Q4 2019 Earnings Call
Thank you for standing by this the conference operator, welcome to all Quinn Financial Corporation's fourth quarter 2019 earnings Conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
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I would now like turn the conference over to Hugo ARIA Senior Vice President Treasurer, and head of Investor Relations. Please go ahead.
Thank you for joining watch Brocklin's fourth quarter 2019, earning school.
Please note that our fourth quarter 2019 earnings release and slide presentation.
Hi, David and are available on our website.
Speak on speaking on the call would be options, Chief Executive Officer, Glen Messina, <unk>, Chief Financial Officer June Campbell.
As a reminder, the presentation in our comments today.
Contain forward looking statements made pursuant to the safe Harbor provisions of the federal Securities laws.
These forward looking statements may be identified.
Reference to a future period.
Use of forward looking terminology.
Forward looking statements by their nature glass matters that are different degrees on certain.
Our business has been undergoing substantial change which has magnified such uncertainties.
You should there be stacks in mind, when considering such statements and should not place undue reliance on such statements.
I was looking statements involve several assumptions risks and.
And I certainties that could cause actual results could differ materially.
In the past actual results at that FERC come they suggested by forward looking statements and this may happen again.
Forward looking statements speak only as a base. They are made and we disclaim any obligation to update or revise any forward looking statement.
There is a result of new information future events or otherwise.
In addition, the presentation and our comments contain references to non-GAAP financial measures such as expenses, excluding MSR valuation adjustments that.
An expense notables and pre tax loss, excluding income statement notables, an amortization of NRC lump sum cash payments among others.
We believe these non-GAAP financial measures provide a useful supplement discussion and analysis about financial condition.
We also believe these non-GAAP financial measures provide an alternative way to view certain aspects of our business that is instructive.
Non-GAAP financial measures should be viewed in addition to not as an alternative for the company's reported results under accounting principles generally accepted in the United States.
Pardon me elaboration not the factors I just discussed please refer to our presentation in today's earnings release, that's why the company's filings with Securities and Exchange Commission.
Coding once filed.
2019 form 10-K.
Now I will turn the call over Glen Messina.
Actually go good morning, everyone. Thanks for joining us.
Let's start on slide four.
And 29, Okay, we delivered strong performance par value creation strategy of incoming fanatical, Florida.
Building, a sustainable business model.
Reducing at a price Chris can you talk about.
With respect to prevent that's performing.
Fourth quarter, which had net income of 35 million Dollarss and we ended 2019, what the book value per share have slightly over $3.
Well for cheap pre tax income before notable items of $12 million, which exceeded our prior guidance.
We've improved our annualized pretax income for notable items and amortization of NRC lump sum payments by over $265 million, that's the second quarter 2018.
This was enabled by completing the P.H. integration on time.
Growing old MSR U.P.B. originations from all sources and realizing significant cost reengineering savings.
With respect to creating a sustainable business model.
We established multiple origination sources that are generating volume at a run rate to deliver between $15 billion to $20 billion. This year, excluding bulk purchases.
To support our growth objectives.
Yes that was secured MSR financing for agency Ginnie Mae appeal that service I.
I think our servicing advance facility Tromso funding costs.
And restructured our mortgage warehouse funding facilities to support our lending growth.
[noise] Teargas rescue need to operate.
We extended the steel maturity to May 2022.
We saw multiple legacy litigation matters favorably.
And we believe we've met all required us to date of the N. why do you have passes conditional approval to the P.H. acquisition.
We've also completed the second three did integrity audits for Massachusetts, thereby lifting our MSR acquisition constraints and that stake.
With respect to the fear PV and Florida energy matters.
Where we see favorable rulings in September last year.
We continue to believe we have meritorious factual and legal defenses, because if you got PB and Florida injury claims and our vigorously defending our position.
We are taking all reasonable and prudent action to resolve these matters in a timely fashion that result in an acceptable financial outcome for our shareholders.
With respect to our client concentration risk with NRC, we're cooperating with them to support the termination of the legacy PHH Subservicing.
We estimate the portfolio with unprofitable after all operating unallocated expenses.
Well talk more about her perspective on the overall NRC relationship later.
We believe we remain on track to achieve a pretax profitability. Excluding income statement notable and amortization of NRC, a lump sum payments in the third quarter 2020.
In addition, we expect that pretax earnings excluding income statement notable will be positive for the full year 2020.
Oh pre tax earnings expectations, I assume a mortgage market environment consistent with the N.B.A.M. GFC forecast as of January 2020, wait cheap our objective and there are no adverse changes to market, this mess or industry or legal and regulatory matters.
Well evaluating the impact of the recent drop in the 10 year Treasury rate on our 2020 outlook.
We expect the positive impact on our lending volumes and margins, but on favorable impact to servicing run off and MSR values.
Well, we were successful execution of our strategy will result in a more attractive business with improved flexibility to consider a variety of alternatives to maximize value for shareholders.
We continue to have confidence that our plans at our execution.
If we if there's been a disconnect between our share price and the fundamentals of our business.
In response to our board has authorized an open market share repurchase program.
$5 million.
Having execution of any share repurchases will be subject to market conditions among other factors.
I'd like to share more details and what we're building here in Austin and our plans for 2020 and be up.
Turning to slide five.
Sure integration reengineering actions.
We are aiming to create a sustainable business model powered by multiple sources of portfolio replenishment and growth.
We've developed a comprehensive suite of products and services.
<unk> bundled or Standalone solutions, and our enterprise wide sales organization is building a growing opportunity pipeline.
Our originations platform is expected to generate enough volume to grow our own done. It's our portfolio went 2020, that's walls grow and diversify or sub servicing.
We are targeting 13% or higher pre tax or we've all forward MSR spent 12% and all reverse MSR stuff we originate.
[noise] overtime, we're starting to grow our owned servicing and subsurface portfolios to at least $100 billion and you PBH.
The growth in our Subservicing portfolio, well be driven by three activities first the origination of new sub servicing agreements with MSR investors.
Second the creation of synthetic subservicing arrangements true bulk and flow MSR sale to capital partners well servicing retained.
Third the implementation of an MSR capital vehicle.
During 2018, we spent a considerable amount of time understanding the risks growth potential and financial performance of our servicing portfolio.
Through this process, we have concluded that our legacy Subservicing for energy.
Increasingly attractive risk and fanatical promise profile and cannot be replenish capable assets.
I expect this portfolio went off over time, and we'll focus on growing other more profitable segments of our servicing portfolio.
Turning to slide sex.
I'd like to discuss our 2020 initiatives to further our progress on our value creation strategy.
Our objective is to deliver adequate long term returns for shareholders driven by multiple origination sources showing operational execution.
How they compare the cost structure and of course profile aligned to the overall industry.
[noise] for 2020, our focus will be.
Achieving significant originations growth in diversifying our servicing portfolio next.
Executing against our continuous cost reengineering framework.
Optimizing sources of capital, including greater balance sheet efficiency.
And continuing to reduce enterprise risks you Nick to Ocwen.
We believe the successful execution of these initiatives will support both our near term profitability goals.
As a longer term objective of achieving a low to mid teen pre tax are are we buy 2021.
This is Sam is there are no adverse changes to current market.
Server industry conditions or legal and regulatory matters.
Based on the assumptions, we reflected on the slide improvements in annualized pretax earnings excluding income statement notable and amortization of NRC lump sum payments.
As expected to be driven by revenue growth, excluding NRC from higher lending volumes and a greater mix of on servicing.
It's about the cost reengineering actions to fund volume driven expenses and loving.
And lower interest expense related to corporate debt repayment and repurchase actions.
We also believe our targeted long term business profile has the potential to generate cash flow to enable investment and own sort of saying at replenishment levels or greater.
Any originations above our reinvestment capacity would provide opportunities to replenish our subservicing portfolio with the support of capital partners and provide ongoing benefits to our scale and margins.
Moving to slide seven.
We've made substantial improvements are letting it flow trials over the past 12 months.
Our portfolio recapture channel, we have improved recapture rates from single digit levels in early 2019 to over 20% in January.
This business has been positively impacted by callous improvements across the platform, including a human capital transformation improvements to enter and possibly and implementation of technology enhancements.
Some of these actions will continue in 2020.
We are looking to double our 2019 recapture volume and 2020 and achieve a 30% recapture rate by yearend.
Our reverse mortgage lending business is now ranked us another three lender bye-bye and we've been named as one of the best works properties to work for by National Mortgage news for the second you're in a route.
In 2019 reversed lending business delivered 23% year over year volume growth and we're targeting approximately 25% volume growth and 2020.
And our correspondent for Atlantic Channel. We're currently purchasing buyer from over 50, Counterparties and have an additional 77 in the pipeline.
We are targeting 2020 volumes of approximately $6 billion to $9 billion.
We have built an efficient operation where the cost structure that is expected to be competitive at the scale projected for 2020.
In our flow channels, we are targeting to grow our volume from agency purchase I wish you went direct customer flow MSR purchase arrangements to approximately $6 billion to $9 billion and 2020.
Currently our top five prospects for fall MSR arrangement represent $28 billion annual bye.
Although we have experienced and continued to drive a significant ramp up in volume, we continued to maintain high standards for counterparty risk tolerance and collateral quality.
In addition, we continue to evaluate M&A opportunities to further expand our lending and portfolio replenishment capability.
On slide eight.
I'd like to talk about our capital allocation of framework.
As we've discussed growing our originations activities and servicing portfolio, our major drivers of our path to profitability.
As a part of growth objectives, we think of our available capital as part of three distinct basket first to maintain adequate liquidity to operator business and mitigate risk.
Second for investment in the best to drive profitable growth.
And third if available excess for opportunistic deployment and share and secondly bond repurchases.
We believe that Perclot in capital in the first two years has a current market return level will result in the best long term value creation for our investors.
When making our investment decisions, we prioritize our lending travel as they tend to provide the highest returns and support a sustainable business model.
To the extent investment opportunity is not available at our targeted or we requirements, we might consider stock and second lien debt repurchases subject to existing debt agreement restrictions.
This would be at more attractive option to the extent we believe there's a disconnect between our current are expected performance.
And the price of our securities.
We are targeting owned MSR you'd be at approximately $90 billion at the end of 2020 based on our 2019 year end liquidity position and the potential for incremental liquidity sunbelt fuel efficiency initiatives.
Assuming cash target of approximately $200 million no additional internal sources of capital some balance sheet optimization actions and after adjusting for the SST I'll pay downs, we believe we have to capital to invest in up to $20 billion, an owned MSR you'd be big.
Joe improved balance sheet efficiency, we are focused on increasing leverage on servicing advance receivables.
Improved asset turn times.
And potential sales of non core or underperforming assets.
The extent to chew their own down I'm, sorry, your P.B. target becomes challenging due to capital constraints or other reasons.
We intend to rely upon greater subservicing growth to increase margins and meet our profitability objectives.
On slide nine.
We show the excellent progress we've made on across Reengineering initiative.
We've reduced our adjusted analyze expenses by over 40% compared to a reduction in a number of lawn service by approximately 18%. This.
This is a meaningful improvement our cost structure and we believe we have additional productivity opportunities available to us.
We are using disciplined and otherwise process used to drive continuous cost improvement through lean process design automation golf operations optimization as strategic sourcing.
And 2020, we've added centers of excellence for similar activities that are performed throughout the business.
[noise] continuous cost reengineering as a critical element of our business transformation.
Our cost structure today reflects the current portfolio composition, which is approximately 56% pls and pre 2016 forward getting back.
Our pls portfolio is the cost of service due to several attributes including high delinquency.
High percentage of modified loans in the portfolio and the high touch nature of the bars, even if they are correct.
Our pre 2016 forward Ginnie Mae portfolio is the next costliest did what tied to look at your profile and approximately $40 million in unreimbursed servicer expenses in 2019.
Our GST and post 2016, Ginnie Mae portfolios are the least cost into service.
We believe the expense reductions we have achieved.
In the fourth quarter have positioned us, but the top cortile servicing cost prolonged Virginia, mango CE launch based on the industry data that's available to us.
Over time, our goal is to manage our cost structure through our continuous cost improvement actions to reduce the high cost structure associated with our legacy portfolios and maintain a competitive cost to service for the recent vintage GST and Ginnie Mae alone.
[noise] moving out to our relationship with everything on slide 10.
I believe our client concentration with that ours. He is one of the key risk that must be addressed our value creation roadmap.
We are cooperating with the NRC to terminate the legacy PHH Subservicing.
The 12 31, its portfolio was approximately $42 billion of you'd be at approximately 310000 loans.
And were recorded net retained servicing fees of approximately $29 million for the full year.
We have to make this portfolio generated a pre tax loss of 3 million or $12 million annualized after direct servicing expenses and overhead allocations for the fourth quarter 2019.
We intend to reduce expenses to align with our smaller subservicing portfolio and anticipate the long do boarding fees will offset a significant portion of our transition and restructuring costs.
We expect approximately 25% of the portfolio will transfer before June thirtyth.
And the remainder shortly thereafter subject to discussions with energy and other stakeholders.
Over the course of our business partnership.
How does ongoing dialogue with energy.
How best to evolved the relationship 12 mutual benefit.
We remain in discussions with energy regarding a broad range of options and it's impossible to speculate as to what may have all.
Well the total energy portfolio accounts for roughly 56% of our servicing you could be as at December 31st. It also accounts for approximately 74% of our delinquent loans.
Because of a high delinquency. This portfolio has an inherently high level of potential operational and compliance risk and require substantial direct <unk> and oversight staffing levels. In addition, various you've never recapture benefits and there are certain provisions in our agreements with energy that could restrict our ability to consider certain strategic options.
Based on revised cost allocations to better align with the energy portfolio characteristics. We have increased our estimate of total fourth quarter NRC related losses from 8 million to $10 million or approximately $40 million on an annualized basis.
These losses are estimated on a fully allocated cost basis and exclude any positive benefit from the amortization of NRC lump sum payment which ends in April.
Going forward, we intend to contain ongoing losses through cost reengineering.
Well I'm driven expense reductions.
Growth in lending and other servicing.
[noise], Alternatively isn't or do you want to exercise the right the terminate the entire relationship <unk> convenient.
We assume the termination occurs on February 28, and a one year transition, we estimate that our transmission or restructuring costs net of termination fees would be approximately $20 billion to $30 billion.
Hey termination of the remaining NRC subservicing would eliminate our highest risk and most costly assets to service.
We believe this would enable a step change.
In our operation and support requirements, allowing us to eliminate a substantial portion of our fixed and variable costs associated with this portfolio.
After rightsizing of operations.
Believed as a potential trying to prevent or profitability by up to an additional $25 million to $30 million over the long term.
So while it would be disruptive in the near term, we believe the opportunity to shut this portfolio what overtime result in a more efficient and better balance business model with materially lower operating and client concentration risk at a more solid foundation for sustainable profitability and improve strategic flexibility.
Now I'll turn it over to Jim will discuss the results for the quarter.
Thank you Glenn My comments today will focus on our fourth quarter results as compared to the prior quarter. As previously noted our fourth quarter Investor presentation includes more details on our results and is available on our website.
Please turn to slide 12, our fourth quarter 2000 lighting reported net income of $35 million includes $28 million with interest rate assumption do other favorable net valuation impacts.
$50 million of recovery from a mortgage insurer in the service provider of expenses recognized in the prior period.
And $14 million upside in engineering costs among other items.
The positive pretax earnings impact the amortization of the lump sum cash payments received from an early in 2017 and she doesn't angel was $26 million in the fourth quarter and $24 million in the prior quarter.
The amortization of these lump sum cash payments will have a 35 million dollar positive impact to our pretax income over future periods. So April thirtyth of 2020.
[laughter] revenue of $262 million decreased by $22 million from the prior quarter, primarily driven by servicing write off lower gross float earnings and $6 million with unfavorable interest rate assumption driven not fair value changes or the reverse portfolio.
Operating expenses of $139 million with $40 million lower than the prior quarter due to continued progress in our cost from engineering actions, which remain ahead of our expectations and the previously mentioned expense recovery.
The favorable MSR valuation adjustment of $1 million in the fourth quarter is primarily due to $64 million a favorable adjustment in our agency portfolio totaling 33 basis points increase and the 10 year swap rate offset by 63 million dollar reduction in MSR value due to portfolio, but.
[music].
[noise] favorable MSR valuation adjustment in the quarter were offset by $30 million of unfavorable and I was just financing and other related liability valuation changes, which are recorded in other income expense.
Weve provided additional information related to the MSR valuation impacts on slide 26.
I would now like to provide comments and our servicing lending segment results.
As outlined on slide 13, our servicing segment reported 59 million dollar pre tax income compared to 13 million dollar loss in the prior quarter.
This was largely due to interest rate assumption given <unk> for value changes, which was $31 million favorable compared to $9 million on favorable in a third quarter $10 million law claim losses and other cost savings.
[noise] servicing business remains focused on providing sustainable loan modification solutions to qualified borrowers in made.
We completed over 5900 modifications in the quarter, 13% of which resulted in some type of debt forgiveness totaling $30 million.
As of December 31st the tolling your P.B., if our servicing portfolio stood at $212 billion, which is down from $217 billion at September Thirtyth, largely driven by portfolio run off a $10 billion offset by $6 billion, let it just shows primarily from LSR originations.
And purchases.
Owned MSR U.P.B., excluding sub servicing in a lucky 77 billion was in line with prior quarter.
Please turn to slide 14.
The lending segment reported pretax income of $4 million $5 million unfavorable to the prior quarter.
Forward lending reported pre tax loss of $1 million inline with prior quarter.
[noise] revenue of $10 million was $2 million favorable primarily due to higher volumes and margins recapture expenses were higher as we continue to invest in closing in the business.
We successfully ramped up our we launched correspondent channel to $398 million a funded volume in the quarter.
We burst lending business reported pretax income of $4 million compared to $9 million in the prior quarter, largely driven by $6 million with unfavorable net fair value change compared to the third quarter.
[noise] reverse London, rather than you were $15 million was $6 million lower than prior quarter.
Excluding unfavorable net fair value change revenue for the fourth quarter was flat to the third quarter.
As you can see on slide 15, we ended the quarter with $428 million with unrestricted cash at quarter end, we will fully funded on our servicing advance and committed warehouse facilities, they still available collateral.
We used $126 million of unrestricted cash to pay down the S. T L balance during January.
Our liquidity was $82 million higher than prior quarter, driven by $172 million of cash from the new MSR financing structures offset by $25 million repayment of debt, including scheduled amortization of the S. T L.
$12 million interest payments on secondly notes and other into a quarter cash uses.
[noise], a working capital needs will continue to changes we support the growth of our originations platforms.
We continue to closely monitor our balance sheet changes and look for opportunities to improve working capital as part of our liquidity management and balance sheet optimization initiatives.
We ended the year with corporate debt outstanding of $639 million following the repayment of $98 million with P.H. bonds and repurchases of $39 million of senior secured notes and a corporate debt to equity ratio of 1.6 times.
We ended the year with shareholders' equity of $412 million or book value per share a 3.06.
We realized a 47 million dollar favorable impact to our shareholders equity in the first quarter 2020 in the adoption of the C. silk accounting standard, which recognizes the future value of tailed laws prolong first mortgages originated prior to January onest of 2019.
In the fourth quarter, we incurred the remaining $14 million of our initial $65 million an upfront cost reengineering expense.
In addition, we've completed our initial assessment of certain cost reduction and process improvement projects related to our current cost reengineering target and a pipeline of additional initiatives.
Based on this review with the estimated in additional upside in cost, we engineering expense of up to $40 million for 2020.
I'll now turn it back over to Glenn Thanks, Jim.
Now, let's turn to slide 16.
For 2020, we're focused on originations grow and diversify your servicing portfolio mix.
Executing our continuous cost reengineering framework.
Optimizing sources of capital and continuing to reduce enterprise risks.
We believe we have built a multi channel mortgage pop work that positions us to take advantage of growth opportunities supported by our internal capital initiatives and external capital partners.
We continue to make progress our cost reengineering initiatives to enable a competitive industry cost structure and support our long term profitability objectives.
Well, reducing funding costs by expanding our structured finance funding platforms, optimizing our existing funding sources and paying down high cost corporate debt.
We believe our actions will drive greater balance and scale across our core servicing and origination channels and we expect to reduce client concentration risk overtime.
And we are continuing to proactively engage our regulators and track our progress as it relates to our regulatory commitments.
We're excited about the opportunities available to us we believe successful execution of our strategy will result in a more attractive business.
With improved flexibility to consider a variety of alternatives to maximize value for shareholders.
I want to back our management team board of directors and employees for their commitment during last year's integration efforts and as we take the next steps forward towards further improving our long term competitiveness and financial performance.
And with that we're ready to take questions operator.
Thank you we will now begin the question and answer session.
To join the question Q you made press Star then one on your telephone keypad, you'll hear a tone acknowledging your request.
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Our first question comes from Bose George of KBW.
Hey, good morning, and she's first just wanted to ask on your comments about NRG, you know and incentives over the benefit essentially that you would get it but.
Contract was terminated can you just talking about the likelihood that it does get terminated as their capacity out there.
<unk> then to other to others, either just thoughts on how that could potentially play out.
Hi, Good morning, Bose I know, it's close in the in the contract a that Weve filed publicly with NRC you know as if there is a termination of C.
Pls related assets legacy Auckland, subsurface, saying there is a termination penalty.
That is you know a discounted percentage of the future servicing fees. So it's a mature material percentage.
You know as we talked about in the script, we have yeah when ongoing an active dialogue with NRC.
Over the course of our relationship too.
I'm going to try to understand ways in which we can you know take our relationship our going away that you know solves both of our business needs and maximizes value for both of US I can't speculate on what you know NRC is is thinking or what their intending to do they issued their own press release today. They said there you have thought taking action on the remaining portfolio.
Yeah.
And actually didn't just to clarify the numbers that you gave the whatever roughly 20 odd million cause for the for the savings of you know whatever 25 30 million does the penalties <unk> separate from that.
Oh, the $20 million to $30 million of you know a upfront cost of affecting a transition a and restructuring of the business was net of any expected a termination fees that we would receive but again because of the confidentiality provisions in agreement, we're not at Liberty to disclose exactly what that number is at this point talk.
Okay, Great. Thanks, and then you get you said that you know you think that you can get low to mid teens are always I think didnt 2021, and I don't recall you know the guidance upside nature before you know just curious whats changed to give you more comfort now that you know you can get there are always next year.
In terms of our discussions of targeting low to mid teen are always for the business I think that's been a fairly constant theme and in our profitability roadmap and Howard directing the business. Yeah. We've made terrific progress and building a sustainable business model for the best at least we believe we've made terrific progress and building a sustainable business model.
We've got multiple sources of portfolio replenishment to feed our servicing portfolio. All we're building you know growing list of potential capital partners to support our growth in Subservicing, we've got objectives to grow our own servicing and as we discussed we're going to continue to Ranjan. Eric This has to adapt our cost structure to the evolving nature of our portfolio.
Yeah, we think it's appropriate burden for us providing appropriate return on capital for our shareholders and that's the objectives our plan.
Okay. Thanks, and then the yeah.
On the NRC payment.
Please note that the 35 million does that flow through just through the first for months of April this year through April and then after that how should we think about the <unk>. The run rate earnings I mean, essentially should we sort of thinking about that 35 million earnings being sort of lower than that run rate going forward.
[noise], Steve 30 feet amortization of the hours a lump sum payment will continue to RPL through April as we provided in our and our guidance I'm you know subjects any adjustments that that maybe necessary due to changes in interest rates.
Tom or changes in business conditions, Yeah, we are expecting at the company will be profitable you know, excluding the amortization in the energy lump sum payment and notable item.
Yeah in the third quarter, Oh 2020, so our objective is to.
Our objective all along since we started this profitability road map was to recognize that amortization is going away and we've got to build a business enterprise that's profitable without that amortization I think as we've discussed on the call. She could see the legacy Subservicing, we have with NRC. The pls portfolio is on.
Capital without that amortization of of the NRC lump sum payment. So object is all happened to build a growing and sustainable business enterprise.
The profit business enterprise that doesn't include the benefit of that lump sum amortization.
Okay. Thanks, and then actually on the the adjustment to see tool.
Whatever impact and be the mood change that had to a detailed.
Sort of going forward.
Does that mean, the you don't do you sort of so she the earnings on those deals that have been like in offsetting amortization that flows through the piano.
So yeah. It takes that those tails are recorded on the balance sheet you know it fair.
In theory, if you were to think about it as an MSR value there wouldn't be an ongoing amortization of that I'm out through the piano.
Yeah, we have obviously taking into consideration as we put forth. Our you know our affirmation of returning to profitability by the third quarter of 2020, excluding energy amortization notable items.
Okay. Thanks, and then just one last one for me.
You noted in terms of during this year it would be up sort of excluding some notable items or did you don't forget did you call out any of them yet or just could you give us a.
You know suit an update on what we could expect there.
[noise] in terms of notable items you know they they are hard to predict yeah. We did indicate on slide nine that we are expecting $40 million of incremental upfront cost, especially with our continuing reengineering and 2020, you are targeting reengineering savings of $35 million to $45 million for the year.
So that's about all of a one year payback.
Great. Thanks.
Okay.
Our next question comes from Giuliano balloon up of B T I G.
Hi, good morning, and.
Huh.
Continued progress during business around <unk> little bit of your perspective around capital allocation, obviously as you ramp up to 20 billion dollar or up to $20 and originations Williams.
And as you kind of looking at the <unk> numbers equally around being able to purchase about 20 billion of I'm, sorry, if you'd be.
Are those most possible at the same time and then the question is if you don't if you didn't scale one or the other pulled away all the way would you.
Easy access for downward.
They weren't julianna and thanks for the so for the congratulations <unk> Yeah. We we've for capital allocation methodology, you know first and foremost who want to make sure. We've gotten appropriate you know working capital and reserve for potential risk and liquidity airports that haven't been.
Second goes to investment in the business and our goal here is to build a profitable sustainable enterprise that is Raleigh and deliver at appropriate return on capital obviously investing in MSR us to do to computer guar servicing portfolio is a priority in that regard <unk>. Yeah. We said we have you have based on the December.
Our 31st 2019 half balance after adjusting for the pay down on the chart on the S. T L.
We have the ability to invest up to $20 billion and our MSR U.P.B. and they were looking to execute a number of balance sheet efficiency initiatives to declare our balance sheet fundamentally and have more effective use of cap on our balance sheet to fund a judicial MSR growth. So right now are our our expectation.
Is it with the exception of the previously authorized board share repurchase Oh.
Oh program for up to $5 million and shares that would be purchased in the open market.
Yeah that the balance of our capital will be going to fund growth in our owned MSR portfolio and there will be using some capital initiatives to continue to go R.R.R. Subservicing portfolio. As you may be aware, we've got a 10 million dollar a total limitation under the senior secured term on for what are called Oh.
Restricted payments, which include share repurchases or a second they got repurchases.
Okay that makes money that's oh.
Or just be on you know maybe person so going forward.
That makes the portfolio, obviously as you build the originations platform.
More.
Jesse and Gi product.
Do you have any sense of where you want the product mix to go or do you have any preference in terms of where that goes.
So well we you know all play we would expect assuming assuming our risk appetite equals the market risk appetite right that over time, our portfolio composition would approach that of what the general market is right. So we are not you know it.
Other than return requirements and our specific view of risk in certain Ginnie Mae products.
Yeah, we've talked before about we're just not based on our own portal experience, we're not comfortable where.
Certain industry players are placing rescos products. So you know we are looking to you know when ball GFC business and Ginnie Mae business.
Yeah, I think we've been.
Yeah, really successful hasn't laden and being competitive involved in both arenas against somebody star risk appetite, so and eventually quite frankly I you know as we think about GFC reform going forward and the potential for there to be limitations on you know to GFC.
<unk> products.
We would have to I think expand our product set to include non it not agency product or not document bottom.
That makes most sense and because you made a comment about.
Your servicing costs.
Again.
<unk>.
Do you ever sense of where that was before and is there additional.
Opportunity to continue to drive the.
<unk> costs for the service.
Loans, even lower.
Yeah. It's your outlook if I go back to you does that the chart reflected on page nine of our Investor supplement you can see it you know two couture Twoq 2018.
No. We had 916 million dollar annualized adjusted cost structure that cost structure. It was on competitive in just about any profit shoot that you could mention <unk>. Yeah. We have got a lot of work we've taken out over 40% of our cost structure TV integration process, we're now down to $531 billion on annualized basis.
Different aspects of our portfolio have different cost structures I think that's best shown on slide 25 of Investor supplement, where we show the market costless or for the body gets on assets that we service in the portfolio.
I believe right now we are very competitive in the our cost to serve for GRC engineered product and we are continuing to execute on cost reengineering initiatives going forward to make ourselves more competitive I think stuck in this.
Business generally your price take or not a price makers, so having always striving for the most effective cost structure you could possibly have it's a competitive advantage that we think a now get that were on M.S. pay.
And with our goal of operations capability and the investments, we're making in application of lean automation and optimizing our global off for a platform I think we can maintain a highly competitive cost structure going forward.
<unk> <unk> I really appreciate it and congrats.
Thank you.
Once again, if you ever question. Please press Star then one.
Our next question comes from Lee Cooperman of Omega family Office.
Yes, thank you very much.
I apologize to food drift Phillies questions, but I was going to TV program. This morning, I go into a little bit later than usual, but.
But I have about four questions, maybe I could put them out if you can is from the what are the you choose.
You gave a lot of numbers, which are good but the bottom line news.
Given the way you intend to run the business what do you see the sustainable or are we use after tax return on equity.
When the Threed out of a book value number and how will you see good take it to achieve that so.
Sustainable or are we in the timetable forget to do.
Second I've been very surprised personally that with the stocks depressed price versus their into I guess the value potential earning power that nobody has made a past us like and assume that the poison pills. So to speak as the Florida Attorney General see if PB are kinda poison pills.
A little would take for you to resolve these issues and give them off the table.
Given the fact that were Florida equip ratio would be to Florida AG would do you work through approved.
Second or third question I guess is the a publicly traded bonds. So at a higher yield to earning a business had an attractive change of control put feature where we more aggressively touring them given the liquidity balance sheet.
And Ah.
Third do you see gives shareholders would be better served if we saw it proactively a private mortgage solution.
You know you're doing very fine job working very hard to fix it but is the show it was better off maybe being the risk by transaction with a larger who profitable entity.
And those would be my principal questions I assume the size of the buyback is limited by your bank agreements because 5 million really is a nice gesture, but it really means nothing compared to the size of the company, but any hope it could be these questions would be appreciated. Thank you.
Yes, there could be anyway.
I'll take them, leaving the order that you put them out there. So yes in terms of an ROI target for the business. We are targeting low to mid teen pre tax are always.
You know by 2021, I think that is based on the market dynamics that we see today that is a sustainable early for this business. There are others in this industry, who are earning the other three terms pennymac is hurting us returns and maybe more and ours. He is very nice returns as well.
I think our business falls more closely related to Handymaxes NRC. So I think that is a a sustainable return level at least as we see the market today.
Yeah, we do have a sizable amount if at all so we don't expect to be a cash taxpayer you other than the beat and guilty tax what you pay today, but in terms of an ordinary income tax payer that I don't think we're going to be attack there for quite some time. So I think in the foreseeable future pretax does kind of equal after tax on a cash basis.
In terms of our price versus asset values and the discount Oh look I think I said before we don't think it's warranted. That's why we put the share repurchase program in place. It is limited to your point by the.
In terms of the S T L.
And you know as we talked about our value creation road map for value creation strategy for the company. There are a number of risks that are unique to awkward and you you mentioned the Florida AGTC at PV matter that is a unique restock when that's still hanging out. There you know you do think our customer concentration risk with NRC as a risk that's unique to us.
And another risk that's unique to US is the pls servicing that's legacy sub prime servicing with highly delinquent borrowers.
I think we do a good job of it we help keep bars in homes do a lot of good modifications for borrowers, but its still.
And asset that's not a common asset that you see a in the mortgage banking market today.
Our board is open to considering any at all up opportunities to maximize value for shareholders I've been public about that before we believe is we continue to move forward and execute our strategy and we continue to deal with some of these enterprise risk that are getting talk when it creates more flexibility for the company to consider a variety of alternatives to maximize.
Value for our shareholders.
In terms of the high yield bonds, you know again that is limited by our that's 10 million dollar basket as well.
But he leaves I as I put forth <unk>, Yeah, we think a.
Profitable business is a valuable business under almost any set of circumstances. So we are giving a car already in our allocation of capital to those actions that will drive the business to profitability and help us achieve our long term return.
And that is getting growing our servicing book growing our sub servicing book growing our lending platforms and creating a sustainable business model. So right now other than what we put forth in our share repurchase program right now where you are working capital for all of our capital really to support the growth and fix development of our business model.
You know in terms of seeking private market solutions, you know again I'll go back to the board is open to any at all opportunities to increase value for shareholders.
We've been public about we're looking at a different a number of different M&A opportunities.
And again the board is open to all possible options that can fair value for shareholders maximizing value for shareholders.
When you talk in terms of a go low to mid teens pre tax or are we so let's say you are talking 12, 13, 14%, where the normal tax would be.
Food company.
When it makes it.
I'll tax right you francoise about 25%.
I guess, where 2021 went up so you're talking about 9% to 10% after tax return on equity as a objective where we somewhere in the here if do we get to be profitable company. So tragic I would think dues to justify value of book value.
Today, you probably have to 12, two or 2% if protection book. So we're not we're not quite there were there pre tax is the objective.
Just talking myself.
I appreciate your responses. Thank you Mr. thankfully.
Okay.
That's the question and answer session I would like to turn the conference back over to Mr. Mussina for any closing remarks.
Thanks, Harold appreciate it.
Look I I'm really proud of the team here for the job they've done to bring off into a place where we have generated positive net income we felt a sustainable business model and we've got a clear and actual roadmap ahead to deliver compared to other value for our shareholders through building a profitable and sustainable business enterprise look forward to updating you on our progress on our next earnings call and bank.
If we were continuing interest and often.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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