Q2 2020 New Residential Investment Corp Earnings Call
Good morning, and welcome to the new residential second quarter 2020 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
To turn the conference over to keep my Margaret's with.
That's relations. Please go ahead.
Great. Thank you Jason Good morning, everyone I'd like to welcome you today can you residential second quarter 2020 earnings call they get all for joining us.
I need to hear today on Michael Nierenberg, our chairman CEO and President he takes into account for Chief Financial Officer, Jack Navarro, President and CEO of distributing division of new rents in indirect.
Oh, yeah throughout the call. This morning, we're going to reference the earning supplement that was supposed to the new residential website. This morning, if you're not already done, though 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. They will be forward looking statements. These statements by their nature or uncertainty may differ materially actual results I'd encourage you to review the disclaimers in our press release earnings supplement regarding forward looking statements during either been factors contained in our annual and quarterly reports filed with the RBC.
And we'll be discussing for non-GAAP financial measures. During today's call reconciliation of these measures. The most directly comparable GAAP measures can be found in our earnings supplement it with that I'll turn the call over to Michael.
Thanks, Kate good morning, everyone and thanks for joining out [laughter]. It's we continue our recovery from the early days out of Kobin 19, I'm happy to report that we've made great progress on many fronts.
We have more cancer in our balance sheet today than ever before we closed the quarter with over $1 billion at cash and liquidity and the company has never been better capitalized we termed out it reduced our daily Mark to market exposure of our investment portfolio.
95% of our investment portfolio wait for me agency mortgage backed securities or non daily Mark to market, where has a mark to market holiday. We made sure we have a surplus of capital to handle any additional amounts of advanced financing if needed. So far to date for advanced seats have not increase it all in fact due to pre.
He pays and better performance, we've actually had 88 net positive result in advances, which are required to less cash and actually positive cash for our company regroup book and we'll continue to focus on earnings and booked out your growth in both our investment portfolios and our operating business the earnings power of our mortgage company.
It's one that has plenty of room to grow and I feel that we've only scratched the surface. When we acquired new rates in 2018, the company made $38 million in pre tax income along the way we acquired the assets of Dichrotec, which are now fully integrated and expect the company to make upwards of $800 million in 2020.
The company today, it's over 5500 employees and it's an important player in the mortgage ecosystem.
Our focus on customers and helping them through hardships caused by cobot 19, it's something we take very seriously and I'm very proud of our partnership that we recently announced with Salesforce will help our customers with a better experience. This partnership will also help us in our direct to consumer business direct to consumer channel.
According to our recapture efforts in customer retention as we get better and we have plenty of room to improve our profits will increase and our MSR amortization will be lower.
On our investment portfolios the non agency mortgage markets have lagged a tightening we have seen in the corporate markets and expect some normalization of spreads over time, what should we should lead to increase values in our portfolios during the quarter. We sold a small amount of non agency bonds that are not core to our investment strategies.
The securitization markets are open during the quarter, we completed three deals which include MSR financings RPL financings and nonperforming loans financings. We will continue to do term securitizations locking in lower cost of funds and term financing across our entire portfolio.
We still haven't 75 to 80 billion up call rights when the arbitrage comes back and spreads tighten we will continue we will get back into Galen calling deals.
All right mix our portfolios today are seeing some of the lowest pricing we've seen in years. They wanted a few asset classes that go up in value when rates rise and our agreed offset to our origination business. So what does all this means.
The company today is stronger than ever earnings potential is one that should grow overtime I'm confident that we will continue to be up a growing book, creating more earnings and getting the dividend back to normalized run rate and hopefully seeing our share price back into double digits I'm now going to refer to our supplement which has been posted online and I'll begin with quick.
With page two [noise].
Page two it's really just a little bit of a snapshot of our business.
Origination servicing that's part of our mortgage company and then we have our investment management business, which is no different than than what it's ever been when we look at the company today, our market cap is $3.1 billion, our investment portfolio was $18.5 billion.
Net equity $5.3 billion and on a pro forma run rate, we expect our servicing business to have $325 billion are servicing.
At year end 50 billion, we projector originations to be between 45 and $50 billion in 2020 and pretax income for the mortgage company have almost $800 million.
Page three.
For the quarter GAAP net loss of $8.9 million, a two cents per diluted share that's due to the faster amortization, we saw a on our MSR portfolios. We do think overtime that will normalize corning's hundred $40 million or 34 cents per diluted share pre tax income for the mortgage company 205.
Hi million dollars, we paid a second quarterly dividend of 10 cents that was up from five cents when we cut our dividend in the first quarter dividend yield as of June 35.4% cash on hand as of June 30, North of $1 billion net equity $5.2 billion, but.
Are you 10 $10.77 per diluted share and that's up from 10 71 at the end of 333 31.
Reason not higher again after amortization on our MSR portfolio.
Page four.
New Residentials road to recovery.
Coming out of coded we said, we set forth a number of objectives and I just want to highlight a few of them one at strengthen our cash position to capitalize on opportunities I missed the ongoing volatility we're able to play offense and defense again $1 billion, a cash and are on our balance sheet more cash than ever before.
Our lower risk profile lower leverage as I pointed out earlier, 95% of our port investment portfolio away from agency mortgage backed securities have no daily mark to market or heavy or have any margin holiday.
[noise] continue to build out a great origination and servicing company, our mortgage company again in the quarter $205 million in pre tax income, that's hard to 27% increase quarter over quarter.
Protect our MSR to recapture the way we're gonna do that is grow arc, our direct to consumer business volume quarter over quarter is up 44% as I pointed out earlier, we have a lot of work to do there and a lot of room to grow at <unk> and our recent announcement of our of our.
Relationship with Salesforce should help us a lot there create additional liquidity for search for advanced financing.
Coming through co varied and looking at the forbearance numbers, we estimated some numbers that quite frankly were higher than.
Namely then we then we need it we ended the quarter with $2.2 billion of unused capacity for advances.
And then finally loans and forbearance decreased quarter over quarter for me from at peak of 8.4% to 7.8% and we continue to work with our homeowners, who where we're dealing with coping 19 hardships.
Page five.
Again more cash on our balance sheet than ever before what we tried to illustrate here is if we took some of that capital and we deployed it in the market at 15% return our core run rate for Q2 would've been a little bit under 40 cents per day per diluted share on a core basis.
[noise] paid sick. They said this is she would like to talk about our implied book value stated book value $10.77. If you look at or operating company and put some multiple on the earnings if you take earnings for our pretax earnings.
Earnings estimate for 2020, which we estimate to be between $750 million and $800 million and put approximately a three multiple on that that'll give you enterprise value of something a little bit north of $2 billion. If you take that and then add the.
If you add the implied value of that $4 per share or implied book value is between 14 and $15 per share got close last night.
At approximately $7 saving.
80, some things that [noise].
Page seven reduce the risk and leverage 95% again of our of our investment portfolio No daily Mark to market. We see team has done a great job, reducing our daily mark to market exposure entering to long term.
Financing facilities or some of our facilities, even go out two years and some of our loan on some of our loan portfolios.
Can we took out.
Extra protection there around advances in anticipation of potential a higher advance needs. They didn't didn't need that in the quarter, we're going to keep that it that extra $2.2 billion and well see what happens is down the road, we wanted to be prudent and make sure. We're very conservative here and again on the securitization side.
We issued three deals in the second quarter. We recently did another deal in the third quarter on our MSR portfolio, 99% in the portfolio has no daily Mark to market exposure, we completed an MSR securitization of $265 million during the quarter that comes off bank lines that's term.
And we'll continue to do more MSR securitizations down the road and we extended our existing financing facility with one of our largest lenders 30 ended the year.
Servicer advances I'm not going to spend a lot of time on again, because nothing's changed in the quarter on the loan portfolio.
Today, 91% of the portfolio has no daily Mark to market. We expect by the end of Q3 that number to be closer to 100% on a non agency portfolio is approximately 85% into portfolio has no daily mark to market exposure. The other 15 ish percent as a 46 LTV and that's comprised.
Hi, either I interest only strips and.
Feel like instruments.
Page eight.
Our balanced portfolio investments, how do we think about our company.
Our investment portfolio is no different than it's ever been it's much smaller it's much better finance.
Then it's ever been we expect some kind of recovery.
In the future on our MSR portfolio.
Servicer advances again I'm not a lot of there's been no change there and then loans and securities a much smaller today than they've been in the past.
We think about our loan and security portfolio with a 60 basis point 10 year note and that too and that 15 basis 0.2 year note and rates I'm kind of in the same place quite frankly than where they then even we'd go will go back to the first quarter, we're not going to deploy a lot of capital and.
And levered assets with a with a mid single digit type return origination and servicing business continued to be a primary focus the return on equity in that business has been very very good.
You know as we as we sit in that robots housing market robots finish a refinancing market, we want to make sure that we continued to perform extremely well there and you saw the results in the first quarter.
Well, we look at our mortgage companies since we acquired the or a new whereas in 2018.
2018 or earnings at the end were $38 million today again, it's going to be approximately $800 million the origination volumes have gone up from.
Approximately $10 billion any year to 50, which should be about $50 billion. This year and our servicing portfolio should end the year give or take about $300 billion. So what are the some of that some of the important thing for our company. This year, one is recapture you're going to hear that word today and.
As we go through the rest of the year, it's something that's very important so we can minimize our MSR amortization and retain our customers continued scale on market share growth across all of our channels and margins today and the origination business have never been better from a servicing perspective continue to de risk our servicing counterpath.
It is one of the things that I pointed out earlier in my opening remarks, we acquired the assets a die Tech detected service a number of of asset for us.
Some of though the that integration is is fully complete and where you actually we have some servicing transfers coming up from PHH over the course of the next quarter Third Party service in growth show point, our special servicer, it's very very well regarded in the industry. We have about 25 to 30 different third party costs.
Clients and that will continue to grow as we deal with.
With the current Kobin 19 pandemic and then as we think about technology continued use in growth of our price proprietary digital processes to drive efficiencies and customer experience. We've made a lot of tweaks to our website portal.
To help our customers get through this.
Hardships that recurrently experience. So how do we think about ourself today page 10, we've repositioned the company. We're focused today on obviously, our investment portfolio as well as our operating business with low mortgage rates high margins elevated refinancing activity, we're going to continue to focus on.
Origination business.
As I pointed out earlier, we think we've only scratched the surface we have a lot of room to grow we're one of the new kids on the block and we look forward to actually improving our company again, we have 55.
Hydra dedicated professionals across a cross or a company who are doing a great job with most of them working remotely as we think about volatility we're going to retain a lot more cash than we ever have we have a billion dollars a cash I gave you an early.
Earlier illustration about if we deployed some of that capital at a 15% return our core run rate for the quarter would have been 40 cents portfolio on the investment side term financing.
Reduced daily Mark to market wherever we can any additional acquisitions that we do down the road will likely be financed in the term markets.
As we think about dads forbearance requests.
Again, I pointed out shell point has a great reputation in the industry Jack the bar and his team do a fabulous job, leading that lead leading that side of our organization and working with our customers.
On the advanced side.
Again $2.2 billion, an excess capacity nothing really to talk about there and then I spoke about the digital nature of what we're trying to do.
Now, it's it's a I'm going to flip to page 12 on the origination side pretax income for the quarter $181 million, that's an increase of 201% quarter over quarter production again about $50 billion and obviously the return on equity as we turn over our capital.
Approximately 200% in that in Q2 gain on sale margins continue to be released robust for us and everybody else in the industry page 13. This is one of the most important things that we continue to focus on keep harping on this again recapture.
In our direct to consumer channel, we have almost 4 million customers in our ecosystem on.
On the servicing side, we need to keep as many of them as possible, we need to provide better service and one of the thing at our main focus here in the direct to consumer channel.
Well hopefully pay off as we retain more customers, we drive down our MSR amortization and we continue to create.
Great profits for our company has direct to consumer.
Margins are very robust and the servicing side page 14, $24 million and pre tax income in Q2 servicing portfolios increased 74% year over year.
We again, we estimate our servicing portfolio to be between 300 and 325 billion.
At the end of the year and a return on equity is about 44% for the for the quarter.
Page 15.
This is talks about helping homeowners during.
During this this hard time, and obviously always over 185000 Forbearances granted in 2020 year to date, that's more than 60 times 2019 volumes.
Our servicing business will continue to work work and help homeowner homeowners moved from forbearance permanent solution.
Whether it be repayment plans deferments loan months' whatever we need to do it I hope homeowners will continue to do and again, Jack and his team to a fabulous job.
Now I'm going to spend a little bit of time on our investment portfolio I'll talk about MSR ours.
On page 17.
Our MSR portfolio today 610 billion as of the end of Q2.
Faster prepayments faster amortization as a result of this refinancing this refine market as well as the purchase market, we expect that to abate over time thinking about it this way the offset between amortization on our MSR portfolio and the origination businesses is a very very good hedge so.
As you origination business tails off at some point down the road the gain on sale that you'll see in the MSR business should be very very significant.
Pointed out earlier in my opening remarks that MSR value today or at some of the lowest levels. We've seen in years, we'll talk about that a little bit more.
During Q1 day.
Page 18, our own portfolio, how do we compare our portfolio to the industry.
This is a slide we talked about frequently and on our earnings calls, our prepayment speeds or 20% slower than the industry averaging in June why is that.
Our low our average loan size is smaller than the industry. Our average loan size 133000 industry 215000, we have a much more seasoned portfolio then the industry's 79 months a weighted average.
[music].
And from origination.
The industry is 38 months or Ficos aurs more credit impaired 721, Franco versus 749, and a refinance refinancing will population is much smaller than the industry at at 33% versus 72% how do we think about the MSR business.
60 basis point 10 year notes when it a few fixed income instruments that will go up in value.
Historical pricing at add some of their more more recent lows. We've seen in years I think there's a ton of upside as we think about the MSR business stays 19 on the loan side.
Set out a coming out of it or we're not out of Kobe, but coming into March to get rid of as much as our of our daily Mark to market financing as I pointed out by the end of this quarter, we should be almost 100% of non daily Mark to market financing. The loan business today is $2 billion, we will add if we think that.
At the absolute returns makes sense for our cost to capital if not.
We'll continue to focus on.
Other ways to increase earnings across our portfolio on the non agency residential security side I pointed out that roughly 85% of our businesses non daily Mark to market, we still ever call rights.
Only difference in this portfolio today versus where we were pretty cobot is much much smaller returns overall again, we're not going to go out into play a lot of capital and Levered returns in the mid single digit servicer advances on page 21, I'm not really going to spend any time right because there's been no change whatsoever since last quarter and.
I pointed out again, it's been a positive event as we've gotten a more cash than cash then that cash that actually had to lead this system and then finally on our covert stuff.
As we think about forbearance forbearance numbers continue to decline, we don't know what the future brings I don't know that anybody does we're going to make sure we have enough cash on hand to deal with our with our servicer advances.
And helping customers through this and with that I'll turn it back to the operator, we can open it up for questions.
We'll now begin the question and answer session. Second question. You May proceed Star then one on your Touchtone phone.
Are you using speakerphone, please pick up your handset before press in the keys to withdraw your question. Please press Star then too.
First question comes from Doug Harter from Credit Suisse. Please go ahead.
Thanks.
Michael you're talking about that illustrative example of.
Deploying cash can you give us a sense as to kind of what that timeframe might be for deploying tasks and now I know you said you then like kind of securities right now, but but what else would you want to deploy into.
So as we thinking about the cash deployment.
The one thing I would say as we can during the quarter.
As we as we came out of Q1, we reduced our agency positions to next to nothing.
During the quarter, we've added about.
Six to 7 billion of the agency mortgages as we as we get through the quarter will likely deploying more capital into agency mortgages.
The ones you know the one caveat I'd add is Fannie two and a half their trading 104, and a half to 2.05 dollar prices at some point I do think rates are going to go up when we need to be mindful of that and how we think about the agency business versus our MSR business.
So when we pre coded we had agency mortgages against our MSR today, we have agency mortgages against our MSR. However, the different todays pricing dynamics ours is much much lower so I think cash deployment will likely come in the form of agency mortgages right now I don't we don't see a lot of value in many other things that.
We'd want to deploy capital in and it's very likely that will sit I see it was more cash in our balance sheet today than than we have in recent past.
And then also I guess, how do you consider share.
Sure repurchase.
In that equation, you know given given the discount to book that you currently trade up.
It's you know I would say anything and everything is on the table as we think about driving.
Our share price higher.
And you know getting back to again my opening remarks of double digit a double digit stock price book value. We think its is understated we put that slide in there closed the quarter I'd add 10 77, when if you think about it this way if amortization really slows down at some point and the mortgage.
Company lets say does less volume.
A one churn on our MSR portfolio is worth about 1 billion and a half dollars at $4 in book value. So if you think about it today 10 77, even if even if the mortgage company broke even.
And the MSR value was a form multiple instead of a three multiple you're talking about roughly $4 a share in book value or something close to 15 versus a.
Approximately at $8 stock price. So we think there's a lot of room to grow AMRI are our team and my theme is truly the road to recovery you know it bothers us tremendously that we that we are trading where we are.
You know our customers or the you know the capital that's allocated to US we have a fiduciary responsibility to drive to drive high returns for our shareholders and we're going to continue to do that so whatever we need to do there we're going to do.
Great. Thank you Michael.
The next question comes from Bose George from KBW. Please go ahead.
Thanks, Good morning, actually just a follow up on Doug's question terms of capital or cash liquidity to use.
You had the high cost debt that you guys took out and which is prepayable at any time you know what are your thoughts about.
Paying some of that back.
So.
There's a couple of things one is we're going to carry higher cash and reserves today than we have right until the world normalizes as we think about the cost to capital. The loan itself is an 11% coupon. If we were to raise equity Bari you know barring the warrants that were issued along with.
Loan so separate the warrant for a second.
If we were to raise capital going back to historical dividend yields our dividend yield would would be something around 12%. So the loan itself at 11% yeah. Its high cost capital, but at some point will likely refinance that with something else. So whatever our options. One is there's unsecured debt as those markets continue to tighten it's something.
That we look at.
Daily, but we will carry more capital on our balance sheet I'm not going to we're not going to go out and do this term loan and then turned around and pay it back a month later, because we think the world is safe because I. We just don't know so in general we're going to carry more cash we're not going to pay back to loan today, and we're going to use whatever we're going to do whatever.
We continue to drive our share price higher.
Okay makes sense I could just.
Switching over to mortgage volumes, you guys guided to 45 to 50 billion for the year.
The what was the run rate in June you noted that the volume was little lower this quarter because of April just curious is the June volume's, suggesting a run rate that kind of gets you to that 25 to 30 billion for the back half of the year.
Yeah.
So on April was lower March was you know we pulled back in March obviously, as we got a Nonqm for example, and pull back on some of our on our channels. So March and April were a little bit lower.
June it's going to be a little bit under 4 billion I think was where the number came out.
And July volumes are robust and we think thats going to continue.
The one thing I want to be clear about is it's not about doing 40 billion or $50 billion. It's about how much money, we can make for shareholders and I think that's the most important thing, but June was a little bit under 4 billion.
Okay and the gain on sale margins in July remain similarly elevated.
Yeah, there, they're very robust I would say the starting to see a little bit a tightening or on the corresponding side.
But the direct to consumer you know the third party originated stuff or JV business very very robust margins.
Okay, great. Thanks.
Things Bose.
The next question comes from Stephen Laws from Raymond James. Please go ahead.
Following up on on Doug and Boses question, but.
So on the gain on sale margin clearly much higher for the direct to consumer from your slides, we talk about what's driving the increase in volume there what initiatives and efforts.
Have you guys made and what have you had to do that come to me to drive that mix higher.
To to increase the blended critical origination platform.
More to Steven so on the direct to consumer side. If you think about and again, we have roughly 4 million customers, we need to be able to retain all these customers with the amount of incoming phone calls we have and the amount of personnel. We have in the company today, which is for agree.
Later, then the amount of personal we've ever had we think we're gonna do a better job the relationship with Salesforce that was announced.
It's something that we think is going to help us with that process things are going to be much more automated and the process will be a much more seamless then a so called manual process.
Yeah. The telephone we have a lot of work to do you know we have where we're very focused on our marketing efforts I'm, we're going to hiring new chief marketing officer written them in the markets now I working on that higher we need to do better job on our web portals, we need to do a better job.
This overall, we do we do a good job now.
Items that are elevated you know processing loans not only for us for the industry and this is why you're seeing so you know such a robust margins on the on some of these channels.
It's not easy thing based on the volumes I saw this morning, Fannie Mae came out and announced that they think there's going to be three trillion dollars a mortgage production. This year, so high volumes for us better service for our customers.
More automation.
More affiliate relationships like the ones, we announced with Salesforce and I think the combination of all of those should.
Enable us to to get to a much better place and do more.
In the direct to consumer channel retain more customers.
Great and this maybe as a little more on the macro side, but isn't due to your origination business as you.
Narrowed the products mentioned.
Of moving away from non QM.
That decision you've seen the government announced the Q impacts will be extended there's there's talk you could even take the.
Well to 48% on.
You know how does that change origination channel are you looking at stuff outside the non well numbers you impasse, you're going to expand things to really cover everything you want to do and then around that think about.
You know the at the upcoming election, and recent ruling by the Supreme Court that could end up impacting the HFSA as far as who runs that being a presidential pointing you can you talk about any any positives or negatives that you could benefit or hurt you guys. As you think about the changes taking place.
So on that from a macro perspective on the geopolitical side I can't I can't help anybody there here, we don't have any any control on what's going to happen with CMP and FHLB pay and.
What we need to do is continue to perform for our customers and continue to do will.
What we need to do there.
I don't know you know when you think about the patch in non QM.
You know we're in the money, making business our mortgage company as I pointed out earlier has a lot of room to grow we pull back on non QM win.
Quite frankly, there was no liquidity in the markets, we pull back on the agency mortgages. When there was no liquidity in the markets. That's what put us in this position that you know then that were in you know when a much better spot today, probably better than ever but that's will put us in this position. So I think we'll focus where we can on things that we you know that make sense the agency business.
This is something that makes a lot of sense now we do our we are evaluating the non QM business again, it's not something that we're going to just jump back in unless we think we have robust gains similar to my earlier comments that we have 77 billion in call rights.
No. There's some of those deals are in the money, but we're not going to call them until we think they make a lot of sense. So.
We'll be strategic around it but I think that focus is going to continue on the origination side. It will be continue to be on the agency side.
And lastly on the forbearance down I think 60 basis points above remember the numbers from the slide deck.
Hi, 7%.
Kind of your outlook there your risk.
Bull and bear case around that number kind of how do you think about it under the table. So if you got pulled down kind of some forecast from a worst case scenario, but.
You know do you think the forbearance risk is bigger in the near term or is it more from a bigger economic slowdown in 2021.
You know I have some I have some thoughts jacketed Navarro, whose you know my partner in our partner is on the phone I you know the cares Act I mean, if you're going again, another bill that could be helpful. I think to homeowners. We really don't know at this point, but Jack anything you want to add you know from a commentary.
Yeah, Michael I would yeah, I would just see that there's two very sort of significant ways that we're thinking about it today. One is the is the very clear indirect trends on the portfolio that we have today and that is basically that the number for forebear, new forbearance requests has come down significantly on a daily basis, there still are some but.
Come down significantly and the number of people who have said to hardship is over and they are ready to move to a permanent solution have increased.
And the overall number of Forbearances has gone down so those trends are pretty clear are you assuming the advances you mentioned it earlier.
But the other thing I might add is that you will see the special and again not I'm not I'm economists and I'm not trying to talk like one, but we'll see the special unemployment insurance expire in July and we obviously see an increase in sort of covert activity around the country. So we'll have to we're gonna have to see how those things play out and were.
We're trying to just be very vigilant across the enterprise.
Michael direction on these issues and we were sort of the head to disappear on the servicing operation, but there's no indication today that these trends are positive trends are going to change that's what we're living with today.
Great appreciate that color Michael Jack Thank you.
Hi, Stephen.
The next question comes from Kevin Barker from Piper Sandler. Please go ahead.
Thank you.
Michael This you know an idea of what your numbers look like for direct to consumer originations in the month of June and then how that's progressing through them up in July.
I just want to reference back to your estimates for $6 billion of direct to consumer originations in the fourth quarter, which is approximately double from what you're doing right now in the second quarter.
<unk>.
We could come in with whatever I'm sorry.
I just want to understand the.
Caveat to a Julie good wondered yes June we did 1.2 billion.
So when we're talking about in the fourth quarters, we get better around that channel and recapture.
We think the fourth quarter numbers of whether its 4 billion or 6 billion. We think those numbers are real.
We think we're going to be able to head.
So what do you think you're you're going to if you did one 1.2 in June where do you think that's going to end up in July there can be north of one five or you are you close to that run rate already.
We think we're gonna be about two to our targeted to be at 2 billion by September.
Okay.
And then what gives you confidence that you're going to be able to hit that number is it that there is continuing to refine demand at the levels that we saw in the second quarter or is there a specific.
Recapture rates that are going to jump because of marketing programs or different different targeting programs that you're doing.
It's a it's a little bit of everything we got you know will be I think will be better around our lead conversion. We've added some we've changed changed some of our leadership quite frankly.
In the origination business bearing Silverstein joined us as president work and working alongside Bruce and Jack.
There.
We were going to be better we need to be better I mean, you hear me say that every time, we talked about the company, we make a lot of money in the company, but you know again I think we're only scratching the surface, whether we do 2 billion or 3 billion. I know you know from an analyst standpoint, you're looking to to fine tune the estimates.
It's hard for us to tell if the refining market goes away in the purchase market goes away or MSR multiple will go from a three multiple to a for multiple will make an extra billion and a half dollars. Our book value will be 15, none of us have a crystal ball, but the way that we think there's a lot of offsets to the profitability were seen in the mortgage.
Many of the mortgage company stays where it is.
Continue to see higher at higher levels of amortization on our MSR portfolio.
But we're really happy originating mortgages and keeping the MSR is that todays valuations.
Okay, and then I'm going back to slide.
Six you know you're estimating that.
Approximately.
There are $5 of additional value or little over $4 of additional value from the origination franchise.
But the market typically puts a very little multiple no earnings.
I'm, just given the volatility associated with it and what we've seen out there but.
Like their comps are improving significantly.
Do you think.
Do you think you'll eventually get credit for that $4 in book value in the market or do you feel like it's.
You might be better as a separate entity.
And you know.
It's a it's a great question, Kevin I think for US we will you know new resonates a stand alone.
By itself I mean, if there's a way to create more shareholder value, we'll always look to do that.
So whether it's a three multiple a to multiple if you look where penny trades or if you look where Cooper trades.
And thinking about those companies you know I didn't know that were there yet but at some point I think we'll get higher multiples for these businesses that continued to make money.
Your point on the origination side, you typically don't get the same valuations because it's a much more volatile earning stream.
But again, the offset to our $4 is $4 in gain on our MSR portfolio that we mark down north of $1 billion over the course of the past few quarters. So you know I like the way we're positioned I like I loved the valuations where some of these things are I think they're extremely attractive the crystal ball today.
For any of US I think is a very very foggy, one because none of us know, what's going to happen and again going back to Stephen's question, what do you get to another bit you, but do you get more more money into the system from another bill.
I'm going to cares act ends at the end of this this month I mean, it all remains to be seen how this whole things kind of play out that far recap carrying a lot more cash today.
Yep.
Hi, Thanks for taking my questions. Thanks.
The next question comes from Henry Coffey from Wedbush. Please go ahead [noise].
Good morning, everyone and thank you for taking my question.
You Mike is it an oversimplification to say that you've got basically two businesses and investment business, where you're going to be focus mainly on agency and keeping our eye open for opportunities and then the origination servicing business, where you see a lot of growth and that business.
You're going to keep putting capital into that business.
Is that the simplest way to think about it.
Yes, and no Henry we haven't we have a 600 billion dollar MSR portfolio. When we acquired you know new raise.
You know over the years, we've actually we've had some very good acquisitions right. We did DHL assess steel and 2015, we developed a very good partnership with dock when we did the deal with a new pen New records in 2018, we they die Tech in 2019, all of these were strategic around MSR advances.
As we got it more into the operating business, however that operating businesses there to support our portfolios.
When you look at our credit portfolio on the non agency side.
I did I get to find them I know, it's quite a large amount of our credit portfolio from our issuances service by show point in Europe.
That we take a lot of comfort and because you know again, Jack and his team do a great job around the servicing side of that business. So the it's while it's a standalone business. It does support our investment portfolio. My main thing around our investment portfolio today as you know we are not going to go.
Out and just deploy capital to 5% Levered return it just doesn't make sense right you know for our cost to capital I think Cabot somebody asked.
Whether it's those before about.
The loan the term loan.
The point cap it at a 5% when you're burnt when you're paying at 11% coupon on your on your you know you're dead doesn't make a lot of sense will lower that cost of debt and pay that off you know I think it you know over the course of the next whatever six to 12 months. Once we once we have a clearer picture of the world but.
They do stand alone, but they do work together I think it's the best way to think of it.
And then I you know you talked a little bit about mods last time.
There's been some discussion in the press, but no verification from any one that you know as we get to the tail end of this whole forbearance equation that will get something you know hamper harp 2.0 nowhere some some form of streamline refinances someone who's been in forbearance for.
Three to 12 months can then get out there and take advantage of really low interest rates and.
No obviously it would be good for the borrower it'd be good if the economics of the mortgage and it would be.
Good for you I don't know who loses but.
Is that a reality or is that just some discussion in the press.
If nothing that I am aware of today would it be surprising the answer is no you know, there's when you're thinking about the origination world. Today, you know, it's it's it's alive, it's well its robust yeah processing times take a little bit longer because of the sheer volumes that everybody is seeing.
And you know what the fed by and all these mortgages I'm not sure that they need to do anything more than that but I just don't know.
You know, but I think anything anything everything's on the table right now it depends what happens down the road.
Great and thanks for answering my questions and bright horizons and agree on water.
We will thank you.
The next question comes from Trevor Cranston from JMP Securities. Please go ahead.
Hi, Thanks.
One more follow up on in terms of capital deployment opportunities.
Can you talk about what you're seeing in the in the third party MSR market, where there was slower bolt.
And if you see that is somewhere you could potentially be looked into deployed capital given how low servicing multiples are today.
Or if you guys are primarily just focused on returning what you can generate.
Thanks.
I think it's twofold. One is we're not seeing it we're not seeing a lot of MSR is come to market in the bulk and the bulk market. The the one thing I would say is you know we have been we've acquired you know a few large packages a bulk MSR as over the course of the path.
Couple of years.
Mortgage banking in mortgage bankers are in the business to originate mortgage loans and refinance mortgage loans. So unless we are able to acquire these assets I think at at levels below where we would originate them ourselves, we're not going to be that acts there again, unless they are cheaper than.
And you know, where we think we can originate because we're going to continue to focus on her own origination business.
While saying that you know two multiples on to handle.
And low threes on agency MSR thin and private label MSR as are very very attractive, but I just think the one thing to note as mortgage bankers.
We'll continue to refinance.
Loans, they create and there's no reason for us to jump in that pool again, we've learned quite frankly, unless the stuff gets much cheaper.
Okay. That's helpful.
And then in terms of the change in the fair value of the MSR. This quarter can you give the split on in terms of how much of that was due to realize payoffs this quarter versus the interchange and expected prepays and changing market multiples are going forward.
It's a little bit of everything what I would say is weve increased our speeds.
Our speed assumptions for down the road.
You know one is we've lowered some of the recapture rates on on certain assets. We have in our portfolio and then multiples you know when we look at conventional multiples and we look at Genie multiples.
Our conventional you know our conventional business is much larger than our Ginnie business.
Any multiples the way to where we are in the mid twos on the conventional side. We are in the very low threes. So overall were like a three multiple which as you know again some of the lowest levels. We've seen in many many years. So we love where we sit there I don't know that that amortization is going to slow down anytime soon.
Soon because when this robust housing market a robust rifai market. That's why we're going to capitalize on the origination side, but when that does slow down we think that the MSR stuff is going to go up a fair amount. That's why we're excited to create it where we are right now.
Okay. Appreciate the comments thank you.
Thank you.
The next question comes from Giuliano blown away from BT I Ji. Please go ahead.
Good morning, and congratulations on a great quarter.
I just jumping on the origination side to fine tune, though some of the questions that have been asked before I'd be curious what kind of margins you're generating on the direct to consumer so platform versus kind of JV retail on and some of your core and some of the correspondent as well just to try and get a sense of where the margins coming from.
How much of a difference or is from DTC.
Bobby on the direct to consumer side, we're seeing gainer margins said roughly 400 basis points. These are gross numbers on the you know on the retail side. There are even higher than that are in you know give or take 500 basis points. This is why.
I you know the point that we continue to hammer home is that we need to get better and that direct to consumer channel because not only it's going to help us retain our customers, it's going to drive a lot more earnings through our route through the system for shareholders.
On the correspondents side, you know you've seen a tightening of spreads there you're starting to see MSR multiples increase versus where we were at the end of Q2.
And as a result, you know you're probably give or take in the you know the 20 Fiveish basis point range I think during a.
During that you know the tough times, we saw in March and April undercover 19.
We saw highs of give or take 60 odd basis points.
The net number on the correspondents stuff is probably you know give or take 25 basis points right now.
That makes a lot of some of them kind of thinking as we go forward.
Obviously, the oil and come up forbearance, you've already had along its contacts with a those customers as they come off is that part of the strategy in terms of growing your direct to consumer margin. Once people kind of re perform for a few months or you can go out and hopefully can reach out for that refinance or are you trying to find your because it just more portfolio wide returns for the will drive the volume this year.
I think it's more portfolio wide I mean people that are in forbearance will work with thing and provide mods and other solutions to help them stay in their homes.
But the broader portfolio is is where we're focused.
One last quick one on thinking about how you're hedging out the portfolio as a whole.
Obviously I missed our values are close to.
At some of the lowest levels, we sing a long time, but do you have to do you have any kind of hedging to rates moving lower or are you and how are your hedges no in terms of rates moving higher or you kind of leaving that Optionality open at this point.
Real were doing both we have agency mortgages, which hedge your MSR business, we have north of $6 billion of agency mortgages against their MSR is today.
We are monitoring rates at the end of.
March 331, the tenure Treasury with 66 basis points today, it's about 60 basis points. So it's essentially unchanged I think a difference use what we're seeing today versus the end of March was that the mortgage basis has tightened so rates have done nothing but the mortgage basis is tightening because the fed continues to buy a lot of mortgages, but will come.
Can you to monitor you know in a higher in a lower rate environment at some point.
You know for example, Fannie two and a half they're only going to go up so much so much more than where they are right now just from an absolute return perspective for out for fixed income investors. So we're monitoring both ways, where probably more biased to think rates are going to go higher at some point I don't I don't think it's it's necessarily today.
Okay.
But where I think we're protected both ways. The other thing to point out as we are you know we do have a loan in bond portfolio that have duration.
So we have agency mortgages, we have loans, we have bonds, but as you know added at an overall three multiple on MSR as we think there's less risk there today than there was obviously a couple of quarters ago.
That's great I really appreciate it and I will jump back in the two thank you. Thank you.
The next question comes from Tim Hayes from B. Riley FBR. Please go ahead.
Hi.
Mike I hope you're doing well.
First question.
You talk about your off balance sheet investments in operating companies a bit more how those companies have been performing recently and then you know I think I'd pose this question last quarter, but at what point do you think it makes sense to internalize these investments and further bolster the on balance sheet operating company.
So on the what I would call the off balance sheet stuff Avenue 365, and he street, which are a title and appraisal company or they are now they are and have been part of the show point you read family Theres been no change there.
As we do more volume there obviously, the appraisal business will grow the title business will grow and the overall earnings from those businesses will grow.
The third party, where we where we've made other acquisitions add Guardian, where I think the upfront payment was between six and $7 million total with earn out is about $25 million, that's going to make between 20 and 25 million of EBITDA. This year. They are in the property credits business obviously with.
Foreclosure moratoriums and Oreo moratoriums out there the earnings will be impacted negatively, but if you think about it overall total purchase price give or take $25 million and 25 $20 million to $25 million of EBITDA. This year in light of that.
Closure moratoriums, it's been a great investment and the guys I've run that do a great job co vs.
We have $64 million into that that's 20 million of equity, there's 44 million of debt.
They have been impacted again by similar things set as Guardian has they had they provide a broad suite of what I would call Tech enabled solutions to originators and Servicers, obviously, a little bit harder to get out there from a travel perspective and create more from a sales standpoint.
And drive more revenue, but that company should do between 20 and 30 million a of EBITDA. This year. So all in all you know those three business, it's really two off balance sheet businesses for the most part should continue to do fine I will do better once we come additive.
Kind of covert 19 world.
Those are really the you know probably the two largest.
Off balance sheet investments.
Mhm.
Got it and then yeah just in the second part of that question I guess was at what point do you think it made sense to internalize. These investments are or further your stake in these companies.
Well Guardian, we own 100%.
Koby, it's we own 26% of we'd like to see you know so guardian, we own and koby as you know depending upon how how they do where we're very fond of Ah the management team there I've been pretty vocal about that Rob Clements and John surface.
Or a great partners of ours, but as as their earnings grow you know we have optionality to increase our our ownership to the extent that we want to do that.
Got it Okay, and then just one more for me.
On the dividend respecting that into aboard decision you made some comments earlier about hopefully getting at higher.
In the not too distant future and I know you recently raised it but it's still well below the core earnings run rate this quarter and just given that you have a very strong liquidity position and don't really need to be more defensive their arguably just wondering how you see the dividend trending in the near term, where if you think it makes sense it kind of Ki bin AD.
This level, while there's so much uncertainty ahead.
I think it's a little bit of.
<unk> does it make sense to keep it at this level you know if we thought we'd get back to book value and get paid for it. It's something that you know again, it's a board decision, it's something that we would discuss.
We don't want it just put capital out there because you are in a uncertain world you know 10 cents versus our normalized run rate of 50 cents. Obviously, there's a big Delta there we want to continue to get through a couple quarters have what I would say very strong earnings and grow earnings you know our main thing is if we go.
Turning to the market in our book value was truly $15 I use the MSR example of $4 per share.
So 10, 77, plus four Bucks lets say its upper 14th and the stock was trading at age.
You'd have to think that you know the stock the equity is very very cheap.
But again, we don't want it does put out capital without getting credit for it and I do think that in a 880 interest rate world, which is kind of how we're all operating in.
I don't know that the mortgage riet space, whether to us or any of our other friends and peers out there should be trading at you know 10 or 12% dividend yields and in this environment. So you know we'll monitor it I'd like to see our you know I want to we want to get back to book value I mean, it's it's something that's very important.
I think for everybody specifically, our shareholders because you want to perform for shareholders.
It is hard as you think about the world that we're in and what's going to happen.
I know, that's a pretty broad vague answer.
And I gave you not no [laughter].
Yeah, I get how you're thinking about it so I appreciate that and then just one more quick one Elgin Bob do you have a book value update as of today.
It's it's pretty similar I would think okay, where where we closed the quarter give or take me might be slightly higher because MSR values are a little bit higher right now.
Got it.
Thanks for taking my questions. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Michael Nierenberg for any closing remarks.
Well, we appreciate Everybodys support obviously.
In this.
Crazy World, We all live and I hope everybody phase well, we look forward Jack performing for our shareholders.
And and updating it throughout the throughout the quarter and on our next earnings call.
Based on our thank you [noise].
The conference has now concluded. Thank you for attending today's presentation as intuition you may now disconnect.
[noise].