Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the New residential investment Corporation third quarter 2019 earnings call.
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I would now like to hand, the conference over to your speaker for today, Caitlin Morris Investor Relations.
Please go ahead anyhow and good morning, everyone I'd like to welcome each day to new residential third quarter 2019 earnings call. Thank for joining joining me here Tonight on Michael Nierenberg, Our chairman CEO , and President Nixon Tomorrow, or Chief Financial Officer, not the call. This morning, we are going to reference the earning supplement that was posted to the new residential website. This morning, you're not already.
So I encourage you to download the presentation now.
Before I turn the call over to Michael I'd like to point out that certain statements made today. It will be forward looking statements. These statements by their nature uncertain and may differ material from actual result.
I wanted you to review the disclaimers in our press release and earnings supplement regarding forward looking statements interview the risk factors contained in our annual and quarterly reports filed with the FCC.
In addition, we'll be discussing non-GAAP financial measures during today's call reconciliation on these matters. The most directly comparable GAAP measures can be found in our earnings supplement that other your turn call over to Michael.
Thanks, Good morning, everyone and thanks for joining us today, so for us to third quarter was a very good one for the quarter more than any other quarters, a sort of different segments of our businesses contributing in areas, where others were a little bit more challenged during the quarter I treasury rates rallied by 35 basis point the tenure.
Our closing at approximately 165 versus a 2% yield at the end of Q2. However at the mortgage market did not see the same during the quarter mortgage rates fell by only 10 basis points during the quarter. So effectively agency mortgages got cheaper rifai incentives were a little bit lower during the quarter our robust.
Risk management and hedging strategies help protect book value during the quarter, we saw a slight increase in book value our investment portfolios performed.
Extremely well.
Where we are today, we're really starting to see the earnings power of our mortgage company, it's really starting to ramp up that we're very excited to see the continued growth in our new resident show point franchise. The completion of the Dichrotec acquisition, which happened subsequent to the end of Q3 creates great scale for us as well as more capacity to originate loans and.
Prove our recapture rates at our MSR portfolios, the lower rate environment has enabled us to reduce our borrowing cost saving our company approximately $75 million on an annual run rate. We will continue to focus on ways to increase that number even more we do believe we will see one to two more cuts from the fed this year, which should create further savings in our financing.
[noise] on our call business lower delinquencies, coupled with lower advance balances should help provide a favorable backdrop for car velocity as we go forward.
As we look forward yields will likely remain low presenting a challenging in.
Investing environment, not only for us, but for the industry. The focus on our operating businesses, coupled with our disciplined approach to risk management should help provide our shareholders with good investment returns as we look forward I'll refer to the supplement which has been posted online and I'm going to start on page three.
So this is our car side of our highlights slide market cap at the end of Q3 was $6.5 billion.
We have $41 billion of assets or dividend yield was 12.8% our book value since inception, it's up to 63% we've generated 147% total share her shareholder returns since inception, and we paid out a whopping $3 billion in dividends since inception.
When you think about our platform I think we have a very different platform. One as we have a great investment portfolio that includes MSR is bond call right.
Loan and as we look at some of the other things that we're doing now are big focus continues to be on capturing the whole mortgage pie. If you look at the right side of the page.
Page three financial GAAP net income for into quarter $225 million or 54 cents per diluted share core earnings $207 million or 50 cents per diluted share.
Our third quarter dividend at 50 cents per common share again, resulting in a 12.8% dividend yield after the end of September thirtyth.
Book value is 16 26, that's up from 16 17 at the end of Q2 total economic return of 3.6% during Q3.
And we raised $430 million and our first ever preferred stock offering there were two of them during the quarter the approximate cost of funds a little bit north of seven per se.
The bottom left quadrant, you can see we have $7.2 billion and net equity and then all the other stuff on on the right or 20.9% total shareholder return for 2019 were very proud of when you look at page five or indefinitely portfolios $3 billion net equity or 42% of our portfolios are in mortgage servicing rights.
The effective levered yields on those today are somewhere between 12, and 15% or the answers are 15% to 25% and again as I pointed out in my opening remarks, we take a much.
I'm much more disciplined approach to our risk management around our MSR book hedging that Foley.
Residential securities and call rights little under $2 billion, a net equity at the ended up at the ended the quarter, that's 28% of our portfolio targeted lifetime that yields at 12% to 15%, obviously with the market where it is there's very little activity investment activity for us as we see levered yields in the bond portfolio of something between.
In 5% to 6%, if we would invest capital today on the residential loan side and net equity of $1.4 billion, So little under 20% of our portfolio targeted lifetime yields north of 13% and then on the consumer segment very small part of our business today.
Well continue to amortize, what I've seen a lot of new activity there for opportunities.
We ended the quarter just from from a cash and liquidity standpoint, a little bit over $700 million that was due to having enough capital to fund our detect purchase which occurred on October Onest paid six this is a new slide for us.
When we think about our portfolio.
We have a number of folks that are truly dedicated 100% of their time to how we hedge our business, we actively manage and hedge our portfolio to protect our book value. As we showed you during the quarter on the left part of the page if you have a look.
Was it of duration businesses operating business, which includes our origination business call right whole loans legacy bonds in agency bonds, all have positive duration the negative side of the negative duration part is being mortgage servicing rights the balance their coupled with our robots hedging again led to an increase in book value during the quarter.
We look at our stability and in in book value in 2019.
We started the we ended the year in December or January at 16 in a quarter from a book value perspective at the end of Q3 were six roughly the same place. So a lot of work being put in on how do we protect our our assets.
Hey, seven and that again, another new slide the markets of change and so have way. If you look to the left side of the pace in 2013 trillion investment company every on our mortgage servicing rights, we relied truly on third parties to do all the work we had excess MSR ours.
Conjunction with nation store, we had a residential mortgage backed securities mortgage loans as some consumer loans, which are true, which will be yes still pointing it can be a springcastle acquisition. If you go to the right side of the pace today not only do we have the same asset classes, but we added a number of things, notably our mortgage origination capability.
Our mortgage servicer ancillary mortgage services again.
Consistent with our theme of capturing the whole pie as we go forward will continue to be opportunistic and try to figure out ways to grow earnings in different areas.
Page eight looking at recent market drivers and the impact on our business declining LIBOR I pointed out help lower funding costs, we projected for art on an annual basis right now to state about $75 million.
With that said, having one to two cuts we believe in the rest of fiscal 2019 mortgage rates are low that should continue to result in favorable origination climate for us when you think about new rates in 2018 in the entire year. They originated $7 billion of mortgages. This year, we project, we're going to be something.
Between 22, and $23 billion of origination so significant growth there not only in origination side quite frankly that both on the servicing side and most importantly for shareholders in the earnings side, the consumers healthy and that helps our overall bond portfolios as well as our call business.
Page nine our Dichrotec acquisition, what did we get.
The left side of the paid 62 billion in MSR ours.
And on other financial assets, we got some servicing advances some mortgage loans and then an interesting business, which is really a recovery business, which were getting rich we're spending a lot at time on which would which we think could be.
Add some significant upside as we go forward for our from from an earnings perspective on the operating side.
Operations in Pennsylvania, that's where ditech is headquartered.
We're building out our correspondent and wholesale business.
We have a lot of upside in our retention business and then on the servicing side, we picked up bops in Arizona, which now gives us the ability to be on west coast time.
And then on the employee side 1100, new employees, how we paid for it on the right side of the page 200 million and caching and there are other financing.
Facilities, including loan warehouses, and MSR and servicer advance facilities.
Bottom part of the page as we go forward what is our mortgage company look like $650 billion of own MSR ours $40 billion balance sheet 4 million customers from an origination standpoint, we believe we're going to be something between 40 and 50 billion of origination next year servicing our service will have 300 billion.
Dollars.
Q3 highlight very little capital deployed.
Overall I think during the during the quarter, we deployed about 170 million or so of net new equity.
Things, we gave which were excited about we grew our origination and servicing businesses by 200% am 100% year over year, we acquired a field services provider called Guardian asset management.
We issued 438 million a preferred equity in two separate offerings, we surpassed $3 billion in dividends declared since inception, and again, we lowered our overall cost of funds by about $75 million leasing on an annual run rate basis now I'll take it to the operating business on page 12.
Again, the past couple of quarters, when we've been on earnings call. We've been talking about capturing the whole pie I'd just as a great snapshot of what of what our business looks like we have origination performing learns loan servicing and then special servicing and our show point business and if you look at the ancillary services not only delivered by Chopin.
Right, but also I pointed out last quarter, we made an investment a co vs.
Where we own 25% of that company. We're excited to see that third party growth. They are not only from us, but hopefully from other industry participants you Street Avenue 365 Guardian are all part of the show pointing family and then we have a relationship with maddock on the insurance side.
Overall, we think that the growth in earnings.
With with extreme focus on these business lines should help offset the lower yields were seeing the markets have you investment standpoint.
Each 13 on origination I pointed out in 2000.
18 that new raise originated $7 billion in mortgage loans. This year. We think we're on target to do 20 to 23 billion significant increase in origination what is really mean, one its high earnings two is our ability to recapture more of our MSR portfolio with a 600 plus billion dollars portfolio should help pay.
Dividends for our shareholders, we have a lot of room to grow we have a lot of work to do but we're really excited about origination business.
The servicing side our theme over the past couple of quarters has been to control our life clearly with with counter party risk out there that's extremely relevant to the performance of rural portfolios.
Having detect.
And they are talented employees as part of our family, it's something that I think we'll be realistic for us.
Servicing side again, we expect 2020 to ended about $300 billion in servicing we will have a special servicer and show point or clean brand of new raise and again, we're excited for the growth that we're seeing in that business and most importantly, the profitability in the service, we're providing to the consumers that will take you through.
On page 16 quickly to highlight from the end of Q3, we settled on 45 billion of MSR those were agreed to in Q2.
Each and every one of those MSR. It has prepayment protection for approximately 1.8 12 to 18 months for MSR portfolio totaled 593 billion as at the end of Q3 compared to 576 billion at the end of Q2.
During the during the quarter, we issued three capital markets notes, we refinance effectively or servicer advances 1.2 billion, resulting in a reduction in cost of funds and a maturity extension and the cost of funds savings have proximity with about 70 to 80 basis points per deal.
And the non agency space, we sold $1.2 billion non agency securities why levered yields of 5% to 6% not not core to our overall investment strategy around our call business.
We successfully executed on our call right business, we call. It 38 deals $1.3 billion, you PB, which is about 22% quarter over quarter higher we completed two securitizations of loans.
For about $976 million on the residential loan side.
We can we did one nonqm securitization for $380 million when Rpls securitization for $429 million. We also funded $520 million of non QM origination from new rates.
Other things again like I pointed out we raised $430 million in two separate offerings on a preferred stock about seven roughly the overall cost of funds a little north of 7%.
Which was the second what was 38 basis points tighter than our an inaugural offering and then across the portfolio again, we say seven roughly $75 million in financing costs on an annual run rate basis post Q3, close ditech $1.2 billion.
We get a couple of Securitizations, one $1.7 billion RPL securitization.
To $796 million collapse, and another 400 million dollar advanced securitization.
Page 17, our MSR.
On our MSR portfolio the thing I want to point out as a couple of is is that when you look actually lets it's got list Sorta page 18.
Look at the left the bottom left part of our paid when we look at our MSR portfolio. This a couple of things to note here. One is our average loan size is 159000 versus the industry, which is 182, we have a much more seasoned credit impaired portfolio than the rest as I pointed out our newer production. The MSR, it's all have prepayment protection ranging from 12%.
18 months.
And then when we think about our overall portfolio only 24% is currently refinancing both based on the rate environment. We're in 70, roughly 75% of our MSR is that we have on our balance sheet had seen.
This level of mortgage rates as well as lower mortgage rates, which dates back over the past few years.
Page 19, our call business roughly 40 to 42 billion are callable in that number it's pretty consistent.
As delinquencies and advance balances continue to come off.
To call more deals roughly 41% have already begun higher mortgage legacy mortgage market.
We have call rights on non agency.
John portfolio again, not allowed to report there we did sell some bonds performance is very good.
The overall.
Market itself.
Is extremely well begin with with high grade corporate.
Performing extremely well and all other fixed income assets other than agency mortgage is performing well the non agency bond portfolio continues to perform well on the loan side, we've been fairly active acquiring some rpls over the course of the past few quarters I pointed out subsequent to Q.
Three that we get a $1.7 billion securitization our loan our loan book from our overall risk standpoint is down since the end of Q2 by about I would say roughly 50% and the overall returns have been Super really goes the thesis there as we're buying some rpls that haven't been service, particularly well we transfer serve.
Shifting to our special service at Shell point, and if you look the and the upper left part of the page one fully bar we took.
Significant delinquencies from 69% encouraged to 80% current in six months to the show pointing doing a great job, they're improving overall performance as well as providing a great service to our two.
Tumors piece 22.
We were pretty large securitization business is very diversified we do servicer advances, we do or call business, we do non QM.
And we do some MSR financing. So overall 2019 has been very very active for you could have a flip the page 22, and then finally and then okay. We'll open it open up for DNA or focus.
First and foremost in this kind of read in borrowing we think the most important thing we can do right now for shareholders is stabilizing book value and I think that team has done a great job doing that permit from an investing standpoint, we're going to be more within a continued to be opportunistic again with yields but the 175 tenure note and there's not much yield in the marketplace.
We need to be extremely disciplined and I pointed out before we invested roughly about a $170 million a net equity in the core in in Q3 will continue to take that same approach as we go forward.
Our operating business very very focused on growing recapture growing origination growing our servicing business.
And alleviating ourself of.
What I would call.
Counterparty risk.
Taking as much control of our life in house as we possibly can we need to continue to protect the value of our assets.
And overall risk management as they continue to point out extremely important to us with that I'll turn it back to the operator, and we'll open it up for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Withdraw your question please press the pound or husky.
Our first question comes from.
Starch from KBW. Please go ahead.
Good morning.
Can you remind us how much equity will be deployed in the detect transaction.
Always there and also just a little color on the day take portfolio would be great just like the loan size cost to service indeed differences from your portfolio.
Sure. So let me let me address the.
The the assets that we bought first Bose.
The MSR is the Fannie Ginny Npls MSR are smaller balance a little bit more higher delinquent in nature.
I think when we looked at our cost of service, we think about at the same way because.
Whether it be new rates are low and care.
Who are currently servicing those portfolios give us a cost per loan to service that loan and those that cost per loan is consistent across our entire portfolio.
When we think about the return on equity.
We are hoping I would say this on the MSR acquisition.
Ditech took the hedge risk throughout that time that we agreed to do this transit transaction until it was funded and the bond market rallied like crazy. So overall the multiples. We acquired these MSR is that we're extremely attractive for our business.
When we think about the return on equity of the business I pointed out we're picking up 1100 talented employees were getting a west coast presence in our Arizona operation, we're picking up a recovery business that we're extremely excited about it.
I can't tell you now because where we closed on this thing on October Onest.
The overall are always I think we're expecting to be north of 20% on this acquisition.
Okay. Thanks, and then actually just in terms of the MSR itself is requiring is there going to be any sort of mark up or down.
Just based on the closed versus where you got it yes. They will be marked up as I pointed out the bond market rallied significantly the overall multiples, we acquired those or give or take something a little bit south of the two multiple.
Give or take between the different product mix, obviously, each day is valued separately, so you'll see a mark up on that asset.
Okay. Thanks, and then just on the MSR hedging can just walked through the strategy a little bit how much is derivatives. How much is the on balance sheet agencies, and just sort of that philosophy of that.
So we the bulk of it is.
We have been pretty vocal about the balance nature of our portfolio coming into.
At the end of Q3, I think our loan book was about $7 billion. Our bond book was about $8 billion.
And then we have a large agency book now that we Havent had in the task and we see leverage ratios on our balance sheet leverage ratios. There and then I think the mid threes right now as a result of the agency.
Pools that we put on our balance sheet versus our MSR ours. So we have so our strategy as a couple one is we have agency mortgage is against the MSR I pointed out earlier that.
Agency mortgages or mortgage rates themselves rallied by only 10 basis points c.. So a widening in that basis, which means that the rifai incentive for homeowners is a little bit lower in the quarter versus the rally we saw in treasury rates. So thats why we use mortgages on the other side of that we have swaps, where where we have receivers.
Against that portfolio, which protects us in the rally rally market. So it's really just I would say swaps and mortgages coupled with the long duration.
We have in our overall portfolio and I think we illustrated that on one of our slice I'm not sure what page megawatts.
That's helpful. Thanks, and actually one last one the next the MSR Mark the negative 228 million can you disaggregate that just what part of it was the just the run off of the portfolio versus move on rates no. The MSR Mark was lower.
Then that in the quarter Nicholas sure.
A majority of that those related to amortization, so approximately 170 million.
28 that Youre referencing was amortization and the remainder was mark our net marks for the quarter was negative 45 million.
Okay, great. Thanks.
Thanks Bose.
Our next question comes from Giuliani Valonia from BT.
Please go ahead.
Good morning, Thank you for taking my questions.
Well I wanted to kind of touch on first was on the originations front.
You guys are targeting about 40 to 50 billion next year is there any sense of the kind of margin that you could generate because there is significant.
Recapturing replenishment cost savings on the margin side there.
Yeah, I think listen it's.
The easy path to growth is to do more correspondent and wholesale.
What are the things we were foot we're working on this morning, even prior to the call is how do we think about.
Increasing our overall gain on sale and making us what I would putting us I think in a tier that's comparable with some of our peers in the marketplace. So we have a lot of work to do there I think you're going to see more correspondent as we go forward a little bit more wholesale.
And then we're looking at a lot of different retail channels. So.
I think the growth overall.
We'll be significant for us, but we have to be prudent because I'd, rather do less volume and make more money for shareholders and do more volume and make less money Big thing is again, we have a 600 billion dollar rich MSR portfolio, so keeping that in protecting our our balance sheet. I think is really really key the other side of that is.
When you think about our origination business and servicing business now that we're fully into the ancillary business life.
I want to continue to see growth in the earnings in revenue, there and partnering with co vs and again, hopefully getting some of our.
Industry peers and friends involved in this third party business I think it'd be really significant for overall book value as we look down the road.
One thing I'd just to point out on book value.
When we acquired show plate last year the company made.
30 or $34 million activity.
As an 18 this year one at run rate to made between 100 different give or take about a $150 million into earnings those huge growth not only in what we're doing in the business, but more more importantly for shareholders and earnings.
That makes sense.
I was kind of trying to look at it was from also from a replenishment perspective, because you can also.
Your MSR portfolio granted visit before Doug is probably about 6.4 billion on your balance sheet, but if you're able to originate at 40 to 50 billion. After you can replenish little under 10% to kind of 12% on the high end, which could take.
Take away most of the amortization.
Internally, which would be.
Great.
Stable stabilizing effect in the portfolio.
With that as long as the earnings work.
I think there was about protecting book value and providing earnings for shareholders. So yeah. We're on board.
That sounds who did the only other pieces around kind of scaling up the internal subservicing.
On is there something the type of margin you can generate on that business. Because obviously you are taking that profitability and bring it in house. So there's some accretion potential there, especially as you scale up another hundred 20 billion or so in the next.
Quarters.
You mean on the on.
Michelle point servicing side, Yeah, I think I think the way to look at the show points businesses, It's truly a third party business.
Show point was really create is as a special servicer.
And so there's two things one is very counter cyclical if you think about it so should we get into a scenario where.
A recession or the consumer rose over that business should continue to do extremely well.
If we don't you know the business continues to operate extremely well and very profitable inject Navarro and his team are they work with.
Third parties in the in the industry not just not just us.
That's great I really appreciate it thank you.
Our next question comes from Doug Harter from Credit Suisse. Please go ahead.
Thanks, Michael just little bit more color on that unusual.
Turning to die time, just just wondering kind of.
You know kind of the pacing to get there is a.
Yes.
Uh huh.
And Uh huh.
Ultimately achieve that target.
You broke up a little bit of but maybe I could taken steps one is on the MSR portfolio based on that the acquisition price we acquired those.
We think the Levered returns will be north of 20% as I pointed out.
On the overall origination business, where we have a lot of room to grow.
I think that.
You know I mean, just to get a sense by November 15th which is in a couple of weeks, all ditech and and new Reds employees will be in the same building. So we've done a significant amount of planning.
Prior to us getting awarded this deal.
Working alongside the company.
In anticipation of.
Hopefully winning this deal so I think to that point.
You know where I want to Adam I would say, we're ready to roll and we are rolling now, but like anything it takes a little bit had time to get going.
We still have a lot of work to do but you know going from 7 billion of origination to 22 were 23.
Is a significant step for the company in doubling that volume next year will be even a more significant steps.
I think just pointed out in the earlier comments as long as we're making money.
That works if the volume if we're if we're doing more volume in that and you're not seeing real return, we'll we'll end up throttling back doing less volume, but more profitable volume. So we have to really kind of pay attention to that.
And then kind of operationally on the servicing side as you.
Integrate the Datatech are you planning to sort of continue to use black Knight on a day tech portfolio or kind of how do you plan to.
Kind of roll that into two years, so there's no point platform.
I'd say.
You know overall.
And we.
We don't want to have all are eggs in one basket I think thats that to say thing to say, but the the show putting new raise guys do a great job for us on the servicing side clearly they've grown pretty significantly thus thats why we use other third parties for some of the servicing.
But controlling our own life and being able to offer a homeowner a better solution is something that.
We'd prefer to do.
And not from a counterparty risk that were concerned about counterparty risk with with a with the loan care guys can they do a great job and we have a great relationship there, but just beat I would offer consumers products get the ancillary business have recapture.
That's really our ultimate goal.
The other thing to point out is.
If you buy a pool of mortgage servicing rights is like.
I know you notice, but we don't slip on a switch and say Okay 30 days later, it's we're transferring over too.
To show, putting their new as it takes this over this will occur over the next six months.
Great. Thank you.
Thanks.
Our next question comes from Tim Hayes from B. Riley FBR. Please go ahead.
Hey, good morning, Mike Thanks for taking my questions.
First one can you just touched on capital allocation you highlighted the returns across your asset classes and it sounds like you expect the pace of deployment to be pretty modest at least the near term, but what do you view to be the most attractive use of capital today, and where do you actually see the portfolio growing and how do you think about the buyback.
This context with your stock trading at a slight discount to book in a 12.7% yield.
Great question, So I think.
You know the investing environment for what we all do in fixed income in the legacy mortgage market is not that interesting.
A couple a couple of things just to point out if you look at loan volumes for example, this year and Rpls.
Year over year since 2018, we saw roughly $85 billion of loans sold into the marketplace 2019 year to date 42 billion has been sold into the marketplace. So obviously a huge drop.
On an annualized basis I would expect that to continue as easy as the GE as season, the banks continue to clean up their legacy Rpls in Npls. So overall those market should remain extremely well did so when I think I last earnings call. We guess why reinvesting in these loans, we've been able to gen.
There is very good returns, but I think over time, you're going to see the returns on that business probably go down just because there's less product and people have putting capital to deploy the non agency bond business.
Over the course of the past few years, we bought bonds that were consistent with our call strategy last quarter, we sold some bonds because levered yields are 5% to 6%. So if we could sell.
That are not quarter or call strategy as we get sell assets that are 5% to 6% Kinda Levered returns.
Moving on them, obviously significantly cheaper redeploy that capital into something else, we'll do that so that going forward the stock remains attractive.
Depending upon where we are on a percentage to book.
We will continue to be as opportunistic I think as we've ever ever then and the most important thing I want to point out on this is that we need to protect our book value and if we could protect book value that we traded a 10% dividend yield at 12% dividend yield I don't know that there's any magic there at the one thing I would point out is that when you look at.
Whether it be NRG or some of our friends in peers out in the marketplace. When 75 to 10 year notes.
Then yields of 8% to 14% to me seems crazy. So there's really no value given to that to the managers out there. So we'll see where we go but going forward, we're going to protect book value, we're going to look for opportunities opportunistic things.
Things to invest it I can't tell you what those all right now because I.
We look at everything, but there's nothing that's a that's jumping at US right now so it could be where we maintain more cash looked at stock buybacks, but I guess theres nothing right now unstable.
Okay.
Okay. No. That's appreciate the color there and.
You clearly you made it clear that protecting book value is your top priority engine, you've done a very good job of that.
But looking at core earnings 50 cents this quarter covered the dividend, but the lowest quarterly number you put up in quite some time and your outlook for capital deployment and the overall investment environment a little bit.
I would say meat, but just wondering how you think about core earnings and dividend coverage going forward as you know, reflecting that environment, and but given a little bit steepening in the yield curve in all the other investments you've been making.
I know, we're going to have to grow it quite frankly in our operating business I think Doug asked about you know early on on that I take acquisition, we're going to have to that's we're really really where we're going to have to grow. It I mean think about it just a year ago, we had.
So for an acquisition roughly 30 million Bucks and earnings this year 150 million Bucks in earnings if we get that on a steady run rate higher in thinking about some other things I think will grow our way into a higher core number.
But if we only do anything stupid I mean, we've all seen this thing play out in the marketplace and I think.
When you listen to.
[laughter].
For example, Jamie Diamond talking about quarterly earnings and how to manage and business to quarterly earnings. We don't want to do anything stupid in this environment because the risk returns are absolutely skewed to the downside to growing your operating business. We have a lot of people focus there that company has a little over 4000 people on the energy side and fortress side, we have 60.
Dedicated professionals working on risk management models, and everything else, where the big investment in the business, but again, it's there's no. There's no free lunch theres nothing easy out there that we think is very cheap right now so we'll be very disciplined about capital.
<unk>.
It makes sense and.
I guess I'll just pick on this a little bit more but I.
I guess my question is it sounds like you have a lot of competent and the investments you're making the operating platform and being able to grow earnings over time through those that Ben that those businesses, but are you willing to maybe see core earnings go down a little bit before they go up and kind of keep that dividends.
He I know, it's a board decision, but just wondering how you think about that.
No we talk about it a lot could corning's go down before they go back up absolutely because as you think about higher yielding investments burning off and.
To the again going back to Doug's question about how long does it take really to ramp this stuff out.
We have to monitor it I can I'm not going to promise you know higher or lower dividends at this point I do think no matter. If our dividend was 50 cents, a dollar or 10 cents trading at 12 or 13% dividend yields at 875 to 10 year rate environment is crazy.
I would agree with that.
And then just last one from me do you have the core earnings contribution from call rates this quarter.
It was two cents for the quarter.
Great. Okay, well, thanks, again, guys and congrats on good quarter.
Thank you.
Our next question comes from Trevor Cranston from JMP Securities. Please go ahead.
Hi, Thanks, good morning.
No as you guys are looking for places to deploy fresh capital and you think about kind of the growth you're expecting on the origination side.
Over the next several quarters can you comment on whether or not you guys have explored.
You know entered into agreements with the agencies, where you might be able to.
Retaining the credit risk on on your loan originations.
And if that's something that might be interested in doing going forward.
I think I'm, sorry, I mean, I think we did volume of $5.9 billion and $5.7 billion in the quarter as our business grows which it has obviously those conversations will happen and then.
Whether we do credit risk transfer bonds, where a little bit small right now that's why we're really excited about the runway in our ability to grow versus or other peers are friends in the marketplace. So that part were extremely excited about.
I think everything's on the table Trevor I mean.
But we're clearly in the out in the operating business now and that's a bigger segment from where we were a few years ago and we've done that obviously through a couple of reasons to control counterparty risk.
Most importantly, right now is to add to help figure out a alternative ways to grow earnings in this difficult rate market.
Okay Gotcha.
And then on the sales of the non agency securities this quarter.
You mentioned the two were sales of bonds that were sort of non core.
To the current strategy.
Can you say roughly how much of the remaining non agency bond portfolios you'd consider.
No not core to the converts.
Consoling Opportunistically.
Most of it is.
You know our bond portfolio is a little bit south of 8 billion I think from a from an overall market values between seven and $8 billion.
Most of our stuff its core we did over the course of the past year and a half or so acquired some fixed rate AAA pass through is that we thought it a good spread to where mortgages were at the time. So those of those are different than our call strategy, but levered levered mid teens type returns.
But most of the stuff we have now I think it is is core to our quarter already or call strategy.
Okay, and then just last question.
On the agency MBS you guys have on balance sheet now can you just give any additional color around the types of bonds you guys are holding in terms of there.
No look low loan balance or.
Generic or just any additional color on those programs there they're fairly generic there.
Hi, there for the most for Theres, they're Fannie threes, three three and a Hanson fours.
And again, we use those we think as a hedge versus our.
A lot of our you know some of our newer production I am it's ours that we've acquired.
Very low pay ups were not when.
Pain point for low loan balance.
Okay, great appreciate the comments thank you.
Our next question comes from Matthew Howlett from Nomura. Please go ahead.
Good morning, Thanks for taking my questions Hey, Mike are you doing.
Just looking at the slide nine on on a 200 billion of you BB targeted that's an ambitious target what are you seeing on on the servicing acquisition front.
Does that contemplate some big acquisitions sort of looked to die tech size or is it just you just get a win more to the flow type product.
And then maybe there was a lower bid out there now for the MSR.
No. It's really it's the Dichrotec acquisition, and it's really our own production as we go forward. It's you know we we have not we agreed to a couple of these larger MSR acquisitions with prepay protection in Q2 that funded in Q3, but overall I think this is more geared turbo.
Loan.
It was you know our own production pipelines.
You know could that be lower internally.
Exactly to that I mean, if you lower absolutely would die Tech I think and that transfer right now we're at about 250 billion.
Okay.
All that to be boarded this year, but and then you'd coupled with the next year's production. We think we'll get you know what is.
I think the point to make everybody is we don't need to be the biggest.
That's not the goal here is to be the most to be as profitable as we possibly can so that number is 200 or 300 or whatever the number isn't as long as we're providing the proper service to the homeowner.
That's really the goal.
Got it and then that's my next question on on the recapture where do you mean, what's the target what do you like to get up to how will die to help you with the recapture.
Going forward, how should we look at that thing about that so.
So I wouldn't say right now recapture rates are lower than we'd like we're spending a lot of time, whether it be on data analytics models, and most importantly, or not most importantly, but importantly, the amount of personnel. We have focused on that part of the business. So when you ask about Ditech, we picked up.
Significant amount of what I would call very good quality folks have been in the mortgage business for for many years. So that part is going to help the term recapture overall recapture rates. If you go back a few years back when we were in the probably the mid thirtys, depending upon the products right now.
Your reprice stuff is kind of okay, but you're the overall numbers are in a lower twentys. So we got a lot of room to go and.
Part of that part of this whole thing on our operating business. It's great to tell you that we've we've made a lot of money. This year in our operating business Fabulous, it's great for shareholders, but what's really important I think for US is the go forward around increasing recapture growing origination and driving more profitability through our business.
Got it and.
And on that or do you expect sort of CPR is on the I know you break it on the Cuba, but will they be higher in Fourq, you and some of the banks are saying of then would you expect them to come down to subside in 2020, just how do you think about just the overall rifai outlook.
Yeah, we think.
Speaks a little higher now as we go forward. So the next few months. It then we.
Expect at some point to see them level off.
And that's kind of consistent with how we looked at our overall book, although it's a little bit different than the than the broader market.
Got it and then last question, Mike you mentioned with the dividend yield at 12% you sort of pointed out and I noticed you did the two preferred at just under 7% Alas one came in lower so you look at capital is that more of a realistic or just clearly cheaper sources will target more just preferred equity now given where your your car.
And David Neal is.
Yeah, I mean, we don't we don't have a need for capital, but it's it's a very valid point I mean, if you could issue I mean, the problem with the <unk> retail preferred market is it's a little bit it's much smaller than then comment.
Right.
Significantly large scale, we needed to do you know we'd explore obviously, we explore all options. The detecting was 1 billion to we didn't raise equity and associated with a bunch of cash liquidity on our balance sheet.
So our planning around liquidity and I think so.
I think Trevor or Tim asked a question about our bond portfolios, we have a lot of liquidity on our I know you have a $40 billion portfolio. If he can generate liquidity from that.
You have to take a step back and think twice. So we have a ton of liquidity not on our balance sheet and liquidity lines today, if we need to raise a bunch of money, we could do that off our balance sheet.
Got it okay. That's helpful. Thanks, Mike.
Thanks, Matt.
Our next question comes from Henry Coffey from Wedbush. Please go ahead.
Good morning, everyone and thanks for taking my questions quick great quarter, and you guys spent an enormous amount of time with me this quarter, hoping we really get to understand the business. So I wanted to thank everyone on your IR team for that.
No just number one I'll I'll start with the tough question you know as you look at book value in dividend, you're earning your dividend on a GAAP basis, you've got good good access to capital.
You've got a well hedged portfolio, how do you balanced dividend versus book value. I mean is there a point, where you have to reduce the dividend to grow the book value or or or do you sort of look at those.
Those two and say look at I need to defend both.
You know I like to ice in a world Warriors.
We will try to defend both as much as we possibly can buy but I'd say pointed out in some of earlier remarks, but we don't want to do anything stupid.
So I can't tell you, whether the dividends going up it's not going up but I can't tell you, whether it's going down.
Got to see how the quarter plays out and what we're doing in the operating business and the markets move so much right. When you think about rate.
Tenure treasury bounces between 2% in 140.
Right and this could happen in the matter of a couple of days. So really just don't know until we get closer to the ended the quarter, where we're going to end up falling out of this during that quarter, we have to make sure that we protect our book value.
And then just to kind of a technical question 100, and a 40 $154.8 million in investment gains how does that break out in terms of sale of non agency call right games sale of agency trading as could just in general terms.
Approximately a 100 million of that came from sales both non agency in agency Securities and the remaining was primarily sale of Rpls.
And then I think you indicated earlier, a small amount of call related gains.
In the hands in number that's for ish.
Okay.
And then in terms of looking at your operating business.
Is the focus is going to be on building out a mortgage originator.
Is it an opportunity to acquire non QM and and related assets that you can then hold on balance sheet or secure or and fund would securitizations.
Is there a focus on having to integrate and cut cost what what what's the overall strategy in terms of how this thing creates the operating business has a lump creates value for NRG.
I think it's going to <unk>, well I mean forget about the financial aspect of it having a better recaptured business. If you go from 20% to 30% or 20% to 35% that's going to help our overall results in or MSR portfolio I think the growth in our operating business and creating something that.
Just to give everybody the math I mean, we paid a roughly $200 million for show point there'll be some earn out for management. So lets say you get to a book value of about $250 million. When you look at a company that generating roughly 150 million of EBITDA that valued at $250 million, it's probably words right.
Ex that.
And if you think about that on our balance sheet from a book value standpoint, 415 million shares outstanding your understated by a fair amount for the segment book value is really at least at dollar higher so there's a lot of what I would call opportunity opportunity around some of the things that we're doing there.
We're not looking to be the biggest and bad its mortgage origination business. If we could do something thats key to our business that works for shareholders were going to continue to do it but you know all this stuff is not all over the place that's something I want to point out as well, we're not and we're not running around just to deploy capital to deploy capital strategically.
You know the show point acquisition has been a good one reducing counter party risk and making a lot of money for shareholders sounds like a good thing.
Great. Thank you and congratulations great quarter. Thanks entering.
Our next question comes from a line of Kevin Barker from Piper Jaffray. Please go ahead.
Just a follow up on some Oh Boses question regarding the died tech MSR and you mentioned there that you gotta for less than two times servicing fee.
Now I understand die Tech.
Smaller bounced off so it has lower revenue when you think about the profitability on that MSR.
Where do you think the MSR should be valued just given you know the lower revenue revenue you would expect just given the lower balances on.
They'll probably be up in value about 30 to.
You know 30 $40 million approximately just from a value perspective.
On on the overall portfolio right.
On the Oh by the time, we said all I guess it.
Little under 60 billion, we keep in mind like when you looked at when you look at the breakout there's there's 5 billion of Pls, which is mostly MH.
Made servicing.
There is 21 billion of of Ginnie Maes, and there's 34 billion of conventional.
So its mix, obviously, if any if any multiple to a higher than the ginnie and the ginnies hired and the pls.
Okay and then.
Regards to the MSR this quarter held up really well compared to what we've seen across the market was there anything specific adjustments that you saw or better performance within your MSR comparisons.
What we saw from most of the industry. This core yeah, Here's what I'd tell you I mean, if we look back and we did and a bunch of regression analysis going back to lower rates. How many of these folks have seen 140, 140 10 year rate.
And 75% of our portfolio was in that bucket on the new production Eversource acquired from third parties and I pointed out we funded 45 billion in the quarter all of those have prepayment protection.
Our CPR as or 3.2% slower.
Then the industry.
Our net prepayments were 77% of the industry or four and a half slower net net so overall you know when this company. We started the credit impaired nature of the MSR is that that were acquired was consistent with the thesis that we thought it all kind of rate scenarios that fiasco.
Perform extremely well and we're seeing that now, but it's not like we havent mark down or above 425 million Bucks since the end of last year as.
Is it.
As a fair amount of money.
Okay, where there any specific drivers this quarter that held up was.
The discount rate with rates lower or.
That rate is a little bit lower you know I mean quite frankly to I do I think there should be lower the answer is yes, but its all these other things right again, 75% of our portfolio seen this level of rates and they're older than three years, lower we have lower gross prepayments lower net prepayments.
We did increase some of our speeds on some of our stuff as we look forward for the next.
For the near term and then we'll see what happens there.
From a refinancing perspective again only 24% of is eligible for refinance today and then the new production stuff again, it'll has prepay protection.
Okay, and then a with the MSR portfolio.
Growing too for the servicing portfolio growing greater than 600 billion here on a pro forma basis.
You know and a lot of it you know going more towards agency or Ginnies.
How much of that do you think is refinance a bowl just given where it sits on different servicing platforms.
And given the Ditech origination platform.
And the show and the new rest platform.
You know.
How much you think you can actually.
Target to be refinanced.
You know again, it's right now based on current industry standards.
We you know underwriting from Fannie and Freddie and some of the stuff we're doing a non QM, we estimated to be about 20, 425%.
Where we go in and what kind of GFC reform, we see going forward could open the door a little bit more if you see more pls.
But I would think another point Kevin is that when you look at our portfolio.
We have a large amount of pls.
And the Pls stuff was originated back from.
Anywhere from owes to read a kind of only and a lot of these loans are just stuck in these pipelines at least you know and a lot of these borrowers or delinquent at times and.
But there is $125 billion out of our total servicing portfolio, that's pls such a significant amount.
Now if we could clean up the legacy Pls market, which we've been trying to do and we'll continue to try to do.
The 125 billion could see some faster prepays.
But that would help our call business as well so there's an offset there.
And there's some alternative products that you can offer to those types of.
Don't know I mean, we're not we're not stretching the boundary on any of our origination staff, we've seen that play out over over the years obviously.
So even on our non QM product could we do a significant amount more the answer is yes.
But we are extremely cautious around this stuff, we want to offer products that people that they were able to afford and pay.
But we did today with the right credit boundaries.
But depending on what happens at GNC reform that May change things, but right now were steady as she goes.
Okay and then.
You know with your origination business are starting to grow gain on sale quite a bit.
That start to impact.
Your taxes or some of the re eligibility and at what point would you start to have to maybe.
Restructure some of the revenue or where it's coming from.
In order to keep the eligibility.
Right now we have plenty of runway to to continue to stay arena.
Obviously, if our origination business continued to grow or servicing or servicing business from our standpoint continue to.
Outpace our investment portfolio over the 20% corporate tax rate, maybe media rethink that and we're always looking at different things I think for now it is we're going to continue down the path and maintaining a REIT status.
Thanks for taking my questions.
Our next question comes from Stephen Laws from Raymond James. Please go ahead.
Hi, good morning.
And.
You bet on this a little bit and in your response to to Henrys question, Mike, but really want to touching on the ancillary services opportunity how integrated is that a lot of its new how should we track.
Whatever the right metric is whether its penetration or number of.
Services and just as importantly, a lot of that some through partnerships, which doesn't go through your income statement. So how do we think about the value or you're creating some of these minority investments that maybe aren't reflected in book value as those.
As those businesses grow.
Lead question so our.
The likelihood is we're going to continue to try to grow with our friends at Clovis.
Those guy and it's going to bear going to run the company it'll be a third party business, we won't see any earnings from that but the goal there would be up to create a real services company that trades that.
15 times EBITDA or you take some kind of large multiple because if we keep that an internal in our own mortgage company will never realized for shareholders. The true value of what that revenue stream could be so for example, right now we own 25% of co vs with the ability to grow that to 70% little under.
70% HM.
There's a way to create a vehicle with other industry folks where people could own it as well quite frankly, I think thats really the opportunity to create more book value for shareholders. So if that for example, feeling 25% and.
Earnings going $100 million a year in it trades at 15 times, and that's a billion and a half dollars well wait or shareholders, you're going to be the winter. There. So thats roughly another dollar share give or take if you look at our show point acquisition as I pointed out earlier I think there's another dollar of at least a dollar.
As implied book value gain there. So the couple of things there plus what our stated book value not counting any given any credit for our call rights I think our book value significantly understated.
That's really appreciate we'll see the results in in distributions of book value creation.
Distribution gross book value creation.
I appreciate the comments on that might come in kind of looking at the 40 billion origination target or stated a projection for next year.
The mortgage rates haven't dropped as quickly as interest rates, we've seen some widening there.
What mortgage rate assumption of use for next year to get to that 40 billion and kind of it or is there a rate we should watch on the high end or low end that would make that 40 billion.
Significantly more significantly less are there any inflection points maybe on the high end were.
For that volume all the rifai cuts off or mortgage we keep dropping we see a level where all the sudden a significant amount of origination opportunity turns on from the Rifai kind of love to get you to frame kind of.
Thoughts on mortgage rates as we look out for say the next 12 months.
No I don't see when I don't know would be magical rate is I think it's really our ability and desire to capture some share of the market that we currently don't have.
So if you stayed in this rate environment, which is very possible. We can stay in that 175 can you know through the rest of the year I just don't know right that the markets and so volatile based on the geopolitical stuff thats going on I think that.
It's really just capturing more market share so rates can move up a little bit. They can go down a little bit I think we had just a large amount of growth initiative and runway to go.
Keep in mind again last year 7 billion of origination this year 22, or 23 billion year rates have dropped a ton right last November tenure rate was about 330 now it.
We'll take 175.
But I think you can stay and has been rising rate environment, we could actually capture more market share from others, that's really lower.
Great and one last question.
Bigger picture and you touched on you mentioned just your forming in response to Kevin but no. There any a couple of issues that you think could.
Significant positive coming out of just the reform.
Others, redefining QM or the QM patch exploration and then at the same time are there one or two just the reform discussions taking place or anything you think might pose a headwind to the business no. That's a bigger hard to predict out of Washington, but any comments around the topics you're watching closely in just the reform.
Listen everybody keeps talking about the patch you know for years, everybody was talking about non QM.
And that's a little Nonqm, but you know for doing 300 or 400 million a quarter.
That's great.
You know there needs to be other alternatives for homeowners.
Having said that they can't get agency mortgage so when and if the patch comes off.
Created an opportunity for private capital should the GE Aziz.
Go on their own I think that will create opportunities for private capital. So I think there's a lot of good stuff that will come I don't know when it's going to come obviously, you're getting into an election year next year and I don't think anything happens between now and then other than maybe that patch.
There's a lot of good stuff that could come out of this which is going to have a need requiring need for large amounts of private capital and I think we're perfectly situated to take advantage of that.
Great appreciate the comments, Mike I have a great.
Hi, good weekend.
Thanks.
Our next question comes from Doug Harter from Credit Suisse. Please go ahead.
Thanks, just following up on the earlier question about about re status I.
I guess, how do you in the board's think about what the right payout.
Payout ratio is now that.
More of the profitability is coming from from operating businesses versus kind of the investment portfolio.
I think what can continue to pay out what we were currently doing on a percentage basis I don't think theres been any shift.
And I don't think we won't have any shift at this point.
So you know obviously, we always want to maximize our capital structure for our shareholders.
And earnings and dividends, but for now I know, Doug <unk> there'll be no shift.
Great. Thanks, Michael.
Weve no further questions in queue at this time I'll turn the call back to Michael for closing remarks.
Well that was along one thanks for.
If everybody's questions and look forward to epic updating everybody.
With our Q4 results that agree weekend, they have a great holiday season, and thanks for all your support.
Take care bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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