-13
Q1-13
Q4-12
Q3-12
Special Situations Monitor (Confidential)
Q2-12
Q1-12
Q4-11
Q3-11
Q2-11
Q1-11
Q4-10
Q3-10
Q2-10
Q1-10
Q4-09
Q3-09
Q2-09
Q1-09
Q4-08
Q3-08
Q2-08
Q1-08
8/20/2014
10
.. Has Increased its Expense Ratio .. 120%
Operating Expenses as a % of Total Revenues 98%
100%
80% 71%
69%
69% 62%
64%
63%
67%
65%
64% 59%
60%
60%
58%
56%
54%
51%
61%
63% 62%
52%
47% 40%
37%
40%
41% 40% 42%
20%
0%
8/20/2014
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11
..And Significantly Lowered Income as % of UPB 0.080%
Pretax Income % of UPB 0.067%
0.064% 0.061% 0.057%
0.063% 0.058%
0.060%
0.060%
0.058%
0.054% 0.048% 0.045%
0.040%
0.037% 0.030% 0.025% 0.020%
0.020% 0.016%
0.018%
0.027% 0.019% 0.018% 0.015%
0.019% 0.017%
0.007% 0.000%
-0.009% -0.020%
-0.040%
8/20/2014
-0.034%
Special Situations Monitor (Confidential)
12
Rapid Growth = Service Quality Concerns “On 19 March 2012, we downgraded to SQ2- from SQ2 our service quality (SQ) assessment on Ocwen Loan Servicing.. The downgrade and the review for downgrade were due to concerns related to the rapid growth of Ocwen’s servicing portfolio and the challenges it faces in integrating the acquired servicing platforms and managing the additional distressed loan portfolios.” (Moody’s Investor Service, August 17, 2012) “Given the rapid growth of its servicing portfolio, Moody's Investors Service analysts are reviewing for downgrade the quality of Ocwen Loan Servicing's primary servicing and special servicing of subprime residential mortgage loans.” (National Mortgage News, January 23, 2014) Ocwen has been criticized for its heavy reliance on offshore employees. In 2012, according to the Wall Street Journal, Fannie Mae expressed concerns about “whether proper controls [could] be enforced with call centers in foreign jurisdictions,” which could complicate the safeguarding of private financial information (Berthelsen and Johnson 2012). 8/20/2014
Special Situations Monitor (Confidential)
13
To Make Things Worse Servicing is now “In Irons” • • • • • • • • •
Large banks have been sellers of MSRs, especially sub-prime Acquisitions been OCN’s only growth driver OCN’s origination business too small to matter here Large-sized UPB sales are largely done Regulators have, for now, frozen OCN’s ability to acquire MSR Fannie/Freddie/Ginnie may be reluctant to do business Private banks may be concerned as OCN has grown too fast Runoffs – Loan lifespan averages seven years One positive offset for MSR could be rising rates in future
8/20/2014
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Ocwen: Sum-Of-Parts Valuation Servicing : Fair value (FV) of the MSR portfolio + Origination: FV of loans held for sale plus franchise value for the origination business; typically 0.5%-1.5% of loans originated; valuation range channel-dependent + FV for the remaining assets like cash, premises, equipment, receivables etc. minus FV of the liabilities.
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Ocwen: Sum-Of-Parts Valuation Servicing : $2.4B ($2B LoCom BV + $390M bump per OCN management) + Origination: $160M (2% of total 2013 originated loan volume) + Net FV for the remaining assets: $145M = Total Ocwen Value: $2.695B Or $19.60 per share
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Summary 1. Ocwen grew exponentially via acquisitions over the past three years. 2. As a result, investors pushed its P/BV ratio from 0.3x in 2008 to 4.3x in 2013 anticipating that growth will continue at historical pace. 3. Avenues of growth are now quite limited and Ocwen is probably in the worst position versus peers to expand servicing assets. 4. Ocwen’s origination business is too small to make a dent. 5. Due to mix change, revenue and profitability metrics have deteriorated and future costs and capital requirements will increase due to compliance and regulation. These are not “one-time” issues. 6. Sum-of-Parts valuation gets us to a fair value of ~$20 per share, significantly lower than current stock price.
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Appendix 1. Ocwen MSR Prepayment Speed 2. Company presentation slide 3/31/14 3. Company presentation slide 6/30/14 4. Price-to-Book value Chart 5. P/BV waterfall 6. OCN stock price chart 7. 5-year income statement 8. 5-year balance sheet summary 9. 5-year cash flows 10. Important statistics 8/20/2014
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Prepayment Speed: Average: 17%; Median 15% 30%
Average Prepayment Speed 25%
20%
15%
10%
5%
0%
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MSR Fair Value 3/31/14:
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MSR Fair Value 6/30/14:
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Ocwen: Price / Reported Book Value 5.0 4.3
4.5
4.2
4.0 3.4
3.5 3.0
3.3
3.2 2.8
2.5
2.2
2.0
1.8
1.5
1.3
1.3
1.1 1.0
0.5
3.6
0.7 0.3
0.4
0.4
0.8
1.3
1.2 1.0
1.4
1.5
1.4
1.4
1.1
0.6
-
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P/BV Multiples & Implied Stock Price BookValue 2,000,000,000 2,100,000,000 2,200,000,000 2,300,000,000 2,400,000,000 2,500,000,000
BookValue 1,500,000,000 1,600,000,000 1,700,000,000 1,800,000,000 1,900,000,000 2,000,000,000 8/20/2014
$ $ $ $ $ $
1.0 14.90 15.65 16.39 17.14 17.88 18.63
1.0 -42% -39% -37% -34% -31% -28%
$ $ $ $ $ $
1.1 16.39 17.21 18.03 18.85 19.67 20.49
1.1 -37% -33% -30% -27% -24% -21%
$ $ $ $ $ $
Price/Book Vaue 1.2 1.3 17.88 $ 19.37 $ 18.77 $ 20.34 $ 19.67 $ 21.31 $ 20.56 $ 22.28 $ 21.46 $ 23.25 $ 22.35 $ 24.21 $
1.4 20.86 21.90 22.95 23.99 25.03 26.08
Price/Book Vaue 1.2 1.3 -31% -25% -27% -21% -24% -18% -20% -14% -17% -10% -14% -6%
1.4 -19% -15% -11% -7% -3% 1%
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$ $ $ $ $ $
1.5 22.35 23.47 24.59 25.70 26.82 27.94
1.5 -14% -9% -5% -1% 4% 8%
$ $ $ $ $ $
1.6 23.84 25.03 26.23 27.42 28.61 29.80
1.6 -8% -3% 1% 6% 11% 15% 23
8/20/2014 Special Situations Monitor (Confidential) 6/3/2014
4/3/2014
2/3/2014
12/3/2013
10/3/2013
8/3/2013
6/3/2013
4/3/2013
2/3/2013
12/3/2012
10/3/2012
8/3/2012
6/3/2012
4/3/2012
2/3/2012
12/3/2011
10/3/2011
8/3/2011
6/3/2011
4/3/2011
2/3/2011
12/3/2010
10/3/2010
8/3/2010
6/3/2010
4/3/2010
2/3/2010
12/3/2009
10/3/2009
8/3/2009
Stock Performance
$70.00
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
$0.00
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Income Statement Income Statement Servicing/Sub-Servicing Fees Gain (Loss) from Loans Held for Sale Other Total Revenue Less: Operating Expenses OpEx % EBIT Interest Expense Other Pretax Income Income taxes Net Income Non-controlling interests Preferred dividends Net Income to OCN shareholders FD EPS FD Shares Outstanding
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2008 368,026 124,102 492,128 323,355 66% 168,773 (86,574) (51,217) 30,982 12,006 18,976 41 19,017 0.30 62,935
2009 264,467 116,261 380,728 235,654 62% 145,074 (62,954) 11,141 93,261 96,110 (2,849) 25 (2,824) (0.04) 78,252
2010 321,699 38,682 360,381 236,474 66% 123,907 (85,923) 1,170 39,154 5,545 33,609 (8) 33,601 0.31 107,483
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2011 458,838 (2) 37,055 495,891 239,547 48% 256,344 (132,770) (579) 122,995 44,672 78,323 8 78,331 0.70 111,856
2012 804,421 215 40,581 845,217 363,921 43% 481,296 (223,455) (333) 257,508 76,585 180,923 (145) 180,778 1.31 138,521
2013 1,825,375 105,424 93,020 2,023,819 1,305,458 65% 718,361 (412,842) 29,704 335,223 41,074 294,149 (12,020) 282,129 2.02 139,801
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Balance Sheet Summary Balance Sheet - Summary Cash Loans Held for Sale MSR Intangibles Premises Other Total Assets
2008 201,025 49,918 139,500 46,227 12,926 1,787,504 2,237,100
2009 90,919 33,197 117,802 3,325 1,524,107 1,769,350
2010 128,523 25,803 193,985 12,810 5,475 2,487,473 2,854,069
2011 144,909 20,633 293,152 78,432 7,350 4,134,121 4,678,597
2012 220,130 426,480 761,925 371,083 37,536 3,854,728 5,671,882
2013 178,512 1,184,678 2,069,381 416,558 53,786 3,970,855 7,873,770
Total Liabilities/Min Interest Equity Total Liab & Equity
1,627,459 609,641 2,237,100
903,487 865,863 1,769,350
2,016,592 904,817 2,921,409
3,393,846 1,343,311 4,737,157
3,907,088 1,764,794 5,671,882
6,017,087 1,856,683 7,873,770
Balance Sheet - Common Size Cash Loans Held for Sale MSR Intangibles Premises Other Total Assets
2008 9% 2% 6% 2% 1% 80% 100%
2009 5% 2% 7% 0% 0% 86% 100%
2010 4% 1% 7% 0% 0% 85% 98%
2011 3% 0% 6% 2% 0% 87% 99%
2012 4% 8% 13% 7% 1% 68% 100%
2013 2% 15% 26% 5% 1% 50% 100%
Total Liabilities/Min Interest Equity Total Liab & Equity
73% 27% 100%
51% 49% 100%
69% 31% 100%
72% 28% 100%
69% 31% 100%
76% 24% 100%
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Cash Flow Summary Cash Flow (Summary) CFO Acquisitions CapEx Other investing activities Net stock buyback Net Borrowings Other Net Cash Flow Beg Cash Balance Ending Cash Balance
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2008 123,091 (5,709) 46,149 (3,832) (73,038) 121 86,782 114,243 201,025
2009 2010 206,646 727,544 (1,167,122) (3,700) (3,821) 539 (532,763) 327,487 3,146 (642,354) 1,013,050 1,276 (3,157) (110,106) 36,877 201,025 90,919 90,919 127,796
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2011 982,145 (2,646,700) (3,822) (4,596) 355,928 1,345,007 (11,524) 16,438 127,796 144,234
2012 1,815,854 (524,213) (19,217) 806,300 6,005 (1,990,183) (18,650) 75,896 144,234 220,130
2013 867,163 (2,294,169) (28,915) (91,894) (215,601) 1,705,669 16,129 (41,618) 220,130 178,512
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Important Statistics Important Statistics Average loans & RE Serviced Average UPB & REO Serviced Total UPB & REO Serviced Servicing Rev/ Avg UPB & REO Pretax Income as % of UPB Average Prepayment Speed (CPR) Non-Performing % Tot UPB Pretax ROA Pretax ROE
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2008 2009 2010 2011 2012 2013 373,416 308,571 479,165 531,402 762,654 2,620,901 46,193,422 41,093,085 59,637,040 81,260,594 118,806,196 415,728,949 40,171,532 49,980,077 73,886,391 102,199,222 203,665,716 464,651,332 0.80% 0.64% 0.54% 0.56% 0.68% 0.44% 0.067% 0.227% 0.066% 0.151% 0.217% 0.081% 25.0% 19.4% 12.7% 14.4% 14.7% 16.9% 24.3% 25.6% 27.3% 27.9% 23.5% 14.5% 2.8% 4.7% 1.7% 3.2% 4.9% 4.9% 10.2% 12.6% 4.4% 10.9% 16.6% 18.5%
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