Q3 2021 New Residential Investment Corp Earnings Call
Good day and welcome to the new residential third quarter 2021 earnings Conference call.
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I'd now like to turn the conference over to Kaitlyn Mauritz Investor Relations. Please go ahead.
Great. Thank you Betsy and good morning, everyone I'd like to thank you for joining us today for new residential third quarter 2021 earnings call. Joining me today are Michael Nierenberg, Chairman CEO and president of New residential and Nixon Chief Financial Officer of New residential also with me today are Sam Ddos and Baron Silverstein Chief Executive.
Officer, and Chief operating officer, and President respectively of NUPLAZID and caliber.
Throughout the call. This morning, we are going to reference the earnings supplement that was posted to 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 today will be forward looking statements. These statements by their nature are uncertain and may differ materially from actual results I encourage you to review the disclaimers in our press release and earnings supplement regarding forward looking statements and review the risk factors contained in our annual and quarterly reports filed with the SEC.
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.
Now I will turn the call over to Michael.
Thanks, Kate good morning, everyone. Thanks for joining us today I'm you know.
When we look at our company today and look back over the recent history I'm Super excited for where.
Where our company is and what this is going to mean for our shareholders. As we go forward the combination of our investment portfolio and operating business lines should continue to drive higher earnings as we go forward the ability to manufacture our own assets through our different operating business lines, that's creating earnings for our company as a true differentiating factor.
Sure.
For us this.
This past quarter, we grew our core earnings from 31 to <unk> 44 cents and we increase increase book value from $11, 27% to $11 35. Despite the fact that the 10 year note. It ended the quarter essentially unchanged versus Q N. Q at the end of Q2 with the macro outlook looking like higher rates ahead, just said likely to win now.
At the beginning of tapering tomorrow and inflation seems like it's here to stay for a while our portfolio, which are in great shape to take advantage of this environment, our MSR portfolio should do extremely well.
And sees much slower speeds in this scenario during the quarter, we closed our caliber transaction, which makes our mortgage company one of those top five players in this space. The addition of a great talent complementary complementary origination business lines and a terrific technology platform really transforms our business.
During the quarter, we announced the acquisition of Genesis capital, which is a market leader in the industry are providing loans to developers and real estate investors.
Yes.
For the development and fixing our single family homes, we believe the integration of this business into the family of our operating companies will be a very good acquisition, which will not only create high coupon short duration assets for our balance sheet, but will also strengthen and help grow our asset for our business. We expect to close this transaction in December.
Regarding the <unk> business also known as the single family rental space. We're now up to 2500 units and while at home prices are up roughly 19% on the year, we still believe that housing supply issues, along with the robust rental market should provide a very favorable backdrop for the business on the investment portfolio side, we are beginning.
The C and slower amortization, which will be great for our MSR portfolios as I mentioned earlier, our core business continues to be robust and our loan and securitization business is in full gear overall leverage for our business is roughly one to one and a half times a week from our agency portfolios and that is one of the lowest levels we have.
Seen in years, when we think about our financing roughly 99% of our all of our financing has no daily mark to market triggers.
Again, a week from our agency business with that I'll now refer to our supplement which has been posted online and I'm going to begin on page three.
When you look at our evolution as a company in 2013 NRG was created to be an acquisition vehicle to purchase.
Excess msr's over time, we've grown our excess MSR business through acquisitions of each Oss are large portfolios of Msr's from city getting fully licensed and as you look at the timeline 2018 really transformed our company when we acquired new raise.
2019, we acquired assets from <unk>, and then as we fast forward into 'twenty, one the acquisition of caliber and Genesis creates what I think are wonderful operating businesses, which will continue to provide.
High quality assets for our balance sheet again, that's driving higher higher earnings as we go forward page for Q.
Q3 highlights GAAP net income $146 $1 million or <unk> 30 per diluted share core earnings $209 $9 million or <unk> 44 per diluted share again up from 31 in Q2 third quarter common dividend 25 nine.
Nine 1% dividend yield and that says as of the end of September cash and liquidity roughly $1 $9 billion total net equity $6 $6 billion.
Book value in the quarter up from 11, 27% to $11 35, total economic return to 9% during the quarter, we raised $465 million and in the common I'm sorry in our preferred stock offering and again, we announced we closed the acquisition of caliber and we announced the acquisition of Genesis capital.
Page five.
Caliber.
Ounces deal in April got it closed in August and the integration not only is well along the way.
Frankly, it began at the announcement.
When you think about returns for our shareholders, we raised our common stock dividend by 25% quarter over quarter and again, our economic return of two 9% during the third quarter.
The acquisition of Genesis, which is one of the leaders in the so called business purpose lending also known as the fix and flip business. As we think about that we think that company will likely provide something between two and two and a half a billion dollars a year of high coupon short duration, good REIT assets for our balance sheet and again, it's going to.
With that Robert Weizmann and his management team are we're going to really I really believe that we're bolstering our save for our business and should do really good things there on the recapture side and as we get into the deck a little bit further we will talk more about that the continued focus about on recapture rates not only on our the caliber side, but also on.
New res side continues to increase.
Thus slowing amortization and creating more retention opportunities on our MSR portfolios from a balance sheet perspective roughly.
Roughly $40 billion in assets under management and again non daily Mark to market away from our agency portfolio was roughly 99%.
Call rights strategy remains very very strong we call at $636 million in collateral in Q3, $1 9 billion year to date and our call population roughly at 50 billion now where 60% of that population is currently callable. So again as delinquencies go down and advance balances decrease.
We're going to be able to call more and more of that of a of that collateral.
Page six just a little bit of a summary of our business as we think about it origination and servicing and you know in the mortgage company as you think about some of the other operating businesses Genesis capital will is an origination business as well, but overall the way to think about the company today is MSR portfolio between excess.
Full that sits both between the mortgage company and an NRG is a little bit north of $600 billion right now.
When you think about our agency portfolio, we keep a core portfolio of agency Securities. One has to do some hedging around our MSR portfolio. The other part is we need for good REIT assets in 40 Act compliance our portfolio residential mortgage loans is really driven by our core strategies, we're not out going into marketing.
<unk> for mortgage loans, and again going back to my opening remarks, when you think about our company our ability to manufacture assets for our balance sheet truly differentiates us I think from the rest of the pack.
And then finally on the bottom part of the page when you think about so-called business purpose lending Genesis capital bridge loans renovation loans and construction loans to the residential housing market page seven just a quick summary of Genesis capital Ah.
It's really on seven and eight.
The acquisition of Genesis capital gives us roughly one $4 billion of high quality performing loans coupons of roughly 7% to 8% on that portfolio of short duration in nature.
So we're really really happy with those assets and obviously, we intend to grow that and as you think about that business had sat inside of Goldman Sachs. We think that the possibilities for our company.
Quite frankly, and with Robert Rossman and his leadership team are are endless and then couple that with our <unk> business. We're really excited about that page eight business purpose lending as you think about it it's a large addressable market a little bit less than half a trillion dollars.
When you think about homeownership rates in the U S.
China always fairly stable in the low Sixty's you are starting to starting to see.
What we think going forward is going to be a large purchase market sanjiv and Baron will talk to that a little bit, but there was a shortage of homes for sale, obviously construction and development has been pretty robust over the course of the past few years and with the shortage of housing we expect that to continue when you think about some of the recent a law change.
In California for example, Youre going to see more development, we think on some of the smaller lots. There. So we're very focused on that when.
When you think about HPA HPA is up roughly 20% year on year at some point housing becomes a little bit less affordable for a lot of folks and as we think about that the rental market is going to remain extremely strong thinking.
Thinking about tax rates in the geographic population tourists shifts that are going on I E folks moving from some of the high tax states to Texas to Florida in some of the other areas, we think theres going to be a large opportunity for us to provide capital in those areas and then finally the growth of our <unk> business page nine.
I'm not going to spend a ton of time on this because I think I've hit this but really again the way to think about NRG today, which I think is very different than where we've been over the years.
Really we are an investment company start with that thesis we are a great investment portfolio led by Charles Sorrentino and his team on the on the operating business we have.
A great mortgage company led by Baron.
Baron Sanjiv and their team.
We will do roughly 175 billion in origination this year and we intend to pick up market share as we go forward and then as we add other business lines that are going to create assets for our balance sheet. We think we're going to be able to use those assets.
Assets to grow core earnings as we go forward. So very excited about the possibilities ahead tailwind page 10.
You know, we think that we are in great shape I get on this call. This morning.
As I said to our board yesterday during the meeting very very excited about the prospects for our company, where we stand.
Our pool of capital $1 9 billion of cash and liquidity one of the highest numbers that we've had.
<unk> ever quite frankly, we are going to retain more capital on balance sheet today, and probably forever. As we go forward. So just to throw that out there when we think about yields. The 10 year note. We believe is going to continue to increase yesterday, we had some meetings. We brought in a couple of economist, John writing and Conrad to crossroads.
And we spoke a lot about inflation, we spoke about the macro picture, we spoke about the global economy and I think everybody is in the belief that rates will continue to rise.
Goldman Sachs has actually pulled forward some of their rate increase.
Forecast on the fed so we think that we're perfectly situated to take advantage of any increase in rates and as you think about that in in our large portfolio of MSR as we should be in great shape again purchase originations are expected to increase I'll, let sanjiv and Baron talk about that are non agency origination as is.
<unk>.
Continues to increase as well when you think about non QM, we shut down non QM during the pandemic.
I think our 2022 projections are probably something between three and $4 billion in non agency production.
And that's a very profitable business line you'd think about borrower strength in delinquencies. They continue to decline and then overall I think when you look to the right side of the page and think about where we are we are a type of top five mortgage originator and servicer in the U S.
When you look at the fragmented nature of this away.
Away from the banks the amount of market share. That's out there is we think is something around 50% and any small increase there.
We will obviously help our origination business, but enable us to pick up market share.
Page 12, just taken you through real quickly some of our performance stuff and then I'm going to turn it over to our to Sanjiv.
On the MSR portfolio, a couple of things to point out here as of the end of September 635 billion, New PB MSR is go up in value as rates rise.
Hold that thought when you think about our new raise.
<unk> servicing portfolio, it's we basically service roughly 70% of our own we still have some sub servicing with Mr. Cooper Ocwen and a couple of other smaller player.
Players in the industry, 100% of our MSR financings or not are now non daily mark to market and here's a good stat for everybody today.
Only 29% of our full MSR portfolios in the money to refinance you go back to Q2 of 2021 that was roughly 40% just to throw a couple of amortization numbers at you real quick Q3 dollars 20.
'twenty on the energy portfolio alone amortization was $509 million.
Q3, 2021, our amortization number on the NRG portfolio alone is $250 million. So you've already seen a decrease of roughly 50% from the highs in Q3 2020 to where we are in Q3 2021. So when you think about higher rates potential for.
Our mortgage company earnings to decrease a little bit here.
MSR portfolio should kick in in a big way and as those go up in value, that's only going to add to our book value as a company.
Page 13, again, MSR portfolios continue to see slower speeds I'm not going to beat a dead horse there page 14 call rate activity as I pointed out earlier, we called 2006 deals in the third.
In the third quarter $636 million in collateral I think Q4 is probably on track to do about the same.
And again, our call right population roughly $50 billion today with roughly 60% of that currently callable.
So mean delinquency decrease and advance balances decrease on the <unk> side, we've been pretty cautious quite frankly.
Today, we have roughly 2500 units just to give you a sense, we backed up pricing over the course of the past couple of weeks, we've put in some higher cap rates just to see what would happen in our acquisition vehicles and quite frankly, we saw lower acquisition rates. So we continue to be very very focused on there on that business.
Entailing prudent looking at property PPO values, just to make sure that the market is not too frothy.
We continue to grow that business and again. The addition of the Genesis capital folks is going to make us a much better much smarter business there.
On the long term.
Opportunity as we think about the investment side, you know I look at the <unk> business today with the acquisition of caliber our Ginnie Mae portfolios are comparable to that of some of our peers in the industry. Our overall P&L numbers. However, today are much lower.
Then some of our peers in the industry. So I think there's a fair amount of upside there as you think about non QM I mentioned that business again, we expect to do roughly $3 billion to $4 billion and the non QM channels next year and then when we think about other opportunities and loans, whether it be in our call right business and other areas in our <unk>.
The ability to manufacture assets were very very excited about what lies ahead servicer advance balances I'm not going to spend a lot of time there.
Virtually unchanged financing is extremely efficient there.
And we continue to see lower lower and lower level on the forbearance side on.
On the mortgage company side I'll, just I'll just close my comments and then turn it over to Sanjiv.
Really really excited about where we stand we have a lot of work to do.
On a go forward basis.
There is there's a large spend on the technology side.
A lot of work to do on the expense side, our expenses when I think about where we are and if you think about an annual run rate of roughly two 5% to $3 billion of expenses, if we could take out roughly 10% to 20% in expenses, that's roughly a dollar a share. So there's a lot of work to do there I'm confident that we're going to get there I do think we're a market leader.
<unk> the acquisition of caliber makes us a far better company and with that I'll turn it over to Sanjiv and I will come back for Q&A countries. Thank you Michael.
I'm excited to join you all in the first earnings call since the close of the acquisition of caliber.
I'm on page 18.
Begin by giving you a quick update on the integration between caliber new Reds.
As Michael mentioned, we had started that work pretty much right after announcement, but across the business with lead us on both sides.
We have now combined into one unified team.
I can tell you that even in the first 60 days since we closed.
Made tremendous progress in that volatile correspondent and wholesale teams have come together in terms of both sales and operations.
And we have also made a tremendous amount of progress integrating thinking through what our integrated technology platform. So it looked like as you all know some of these things take a little bit of time, but we know that we will drive improved efficiencies through our consolidated tech platform.
Over the next two months, we will continue to integrate the rest of our origination channels. It's basically DTC across the two companies because retail is largely unchanged. It will stay on the caliber platform and so that part of the business day is pretty much unchanged.
Also looking at working to our servicing platform, but to see how we consolidate a pretty large servicing platform.
Overall very pleased with the progress and we are very confident about our ability to achieve full integration and full synergies through 2022 with a strong focus on expenses as Michael mentioned.
As part of our integration efforts, we have already identified synergies, which are shown on the right of the chart I think we had shown some of these numbers before but even in the two months since we've closed we've made significant progress towards achieving our financing cost goals. For example, we know and I know Michael I've mentioned this in an earlier call. We are now.
Very clear and established that the savings in our financing costs will be roughly $45 million annually, which is a very significant savings in the combined platforms.
On the operating side doubling down on Digitization and automation to make sure that the combined platform will drive improvement in cost of production and cycle times, you've talked about cost per loan cyclothyme as being critical metrics that we look across our business.
Net net we are very confident of achieving synergies through all of 2002.
In the $80 million to $120 million run rate.
$80 million to $100 million annualized and the run rate of 150 to 200, and I know that fall short by about $100 million, what Michael actually want.
On the origination side.
We have on page 19, I am excited to share with you the solid performance of our combined business. During the quarter. This was literally stitching up the math just adding the two volumes together, we havent really synergize, our originations so to speak but you can see that the origination platform origination segment made 100.
$77 5 million and pre tax income in the third quarter. This was driven by volume growth you can see that on the bottom left hand chart very significant growth in our volume in a very significant change in the mix in our volume.
That mix and the change of volume has essentially impacted margins underwrite in a very positive way and you can see.
The combined company is not only a very large company in terms of origination volume, but also very profitable in terms of the origination margin mix.
As the acquisition of caliber closed towards the end of August I think August 23rd was when the acquisition was completed.
Actual reported results of $34 5 billion in funded volumes only includes a stub period of caliber performance from the end of August through September, but if it had been a fully owned company through all of the third quarter, the combined origination well.
Volume would have been $45 3 billion, which as Michael mentioned is now the fourth largest makes us the fourth largest nonbank originators and I think the fifth largest originator, including banks and non banks because it includes wells Fargo and this would give us a market share of roughly 5% which is up.
A decent market share in a lot of scale.
Our combined funded volume was growth was flat on a pro forma basis, we were about 1% quarter on quarter. We noted that we did better than the market.
<unk> caliber and new rates were down slightly on DTC, but up on the correspondent side.
And bill to adjusted loss also remained very strong at $43 8 billion.
Compared to $43 1 billion compared to $38 9 billion.
In the appendix, we breakout caliber of new red volumes as well as margins by channel to provide additional context, but in future. We will only show one metric for the combined entity.
As you can see the channel mix is changing very materially in terms of the retail and retail like margins, which are stable and higher margins, enabling us to perform across pretty much all rate environments.
This is a very significant differentiator for many of our Monoline peers.
Additionally, without combination the overall platform has added scale across each channel if you look at <unk>.
Histogram on the bottom left hand side, you'll see.
That E channel if you annualize. It is now roughly at about 30% to 40 billion E channels in terms of origination volume if its annualized providing the overall business with natural hedges against margin pressures in any one channel.
We saw that in the wholesale channel last quarter, we saw that in the wholesale channel a couple of years ago.
This four channel strategy essentially enables us to grow profitably across all cycles.
We reported a Q3 gain on sale margin of 161 basis points. This would have been 184 basis points. If caliber had been owned for the entire quarter.
On the whole the third quarter margins remained strong chorus.
Corresponded margins actually improved a little bit as did wholesale because of the price wars easing off in wholesale and in retail and direct direct to consumer margins remained high, albeit flat quarter to quarter.
Just in terms of guidance for the fourth quarter and accounting for seasonal factors, we are estimating about 35% to $40 billion in origination production.
That would put our combined full year.
2021 funded production at roughly $175 billion to $180 billion.
Again, as Michael mentioned earlier, the organic MSR origination power of 175 to 180 billion originator.
Funding in the <unk> ecosystem is a very powerful and differentiating dynamic for the entity.
On slide 20, I'll move on to recapture it real quick.
You can see that both new resin caliber improved our recapture performance quarter on quarter.
It was mainly an exchange of ideas at this point and best practice between the two companies, but we have every confidence in our ability to show continued improvement in our track record you can see we've had a pretty good track record of over 60% and recapture rates at caliber.
That combined with our heavy investments in consumer experience.
We know, it's really going to get us there in terms of the magical closing the gap between the two companies our ability to do this on a much larger servicing book is a huge opportunity for us even as the market is refinancing slowing down a little bit.
The recapture sensitivity table on the top right speaks to that unencumbered surety and we thought we would articulate that for you.
Net net.
With industry refinancing expected to come down we believe the size of our retained servicing portfolio and closing the gap in a relative recapture performance will give us a lift that will help us mitigate some of these refinancing volumes coming down.
I have talked about purchase recapture in the past, it's not something that the rest of the industry talks about mainly because.
The numbers in the industry are tend to be tough on purchase recapture but glitches recapture is the ability to recapture existing borrowers who purchased and next homes.
In geographies, where we have a very strong retail franchise. This is an immense opportunity for us today caliber captures about 57% of pushes recapture transactions in the market.
The potential to do that across a much larger combined servicing base with the retail franchise is a very significant and strategic advantage in purchase which is a great segue to our next page on purchase.
Slide 21, I'll quickly talk about purchase as you know we've always talked about purchase we've been a leader in purchase lending it's in our DNA and it's a fact that has contributed to our strong consistent and steady margins across rate cycles.
The MBA is forecasting purchase volumes to rise roughly 10% and 22.
As Michael mentioned before we know that the market dynamics around the urban suburban shift state taxes, and the demographic factors such as millennials will be a strong tailwind to support purchase.
This backdrop bodes really well for our franchise.
Platform has already proven that our local relationships set us apart.
And there are borrowers still leverage local brokers and realtors to help them buy a home.
Our combined purchase volume increased 18% from second quarter to third quarter.
At $23 2 billion of total purchase volume, we know that we are over indexed in a purchase market share roughly five 6% compared to 5% overall share.
On the bottom right of this page we show the purchase mix in each of our distributor channels retail joint venture wholesale correspondent account for over 75% of our total origination volume and you can see each of these channels.
<unk> share is over indexed to the market.
Yeah.
On page 22, I wanted to talk to you a little bit about.
Our market share.
As Michael mentioned earlier, how fragmented the market is.
It's not a goal, but I think it's a natural place we land.
In fact on our last call we had put out an explicit number in terms of our market share growth at 10%. Let me take you through how we think we will get there.
We are strategically positioned at scale as I mentioned before in each of our four channels.
And within each channel, we believe we can capture outsized share through our distribution.
And a technology platform that brings digitization and automation into our manufacturing process across each of those channels.
This page shows.
<unk> thoughts.
The channels.
As we make progress on our goals. We are confident we can carry that momentum and continue to capture market share opportunities.
Again, I'll share a common ethos that Michael and us have and that we will not chase market share at the cost of profitability.
In other words it.
Strategically.
Our.
Our view that's why we will continue to focus on growth through technology, we will make sure.
We continue to focus on profitability liquidity and responsibility to our regulators.
Last slide on servicing slide 23.
As of the end of the third quarter, new resin caliber now have a combined servicing platform of $479 billion.
In <unk> of loans, representing approximately $2 3 million customers.
That size would position us as the fourth largest non bank servicer.
Of the $476 billion $385 billion represents servicing of our owned MSR and $75 million represents loans that we service on behalf of third parties.
We anticipate that at the end of the year, our entire servicing portfolio would be roughly $480 billion to $190 billion in UCB.
Overall forbearance rates on our servicing portfolio continues to be pretty low at 194%.
Servicing team continues to work diligently with homeowners to find solutions.
As we continue to evaluate our strategy of bringing together our servicing platforms. We are diligently focused on minimizing any borrower disruption achieving economies of scale and maintaining high levels of recapture and retention of our existing borrower base and with that let me turn this back to Mike. Thanks Rajiv.
Why don't we turn it back to the operator and open it up for Q&A.
Thank you.
We'll now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
If at any time in your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question comes from Kevin Barker with Piper Sandler. Please go ahead.
Good morning, Thanks for taking my questions I just wanted to get an idea from when you think about caliber of new res integrate it could you help us think about what the pretax operating margins would be on the combined entity when you measure it against origination volume.
Year to date, and then would you expect that the run rate.
Next year, and then maybe into 2023.
So in other words youre looking for forward guidance.
Sure.
Actually no. We're just looking for like what do you think you can operate these businesses at four on an operating basis.
Per UBB originated.
When you're on the combined entity.
Obviously, it will move around depending on cycles, but.
So why don't I take the first crack in and go back to them.
When <unk> speaks about expenses or I speak about expenses, our topline revenue in the origination business. When you look at gain on sale for the quarter was about 900 plus million dollars on the origination side. So really our goal when we take a step back is to reduce or you know.
I mean to do the best we can obviously Boeing.
Boeing Sanjiv speaks to whatever expense reduction that.
That we could do I think that the ability for us to reduce our expenses there and drive higher net earnings for the company is significant and that's where the integration work, which has begun and quite frankly has a lot of work to be two to continue as we get more and more efficient and use the technology of <unk>.
Labour side is really going to bear some fruit for us as we look at going forward into 'twenty, two and 'twenty three.
Origination volumes when you look at the MBA stuff.
If you look at 2020 production in 2020 production was roughly four trillion.
Thousand 'twenty, one was you know it.
Projected to be about three and a half and then when you look at 2022, it's about two and a half ish and that's what the steady run rate looks like so we think we're gonna be able to pick up market share. We think we're going to be able to take out expenses on a go forward basis as we pick up market share reduce expenses at $900 million number will obviously come down because youre going to be.
Doing less volume, but so will the amount of expenses that come out of that so.
I don't know if that's helpful. But that's how that's my initial take on it but I think on the expense side. You know when you think about the large amount of expenses that in the combined organization, we're going to be able to I think be able to take out significant amount of expenses and that's that's a real lever for us to pull in the on the operating side there.
Okay. So.
The gain on sale margins, obviously, a higher caliber.
But they also have higher operating expenses, just given a distributed platform.
General and operating in several different channels right. So would there be do you think caliber could be significantly accretive to the pre tax margins that are generated in the origination channel today versus what.
Versus what caliber was producing prior.
Yes, Kevin.
So youre right in stating the fact that the.
And on sale margins from caliber are higher they're also quite stable.
You know you saw on one of the slides I talk about gain on sale margin of 184 on a pro forma basis, our expectation is because of our mix.
Gain on sale for the combined business is actually doesn't drop that much we think thats probably dropped.
More in DTC compared to historical margins, Michael and I were talking about this earlier today DTC is about 40 basis points, you think across the industry dropped probably about 20 basis points, but correspondent and wholesale pretty much at historical levels. So we think gain on sale margins don't drop that much for us because of our mix.
Our opportunity is in expenses.
We pointed out.
And we think that.
With the addition of non QM businesses, roughly three and a half.
The $4 billion as Michael indicated earlier, a pretty substantial gain on sale margins.
That combined with the fact that we will take our expenses aggressively will be accretive to the overall franchise.
Okay. Thank you Sanjeev. Thank you Michael.
Thanks, Kevin.
The next question comes from Doug Harter with Credit Suisse. Please go ahead.
Thanks.
Michael can you talk about your expectation for the dividend.
Kind of given your level of earnings right now and you know kind of how you're balancing raising potentially raising the dividend versus looking to retain capital and use that to reinvest back into the business.
Good question Kevin.
Doug sorry about that.
Yes, I'm here as you're thinking about a 44 cents in core <unk> 30, and GAAP as we look forward.
Into 'twenty two we think we're hopeful that we're going to be able to maintain something with a four handle as you think about our core earnings Theres always the balance about them on.
The dividend of how much capital you actually give back historically, we've been paid.
Paying north of 90% of our taxable earnings to our shareholders.
I think the way that we're thinking about it is it is November 2nd today.
From a dividend perspective, any dividend announcement, we would get paid at the end of January. So we have some time, but I think as we have a 40 <unk> core run rate, it's likely that we would consider increasing our dividend assuming that the board.
Has the desire to go there so.
We don't want to give it back all the capital, but as long as we continue to see this path and continue to operate the way that we are and as I pointed out in my opening remarks, when we think about the ability to manufacture our own assets. The great investment portfolio does slow down we're going to see I think in speeds.
I do think that they'll likely be another increase at some point in the future no promises but that's.
My my take.
Great I appreciate it.
Well Michael.
Anything else Doug.
I guess.
Yeah.
And just I guess how quickly.
On the expense side.
Can you actually really start ramping it up is that something that that we start to see kind of in the fourth quarter or do we start or is that more of a 'twenty two event, where those costs start to really start coming through.
What I would say is on the expense side. Initially day, one when we all got together I think we picked up roughly $50 million in synergies around some of the financing stuff. So that was an immediate.
Pick up keep in mind, that's on an annual basis right. So you're not going to see that all day, one and in Q3 or Q4, I think the real expense saves youre going to begin to see youre going to be in 'twenty. Two as we go forward you know one of the things when we're all sitting around the table Youre doing this call. This morning, the technology side of where we go with our business as something that Cigna.
Again, I don't I I personally believe we have only scratched the surface clearly the caliber technology organization is something that we didn't have on the on the new.
The new rent side.
So that is a huge massive pick up when we think about the acquisition of caliber as we go forward in the market now quite frankly, we're going to hire a chief digital officer, we have a search that team has been interviewing a number of folks that we hope to get that done by by year end.
Which then would launch what we will call is a lab with.
The company that.
That will focus on how we become quite frankly competitors to rocket and everybody else, so or anybody else, that's a real leading technology provider in the industry. So that's kind of really where I think we're headed that will help us on expenses, but it's I think the long winded answer to your question is going to be more likely youll see these.
Results in 'twenty, two and forward.
Great. Thank you.
Thank you.
The next question comes from Trevor Cranston with JMP Securities. Please go ahead.
Alright. Thanks.
A question on the MSR portfolio.
Some of the numbers you were talking about around slowdown in speeds that amortization.
I guess most of that seemed like it was in the context of that.
Possibility of higher rates.
Was curious if you could maybe just comment on.
How do you see prepay speeds evolving at <unk> and going forward.
Assuming a flat rate environment, where we are today and how much of a slowdown.
Yes.
Thanks.
I think it's I think there's a couple of factors Trevor that go into that one is we keep talking about recapture rates and on the new risk side, where we were in the twenty's now or in the forties and caliber is in the <unk> so that delta between.
$40 60, I think it's something that we'll continue to add to the slow down we're going to see in overall speeds I think when you think about HPA being up roughly 20% on the year, what does that really mean housing becomes a little less affordable as rates move a little bit higher here. So.
So we are expecting that slowed down I think street consensus.
Is roughly down speeds down 6% I think in November as.
As we as we look forward so.
I think it's a number of different factors that are going to go into.
That real slow down, but clearly Q3 2020 over versus Q3 2021, a dramatic reduction in the overall speeds.
Our organization is a thousand percent better today than where we were in 2020 quite frankly, we got hit in the teeth during that March period.
And we recovered quite nicely and that is not just due to the market, but quite frankly, it's due to the hard work of our organization and our team. When you think about our MSR portfolio of 600 and something $1 billion.
I was doing the math this morning prior to the call.
If we have one turn one multiple higher in a valuation where we are today, that's going to add roughly one dollar and a half ish to book value as we go forward. So really what we're playing for is you know I don't take higher rates hurt us I think lower rates don't hurt us either because our.
Actually machine is that is that good and Thats a difference where we are today versus where we were going back in time. So the balanced nature of what we're doing around the MSR portfolio of higher rates, we are biased to the short side.
As I pointed out I think earlier in our opening remarks.
The combination of higher recapture higher rates higher purchase market lower Refis, I think drives higher book value and higher earnings as we go forward.
Got it okay, that's very helpful.
And then just one quick one on gain on sale margins.
And thank you for all the detail you guys gave on the margins for the different journals.
But I heard the guidance you guys gave for <unk> on <unk>.
Origination side I may have missed it but did you guys comment on.
The expectation for what you're seeing.
Margins on an overall basis heading into <unk>.
Okay.
Okay.
Sure.
<unk> yeah.
The fourth quarter, we are seeing margins potentially decline more in DTC than in any other channels, obviously as the refi population is shrinking.
All getting aggressive with rates. So we expect DTC to drops to roughly 40 ish basis points.
Correspondent is kind of at historical levels, but we are bracing ourselves for you know five to 10 basis point drop in margins.
And correspondent.
Wholesale has actually ticked up quarter on quarter from 95 basis points to 105 basis points combined we expect it to stay around the 100 basis points range. So no major change Trevor on the wholesale side and the retail of course high and strong.
Continues to be at the 365 feet.
Ish range and we expect it to stay stable through Q4.
Okay perfect I appreciate the comments. Thank you. Thanks.
Thanks Trevor.
Okay.
The next question comes from Bose, George with key EW. Please go ahead.
Hey, everyone. Good morning chip.
Wanted to first ask just about Genesis are you able to disclose the purchase price or is there a way to for us to think about the accretion also is there any goodwill created as a result of that.
Yeah. So.
So there's roughly a 100 million of goodwill created.
Depending upon where the loans are marked as I pointed out earlier that roughly 7% to 8% kind of coupon.
I'm very short duration loans so.
As you know depending upon.
How we book those that's going to dictate I think the goodwill amount from an accretion standpoint, it's likely I think early on probably about a penny a quarter.
Is the way to think about that again, depending upon where those loans are marked and the overall amount of capital from a business perspective or equity I should say is about 350 million, probably three and a quarter to $350 million I think something is as.
Is where it will settle out on that one.
Okay, Great. That's helpful. Thanks, and then in terms of future acquisition are there things that you guys are looking at either on the mortgage.
Servicing side are there things that could complement.
But at the moment.
OS that's like leading the horse to the water the answer is yes.
Yeah. We're always we are M&A and acquisition team are always on the hunt for things that we think will be accretive for our business.
I look at some of our peers out there and in.
Some of the large private equity firms.
Our ability to go out and acquire an operating business that is going to generate a good REIT asset for our business, which will feed into our earnings is really where we where we've gravitated to and I think where we're going to continue to gravitate to.
Don't want to overpay for anything.
Even echoing what signs you've said when you think about mortgage production, we're not in we're not in a race to be the biggest we're just in a race to make the most amount of money for shareholders. That's kind of how we think about it we are looking at things quite frankly in the commercial space.
Which could be accretive you know these are not what I would say going out to acquire a whole business.
But there are some things that we're currently working on that we're excited about the prospects of potentially getting that done.
Not a lot of capital required.
And then what that would do is effectively put us in the business of creating assets for our balance sheet same theory same thesis with Genesis seem that same thesis on the new red caliber site.
Short answer is yes.
Okay. Great. Thanks, that's helpful. And then just actually one follow up on your earlier comments about the servicing technology.
Sure.
Timeline do you think by when you kind of decide which platform you choose it sounds from what you said that the likelihood is that you end up consolidating on the caliber of platform is that fair.
Yeah, I mean that part has already decided that was decided I think at the day that we announced the acquisition. So the H two O platform. The caliber has gone to even the team and Renee glottis have built.
Something that I think is you know is far superior to what is something that we had on the new rent side.
And we're going to continue to expand on that.
Can I go back to prior earnings calls over the past couple of years, where everybody always ask how are we going out how do we think about ourselves versus rocket and I always said, we'll never compete against rocket.
And Theres no disrespect to those guys because they've done a great great job in their business, there's nothing that's going to stop us now.
Okay, great. Thanks.
Thank you.
Your next question comes from Eric Hagen with BT IAG. Please go ahead.
Hey, Thanks, Good morning, guys. Another follow up on the margin.
Can you discuss any differences between margins for purchased loans versus refi and then when the purchase loans end up back in the MSR portfolio do they get valued any differently in this environment compared to the refi loans.
I think the margin stuff yeah.
Yeah, I mean, obviously, we see that in our DTC and our joint venture businesses.
The purchase margins are much higher than they are on the refi side.
Uh-huh.
Roughly 50 to 75 basis points in certain cases.
And.
Much more stable in terms of given where rates.
The rates are at today.
I'm talking about the primary rate.
Also when we.
Book. These loans today are one of the things that we see is that these loans are.
Because they are being originated at relatively low consumer rates.
Our expectation is that they will have a much longer duration in fact going back to even refi.
Point that Michael was making earlier.
On the slowing down of the.
After run off in our businesses, which is related to the question. You asked what we are seeing is that for the same cohort of customers that are in the money far fewer of them are refinancing auto ship because of share refinance fatigue. So that is something that we also have taken into account in our <unk>.
Refinance models, so hopefully that answers your question on the duration.
I don't think it does Oh go ahead, Eric Eric regarding the Mark There is no difference in how we book our book to Bill.
Boeing on the MSR side.
Got it yeah, that's what it was last call.
I was going to be great and then can you discuss the outlook for the Colorado business at this point and what's the pace of activity could look like there and how much capital you think you might need to capitalize on that opportunity.
Is it hopefully gross.
Yeah, I think the one is the financing market is extremely efficient so.
And our desire to turn around our loan portfolio as we call. These deals is pretty high.
The overall opportunity.
I think we're running a little bit south of $2 billion year to date.
That will likely continue as we go forward you know keep in mind a lot of these loans or most of these loans her from vintage mid two thousands late 2005 to seven.
You have to think they're going to continue to get cleaned up and if the industry was smart we'd figure out a way to add to call. All of these deals quite frankly, you liquidate.
The Oreo that's sitting in these pipelines.
And not that that's a driver or a restraining factor I think on the.
On the side of the call business, but you would clean up those those are.
Legacy deals and then you'd figure out a way to collapse the rest of them.
Clearly, there's a lot of different interest in folks that own different parts of the capital structure, but I would expect it to continue to only pick up as we go forward.
Got it thank you very much.
The next question comes from Henry Coffey with Wedbush. Please go ahead.
Yes, good morning, and thanks for taking my questions frankly awesome quarter.
Just a little picky question, a gain on settlement of investments of $98 million loss. This quarter of 78 million in the prior quarter, what is that tied to and under what environment would that gain even though its not part of core it does affect book value how would that.
Shrink or change.
The gain on.
On sales of investments that relates to the carry on derivatives, there's an offset that comes through in the mark to market. So overall that number was relatively flat in the quarter.
Okay. So the $98 million is offset by what.
Yeah.
What.
Offset by swaps.
So Henry it's a long and short I think on our agency mortgage business versus our swap business. So the way to think about our overall portfolio and nyx.
Nick's here.
Obviously next much more knowledgeable about the way this stuff gets reported but.
If you take a step back and think about our portfolio. We have roughly $9 billion of agency mortgages that we have to keep on our balance sheet for re compliance.
As I pointed out we're not just net long we're actually in fact, where net bias to higher rates, so effectively against that we have swaps against that.
As rates move higher the value of your agency mortgages likely go down in value, but youre going to pick up your income on the on the on the swap side. So we're hedged against that portfolio and Nick correct me, if I'm wrong, but I believe it's an up and down between those two that's correct.
And the offset is in comprehensive income or.
No.
Comes through Mark to market.
Henry.
Hmm.
Okay. Yeah, no. That's helpful. That's extremely helpful.
And then getting back to the operating business of.
On the on the wholesale side of the equation caliber was number three another number four.
You've got rocket would that new initiative, they announced with Salesforce, which sounds still confusing but.
It sounds like it's kind of a restart of that old business PHH core pad with banks and credit unions.
Pennymac has talked about wanting to be number three in that business.
Obviously home point isn't going to go away.
What are your thoughts there your it's not an unimportant part of what you do are you willing to sort of step back in and focus on other areas or are there acquisition opportunities in the wholesale business that we should be thinking about or.
What are your thoughts in terms of the <unk>.
Future growth of the wholesale channel.
I think we've been pretty clear that everything we do is about how we make money for shareholders. So this is not a pounding of the chest, where we're going to get into a price war with anybody on any channel right.
Right when we think about the capital we're fiduciary to our shareholders at.
At the end of the day, if we can grow a channel and it's profitable or if we have a view to even if you I mean I guess.
Throw a hotel to the side. If you think about the correspondent business correspondent business is truly a manufacturing arm and a normal steady state environment youre, not making a lot of money in correspondent, but you create MSR. It. So if we think valuations on MSR is theyre going to go higher that is a great channel for us to kind of put our foot to the pedal a little bit in the wholesale channel and I think <unk> been pretty clear.
About this and I think he mentioned on even on our last earnings call. You know, we're not going to compete against rocket in UWS, when Theres, a price war, which does not yet.
If pricing normalizes, which it has in the marketplace now will continue to originate product, but we don't want to get into a price war with anybody unless we have a specific view on the market and where this is going to take our company.
Yeah I was just.
You know, Michael and I have talked a lot about this channel.
I agree with we are number four in terms of originations.
I am certain that we are number three in terms of profitability. That's number one number two.
Folks may aspire to be number three but we are number three so that's the other thing.
And the way we plan to evolve from a distributed wholesale business is to grow in the direction that essentially <unk> and have no problem, saying that it will be a fast follower to your Wm and so we are investing pretty heavily in our direct to broker business as opposed to just our distributed business.
Our distributor business shows that we have much higher wallet share with larger clients are directed broker business shows a much lower cost of operating that could roughly 53 basis points of cost per loan.
And the most important thing I will say that the Michael touched on this is that our wholesale and correspondent channels actually are a fantastic distribution channel for us to distribute non QM life products, and we will gain outsized share because of our shelf presence in different geographies, that's kind of how we think about it on the other hand, we also realize that recapture.
Entities in wholesale are much lower and so you know we treat it as a strategic channel as a hedge to retail and gifts retail loan officers moves to move to wholesale but I think we have a pretty comprehensive view of how we wanted to go into a 30% to 40, maybe $50 billion channel profitably.
Great. Thank you very much.
Henry.
The next question comes from Mark <unk> with Barclays. Please go ahead.
Thanks, I had a follow up question on the <unk> gain on sale margins I appreciate the color.
On the direction of margins by channel, but <unk> Youre, obviously going to benefit from a full quarter of the higher margin caliber businesses can you any sense you can give us on how kind of your your <unk> margin could compare to what you reported the 161 basis points in <unk>.
Yes, so on a pro forma basis.
We said 184 basis points of what you would have done in Q3 in Q4, I would say probably around 176 basis points. So roughly.
Eight basis points of my message right.
Even though we are seeing a 40 basis point drop in factoring in a 40 basis point drop in DTC. It's the mix in the other channels, particularly in retail that allows us to mitigate a lot of that drop so net net.
Down eight basis points.
Okay, Great. That's helpful and then Michael how should we think about the cyclicality of the Genesis business.
Europe, Youre acquiring particularly around originations is that a business, where it's a lot easier for them to originate these loans and kind of a frothy your housing market or is it do you expect kind of a more steady production from that business.
I think it's you know it's a good question I think it's going to be more steady production I think in production is going to increase quite frankly.
We're looking at a lot of different initiatives that are there.
The team has that quite frankly, couldnt do under certain circumstances, you know based on where they were with with Goldman.
So I think the opportunity for us to grow in certain channels, there is going to be pretty significant.
The other thing there is.
Not just a quick sidecar in this.
Another question in the queue from a from an investor and I just wanted to address over the past.
One or two earnings calls I spoke about a management team that we were potentially going to bring on to to lead the.
The <unk> business.
Yeah.
Doing the Genesys acquisition, I think puts us in a far better place than if we're going to go down this other path with the different management team.
Not that there was anything wrong with the other management team great Great group of folks, but we think this is a much better solution for our company and with Charles leading our investment business, we think that you know.
The overall acquisition of Genesis is going to add not only on the origination side of the loan stuff, but also again as I said in earlier remarks, it's going to be it's going to really bolster our assets of our business through the acquisition channels. So we're getting to you know we're pretty pumped about that.
Okay are there any you know.
Synergies would that business with the new kind of a local distribution you have in real estate markets from the caliber acquisition.
Absolutely I mean, if you think about it caliber has give or take 400 branches.
We have 5000 loads in the entire system. So all of a sudden we have more products to roll out to what I would call family and friends of the retail brokers.
It should be highly accretive there as well so.
The overall strategic thing when we do an acquisition and we think about it logically is to actually look at it across all of our operating platforms and if you look as we continue to grow our operating platforms.
We've only scratched the surface from a synergy standpoint, you can think about servicing you can think about.
The services businesses that we have and how each one of these underlying businesses could provide more and more support and actually generate more income for our overall company.
I think again I think what we do is unparalleled to anybody else in the industry.
Okay got it thank you.
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.
So thanks.
Thanks to everybody for joining us.
And this is not necessarily related to our company, but I was walking to work. This morning, and I'm thinking of November 2nd says, we all take a step back and look at life that goes really quick I think back to the March days of 2020, I look to where we are now hopefully we continue to do what we're doing in <unk>.
And drive higher earnings and higher dividends and higher share stock price for our shareholders. So.
Thank you we thank you for all your support.
And we will talk to you again I'm sure.
In the new year, if not before so I have a great holiday season, and thanks, everyone.
Yes.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.