Q1 2022 New Residential Investment Corp Earnings Call
Good morning, and welcome to the deal.
First quarter 2022 earnings conference call.
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Now I'd like to turn the conference over to Bob.
Please go ahead thank.
Thank you and good morning, everyone I'd like to thank you for joining us for new residential first quarter 2022 earnings call with me today are Michael Nierenberg, Chairman CEO and president of New residential Nexsan Torres Chief Financial Officer, and also bearing Silverstein president of <unk> caliber.
The call we're 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 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 <unk>.
Any 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 reconciliations of these measures to the most directly comparable GAAP measures can also be found in our earnings supplement and with that I'll turn the call over to Michael Thanks, Bob.
Good morning, everyone. Thanks for joining us.
As we all know there is lots of pain and suffering in the world as we think about everyone who is in need of help or a prayer, we send out our warm wishes and hope for healing and an end to the war as soon as possible.
Now onto business. Despite the volatility in the markets. Our company had a very good quarter as we have mentioned during prior calls we have positioned our company for a higher rate environment, taking all the necessary actions to protect our portfolios and operating companies from rising interest rates.
During the quarter, our book value increased to $12.56.
Currently are.
Our book value sits at approximately 13 50, we have interest rate hedges in place, which protect our long duration assets, along with our MSR portfolio, which should only help to increase our book value as we go forward based on our.
Expected fed actions.
We have increased our cash and liquidity levels to $1 $7 billion, we will be patient as we look for opportunistic investments across the financial services sector. We believe patients will be rewarded in these markets in the first quarter was a great example of our diversified business we.
Regarding our operating companies the integration of new resin caliber will be done by the end of Q2.
As we previously mentioned, we expected saves in the in the area of $175 million to $200 million as we go forward. We believe that number is light and we will we will likely have more saves in excess of the 200 million dollar number.
We initially mentioned.
As we think about our homeowners we are looking for more ways to be able to offer them loans products and other ways to support our homeowners as we go forward.
As we all know the origination business, which had been extremely profitable in the past couple of years is now in the middle of a serious contraction and will remain this way for the near future. The buildup of capacity is now part of the Big Unwind, we view the origination business as essential to our overall strategy our various channels will focus on customer retention.
Pension and a retail will focus on the purchase market, which will become a bigger part of the origination business our ability to launch new products and focus on non QM jumbo HELOC will differentiate us from our peers.
As we go forward looking across the industry I would expect very little profitability in the origination business unless we see the treasury market rallied back to lower yields. This will put enormous pressure on the mortgage banking community as a whole this will lead to more M&A and we believe this will lead to more MSR sales as mortgage bankers will.
Need to sell MSR is in order to fund their businesses.
As we look at our broader base of operating businesses Genesis, which is a fixed and flip lender we closed on in December .
When we think about that business, we've embarked on an expansion plan that will open up many more markets across the U S. Our ability to cross sell through the caliber salesforce should create additional volumes for the company the loan portfolio floating rate assets, coupled with the origination of high coupon short duration assets make this up.
Perfect asset for our balance sheet on a door our single family rental business, we have taken a cautious approach to growth and believe with housing affordable housing affordability at some of the lowest levels in years cap rates should come our way coupled with rent growth, having dry powder will enable us to continue building a great business on the.
Investment front yoga and assets are beginning to look attractive with the widening of credit spread spreads and the rising yields.
To put this in context credit spreads and securitized products, particularly in the mortgage space and more than doubled since the beginning of the year.
Now at a point, where levered returns in certain asset classes are in the mid teens. When we look at the Treasury market. The 10 year note has risen 100% from $1, 50% to 3% yesterday and the two year Treasury note has risen from 30 to 73 basis points at the end of December to $200 to $2, 73%.
These are massive massive moves and we are positioning the company in a great way to take advantage of where we are.
I'll now refer to the supplement which has been posted online and I'm going to start on page three.
When you look at our company today, we have paid down $4 billion in dividends since except since inception, our dividend yield of nine 1%, our net equity of $7 $1 billion, our market cap of $5 $1 billion, our balance sheet today $38 billion MSR.
<unk>, an industry, leading 626 billion of owned Msr's.
When we look at our mortgage companies in operating businesses. We are a top five non bank originator and servicer in the business one thing I want to be clear, we're not about size without profitability. So as we go forward. If we originate less loans. That's what we'll do we want to make sure that we make money for our shareholders and support our customers.
And we have an industry, leading business purpose lender in Genesis, which I just referred to our single family rental business continues to grow and then we have some complementary operating businesses, including title appraisal and a great property business property preservation business named Guardian.
Financial results for the quarter GAAP net income to $661 $9 million or $1 37 per diluted share core earnings 177, $4 million or <unk> 37 cents per diluted share book value $12.56 per common share first.
Quarterly common stock dividend twenty-five sense cash and liquidity $1 $7 billion net equity seven 1 billion business highlights on page five the company today is positioned to perform we always use this line across all interest rate environments. I will tell you today, we are positioned for a much higher rate.
Msr's as I pointed out before 626 billion and an industry, leading MSR portfolio will go up in value as rates rise. We saw the results of that in the first quarter origination franchise continues we will continue to be focused on purchase and recapture a bear and we'll talk to that in a little bit.
Assets that we have on our balance sheet that have positive duration are all hedged against rising rates.
When we look at shareholder returns for the quarter book value up approximately 10%.
Shareholder return for the quarter up approximately 5% of customer base $3 2 million customers, we do a great job supporting our customers and as I pointed out earlier, we are looking more and more ways to support them and that will likely be through other types of products and down the road as we continue to expand our financial services.
Anything is possible when we look at our capital markets and financing capabilities currently 99% of our portfolio is non daily Mark to market. That's a week from our agency mortgage business. We closed five securitization during the quarter, which represents $1 5 billion of collateral.
Cash and liquidity again $1 $7 billion, we continue to work with third parties, including our banking partners and insurance companies to establish new financing lines and capacity across all of our operating businesses.
ROE and profitability.
We continue to focus on reducing our expenses as pointed out earlier, our $175 million to $200 million expense save initially quoted when we did the caliber deal.
It will likely be significantly higher as we go forward the integration of new resin caliber continues.
Continuous and that'll be complete by the end of Q2 page six is really just our strategic evolution of.
Of the company and how it was built informed it was spun out of Newcastle in 2013 really just acquire excess msr's.
The residential assets over the years, we've grown into a real operating company on the mortgage side. We've added a business purpose lending we've added other complementary businesses in the financial services sector and I'm excited for the future and I will tell you is that we've only just begun.
The macro environment, there's no secrets here inflation at multi year highs the fed's going to raise rates, we believe 50 basis points. This week.
Oh political uncertainties continuous data to market volatility and macroeconomic concerns I pointed out about where our two year and 10 year treasury yields of what they've done in the quarter credit spreads once again have widened significantly double where they were in the fourth quarter of 'twenty, one and the housing market.
Housing inventory remains.
Extremely low.
Price growth continues to increase affordability is under pressure and this should lead to a much better market on the <unk> side, we will be patient and however, and acquiring units at appropriate cap rates and just to point out there when we look at the S. If our business, we do not factor in H P. A we think about.
Rent growth down the road.
In a great securitization market I mean, we like where we currently sit in that business.
Our overall experience in the markets, we have a very seasoned investment management team, who has seen not only these current challenges in the market. We've seen the great recession. We've seen obviously the you know the 2020 March period during Covid and we think we can handle anything.
We continue to learn from difficult markets, our balance sheet again, $1 7 billion of cash and liquidity.
We will continue to maintain an opportunistic approach to investments and capital allocation prioritizing return on equity goal is to be the best not just the biggest.
Page eight just to show you how we performed really in the first quarter. As you think about the company are mortgage rates rose Treasury yields rose rapidly in the first quarter that drove our MSR portfolio much higher.
We will have much lower amortization as we go forward earnings overall in the segment origination pretax income $25 million in the quarter that will continue to remain under pressure book value growth will continue 12 56 at the end of Q1, 13, and a half today and when we look at core earnings.
Very stable core earnings if you look across where we are today, citing a 37% core earnings number for the first quarter of 'twenty two.
Page nine our ability to manufacture assets, we do not need to go out in the marketplace and compete against others to go buy assets.
Well, we listed here is the total addressable market and what we believe across the different mortgage products agency origination for 'twenty, two we expect to be in and around two and a half trillion dollars. The non agency origination market in and around 600.
<unk> $600 billion in business purpose lending about $500 billion below that you can see our different operating companies numerous caliber and then to the right side of the page Youll see Genesis capital, which is our our business purpose lender page 10 of our playbook, a large portfolio of Msr's will go up and down.
You again complementary operating businesses industry, leading origination franchises across not only the single family residential business, but also in the business.
The lending market and then as we look into 'twenty two.
Pretty vocal about getting into the commercial real estate space, we're going to be patient we have some opportunities ahead of us.
And we're very excited for what the opportunities will will be.
You can put in front of us as we go forward.
I'll now flip to page 12, just to talk about our business and investment summary, when you look at our business across all the different verticals that we have or or things that we can do here a top five mortgage banking originator with many different channels servicing leading non.
Bank mortgage servicer a.
Combined servicing one is about 625 billion of which 400 is servicing in house, we have MSR related investments, we have MSR serviced by third parties.
So again, we love that asset right here in this rate environment from a real estate standpoint, our bond business is you know when you when you look back to the first quarter, we did very little on the investment side with the markets being extremely choppy, we expect that to remain constant as we go forward until the markets settle down.
Here page 13, really just on the MSR portfolio today, which is a really interesting stat only 4% of our full MSR portfolio is in the money to refinance if you go back to 'twenty or 'twenty, one that number was up towards 40%. Our newly originated MSR is this quarter had an average mortgage rate of 333%.
A lot of those mortgages were originated in the fourth quarter.
From an MSR front I'm not going to beat a dead horse, let's move on to page 15, and just talk about our single family rental business. Today, we have roughly 3500 units or average cost basis is $255000 were positioned across 19 markets in 12 States our average cap rate is.
5%, we're going to maintain.
Maintain discipline around our cap rates stabilized occupancy of 98% and then when we look at rent growth. We continue to see good rent growth in the area of approximately 5% this business will grow over time.
All right not a lot of activity on the car REIT sector as market Volatilities prevents us from calling deals because the economics simply don't warrant. It. So we'll continue to build up more cash as we go forward Kate 17, our servicer advance business not a lot to talk about their servicer advances were down to $3 1 billion, which is down.
7% from December we have plenty of capacity, we do an excellent job in financing that business.
Now I'm going to turn it over to Baron who will talk about the mortgage company and then we'll come back for some Q&A. Thanks, Mike Good morning, everyone as Michael mentioned earlier, the current macro environment has changed dramatically over the last few months.
Sharp increase in interest rates has certainly slowed refinance volumes and are pressuring origination margins overall, however for new resin caliber and coupled with our partnership with NRG the.
The market environment proves the benefit of a balanced origination and servicing business.
As shown in our performance for the first quarter with pretax income of $787 million, which includes an MSR mark to market gain of $631 million. We originated approximately 27 billion in funded volumes.
Which is a 29% decline quarter over quarter and increased our servicing portfolio to 497 billion notional servicing balances.
With our reduction in originations, our MSR and sub servicing will continue to provide the stabilization and a higher interest rate market over the past two quarters, we've been talking about our integration progress of new resin caliber and we continue to see successes through implementing best practices between both companies.
We expect to exceed our initial run rate synergies target of $175 million to $200 million by the end of the year and we will have finalized our origination channel integration by the end of the second quarter as Mike will talk about.
But now our focus has shifted to aligning our business to the current environment. We continue to take steps to lower our overall cost and be disciplined in managing our capacity, while ensuring we deliver the best experience for our employees customers and partners, but even with the current origination headwinds we continue to evaluate opportunities in our sector to match.
<unk> is the value in our platform.
Turning to slide 19, the origination division ended the first quarter with approximately $26 million in pre tax income and approximately $27 billion in pull through adjusted lock volume, which is a decline of 74% and 20% respectively quarter over quarter rig.
Regarding margins and there is further detail on slide 32 in the appendix, we continue to see pressure in all channels and our direct to consumer channel, we were able to maintain our margins with only a slight decline through the throughout the first quarter. The interest rate Spike in April has further compress margins, but still above historical averages for the chat.
I will.
Our distributed retail and joint venture platform saw a 17% drop in margins quarter over quarter, which coupled with seasonal factors is added to the competitive pressures to this division.
We have seen some easing in April as the spring buying season continues.
The wholesale division has maintained margins quarter over quarter benefiting from approximately 20% of our funded volume coming from our non QM product and similar to other channels lower volumes increased competition has driven correspondent lending margins lower our platform. There is highly scalable and we have been able to maintain the.
<unk> quickly and are seeing a flattening in April as well.
Our decline in pretax income reflects the current market conditions and these margin pressures. It also reflects our strategy of focusing on ROE.
While being disciplined patient and taking advantage of pricing opportunities when they arise.
Turning to slide 20, we.
We have an incredible origination platform and we've proven to be able to grow our purchase volume and market share and we will continue to do so through opportunistic partnerships, new joint ventures, and the expansion of our retail platform.
Our growth strategy also includes.
Our focus and alignment with the FHFA affordable housing targets and expansion of our local footprint continue to growth of our non QM programs throughout all channels growth of our product set and Michael talked about this in our partnership with Genesis capital through fixed and flip renovation and construction to Perm, which will help our L. O's referral partners succeed in there.
Expected markets and expansion of our ancillary entitle businesses within our own platform and also adding new party New third party accounts.
Our our purchase focused platform, coupled with product partnerships and investment and tax is the path to succeed in this environment on.
On slide 21, the servicing division ended the first quarter with approximately $762 million in pre tax income predominantly driven by the mark to market gain and as Michael previously talked about the size of our MSR portfolio, but our servicing platform will remain positioned to benefit from higher interest rates and lower <unk>.
Amortization.
We also increased the size of our direct service portfolio by approximately 3% quarter over quarter and that includes an increase of our sub servicing portfolio by approximately 9%. We have remained focused on growing our sub servicing portfolio and that shows in our results for the first quarter and in our clients' confidence in us.
And our focus in helping homeowners stay in their home we.
We have a lot of opportunity on our servicing business and coupled with a new residential msr's, we have approximately $3 2 million homeowners persist throughout their homeownership journey.
On the last slide.
Slide 22 talking about recapture youll see that our refinanced recapture rates have remained strong quarter over quarter. While rates continue to rise. We are also seeing the percentage of direct to consumer cash out refinances continue to rise, which based upon April production now exceeds 75%.
Since over half of our customer base now has at least 40% equity in their home. We are launching a new HELOC product that will target our servicing customers and allow homeowners to retain their existing low rate mortgage while allowing them to tap into their home equity for home expansion renovations or otherwise we expect this to be a successful product launch and also.
Us and retaining our customer base.
Also beginning of second quarter, our plan to strategically distribute leads across channels to utilize our local network and partner channels to maximize purchase and refinance outcome. The key being as we continue to mature with our relationships with our homeowners will also be able to take a higher share of opportunities by offering additional products and services.
Including recapture in the future on that Michael back to your experience.
Just two to.
Two quick slides or a couple of quick comments page 23 is really just a better operating companies. This will grow over time.
Again as I pointed out we will be in the commercial space. Once the market settled down we have a couple of things we're working on.
We're very excited about and then finally on page 24, you know, how we think of ourselves.
And set ourselves apart, we like to think of ourselves is not just a REIT, but really an investment manager allocating capital appropriately across different investment strategies.
No need to continue to talk about the MSR portfolio cash and liquidity I think this is a really important note $1 7 billion of cash and liquidity today. If you go back a couple years ago. If we deployed $1 billion of that one seven and just think about it. This way if we deployed it at let's call. It a even use a 12% levered return.
That would be an extra $120 million a year in earnings.
Think about that with roughly 400 in eight ish million shares of 470 million shares its substantial that would be a substantial pickup to core earnings in our business. We're just simply not going to go there because we do think we will be rewarded a having a much larger cash.
And liquidity.
On our balance sheet today as we go forward our ability to manufacture assets I think that truly differentiates us we will be extremely prudent we are in a horrible market for mortgage origination, it's only going to get worse gain on sale will only get worse and I think youre going to see a lot of folks actually you have to really pull back in that business that that will create some great.
<unk> for us on the MSR side, we haven't seen a ton of kind of it yet, but I do think that will will come going forward and then as we think about our track record of being a steward of shareholder capital.
Really care about making returns our numbers are good.
And with that I'll turn it back to the operator, and we can open up for Q&A Q&A.
Yes.
We will now begin the question answer session.
Just a question you May press Star then one telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the Kate.
Your question. Please press Star then two.
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That's helpful.
On our roster.
And our first question will come from Bose George <unk>. Please go ahead.
Hey, everyone. Good morning.
Thanks for the book value update this just curious what does that imply in terms of servicing valuations and then how much room is left for further MSR valuation increases if we see rates continue to trend up.
So at the end of the of the quarter Bose are weighted average MSR multiple of approximately $4 five or <unk>.
Or $4 49, as we look forward I'm, taking the 10 year treasury rate, which at the end of $3 31 was $2 34.
If we go up a 100 basis points now.
Now I quoted a book value of approximately 13 and a half today up 100 basis points, we project an MSR multiple of about $4 eight nine.
And the change in book value would be 700 million so of that some amount of that has already captured but you're you know you'd likely get to somewhere between 14 and $15.
Book value or on the company.
Okay. Great. Thanks, that's helpful. And then just sub servicing contract with Ocwen that ends I think in July I mean is there any benefit to move moving that stuff your own platform or is that just too delinquent or just how do you think that plays out.
You know obviously, we have a good working relationship with Ocwen I think theres more to come we'll likely keep the portfolio with ocwen.
We have discussions with them frequently on that and I think you'll see something.
Hopefully in the near future come out on.
On that.
Okay. Thanks, and then just actually one more on servicing technology have you made the plan about consolidating onto one platform or where is that progressing.
So we're currently in we are currently on two different platforms. One is service director, which is the legacy <unk> system.
And then when I'm when we acquired caliber caliber essentially fired Sejant and went to our MSP. We're currently in discussions as you can imagine with a number of different parties.
Regarding what would be best for our company and what we think will be best for the market.
And there could be some equity component that comes along with that we've had discussions with all the likely players in the marketplace and we'll continue to do so and we hope to have sighted decision on that shortly.
Okay, great. Thanks, a lot.
Okay.
Our next question comes from Kevin Barker of Piper Sandler. Please go ahead.
Good morning. Thank you could you discuss some of the initiatives that you're putting in place to reduce the operating expenses in the origination channel and whether you've considered you know bigger structural changes whether that's.
Reducing the amount of channels, you're in or just focusing on retail and correspondent.
Under if theres anything youre structurally youre looking at on the origination side in order to sustain profitability.
I understand you have significant amount of cost synergies that are coming in place from the caliber merger.
So as I alluded to additional cost saves there, but obviously, it's a very difficult environment.
Anything you could add as far as what Youre looking at on the origination side.
Look at everything Kevin everything is on the table from the perspective of us to make sure that we maintain profitability. Our view is and that includes for more technology perspective from and how we evaluate each of our businesses. So.
We like the ability to be in all four channels, we want to make sure that each of our channels are profitable on a fully loaded perspective.
And that is where we are today and our expectation is that you know as I talked about as we continue to drive additional products as we continue to build out additional partnerships with our existing partners and continued growth as the way that we will continue to work the way we will succeed.
And Kevin did.
Just on that front, you know Baron Baron spoke about.
You know fully loaded units every single day, we look at each channel to say is that breakeven or make money and part of it part of the calculus. When you think about where we are in this business. We will get we have gotten significantly smaller over the first quarter.
Into the second quarter on the origination business.
Each unit, we produce we wanted to make sure that the channel in that unit is making money. When you when you fully allocate corporate and all expenses to that to that channel. So to the extent that we don't think we can make money in that channel well either pull back you know much more significantly.
We will get out and I think where we are now is where we pulled back significantly.
Our volumes were down a lot in my earlier comments about this being a horrible market for mortgage origination I think that continues as we go forward because there's so much capacity in the system as we all know.
And people are going to be fighting for unit, that's not going to be us will rollout of different products I mentioned before about Baron.
Mentioned I mentioned HELOC Baron mentioned he liked we have non QM prime jumbo and maybe some of the other things I would like to see us become a real full scale.
<unk> services company rollout of other types of products to our customers, which I think can offset the decline youre going to see in gains in the origination business, but we're not going to do something for the sake of doing it to compete against some of the larger originators in the market, we don't need to compete for a conventional loan or a ginnie Mae loan unless the other.
The flip side of that could be as we loved the MSR value and we think it's going to go up limit now on the MSR value side, we all know at some point that they get capped because they have negative convexity. They will only go up so high where we are now in both question about essentially our market four and a half we think theres plenty of room to go but at some point will.
Extremely mindful that we don't think they're going to go up a ton more and the risk reward is skewed to the downside.
I mean, just to follow up on the on on those comments you know servicing multiples that we're seeing in the market today.
Five times, some cases transactions that are pushing.
Pushing six time servicing fee.
Do you feel like Youre getting to a point, where you could start hedging or putting in place.
You know some type of instruments to to protect the value.
Given that we're I would say probably the highest servicing multiples received post financial crisis.
Yeah, no. It's a good question.
You know Theres room to go new production MSR as have I think have a five handle right now on the conventional side.
If you think about it if you put a hedge if you get long in instrument against that and the 10 year goes to 4% and fed funds go to you know I'm looking at some charts. This morning fed funds one of our economists semi short. This morning that shows their projection is that fed funds rate goes to north of 4% in <unk>.
24, and if you look at the fed futures the implied fed futures, we go to three and a half and in the middle of call. It 23 getting long a fixed income asset that has duration will just go down in value. It will protect you with the market you know obviously goes the other way.
I think in that case, I'd, rather keep more cash reallocated to you know I pointed out in the investment business you could generate we think right now if we deploy capital with proper financing, we're going to be able to deploy capital in kind of a mid teens type returns. So I think we need and this is where we go back to being really an investment manager and not a REIT we have to think of.
About how we deploy capital across the different paradigm. So we're not just going to originate mortgages to originate mortgages and take undue risk.
Yes, I'm, just saying like it could you buy a significant amount of agency MBS at this point.
And by utilizing that cash to buy those assets.
Probably her agree.
You know what would be a counter cyclical type.
So that clients versus the MSR, while still retaining some yield.
Well I'm thinking about it this way you're originating in MSR, let's say at five and a half you get long of Fannie 3% coupon.
Five and a half will go to six and your Fannie coupon is going to go down 10 points.
So you know I don't I mean at some point, we may get there. If we think we go into a recession quite frankly, but I don't you know right now we're not going to fight the fed and we're not going to fight with Treasury is going to do around the mortgage basis.
Okay. Thank you for your questions. Thank you Michael Thank you.
The next question comes from Eric Hagen of BT IAG. Please go ahead.
Hey, Thanks, good morning, a nice quarter.
Do you guys have any perspective on the liquidity and capital rules switch FHFA in Ginnie Mae or in the process of modifying right now.
How that might drive the approach to capital management.
Not at all.
Why don't we let Nick handle that one sure. So I'm sure you've read the FHFA all the comment letters that have gone back.
As the industry has put out the expectation is as written the rules would increase capital.
Call It three times current requirements.
Our requirements, we believe the FHFA is listening to the industry and those requirements will come down we're comfortable with our liquidity position and meeting the requirements as written and.
The requirements as we ultimately think where we'll land.
Great. Thank you.
And then with MSR is appreciating in value is there the opportunity to achieve a higher advance rate on those assets with secured funding and.
Can you remind us.
Of those of the current secured funding how much is fixed versus floating.
So the answer to your first question is yes, right as the value of the asset goes up theoretically your ltvs going down. So you could create more equity. That's when you look at our $7 1 billion of net equity at.
At the end of the quarter a lot of that's been due to the MSR asset when we look at our funding.
Essentially most of it is it's either most of it's in the capital markets. That's fixed we do have some stuff with some of our banking partners, which is either locked in with fixed or it is floating and then on the other side, we have strategic interest rate hedges on our own balance sheet, which offset the rise that we're seeing in the fed funds rate.
So you know leading to that to that same question in my comments earlier about us hedging are fixed or fixed rate or or assets that have duration with interest rate swaps. Our entire balance sheet has interest rate swaps, which will protect us towards higher rates that also as it is applicable to our.
Genesis business, where.
When you look at those loans, they're fabulous, there give or take 8%.
Coupon initially or seven 8% floating rate loans.
As they sit on our balance sheet, and we get ready for either securitization or working with our banking friends from a financing standpoint, we have hedges to protect us in the front end as we do believe fed funds are going to continue to increase so across all of our different asset classes that we have where we're bias more to the short side, but and then going back to.
Kevin Steinke, if we thought we were going to enter into a recession. We would just you know we'd immediately adapt to.
A longer read by us, but right now I think everything is protected on the balance sheet from our interest rate hedge standpoint, our financings with our bank friends are protected as we have these assets on our balance sheet with short with our front end swaps. So we feel that we're more than covered or more than protected for the rate environment.
In.
That's really helpful. Thanks, Michael.
Thanks, Eric.
Okay.
The next question comes from Doug Harter of Credit Suisse. Please go ahead.
Thanks, Mike.
Mike I was hoping you could just help.
Quantified you said you want to run with kind of more liquidity.
How should we think about how much of that 1.7.
Our cash and liquidity today is kind of investable you know how much of that are you kind of saving to be opportunistic if.
There are deals that come around or where do you kind of put it into the low teens returns that you see available today.
Yeah I think.
Listen I mean of the billion seven could it be a 1 billion that could be investable yeah.
Would we invest $1 billion in today's market the answer is no.
I'm not sure that the worst of of what we've seen is over I'm you know I'm just looking at some quotes as we're on this call Paul Tudor Jones said quote. This is the worst investing environment he things for bonds and equities that he's seen based on the fed being in play and what's going on in the in the world.
So we're likely not going to go out and spend money I do think we will diversify away from some of the single family residential stuff over time, you know the commercial space again, I keep harping on that we're going to be very patient.
In that space, we are making some strategic investments there are small amounts.
Some commercial real estate debt and things like that but.
You know it's going to be.
Patience, we Wanna get rewarded you know we wanted to think about our balance sheet today is.
When we do put out that capital one is the financing has to be great and two is that the rewards have to be 15% to 20% returns as we go forward.
And just on the commercial.
Something you've talked about.
I guess do you feel like you have the right investment team kind of in house already or is that something that might require a kind of an investment in or an acquisition to kind of got the right team yeah. No. There there is.
Listen we have great resources.
On on the energy side.
We you know the the investing in the commercial real estate space will come with a with some folks.
So people that we know for a long time, who have a great proven track record, who know how to make either Lps money or shareholders' money. So.
Our team here is terrific, but it's going to bring in more expertise around the business.
Great. Thank you.
Thank you Doug.
The next question comes from Stephen Laws of Raymond James. Please go ahead.
Hi, Good morning wanted to follow up on Kevin's question about the expenses the sequential decline can you can.
Can you talk about how much of that is tied to variable compensation related to the decline in loan originations how much of that decline was the synergies that you guys have been able to achieve so far.
And as we think about you know from here.
Are there other steps you can take or you know what the industry is kind of over capacity you know should we expect to see.
You know more formal head count reductions kind of across the sector.
You know with with where the outlook for mortgage volumes are today.
Why don't I take the last part of your question and then I'll refer to Baron and Nick on the and what we've realized so far.
The mortgage origination business when we look back.
2020.
We were higher than 500 people a month to keep up with volumes in most of those folks that are at home from a remote perspective, because he needed folks to process loans because volumes as we you know if we look at last year, we did $180 billion of origination. This year, we'll do 80 ish or something.
I don't want it this quota number there because it is going to be about profitability. If we thought we can make money and reduce our costs, we would originate more and more mortgages.
So I do think that the industry itself.
Every day you read another snippet, whether it be on housing wire or some other rigs that people are letting people go it's going to get smaller.
There's too much capacity in the system.
And for those are folks that don't don't reduce their head count where you're going to see is they're going to compete for units to try to make up for it or to substantiate head count as a result.
No money there was going to be very little money to be made per unit. So we've taken the approach to making sure one we reduced our head count to synergies.
One thing we didn't mention before and I think we probably mentioned in the prior call. We hired a Nino Kate from who has a lot of experience you work with Cooper on the digital marketing side. She is leading our effort. There. So when we think about our ability to either reduce costs or drive saves and technology Nino coupled with our ore ahead of time.
Dino lack.
Pretty pumped about those two folks in those groups.
So you've got to get synergies out of your business, you've got to create more efficiency, but you're going to see head count gets smaller across the industry. We've made significant.
Cuts, we don't Wanna be those folks, but we need to get our business right sized for the current environment as move forward.
So and then as far as states, maybe you guys want to take that.
Where we are.
Yeah. So Michael did talk about it is where we were at $140 million, what I'll call. It run rate synergies you obviously see.
Even in our origination business, our overall expense rate from.
From a run rate perspective is down $90 million quarter over quarter, we expect to see you know that.
That number continue to drop with our you know as we continue to forecast out.
Where we think originations are headed for the rest of the year with respect to what I'll call the fixed versus variable what I would recommend is just having a follow up call. We can have a have a discussion on that.
Excellent look forward to that as well as the.
Second question you know it looks like you did your first S. Apart securitization. Your first residential transitional loan securitization can you talk about market reception for those you know, obviously a volatile rate environment.
You know how you look at those markets and availability and pricing there going forward as you continue to grow and SSR and the rest of the transitional loans.
Yeah, I think one is the reception to our securitization was great the advance rate on those assets.
<unk> created a truly once you are fully leased up north of a 20% Roe.
For for that pool of assets.
One thing that's really important Stephen is that you know when we look at our business, we want to make sure that we assume the capital markets are shut down.
So when we look at the volatility that we saw in the first quarter and that's why we called I think $80 million in loans.
When we think about volatility we want them, we want to ensure that all of our financing is extremely buttoned up that if there is no capital markets, how do we protect our balance sheet and Thats and Thats the way that we're running our business today and we will have another securitization probably in the.
Either late this quarter probably into the third quarter as we acquire more units, but just to be clear as we are right now from an overall unit standpoint, we're roughly 3500 units were very very small the amount of total equity in the businesses is.
Is small today.
But we were really looking to grow that when some some talks with some folks about them adding.
Adding resources, adding operating capacity, we have some very good relationships in the industry and this will be a big growth area for us as we go forward, we'd like to you know with with housing affordability decreasing we do think that cap rates need to go up a little bit. So our entry points. We think are going to be in a in a very good way as we go.
Sure.
Great I appreciate the comments this morning. Thank.
Thank you.
Yeah.
The next question comes from Giuliano.
Compass point. Please go ahead.
Oh, good morning in the restaurant on a great quarter.
One of the areas I was curious about.
No Brian .
The custodial deposits side I'm curious if you've disclosed the.
Besides your custodial deposit portfolio on the servicing side.
And the reason for that is just to get a sense of how big it is and.
And kind of the direction of the size of the.
Portfolio to get a sense of what kind of upside you might be able to have from short.
Short rates moving higher and obviously getting some additional carrying them on the on those deposits.
Okay.
Uh huh.
Giuliano it's Nick.
Our custodial balances, we don't disclose them in our financials, but they do run about $13 billion to $15 billion on average.
Yeah.
Your to your question if the fed is more aggressive.
And raises rates in a in a more.
Call. It extreme fashion, you will see higher floating come off our deposits.
That's right.
Going through the just looking at some of the different pieces of the.
Tomorrow, they might have some upside in.
Yeah.
Short rates move higher and obviously if.
If we move your 150 to 200 bps.
No material impact on $13 billion to $15 billion.
Any pickup in value Julien as you know is embedded in our MSR value.
That's right.
And then switching topics a little bit I realized.
Both of them a couple of people have asked for some more questions.
Around you know potentially hedging or.
How do you think about MSR values as I reached out as well.
Pete values from Uh Huh.
Over the last 10 to 15 years or so.
I'll be curious from your perspective, there are a lot of platforms out there you know there isn't a handful of public companies that are out there that have you know.
Almost all portfolios that may be interesting that are marked by market are lower than where you have your MSR is marked and you also have community kind of ordinary swap trading at a discount.
Would you do you have.
Do you have a preference or do you have any interest in adding more origination capabilities or would you need something very unique on the origination side to add more bodies, there or are you more asset focused.
We have all the pieces that we need at this point if there was a great kind of distressed opportunity on the origination side of course, we pursue it.
I think it goes back to some of your earlier comments cap.
Capital allocation matters, we're not a mortgage company you know, we're an investment manager we're.
We're not a REIT so as we think about deploying capital for US financial services. For example, we have a property preservation business named.
Named Guardian, which has a lot of third party clients.
And those guidance do a great job in and that's an example of something that's not where.
We need to go out and just buy assets. So we need to go out and buy another operating company that company will grow assuming that if the economy does go into a recession at some point the earnings in that company will continue to grow and that's a cash on cash business. So I think the most important thing that I'd like to get across so one of the more important things to get across on this.
Paul we're sitting on a lot of cash and liquidity, we don't need to just go spend at our core run rate will likely be in the area of where we currently are and book value should continue to grow the capital allocations and big deal just because you are in the mortgage business doesn't mean that you have to take $1 billion and go buy another mortgage origination platform.
At Forum, whereby MSR is at a six multiple if the opportunity comes our way, we'll do that but it's more about how do we diversify one two and how do we deploy capital in a more meaningful way that's going to drive higher core earnings and higher returns for shareholders and I think thats the point to get across.
That's great I really appreciate it.
Yeah, the answers to the questions and I'll jump back in queue.
Thank you.
Okay.
The next question comes from Trevor Cranston of JMP Securities. Please go ahead.
Alright. Thanks.
One more question related to MSR evaluations.
You mentioned the possibility of more MSR coming up for sale as you know mortgage companies potentially struggle more over the course of the year.
Can you talk about how much upside you guys would have for adding sort of the low coupon MSR. That's been originated over the last couple of years.
And more generally kind of how you would see returns on bulk MSR purchases today versus other lesser closest you might be able to deploy capital into.
Trevor It all comes back to returns.
We are we going to buy a 3% gross WAC MSR at a six and a half multiple I don't think so.
But if we can buy them at the right levels and we think we could get you know mid teens returns because.
Because we think we can deploy that same capital in a different way at a mid teens returns I think that's really what it's going to come down to what we had MSR is if we think the values there, but we don't need to add any more we get to 625 billion between excess and full can we grow that the answer is yes will we yeah. We can grow it organically through our origination business and one of the one of the things we.
Look at everyday as we say, okay, what's our breakeven on the MSR portfolio, where can we originate that unit and how do we think about the macro environment going forward. If we think the macro environment is going to show up then it just comes down to saying, Okay can we produce that unit fully loaded at this yield and how does that compare to for example, when Charles Sorrentino is looking at.
The broader NRG investment universe, how does that compare to him deploying capital for example in a triple a security on a levered basis that is going to be a <unk>.
So it all depends on and again it goes back to the capital allocation thing or is there a is there a operating business that may be in the commercial real estate side or in the consumer side that we think we're going to generate 20 plus percent outsized returns.
So it's not just to grow in MSR business is not just to grow mortgage companies not just to grow a single family bond business, it's really how.
How do we how do we create value for shareholders thinking of us as a total return manager.
With your capital.
Yes, Okay makes sense. Thank you. Thank.
Thank you.
Yeah.
The next question comes from Courtney Solomon of Barclays. Please go ahead.
Hey, guys. Thanks for the time here and for the questions really just getting out is.
Is there any color that you might be able to provide them with regards to how the how the quarter panned out with regards to the monthly cadence pertaining to origination volumes you know obviously, the first quarter with Super volatile we started the quarter with a 30 year at what three or 3.25% throughout March we averaged about 4.5% no huge.
Difference there and one of the things that the market and I'm trying to gauge is how sticky. This consumer is on the purchase side.
You know in the past, we've seen demand drop off on that for four 5% area and this consumer seems much more resilient to me do you guys have any thoughts there and then also any color on how April is trending so far really appreciate it. Thank you.
I think on the consumer side, yes, it's resilient you know the consumers resilient. If you look at home price appreciation for the first quarter I think the numbers were like 13% or something are across the country. I you know listen I'm, not an economist and we obviously read a lot into.
Where we are the unemployment rate continues to remain lower people project that to go even lower as folks drop out of the workforce because they don't want to work or they're of aging and retiring I do think right now mortgage rates are in and around five 5% if you're thinking about it this way going back to the.
Fourth quarter mortgage rates have doubled the average payment for a homeowner is double and home prices are up 13% in the first quarter I do think at some point that will impact the consumer and you'll have some slowdown that's just my own personal opinion, so far the trends have been I think you know where the.
Tumors pretty strong you've seen a lot of folks rush into I think acquire homes in the first quarter with the expectation that mortgage rates are going up.
You know right now the consumer seems pretty healthy.
The flip side of that as you couple you know a five dollar cup of coffee at Starbucks $5, a gallon for gas mortgage rates double I think at some point it has the impact of consumer and one of the things that you know if you look at the mortgage banking industry with the amount of folks that are that are actually leaving the system I do think at some point in place on the consumer we haven't.
Seen it yet the consumer remains strong probably worth looking at the data from like a bofa or or a J P. Morgan you don't have that have a large swath of data around their card business.
Alright. Thank you any color with regards to the monthly cadence in the quarter anything even directionally would be appreciated. Thank you.
Relating to the consumer.
Relating to origination volumes.
Yeah, I mean, we put in our forecast already that are our expectation is that our funded volume will be somewhere between 17 to 22, we expect to be somewhere in that higher end of that range, but that's the guidance that we provided and it's all related to profitability. It's not it's not about the volume number we did 25 billion.
In the first quarter, we project 80 to 90 billion or something like that for the full year and that number could be 50 that number could be $1 50. It depends like we have the machine to do it. It just depends on how much money that we think we can make for shareholders on on each unit and what kind of service we can provide to the homeowner.
Yeah understood. Thanks, guys. 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.
Thanks to everybody for your questions and and joining the call. This morning, and look forward to hopefully performing for everybody as we go out through the course of the year well and we're around for any follow up questions have a great day.
Yes.
The conference has now concluded.
Thank you for attending today's presentation and you may now disconnect.
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