Rithm Capital Corp.
Q1 2015 Earnings Call Transcript

Published: 8 May 2015

[Operator:]

Good morning. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Residential First Quarter 2015 Earnings Conference Call. [Operator Instructions] Thank you. From Investor Relations, Mandy Cheuk. You may begin your conference.

[Mandy Cheuk:]

Thank you, Steve, and good morning, everyone. I would like to welcome you today to New Residential's First Quarter 2015 Earnings Call. Joining me here today are Michael Nierenberg, our CEO; and Jonathan Brown, our interim CFO and CAO. Throughout the call, we are going to reference the earnings supplement that was posted to the New Residential website this morning. If you have not already done so, I would suggest that you download it now. Before I turn the call over to Michael, I would like to point out that certain statements made 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 investor relations regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC. And now I would like to turn the call over to Michael.

[Michael Nierenberg:]

Thanks, Mandy. Good morning, everyone, and thanks for joining our Q1 earnings call. For the quarter, I think we had a terrific quarter. We've been executing on all of our core strategies, trying to simplify our company, and from a core strategy standpoint, with the acquisition of HLSS, their assets, we now have critical mass in what I would call our 3 core strategies, which are MSRs, servicing advances, and non-agency securities with call rights. From an earnings perspective, we had record core earnings in our business, and all of our segments continue to perform extremely well. We closed on the HLSS acquisition in early April and this has really transformed our company, giving us again critical mass in our core business lines. We are now one of the largest capital providers to the mortgage servicing industry. Our message is consistent

[Operator:]

[Operator Instructions] Our first question comes from the line of Paul Miller with FBR.

[Jessica Ribner:]

This is Jessica in for Paul. Just 2 quick questions. What would you say the average duration on the excess MSR portfolio is today?

[Michael Nierenberg:]

Being that they're mostly credit-impaired, it's probably something in the area of 4 to 5 years.

[Jessica Ribner:]

Okay, great. And then what's the visibility for acquiring more call rights? Are there sellers? Is it something that you kind of have to look for?

[Michael Nierenberg:]

The answer is we always look for it. The amount that we currently have is roughly 35% of the outstanding market. Obviously, we're in conversation -- we're always in conversation with potential sellers of call rights. Typically, when we acquire pools of private label servicing, a lot of those come with call rights and we're currently in discussion on acquiring some pools of private label servicing. So we hope to acquire more. There's no guarantees, but we think we'll be successful in acquiring more call rights.

[Operator:]

Your next question comes from the line of Bose George with KBW.

[Bose T. George:]

Just a couple of questions. First, just from a capital standpoint. Pro forma for the HLSS deal, do you have any excess capital after that?

[Michael Nierenberg:]

We do have some excess capital as a result of the capital raise. Part of our strategy and as we continue down the path, we do have some commitments at MSRs. We have purchased some non-agency securities. While saying that, we still have some -- we still do have some capital.

[Bose T. George:]

Actually, is that quantifiable? Or does it kind of depend on other things?

[Michael Nierenberg:]

I mean, to give you sense. As of and I could talk to as of today, we have $375 million of cash on our balance sheet. However, some of that is allocated towards future investments. But again, we do have some capital on our balance sheet.

[Bose T. George:]

Okay, great. And then just on the funding side, are you going to put on any sort of permanent funding? Or is it really going to be asset based for the HLSS deal?

[Michael Nierenberg:]

I think the way to think about the company is we do some short-term financing around some of our MSRs to raise some capital in order to pay for the acquisition. On our non-agency business, we continue to work with our bank counterparts and other counterparts and use the repo markets. And typically, those facilities are 364-days facilities with advance rates of approximately 75%. Our loan business will continue to be something similar, but again, that is going to be more deemphasized and our loan growth will likely come as a result of our call rights when we acquire some delinquent loans, when we call those deals. Overall, we continue to evaluate our capital structure, we are looking at longer-term debt financing and we have done some of that with certain parts of our portfolio.

[Bose T. George:]

Okay, great. That's helpful. Just actually one more. Just in the GAAP to core reconciliation, the $13.4 million of interest income, can you just walk through that line item?

[Jonathan R. Brown:]

Sure. So for GAAP purposes, when you put a loan into a held-for-sale category, you have to discontinue accretion on those loans. However, economically, they continue to earn economic return. And so for core earnings purposes, we continue to accrete them. That was a change we made last quarter in our core definition as a result of putting our loans into held-for-sale.

[Bose T. George:]

Okay. So it's really just coming through a different line item because of the reclassification?

[Jonathan R. Brown:]

Exactly.

[Operator:]

Our next question comes from the line of Doug Harter with Crédit Suisse.

[Douglas Harter:]

I was wondering when you have conversations with others about buying call rights, sort of what is the pricing look on that? And if you were to apply that to just kind of the value of your call rights, how would that look?

[Michael Nierenberg:]

Doug, in just acquiring call rights, that's not an easy thing as I pointed out earlier. Typically, the call rights, when we acquire pools of private label servicing, we try to acquire the call rights associated with those pools of servicing. So the all-in price, the way that we think about it, is 1 price that goes with that MSR. While saying that, at some point, now that we have critical mass, it's likely that we'll be valuing our call rights on our balance sheet on a go-forward basis. But it's hard to tell because as you think about the non-agency universe and one of the things that's tricky as we think about calling these deals, if the average -- deals that have less delinquencies will get called right away and obviously the value of that option is significantly higher than an option that's kind of 3 to 4 years out of the money. What we try to do in the presentation is give you a sense as far as when the population is callable as we amortize these the call rights down based on a constant prepayment speed. But overall, the shorter the call right, obviously the more valuable; the longer is, they'll be a little bit out of the money and they'll be worth less in the way that we're thinking about it. But I think you'll get more clarity as we go forward over the course of the next quarter in the valuation of call rights.

[Douglas Harter:]

So just to be clear

[Michael Nierenberg:]

That's....

[Jonathan R. Brown:]

There's essentially no value on the balance sheet. When we acquired them, we put a small number on, but it doesn't move with the mark-to-market.

[Michael Nierenberg:]

So currently, they're valued at something close to 0.

[Douglas Harter:]

Got it. And that slide where you guys showed the kind of what you view the callable universe as of each year. I mean, so with that $33 billion as of today, I mean, would that be economically feasible today? Or do delinquencies have to improve for that to make sense to call out $33 billion?

[Michael Nierenberg:]

The answer is both. We're going to be doing a securitization this quarter and that'll be something between $400 million and $500 million and then we have another one queued up for the following quarter. And we continue to evaluate the population and we expect it to be -- I guess, we expect the pace to pick up throughout the latter part of this year and then over the course of the next probably 2 to 3 years as delinquency pipelines clean up. And if you think about it, a lot of these, as a lot of these kind of delinquent loans have been sitting in these delinquent buckets for a long time and as those get liquidated by the servicers, the deals theoretically should be more callable.

[Operator:]

Our next question comes from the line of Jason Weaver with Sterne Agee.

[Jason Price Weaver:]

First, I wonder if you could just talk about if you think there's any relationship -- or how do you think the pricing and availability of the MSR pipeline might evolve in response to changing monetary policy expectations.

[Michael Nierenberg:]

I think the big thing, when you think about MSRs, there's not a ton of servicers overall that have the ability to acquire critical mass from a lot of the large bank sellers. So as you think about that, a lot of what we do or a lot of what Nationstar does, for example, is dependent on the regulators in Washington. So if a pool of $20 billion, for example, comes from bank A, the folks that are going to be in the best position to buy that are going to be the large nonbank servicers that are well capitalized. And as you think about Nationstar, they're well capitalized and they're in a great position to continue to acquire MSRs. Part of it's pricing and a lot of it has to do with who is really going to get approved by the regulators to acquire those agency MSRs. On the PLS side, it's a little bit different and where we have an edge is being that we're the largest capital provider to the servicing industry. Whether it be with Nationstar and/or Ocwen, we feel like we're in a great position to acquire whatever remaining PLS is out in the market place today. So part of it is pricing, but the other part I think that's probably more relevant is really the counterparty who's going to acquire any servicing. And that's why having relationships with Nationstar is fantastic, having Ocwen come into our stable is great. So we're pretty excited about what we think is future opportunities to acquire MSRs.

[Jason Price Weaver:]

Okay. And when you mentioned long-term debt a few moments ago, was that in relation to are you looking at possibly doing an unsecured -- senior unsecured deal? Or is that something else?

[Michael Nierenberg:]

We're evaluating our capital structure across everything and we continue to do that every day obviously. It is our desire to extend our maturities on all of our debt financing as long as possible, so we'll continue to look at that. Whether it's a term loan, whether it's whatever that may be, we'll continue to evaluate our capital structure. No guarantee how we're going to do things, but that's -- we'll evaluate what we think is best for our shareholders.

[Jason Price Weaver:]

Fair enough. And just one more, I didn't -- or you might have said something earlier about the opportunistic portfolio, but is there anything you can share about anything on the horizon you're looking at doing there, possibly replacing some of the runoff in the consumer loans?

[Michael Nierenberg:]

We think, based on the HLSS acquisition, the company is now in a great place to execute on, again, the 3 core strategies. I don't think there's anything that's, that interesting for us right now on the opportunistic side. So we'll continue to grow in the areas that we have grown in, which are going to be MSRs, servicer advances as to the extent we acquire more PLS and then non-agency securities as we own all the call rights.

[Operator:]

Your next question comes from the line of Jason Stewart with Compass Point.

[Jason Stewart:]

I wanted to just get your color on when you look at the collapses, the call rights how you think about generically where the P&L will come from over time from the security side versus the back-end loan sale execution side?

[Michael Nierenberg:]

It's both. We tried to give you guys an example on Page 11 just kind of how to think about things. I pointed, I think, at earlier that the securities we own -- if you owned securities that are between $0.70 and $0.80 and as the pipelines continue to clean up, the accretion of those securities from using a round number, just for illustrative purposes from $0.75 to par, depending upon how many securities you actually have, and then buying -- and then at the clean loan portfolio -- thinking about it this way, clean loan portfolios, when we do securitizations based on the illustration on Page 11 will show you a profit of approximately 5 points, right? So if you say, okay, you're taking a pool of loans, you call it at par, your securitization will be something between 4 and 5 points depending upon how delinquent the population of loans within those securities that you're calling, that's really going to be the driver. But in the meantime, we expect, based on the $235 billion of call rights, that our non-agency portfolios will likely grow over time.

[Jason Stewart:]

So let me ask you just -- let me just ask it a little bit of a different way because I understand, and you guys do a great job with disclosure, the security side I think you've disclosed historically you've made $12 million on something like $1.4 billion of call rights through 2014. If we apply that to a prospective UPB of call rights you have, the number is just much higher than $2, I think around what you said, it was like something like $2 a share. It's just much higher just on the call rights alone. Understand there are some differences, but it seems to me like when you acquire the HLSS assets, part of the reason was you acquire them because you had this much larger portfolio of bonds to buy in on the front end that really increased the opportunity. I'm just trying to understand perhaps where I'm not thinking about that the right way.

[Michael Nierenberg:]

No, I think you are thinking about it the right way. The call rights -- think it about it this way. The call rights currently of $235 billion, there's going to be amortization if you get to a 10% clean-up call or 10% factor on the underlying deals. So in our best case or our best guesstimate at this point, that $235 billion at the time of call will be between $100 billion and $125 billion. If you think -- if you use our assumption that we're going to make a call at 2 points or 3 points on that $100 billion, that $100 billion then becomes $2 billion, right? So we're going to call all those deals that $100 billion times 2 points gives you $2 billion of earnings. Based on 190 million shares outstanding, the approximate addition to our earnings will be $2 per share. Does that help?

[Jason Stewart:]

Yes. No, it's helpful. I think it's a great discussion, and you never want to -- your sister company, NCT, telegraph their call rights on collapsing CDOs and I don't know how far you want to go and that, but I'll leave it there. My other question was Wes yesterday said on the Fortress call that the permanent capital vehicles will be between $12 billion and $15 billion of equity at the end of this year, that's his target. My question is just how much do you think NRZ will be of that $12 billion to $15 billion?

[Michael Nierenberg:]

I think -- the way that we're going to manage our company, we're not just going to -- the $12 billion to $15 billion that Wes quoted is across the entire permanent capital universe and we clearly have a lot of different businesses around permanent capital, as you know. The way that we're going to manage our company is we're going to try to create sustainable earnings on the lowest levered company that we can. I think, initially when we feel that a ton of questions after we did the HLSS acquisition are targeted, and again this is our targeted pro forma based on the balance sheet the way that we see it today and again there could be no guarantees, is something between $2 per share on an annualized run rate. That's the way that we're going to try to manage. We want to be able to be -- create sustainable earnings that you could count on-quarter-after-quarter and that's the way that we're thinking about it. Where we go with the company, I think it's going to be dependent upon our ability to acquire excess MSRs for one of our core business lines that we currently have on our balance sheet. So there's no plan just to say, okay, let's go raise equity I think is the short answer to your question.

[Operator:]

Your next question comes from the line of Jason Deleeuw with Piper Jaffray.

[Jason S. Deleeuw:]

Also just want to say congrats on closing the HLSS asset acquisition.

[Michael Nierenberg:]

Thanks, Jason.

[Jason S. Deleeuw:]

First question. Just on the $64 billion of UPB MSRs that you're going to close on or committed to close on, are those mostly credit-impaired assets?

[Michael Nierenberg:]

Yes. I think almost all of those are some type of credit impaired, whether it be a high FICO, some loans that have already been modified -- I mean low FICO, loans that have been modified or higher LTV securities. And again, some of those are still subject to approval because some of those are agency, but we expect all those to close between this month and early third quarter.

[Jason S. Deleeuw:]

Got it. And then just thinking about MSR acquisitions in the future, you guys have -- you've done it in conjunction with Nationstar and now you got Ocwen as another servicer. But banks are, as you point out, moving MSRs off their balance sheet on other balance sheets and I'm just wondering if there are opportunities for NRZ to acquire MSRs, I guess, directly maybe from banks or do some sort of financing arrangement where you wouldn't necessarily need another servicer to come along with you guys on that transaction, is there any opportunity for that?

[Michael Nierenberg:]

I think on the bank side, the banks, once they agree to sell an MSR, they don't want to service it. As you think about the market, we would need to be a licensed seller servicer and we have no intention of being a servicer. So the nonbank servicers would need to own that MSR on their balance sheet. One of the ways that we can do it is we could get licensed and then work with different servicers. I think, for now, that way that we're thinking about it, we're comfortable with where we are. We're comfortable with our relationships with both Nationstar and Ocwen. You also saw in our presentation we have a relationship with SLS. So we've expanded our servicing partners, but while saying that, we don't intend on being a servicer. So the likelihood is -- of a bank retaining servicing and then us being the capital provider is probably not likely.

[Jason S. Deleeuw:]

Got it. And then on the MSR, the excess MSRs, and the mark that we had this quarter, they were very small relative to what we've seen from other companies this quarter and I'm just wondering if you can talk to, I know because this is probably partly because of the credit-impaired assets, but if you could just talk to the characteristics of your MSRs and why there hasn't been a lot of volatility in the mark-to-market of those, that would just be helpful.

[Michael Nierenberg:]

Sure. I mean, to give you a sense. On our Fannie portfolio, our 12-month projections on our Fannie portfolio were approximately 11% CPR. They came in at 11% CPR. On our PLS, our projections -- our 12-month projection was 13.6% CPR and they came in at 12.5% CPR. So actually, our projections, from a speed perspective where we projected over the course of the past 12 months, have been lower. The speeds -- the actual speeds have been lower than our projections. On a 3-month basis, for the quarter, to give you a sense on our Fannie portfolio, our actual speeds were 10.8% CPR versus a projection of 11 and change. On our Freddie portfolio, our speeds are 10% CPR versus a projection of approximately 10% CPR. Our PLS was actually 11.9% CPR versus a projection of 12.6% CPR. So overall, what I'm trying to illustrate to you is that our CPR projections were one thing, our actual speeds were lower than our projections and that continues to bear fruit as our investment thesis in a lower rate environment has been to focus on legacy, credit-impaired MSRs. That is why we did not have the -- any write-down really in the quarter.

[Jason S. Deleeuw:]

Got it. And when I think about -- because I think your MSRs, given where the path of interest rates in the future over time, they're probably worth more on where you've got them marked. But what assumed prepays do you have in there when you mark them now? Like I'm trying to get a sense for, let's say, we do get rising rates over time, is there significant upside value that you can mark up those MSRs at?

[Michael Nierenberg:]

Yes, the way that we think about it in a 50 basis point rising rate environment, we will feel that our portfolio will increase something between $40 million and $50 million, okay? On the HLSS side -- and that was the existing NRZ portfolio. On the HLSS side -- being that these are credit-sensitive, they won't go up as much but they are not going to really go down in a lower rate environment. On the HLSS side, a 50 basis point selloff where we actually rise in rates will contribute about another $35 million to the value of our MSRs. So if you think about it, any 50 basis point selloff, the value of our portfolio we expect to go up something between $80 million and $100 million.

[Jason S. Deleeuw:]

Got it, that's very helpful. And then the last question on the consumer loans. So there were no GAAP earnings, we just had the earnings run through the core numbers. Is that's how it's going to work from an accounting standpoint going forward?

[Jonathan R. Brown:]

So on a GAAP side, what runs through is the cash that we received from the consumer loans, so there was some cash that went through and was recorded as a gain, now that we have no basis. And for the core, you're right. We continue to accrete the loans since the refinancing didn't generate a gain for core purposes. And the difference between those two is the net add-back to core.

[Operator:]

Our next question comes from Michael Kaye with Citigroup.

[Michael Robert Kaye:]

Could you just give us me some thoughts on the dividend going forward? Already, the payout ratio seems kind of low, $0.38 dividend versus $0.44 core. And should we expect to see a full step-up, to the full dividend run rate in Q2? Or is it going to take some time to hit that post-HLSS?

[Michael Nierenberg:]

On the dividend, we'll continue to pay out something close to 100%. So as we continue -- as we go through the company, the access just boarded in early April. We'll continue to evaluate our dividend policy, but I think the way to think about it is we're going to pay out something between 95% and 100% to our shareholders.

[Michael Robert Kaye:]

Okay. And just looking ahead, I mean, is there any opportunity and interest in your part for purchasing more MSR assets from Ocwen? I believe they still have about a $46 billion UPB of additional PLS?

[Michael Nierenberg:]

Yes, I think if the pricing works and we all come to agreement, that it works for us as a company, of course.

[Operator:]

[Operator Instructions] Your next question comes from the line of Ken Bruce with Bank of America.

[Kenneth Bruce:]

You addressed a lot of potential questions and thank you for the enhanced disclosure. I guess, there's a few things that still I'm trying to square up, I guess. As you look at the excess MSR potential in the distressed loan arena, what market share do you see yourselves having? And how might you go about extracting more of those servicing assets, whether it be with Ocwen or an HLS -- or sorry, Nationstar to essentially have the opportunity to acquire those?

[Michael Nierenberg:]

Ken, they way that we continue to think about it, and I think I'm not sure what page the slide is on, on the MSR side, as you think about the banks, the banks basically service 75% of all MSRs. We expect that to continue towards 50%. The banks are -- they'll sell some maybe some clean Ginnie Mae stuff. But in general, they're going to continue to shed noncore assets. We think the runway is roughly $2.5 trillion of kind of credit-impaired servicing in today's market. That $2.5 trillion should give us a very good runway to continue to grow around the legacy side. So I think there's plenty to do. As it relates to the overall market share, we're not striving to be #1. We're trying to drive share. Obviously, we're trying to drive value and results for our shareholders. So it's hard to say, okay, we want to have 50% market share. So I think it's really dependent upon how we drive shareholder value.

[Kenneth Bruce:]

Right. And I guess, as you pointed out in your prepared remarks, I mean, a lot of what you're attempting to do here is to provide better transparency into your business so that we, analysts and investors, can gain some visibility around the business, which I think goes to driving the lower yield on the stock. I presume that, that's what you meant. I don't expect you to be dropping your distribution, so I assume you want the stock price to go up. And for that to happen, I think there needs to be better visibility. And one of the things that the market has a challenge with is just understanding how the market from banks to nonbanks happens. We've been talking about a $2 trillion to $3 trillion nonbank market for awhile and obviously the industry has had some challenges here of late. So I think that's kind of part of the issue is just having some understanding how those assets migrate over, so that you've got the opportunity to acquire them. When I look at Slide 8 in terms of that market opportunity, it would seem to me that maybe some of these assets do end up being stuck at banks and to maybe Jason's earlier point, a way to -- any way to figure out how to finance the excess MSRs, if they do end up residing on the bank balance sheet, I think, would be an interesting opportunity for you all to pursue. I guess, maybe my other question and you spent a lot of time on call rights, I appreciate that, is there any way to, when you look at Slide 10 or just think about how that opportunity manifests itself, is there any way to think about the cadence of essentially the earnings recognition or the earnings, however you want to kind of articulate it, any way to think about how that happens over time because I think one of the challenges that Newcastle had is they had a huge opportunity to extract the hidden value in those -- in similar-type transactions on the CDO side, but understanding the timing of that was always one of the challenges of the market, and I'm hoping you may be able to provide some sense as to how the cadence would ultimately play out over the course of the next couple of years.

[Michael Nierenberg:]

Yes, I think it's -- again, it's so hard because there's a lot of these loans, as you know, that are stuck in these securitizations as a result of, what I would call, the existing regulatory pressures that existed in the market, whether that be loan sitting in judicial states where you couldn't liquidate the pipelines because of the hang-up in the courts, et cetera. I do think we're going to have some good success this year in that business. I think the bulk of the earnings power are really going to be in '16, '17 and '18. And I think that -- I'm hopeful over time that we do figure out better ways to kind of -- and then obviously this is a servicer thing, it's not an NRZ thing because we're really just a capital provider and own assets, but I'm hopeful that the services will figure out ways to kind of liquidate these pipelines, which will then make them -- make it feasible for us to call these securities. So I think it's more going to be a '16, '17, '18 kind of runway, although we're going to have some good success this year is the way that we're thinking about it. And we're working on some different things that hopefully will bear fruit shorter -- sooner rather than later. But I think a lot of it depends on the pipelines cleaning up.

[Kenneth Bruce:]

And when you look at that, is it more of a -- is the friction just because of all the things that are going on at the state level or wherever the friction may lie? Or do you think that there is sufficient incentive for the servicers to try to pursue those improvements in and of themselves?

[Michael Nierenberg:]

Yes, I think the servicers will continue to service in accordance with what their -- what the PSAs tell them to do as well as accordance with, I think, some of the settlements, as you know. So it's not something where if you call the servicer and said, I'm going to give you more money that they can liquidate a pipeline, I don't think it's related to that. They have to service according to certain guidelines and I think they continue to do that as well as in accordance with the different settlements that they've had with the various regulators. So I think it's more on the servicing side. It's really not on our side. I don't think it's an economic thing. Obviously, no servicer wants to continue to service delinquent loans because it costs them more money. So the quicker, I think, that the pipelines get liquidated, I think the better it is for the entire industry.

[Operator:]

Thank you. There are no further questions at this time. Michael Nierenberg, I turn the call back over to you for closing remarks.

[Michael Nierenberg:]

Terrific. Thanks, everyone, for your support and calling in, and we look forward to catching you up in the next -- over the next quarter. Have a great weekend. Thanks.

[Operator:]

And this concludes today's conference call. You may now disconnect.