Q1 2021 New Residential Investment Corp Earnings Call
Paul.
[music].
Good day and welcome to the new residential first quarter 2021 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key borrowed by zero. After today's presentation, there will be and opportunity to ask questions to ask a question and you May Press Star then one. Please note that this event is being recorded.
And I would now like to turn the conference every day Kaitlyn Mauritz head of Investor Relations. Please go ahead.
Great. Thank you Paul and good morning, everyone I'd like to thank you for joining us today for the new residential first quarter 2021 earnings call. Joining me here today are Michael Nierenberg, our chairman and CEO and President Nixon Toro and our Chief Financial Officer, Bruce Williams, CEO of new routes and bearing Silverstein president of new Red throughout the call. This morning, we were going to reference.
And as the earning supplement that was posted and the new residential website. This morning, if you've not already done. So I'd encourage you to download the presentation now before I turn the call over to Michael I'd like to point out that certain statements day will be forward looking statements. These statements by their nature are uncertain and may differ materially from actual results and.
I'd encourage you to review the disclaimers in our press release and earnings supplement regarding forward looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC and in addition, we'll be discussing some non-GAAP financial measures. During today's call. A reconciliation of these measures. The most directly comparable GAAP measures can be found in our earnings supplement and with.
I will turn and Oliver and Michael.
Kayla and good morning, everyone and thanks for joining us.
As I look back and we look back what a year it's been.
I'm Super excited and we're Super excited for our future and what lies ahead one year ago, our stock was trading with a six handle and and around $6 50, dense, we're raising and pool of capital and 11% and the world continue to feel uncertain today, we have more vaccines and demand. The U S is healing and energy just announced an acquisition of.
Caliber at one $675 billion, what a difference one year has been our investment business and operating business lines had good quarters. Looking ahead, we feel that we are poised to grow earnings and create a world class financial services company with caliber and the competitive landscape gets more difficult on the operating side and the.
And that will play into our strength with our capital base balance sheet and great leadership team.
The combination of the caliber and new res teams with the great talent and both organizations will create a company to be reckoned with the possibilities for us our analysts and we will be focused on rolling out other products to our homeowners and build on the great retail presence day caliber has created with refinancing volume significantly lower and the purchase Mark.
And for housing expected to remain robust and there's nobody that will be better positioned to take advantage of this scenario than us.
As we look ahead, our investment business is well positioned to take advantage of higher rates with MSR is leading the way. It will go up as rates rise leading to more cash flow and higher earnings and the addition of caliber and the great strides we have made around recapture and new rates will offset the lower expected earnings we will see and the origination business is.
And on sale margins continue to shrink the potential for a higher capital charges will lead to more consolidation and the mortgage industry and more MSR sales.
With the GSE footprint shrinking and certain segments, we will benefit as the non GSE mortgage market grows again, the core business. So the largest single quarter since pre COVID-19, we called over $600 million and.
And deals the <unk> business continues to grow we have turned non QM non QM and back on and with a great sales organization at both caliber and new Res and we're excited for the volumes that we will continue and hope to see one thing that is really important to us and our culture is the need to help others.
We will be working on lending programs to help all communities around the U S. We look forward.
And so rolling those out soon and the capital front, we are better appetites and at any point and our company history.
As we go forward, we will retain higher levels of liquidity to take advantage of any of the opportunities that we see ahead I'll now refer to the supplement which has been posted online.
I'm going to begin on page two.
So when you're thinking about energy.
Over since since we rolled out the company and 2013, we paid $3 $6 billion and dividends and our equity today is $5 $5 billion. Our total shareholder return has been 101% and today our market cap is in and around $4 $7 billion.
From a balance sheet perspective, 24 and $5 billion.
Of assets on our balance sheet and we are the largest non bank owner of mortgage servicing rights again, one of the few assets that will go up as interest rates rise.
And the origination side first quarter volume $27 $2 billion for new rates.
Pre tax income 191.
$2 million and we are a top 10 non bank originator and the servicing side the servicing portfolio $304 $6 billion <unk> at the end of Q1 pretax income $31 $6 million and again, a top 10 non bank mortgage servicers.
Page three.
The earnings from company highlights and GAAP net income $277 6 million or <unk> 65 per diluted share pre tax income $222 $8 million from origination and servicing segments core earnings $144 8 million or <unk> 34 per.
Diluted share.
David and remain the same at 20.
Dividend yield at the end of March seven 1% Q1 shareholder returned 15, 2% at the end of March cash on hand, little over $1 billion net equity five $5 billion and our book value of 11 point.
$11 35.
Book value gained from the end of Q4, and four 4% and total economic return during Q1 six 3%.
And then as far as all of you know, we raised $522 million when we announced the caliber transaction page for US really is our book value work I'm not going to spend a lot of time on this again book value of $11 35, that's up from $10 and 87.
As we look at page five Q1 and beyond and highlights our when we talk about what we did in the quarter and a little bit past the quarter. Obviously, we announced caliber we're super excited about debt transaction will talk a little bit more about debt as we go forward when you look at our capital.
Referring back to my earlier comments, we've never been more equities and in our company history.
We have $2 3 billion of unencumbered assets of which $1 billion is cash when we look at our origination business $27 $2 billion and the and the first quarter debt as a record for US call rights again turned back on highest quarterly number since the end of Q.
Q4 of 2019, we call it $636 million and deals.
On our <unk> strategy, we bought out a cumulative amount of $1 1 billion and BB OS and we're starting to redeliver, those and we look forward to continuing to grow that business as we go forward and again, our shareholder values. When we talked about book value grew four 4% and the quarter and our economic return went up.
Economic return was six 3% I'm going to spend a minute and talk about our investment business.
When we think about the go forward for US I think debt. This plays extremely well into our strength. We do believe that the private label market will will start to grow again as the GSE landscape pulls back and certain areas. So when you think about us as a REIT and you think about the talent on our investment portfolio side, we're very excited about that.
And we think that'll be accretive as we go forward call activity again $636 million and the first quarter.
<unk> business is back.
And when do we think about it from a profitability standpoint, we're super excited about debt as well MSR asset sales are likely to rise as gain on sale margins continue to contract.
And.
Originators are going to need more liquidity and if you think back to our history. We're poised to take advantage of MSR sales and the marketplace and the non QM front I mentioned earlier, we started rolling out and non QM origination side the combination of.
New risks and caliber.
It should make us one of the largest non QM originators in the marketplace and when you think again about our securitization business our investment portfolio. We're very excited about what's to come on the single family rental side I haven't spoken about this and the past we have a pipeline of about 1100 homes.
About 50% to 60% of those are already funded and.
And we look forward to continuing to grow that business and then again on the on the EPS Fred and that's a business line that we expect to continue to grow on page eight and just looking at our investment portfolio during the quarter repurchase $1 $6 billion of agency securities $333 million or <unk> <unk>.
During the quarter, we sold $750 million of residential loans and $186 million of legacy.
And on non agency securities, mostly down and the capital stack from a credit perspective as a dollar prices have rebounded and even surpassed the highs that we saw in the first quarter of.
2020 post Q1, we grew our asset for our portfolio and as I mentioned and we've already in this quarter called $100 million of non agency deals the bottom part of the page it could have and have a look and just see from.
Our investment portfolios and that should give you a sense of of how we think about our business on a go forward basis.
Page nine are on the MSR front and just a couple of things to point out here one is.
While we saw a MSR values rise and the first quarter. We do believe there is a lot more to come there.
Not seen the massive slowdown that we expect going forward from a speed perspective, which will lead to.
Lower amortization and more cash flow with first quarter was still fairly robust on the amortization front. When you look at our financing business around the MSR portfolio continue to move our MSR financing business from bank from bank balance sheets into the capital markets and that'll be a common theme as we go forward.
And once everything's transferred our bank balance sheets into the capital markets. When we look at our mortgage rates for the quarter to $2, 79% versus $2 86 in the fourth quarter and on the servicing side we increased.
And new res and SMS servicing and <unk>, 53% of our overall portfolio, which is up from 50% at the end of Q4 on the recapture front I mentioned, we continue to grow our recapture our rates and the group has done a great job there and if you think about where we are and the low twenty's calibers north of 50% and you think about.
$515 billion portfolio of MSR as we have at the end of Q1.
Again, we think that as we get better and better and the refinancing markets continue to contract Youre going to see a lot more cash flow and higher earnings for the company as we go forward.
Page 10.
As we think about rates and the first quarter.
And our Z, our MSR portfolios benefited from higher rates.
Referring back to my earlier comments Msr's are one of the few assets that will go up as rates rise you can see some sensitivity tables at the bottom part of the page on the left side changes and recapture rates what that will do to our market values and then overall multiples on the bottom right side of the page what that will do to improve.
Slide book values as we go forward. So again $11 35 book value at the end of Q1 as we go forward and as rates rise. We think that book values will continue to increase core rate business.
Again, not to beat a dead horse $636 million of collateral called and the first quarter, we have already called $100 million. This quarter, we did some loan sales and we expect to.
And to continue to increase our call business as we go forward.
Page 12, I'm not going to spend a lot of time and that Theres no real material change from our balance sheet as we think about the loan business or the non agency legacy business still relatively small as we as we look back and the company history again during that COVID-19 period. If you recall back to March of last year, We sold six 6 billion and non agency.
And see a legacy securities today.
Our total balance sheet around that is about 1 billion three of which 52% of risk retention bonds that we have to hold for Dodd Frank and.
And the servicer advance side page 13, not a lot really to talk about actual advances went down quarter over quarter, we have a ton of capacity.
And again to the extent that debt.
Net advances increase down the road.
And we're well positioned to to handle anything that comes our way I will now start talking a little bit about the operating business I'll turn it over.
A chunk of this section to bear and who is sitting to my left.
<unk>.
Starting on page 15, the acquisition of caliber.
Again Super excited I think the combination of new Reds and caliber will.
And are positioned to compete against anybody and the industry. We have a lot of what I would call high aspirations.
Just a couple of highlights on this one as we hope to close this in the third quarter I know a number of you were thinking about that as you model up.
Earnings and the balance sheet from a purchase price standpoint, roughly one times book, We had 140 billion of MSR and this is Ed.
Currently recapture rates on the caliber from north of 50% and industry, leading there when we think about the retail footprint.
We have.
When we think about marrow and their retail network and they referred to as the Thundering herd.
And I'd like to think about our retail and the caliber retail folks as like a thundering herd.
As I pointed out rates are up a fair amount from the fourth quarter, our refinancing markets have come off a fair amount in the first quarter.
And so what does this mean, you're going to continue to see a and much larger purchase market.
And again, there's very few companies that I think our wealth as well positioned as we are once this deal closes with.
Great retail network on the caliber side to take advantage of that when we think about asset generation is roughly 380 branches on the caliber side, we are going to be rolling out more and more products to that system.
And I can imagine down the road at some point, we have a consumer business and.
And leverage off the retail network. If you think about some of our history here at fortress with Onemain and some of the and spring Castle early on.
I think thats again, our possibilities are endless and what we can do with the with this company when we think about talent scale and our capacity the mortgage industry over the past couple of years has suffered from a lack of.
Available talent the combination of these two organizations give us all we need to support growth and grow and and meaningful way as.
As we go forward on the technology front, the combined company spend well north of $300 million.
And I look forward and we I think all of US look forward to game changing mortgage technology.
And when you look at the valuations and some of these mortgage companies that are theoretically mortgage technology companies on the origination side.
And quite frankly in my mind, there's a lot of bells and whistles around that there is no reason that we can't be the same or better as we think about that and think about our technology investment. So we're very very excited about debt and then overall when we think about the transaction is going to be very accretive for our company our employees and our shareholders. So very.
And their page 16.
This is really just a snapshot of caliber.
Pre tax income and this goes back to 2020.
$891 million and 2020.
25%, CAGR, 54% retention rates fifth largest non bank originator by purchase volume and get a very very important stat. As you think about the refinancing market is kind of rolling off roughly 380 retail locations and the six largest non bank retail lender and 630000 customers on a scaled plat.
For him. So overall again super excited about the.
<unk> transaction.
Complementary business models, and I think where we go from here and I'll now turn it over.
Presentation to Barron.
So Darren alright, Thanks, Mike Good morning, everyone and I'll turn it on slide 17, and just to Echo Mike's sentiment.
We're also really excited about the opportunity to combine the new res and caliber platform and while we're in the early stages of our integration discussions. We believe the two companies will have significant upside thats going to accelerate our objectives goals for the origination and servicing efforts.
As the slide show, we feel the combination of platforms will provide a strong alignment and all of our business models and long term strategies, whether that's in direct to consumer by increasing our recapture rates over 50% leveraging calendars distributed retail channel to improve our JV franchise and wholesale further penetration and.
And the director broker channel, while expanding our non QM platform growing our correspondent footprint, expanding our servicing franchise and both our customer for life and special servicing strategies and as Michael also just talked about and talent scale and capacities to support our growth along with our transformational mortgage technology transactions and when.
It'd be great from both companies and we're looking forward and providing more details in the months Paul.
So turning to slide 18, and give a little bit of color on the new.
Operating results.
First quarter of 'twenty, one was a great quarter for origination platform, including record quarterly fundings and record quarterly pull through adjusted lock volumes.
For the Division, we ended the first quarter with $191 million, a pretax income of 23% decline quarter over quarter.
Primary reason for the decline is cheap and margin compression as we saw margins compress along with rate move and February however.
However, and April we've seen a stabilization of margins and all channels other than wholesale which has remained under competitive pressure due to some of the moves from the larger players and the sector.
When I look at the performance of each channel during the quarter made progress and many of the key goals and initiatives that we've talked about on our last earnings call direct to consumer remains a huge focus for new red and energy and a continued long term opportunity for our company. We've continued to grow this channel, 30% every quarter and in March we had our.
And largest funding months closing $2 3 billion and loans. This is something we're really excited about as we're adding capacity and starting to meet our demand and the prior changes and sales and operational efficiencies are taking hold.
And the JV business. The first quarter is typically slower than the rest of the year given the seasonal lock.
Volume slowdown in December and January.
Our JV channel has also been historically purchase driven and were seeing more purchase volume.
And as refinances slowdown.
Regarding our wholesale channel, we continued to grow our platform by adding new customers and broker relationships building, our branches and while margins have compressed the relaunch of our non commit non QM channel has begun to pick up steam were new.
Now out with all of our product offerings and sales teams have picked up momentum so lots from $35 million and April with the goal to get back to a pre COVID-19 levels of $125 million per month.
And our correspondent channel, we had another record quarter purchasing 17 over 17 billion and mortgage loans with March being our largest funding month ever at over six and $5 billion.
And we will continue to evaluate the market dynamics of our correspondent channel Opportunistically buying MSR and <unk> and adding to our customer base. So when you think about our performance for the first quarter. Both in terms of funded units and other metrics, we use to evaluate our performance we saw great progress.
Turning to slide 19.
We showed this slide last.
Last quarter as well, but I do want to highlight the market share growth.
That continues to be agnostic to market conditions as all mortgage companies have grown origination production and profitability in 2000 and good morning.
In a rising tide lifts all boats. However, we've demonstrated our ability to successfully grow not only our origination volumes and also our market share and our focus is to continue capturing more market share. We believe we can do that across our platform and across our channels at the end of the first quarter, our market share is growing and two 5% which is 30% growth.
Quarter over quarter.
Small market changes small changes and market share can have a big impact on our overall profitability and that's what we're playing for and.
We also have one of the largest servicing portfolios.
Over $1 7 million homeowners and that we want to retain as customers of new reps and as we continue to build on our brand and get better and recapture the plan is to execute on that goal.
<unk> side of the page reflects a recapture performance and the first quarter.
And earlier on some of our process changes taken hold and that can be seen in the quarterly refinanced recapture statistics with a 27% 27% increase quarter over quarter.
And this proves out the importance of our brand awareness and recognition to further build customer loyalty and message being as we get better connecting to our consumers our direct to consumer platform will only continue to grow.
Moving to slide 20.
I already highlighted the performance of our direct to consumer channel and my earlier comments. However, just to reiterate that we have done a great job growing this channel and you can see that and the top left chart three.
Volume and quarterly fundings of $5 7 billion.
Pull through adjusted lock volume and six four which in turn and drives our recapture performance, we continue to see margin compression quarter over quarter, the DTC margins.
Increased slightly in April so expectations are that margins may flatten for the remainder of the quarter.
We had our largest funding months again in 2000, 2021, and March 2021, and did so for each month and the quarter.
And as I mentioned and changes to our tech and processing structure to improve efficiencies.
<unk> also entered the new customer acquisition business and expect that expansion will offset some of the reduction and refinance volumes and amongst the top.
Turning to slide 21.
So the servicing division we ended the first quarter was 31 6 million and pre tax income of 34% decline.
The primary reason for the decline and DTI is related in large part to the seasonal adjustments to accrual accruals that were released at the end of last year and a reduction and expenses for context, our third quarter 2020, PCI was $30 million and more in line to normalization of our servicing P&L.
We ended the first quarter with an aggregate servicing portfolio of approximately 305 billion NPV and approximately $1 7 million customers, which represents modest growth quarter over quarter and on the bottom right you will see a slight tick up quarter over quarter in terms of cost per loan to service, which is due to the efforts we employ to help COVID-19 impacted and homeowners.
<unk> and loss mitigation solution and retain their whole we expect these costs to continue through the end of the foreclosure moratoriums.
On slide 22.
We continue to provide the summary, as it's important to me it's important to our business to showcase the strength of our best in class Special Servicer, and our special servicing team.
Jack Navarro, and our special share point mortgage servicing team do an outstanding job and are well recognized and the industries is one of the best special services and the business.
The recognition from both Moody's and Fitch to upgrade our platform and.
After the significant growth and the challenges from COVID-19 are further testament to our strength and special servicing.
On this last slide slide 23.
I think it's just worth highlighting and continued progress we've seen from borrowers on forbearance.
Since the cares Act was first announced we've helped over 234000 homeowners navigate the COVID-19 pandemic of 142000 resolve their forbearance 40000, homeowners and resolved and forbearance and since refinance or pay day loans and sold our numbers are in line with the industry and good.
And so far more to do to help out homeowners.
With that I'll turn it back over to Mike.
Operator, why don't we.
I will turn it back over to you and open up the lines for Q&A.
Thank you and we will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
And if youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two once again, let me start and one to ask a question and.
At this time, we were part of inventory to assemble the roster.
Our first question today will come from Kenneth Lee with RBC capital markets. Please go ahead.
Hi, good morning, Thanks for taking my question.
Just one on the funded origination volumes and wondering if you could just provide a bit more color brown and what you saw in the quarter and.
And perhaps I wonder if you could just share some some of the key factors.
And that's driving the expected origination volume and the second quarter.
So I.
I mean, just keep in mind and the context of our funded volume right. There is a lag and the context of.
And from lock to closing and that depends on the channel origination say between 30, or 60 days or more and certain channels.
I think what we've seen is and Michael briefly talked about this we have seen a decline in our overall refinance volume as rates have risen and refinance numbers are down probably close to about 20 or 25% and.
And though we are starting to see a little bit of a stabilization as I mentioned before in the context of the month of April.
And where we've kind of leveled into what I would say, perhaps depending on what happens on the interest rate environment, hopefully a more normalized market and I say that and in terms of.
Margins and.
And and funded volume.
Great very helpful and just one follow up.
And if I may just around the call rights.
Wondering if you could just talk about some of the key factors driving that and the favorable environment right now thanks.
So and the coronary business I mean, a lot of it has to do with spread and where assets are trading quite frankly, when you look at the loan markets you look at the non agency bond markets.
We've been pretty clear, we're not putting out a lot of capital for non agency mortgage securities here as we think the risk returns for.
For us are not great as.
As we look at the call business, However, and you look at it again asset pricing you look at what's happening with forbearance rates, we expect our call business, having $70 billion to $80 billion of call rights to to remain robust as we go forward.
From here on and that's really what day drivers have been.
Great very helpful. Thank you very much thank you.
And our next question will come from Trevor Cranston with JMP Securities. Please go ahead.
Alright, Thanks, and good morning, good morning.
You guys mentioned normalization of gain on sale margins a couple of times I.
I was wondering if you could dig into that a little bit more and maybe provide some context for you.
And what are you seeing margins today versus where they were and the first quarter or or just generally.
Would you guys would think of as a normalized.
Overall margin for the origination business.
And it really depends on the channel and we look at each of the channels.
On a different framework I would tell you that.
And the direct to consumer channel and we're seeing margins and the low to mid three hundreds.
<unk> channels of our retail channels, we're seeing our margins coming in and say the mid four hundreds and <unk>.
<unk> has been as I talked about somewhat volatile and the contacts as margins continue to compress given the competitive pressures that we've seen and.
We are now basically a 100.
And then we've seen decline month over month, there has been a very very very steep decline and margins overall within the wholesale.
Channel and that's why it's so important for us to focus on alternative products and Michael continues to talk about our our non QM franchise and and.
Really for us, it's a big push to to make sure that we get that rolled out with between us and as well as the partnership on the caliber side on the correspondent side.
We have definitively seeing kind of what we're hoping for is a little bit more of a flattening of where we are with margins and I would tell you that they.
Range around 35 basis points and it just really comes down to.
How youre splits are and how you attach to the channel overall, but I would tell you that they are also flattened out around that 35 basis point range.
Yes.
One further comment on that I mean, you would expect as we go forward margins to normalize back to probably 2019 kind of levels I think for the industry and when you think about where we are and bear and always refers to the so-called channels.
With with the combination of caliber and new Reds, and thinking about retail and the refinancing markets coming off the.
The retail channels, where the retail network is so important to us the direct to consumer.
Channel is very important to us and then we think about our JV channel doesn't mean, we're getting out of any channel, but I'm just saying when you think about from a profitability standpoint, a lot of those those three areas are very sticky and nature. When you think about think about it from a profitability standpoint.
Got it okay. That's helpful.
And sorry, sorry.
Okay.
Yes.
And just think the channels can actually perform.
Differently, depending on the market so having the multiple channel multichannel strategy can be debit beneficial right and so even if one is underperforming you can actually outperformed and the other market.
Sure.
Okay.
And then last quick last quarter you guys.
Hum.
Published a table that shows the earnings benefit.
And from rates, increasing and I'll.
There is two big moving parts there one was less amortization on MSR and then.
<unk> was lower.
Income from the origination business.
And just curious as we are actually seeing interest rates rise about the level of magnitude.
And in that chart.
And is there anything that you.
Do you feel like has changed versus those numbers, which I think.
And overall <unk>.
Core earnings benefit.
On either the MSR cycle and the origination side.
We haven't seen the benefit from a amortization standpoint, and the first quarter.
While we've seen gain on sale gain on sale margins come in and overall origination.
Profitability will be lower as we as we go forward or at least that's our guest Imation right now with the MSR asset should go up and you will get more cash flow because when you look at the refinancing markets Theyre, probably off 30, plus percent and ovarian and gave a number we were down 20 or 25%, but I think you know.
From an industry standpoint, and this has been published by a number of our friends and peers out there as they've reported.
There is there was going to be less refinancing activity, which will lead to higher valuations and MSR ex the one difference I think where we are today versus if you roll back the clock a few years ago, where we didn't have as many agency securities and the first quarter agencies.
Widened a little bit then came back while rates are up the absolute value of that mortgage asset on the agency side is a little bit lower so that impacted.
And from US overall book value, a little bit but and.
And we have hedges again, some of our agency securities as well, but as you go forward I think youre going to see that real lift when amortization slows down and I think from an industry standpoint, we expect amortization slowed down by about 30% as we go forward.
Okay I appreciate the comments thank you. Thanks.
Thanks Trevor.
And our next question will come from Henry Coffey with Wedbush. Please go ahead.
Good morning, and thank you for taking my question.
Just to continue with what Trevor was asking about in terms of really watching where your amortization rates are going is it as easy as just kind of checking the pull factors every month, and seeing where agency speeds or or or there are other issues that we should be looking at.
We have been pretty vocal.
Over the.
And in the past about our credit impaired portfolio and we still think that the amount of.
We have a $515 billion portfolio of Msr's.
We think that the.
And the eligible population of that is.
And is about 30% for refinancing right now we're in the money the government came out with some <unk>.
Some new programs, whether they're going to try to increase origination.
And to folks that haven't been able to refinance in the past, we'll see how that is and really the impact on our portfolios. We don't think its material. So I think part of it Henry is the factory and the other part is I would just say, 30% right now and as we go forward monitor and and rates.
And mortgage rates and we'll try to get a little bit more refined and that the other.
The other part about that is.
And with the new res team increasing their recapture percentage is probably more into I guess into the mid Twenty's now from when we were in the teens you look at the job that signs even his team have done and caliber on on our recapture.
From a recapture percentage and north of 50 on and a number of their channels.
We do think amortization will slow down and we look forward to a much higher and higher marks on our on our MSR portfolio is higher book values and higher earnings as we go forward towards the latter part of 'twenty one.
And you are in many respects hedging the MSR is with agencies. So is the real contribution going to I mean, not not on a one to one basis, but theres some of that there.
Is the real contribution from the MSR is going to be related to amortization and sort of total yields or how should we be thinking about it.
It's kind of both.
We have a give or take a 14 or $15 billion.
Agency mortgage position some of that has to do with that comply.
Compliance from a REIT perspective, and 40 Act compliance.
Against that we have a material amount of swaps, where we have payers on against that meaning that we're effectively hedging out our agency book. So net net we're short so a increase in rates will lead to higher MSR values obviously.
It will lead to a a P&L positive P&L and our swap book.
A lower P&L on a specified book and you saw a little bit of that play out in the first quarter. When you look at swap P&L up.
Agency mortgage P&L down and then the.
MSR P&L.
And then finally, you havent been excited about investment opportunities and a long time.
We.
I think I think the bargains were back in March which didn't really matter to anybody as we all kind of trying to rectify books and matter much.
Yeah.
And how much.
And.
The recently raised capital is going to go into the new investment opportunities like single family rental and how much.
He is going to be just retained for ultimately going into the caliber transaction.
I think the way that.
All of us or the way that we think about the world we will have higher.
It's a capital and our balance sheet at all times.
To your point and Henry we've been pretty vocal that the investment opportunities have not been great theyre not great right now by any means.
When I think about the engine that we have here and.
Again.
With the caliber folks.
We could produce a lot of product.
And the product with the GSE footprint pulling back a little bit that's going to create some really interesting opportunities for us we're already seeing that now and obviously the Epo stuff has been pretty fruitful we have never been extremely large ginnie player. However, and so some of our again some of our friends and peers out there have had better results in net in net.
Space, but we're going to be patient and we're going to have plenty of capital on hand at all times to take advantage of what we think is going to be a higher rate environment and at some point gives us the opportunity to deploy capital away from our operating business and then thinking about the MSR business for example.
And there will be higher capital requirements put on all I think mortgage originators as we go forward. So what's the result of that if gain on sale margins continue to contract which.
It is very possible there will be sales of MSR and we think that the REIT itself is poised to benefit from.
From that as we think about higher rates higher capital needs and lower gain on sale.
So it will be the last question.
Can you tell us and capital.
Can you tell me something about the single family rental business is that and operating business or <unk>.
How is that going to work, yes, its small for US now we have about 1100 homes.
A lot of that is funded.
Work with a third party, who who is really our operator.
We're in certain markets. We're currently in 15 markets. The current top markets for Us are Atlanta Houston.
Florida, and and we do and we're doing some stuff and Mississippi.
So it's small now.
We'll monitor home prices quite frankly this is not just.
Buy homes to buy homes.
I think our early acquisitions and this business have been good our performance has been good.
Right now and I think our average cap rate on this stuff on labor. It is about five 5% and we have good financing on it. So we'll see how it goes but we expect it to be a real business as we go forward, we think the shift in the United States with home prices continuing to rise and certain markets.
Very good on the rental side, where we are pretty excited about that we have a good team that's really allocated to working on that business.
Great. Thank you very much thanks Henry.
And our next question will come from Bose George with <unk>. Please go ahead.
Hey, everyone. Good morning, Thanks, I wanted to go back to the questions on the gain on sale margin.
And I think there and you noted that the Tpa margin is now sub 100 basis points.
Was that like.
Last quarter and in the fourth quarter.
Last quarter, we ended.
And it was basically double that into the end of last quarter close to 200.
And then I would tell you basically at the end of the third quarter Youre almost another 100 basis points above that so you're really dropped in about 100 basis points per quarter.
Okay, great. Thanks, and then.
And what can I get an update just on the book value quarter to date and then.
And just a related question and on the MSR Mark.
Did see like some other companies take some pretty big MSR, Mark. So I was wondering like if.
If I look at your MSR portfolio versus the others.
And the lack of or the lower prepay ability per part of it so to make the market a little more subdued versus the peers.
Yeah, Let me, let me start with the Mark.
We expect to see margin increase on net portfolio.
Fairly dramatically as we go forward.
When you when we saw that high levels of amortization I think March even came in a little bit higher than people expected prepayments and March were about 18% and faster than.
And then what people thought.
I think part of that is a day count thing, but overall as we see speeds come off and again, we do think there'll be 30% slower as we go forward. This is really this is really going to be a big deal for us because this is what's going to lead to higher core earnings as we go forward.
So mark will go up and that will help our book value, obviously, but I think really as we think about getting back too much.
Much higher core earnings on a go forward basis that will start to kick and we hope in the third quarter.
Third to fourth quarter of 'twenty, one regarding book value, Nick Nick Nicks here and accordingly.
And just walk through some of the adjustments and book value sure. So boes from quarter and from a performance standpoint, our book value is relatively unchanged.
And thing you need to factor in and the additional share issuance.
And so that will bring more book value down by approximately <unk> 15.
Okay, great. Thanks, a lot.
And our next question will come from Eric Hagen with BTG. Please go ahead.
Thanks, how are you guys, maybe another one on the MSR and the framework for how to think about that valuation when we looked at the MSR value.
At the end of 2018 as maybe one good.
Proxy for one speeds, where we're basically at their lows I think the MSR was carried at a multiple of around four and so and we think about the sensitivity going forward and sort of the overall upside that I think you noted and the presentation is it right to think that you guys can get back to me of that valuation more quickly or even exceed that value from 2018 that Paul.
Or that Forex kind of area because you have a more robust recapture framework now or is there something else that could.
And drive that.
It's a really good question I think if you go back to <unk> the product mix, we had on our balance sheet at that time was very very different and where we are now. So when you think about if you're originating I think I think our growth rate in the first quarter was $2, 79% or something like that.
That's a newer production MSR and if you think about that MSR today, it's probably a four and a quarter four and a half multiple if you think to the old days going back to <unk>. We had this legacy.
And we probably had more legacy MSR and so at a four multiple so I think the way to think of us going forward as there is more production and these lower these lower rate mortgages that were originated going back to the fourth quarter and the first quarter of.
Respectively, <unk> 2020, one those will go up a fair amount more than that for multiple legacy stuff will go up but not as much just because you'll have more seasoning on it so getting back to that for multiples that doable absolutely.
And do I think it happens.
Today, no will it happen over the course of the year I think it's very likely.
Good stuff. That's that's helpful. I think new res issued some securitized warehouse funding last week can you talk through some of the deal economics, there and how it compares to bank warehouse funding right now and then separately did you guys say how much.
Nation volume and caliber did last quarter.
And so on the caliber front, we did not but I think the way to I spoke to <unk>, obviously, we talk all the time on.
And the caliber side.
I would expect the origination volumes for the year.
To be something comparable to what they were in.
And 'twenty. So when you look at that page, it's give or take about probably 70 to 80 billion something in that range.
And in 2020 was it was $80 billion so.
That's on the caliber side and the warehouse side and I'll, let Darren talk to some of the math around it.
And our goal and this will continue to be as a company will be to limit the amount of real.
Exposure, we have to any one counterparty as we think about our business going forward. So the more stuff that we put out and the capital markets the better our business becomes.
I think and a couple of the prior quarters, we were extremely vocal about getting away from real Mark to market. This does have mark to market provisions the mark to market provisions on this stuff were better but the cost of funds and the advance rates are actually better versus bank funding, so bearing and I know if you want to add anything there.
Real key here for us is that we're able to come to.
To obtain three.
Three year committed warehouse financing at a very cost effective rate cheaper than what we get from the bank.
And that and I would tell you, especially with my prior background is very very attractive and accretive for our platform.
And in the context of doing.
Capital markets transactions.
Michael talked about there are it's a little bit more favorable than how we benchmark. Our bank financing. We are always still going to have bank financing. Their roes are important partners to us but to the extent that we can diversify and obtain three year committed financing, we're going to look to try to do that.
Thank you guys very much.
New.
And our next question will come from Kevin Barker with Piper Sandler. Please go ahead.
You mentioned.
Funded volume is going to be down slightly quarter over quarter in 2000, and and the second quarter.
Partly due to direct to consumer the decline in refinance demand for direct to consumer.
What other channels are you seeing a little bit of pressure there on volume.
Recognizing that pull through adjusted locks were only up 4% quarter over quarter.
Yes, I mean look we are we look at each channel from an overall return perspective as opposed to necessarily focusing on volume.
And on our direct to consumer we're very much focused on.
And our recapture rate now and we still have a <unk>.
Significant number of consumers that are in the money.
I think that as Michael.
Prior quarters talked about the in the money and calculation of consumers that can see.
<unk> hundred dollars a month, we still have approximately 1 billion consumers and in the money for us today at today's interest rates.
So we do look at.
The context of our direct to consumer franchise, having continued.
Continued upside and growth as we expand into that new customer acquisition, our jv's definitively going to see refinances slowdown and we.
We've seen that already has talked about but that's a purchase business with our partnerships with realtors across the U S. So it's really just a more of a matter as to how we're maximizing ROE through our third party channels, including wholesale and correspondent and.
And at this point, we still believe the correspondent business is accretive to our franchise.
And we look Opportunistically and CTO and we talked about non QM.
The other thing Kevin on that front.
From a volume perspective, and I know everybody always talks about volume, we care about making money and so if we do less volume and we make more money.
And that's really where we're going to shake out. The other thing is when you think about the spread compression you're seeing and the correspondent business, which is.
And you go back to the old days.
That's a good MSR accretion vehicle for us if we believe rates are going to go up so when we think about the amount of volume we do there.
It's.
Essentially you're buying a closed loan so that's something that we'll continue to monitor one from a P&L standpoint, but from a market direction standpoint, as we think about.
The overall REIT market.
Okay and then.
Several of your competitors nonbank competitors have continued to build capacity and look to continue.
Take market share.
As we move through this year, but and it seems like we are.
And we're definitely seeing lower demand.
What gives you confidence debt to direct to consumer channel and maintain.
And sale margins at 2019 levels.
With that type of dynamic.
Where capacity is still building.
And.
2019 was a relatively good year when we look at.
Post crisis mortgage origination profitability.
So.
One of the reasons, we did the caliber transaction. One is it's a great company to obviously, a great leadership team and what I referred to this so-called thundering herd.
So that purchase market is going to be something thats really important to us it's not.
And when we think about real volume and we think about real P&L youre going to see a lot more efficiencies I think around the technology side, we have a lot of initiatives that we're currently working on getting loans closed quicker and.
And when you talk about share scale I do think the mortgage business is here to stay it doesn't mean people are going to do anywhere near the same volumes as we go forward because if refinancing volumes continue to go down by 30% at some point and at some point and if the housing market rolls over a little bit.
Volumes are going to come off pretty dramatically and I do think you see margin squeezed and think about our business. We have 500, plus $1 billion of MSR as we are so perfectly situated to actually take advantage of.
Virtually a very low.
Callosity.
Origination market.
As we go forward that coupled with I think the recapture rates that we have both on the new risk side, which are growing and with calibers done on their side.
Youll see lower volume so I do think the mortgage business is here to stay I think the valuations of the mortgage companies, whether it be us or.
We always think we're undervalued honestly, but when we think about other peers out there whether it be J and Cooper and David and his business it.
It is here to stay and.
We all know that the mortgage business is episodic as it relates to P&L and flows, but it's a real problem.
<unk>.
It's a huge market, it's a multi trillion dollar.
And market and.
So volumes may come off P&L may come off but long term, it's here to stay and I think everybody having capacity is going to matter.
Okay. Thank you for taking my questions.
And our next question will come from Giuliano Bologna with Compass point. Please go ahead.
Good morning, and thanks for taking my questions I guess from it from a low starting.
And starting point and one of the areas was curious to get your input was.
And when we look at the caliber transaction.
I think that a little bit over $1 4 billion of MSR is towards the end of February it was moving over $1 1 billion at December 31.
And I'm curious kind of about two different things there one.
Do you know if those numbers include any kind of any recapture assumptions or if those are pre recapture and and the second part of that is.
Twofold, but when you bring on if you were to merge the two entities caliber recaptured from its pretty impressive.
And that can obviously lift your recapture performance over time may not be immediate.
And that could push your recapture assumptions higher over time for your core portfolio, which could be accretive and.
And also the caliber portfolio itself and you also get some embedded recapture benefits when.
And assuming the transaction closes and.
And the transaction happens the.
The way that I calculate that as and there could be a $150 million plus of additional upside if not more for the caliber portfolio before any kind of toggle and benefits of your core portfolio.
That could be more than offset the dilution from the secondary is that a good way of thinking of it and commodity.
And going out in the wrong direction there.
I can't ask you to repeat that question Jonathan.
So why don't why don't we start with the caliber portfolio.
And the caliber portfolio when we quote the 140 billion that's ads at the end of 12 months to 31.
So the way the transaction works, it's a closed box so once it closes.
And we get all of the so called assets and.
And from a balance sheet perspective.
The 140 billion and theirs.
No formula that's put into that recapture percentage as it relates to that $140. So we we have that as you think about caliber and caliber.
Caliber does call it 75 to 85 billion.
Production and you have to assume some kind of amortization rate and recapture rate.
The net of that will be that's what our MSR portfolio will be we think as.
As we integrate and bring both companies together and the transaction closes the lift that our overall business will get from quite frankly, both sides and the recapture percentages going up are going to be significant from an income standpoint on our own.
They're all earnings for our company profile.
I don't know exactly what that is I think when we did the.
When we when we announced the caliber transaction.
Our goal is obviously to make as much money for our shareholders as possible.
It is highly accretive we believe this transaction, but I don't I don't want to short a specific number.
And may have done that and the past back in and listened to some of our other calls, but I see no reason why we won't get back to.
A much higher earnings stream.
And that makes sense and.
My question is very convoluted.
It's about which may be a little bit of a different direction.
And the books, all your impacts and.
Post merger is there any benefits from adding higher recapture assumptions and your MSR fair value analysis.
First your MSR values up and also.
And similarly for the MSR is that will be coming over from on the caliber side.
And then moving higher yes, we haven't.
And any of our book value assumptions related to any lift we're going to get on any recapture from from the caliber franchise at all one thing and Nick pointed out and just when you think about book value today, and as we think about the second quarter. So everybody can model this correctly.
<unk> thought sure so as I mentioned to those earlier.
And the expectation is there is it approximately 15.
Dilution on book value relates to the share issuance.
In addition, the impact on core earnings is going to be dilution.
<unk>.
And as Michael mentioned earlier in terms of book or anticipated book, we haven't factored in any lift from factoring and recapture into the caliber mark.
Perfect I really appreciate it and I'll jump back in the queue.
Thanks for the question.
And our next question will come from Mark <unk> with Barclays. Please go ahead.
Thanks, you highlighted the opportunity and non QM originations.
That market's been really slow to develop ever since kind of the whole QM framework was created and can you just talk about.
Whats limited the growth of that market, what do you think maybe changing to make it a bigger opportunity.
How big you think it could be for you and then finally kind of how the returns for that May stack up to originating QM loans, particularly kind of and in light of the fact, you just don't have the same kind of legal safe harbors.
Yes, I mean, just the reason it hasnt started up as the industry is short quite frankly capacity the.
And the combination and the two companies will give us the capacity we need the other thing is when you think about the nature of the origination market and 2020 with <unk>.
So much production on the agency side is it was not enough folks quite frankly to process non QM loans.
As you think about refinancing volumes coming off and the need for what I would call non QM products and new.
Non government guaranteed products.
And we expect it to be a pretty significant.
Part of our business caliber has been there before.
You've been there before and bear and I think I alluded to $125 million a month.
I'm looking at him and thinking like that is very low.
So we will.
We will try to grow prudently around that space, but it's really the governor has been the ability to process loans and capacity from a profitability standpoint, and it's a pretty profitable business I mean, we I think and our debt.
<unk>, two and asset sale of $750 million of loans.
You've called out some deals where we issued in the past.
And dollar prices on those assets have been 106 107, something around that range and if you go back to the COVID-19.
Crisis, those couple of tough weeks for us and others and March those loans were trading and give or take 90, so you've seen and obviously a dramatic recovery and pricing that will help drive I think more production for us is having the capacity the greater the great. So called retail network on caliber as well as us.
We want to get these products out as soon as possible and I think it's really going to be a good profitable business for us.
Okay got it and do you.
You see that as also being an opportunity to create some credit assets for the REIT to hold.
Absolutely I mean, one of the things if you think about even sanjiv and his management team they come from a consumer banking background.
There is no reason why we shouldnt be able to think about.
And we're working on this now.
One main type business obviously.
Obviously credit profiles will be evaluating different credit profiles, but theres no reason, why we shouldnt be able to roll out different products into the marketplace through.
And the caliber retail network as well as on the new risk side, we have a great sales force on on the new risk side.
Okay got it and then just one last from me.
As you think about the opportunity to do more bulk MSR acquisitions coming back is.
As original again and saw margins compress.
And what kind of returns do you think youll be targeting for those acquisitions.
We have to be thoughtful obviously, we have a huge production machine.
And when the two companies come together, so we're mindful of that.
We've always been out there, saying give or take 8% Unlevered and I think we will probably stay with those kind of numbers with proper financing youre in the double digits. So.
And that's part of it the other part to think about as we are and the middle of an acquisition and we have to think about balance sheet and governors and and.
Our our friends and DC and how we think about capital so.
And Theres some things to think about there, but we want to be in a position to be supportive of one the industry, but <unk>, obviously taken advantage of any opportunities that come our way around MSR sales.
Okay, great. Thank you thank.
Thank you.
And this will conclude our question and answer session I would like to turn the conference back over to Michael Nierenberg for any closing remarks.
That's all I have we appreciate.
Everybody's time this morning on.
On the call and questions any follow up give us a holler and look forward to producing good results for our shareholders. As we go forward and stay well have a great spring and we'll talk to you soon thanks.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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