Rithm Capital Corp.

Good day and welcome to the new residential first quarter 2020 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Caitlin Morris with Investor Relations. Please go ahead, ma'am.

Thank you, Rocco, and good morning, everyone. I'd like to welcome you today to New Residential's first quarter 2020 earnings call, and thank you for joining us. Joining me here today are Michael Nirenberg, our Chairman, CEO, and President, Nick Santoro, our Chief Financial Officer, and Jack Navarro, President and CEO of the Servicing Division of New Res. 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 have 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 to the most directly comparable GAAP measures can be found in our earnings supplement. And with that, I'll turn the call over to Michael.

Thanks, Kate. Thanks, everyone, for joining us this morning. You know, our earnings today are truly a tale of two quarters. As we entered March, we were on target for a great quarter. Core earnings were slated to be 65 cents. Book value was modestly lower despite the fall we saw in rates and overall liquidity for the company was in very good shape. Then came COVID-19. The past six to eight weeks have been some of the toughest markets many of us have seen in our careers. It's been very challenging, as everybody knows. For our own portfolio, just to give you a little bit of a refresher, we were always long MSRs. We owned MSRs. We had non-agency bonds and loans against that as a hedge as well as some agency securities. What happened was the correlated hedging strategies, you know, after the world shut down, broke down on everything. We saw all asset classes fall in price. And what happened is this created liquidity issues, not only for mortgage rates, quite frankly, but even long-only investors as falling prices caused redemptions, which put extreme pressure on the system. So what did we do? We went out and said, okay, we got to take action. We sold 27.9 billion of assets. We raised liquidity, we paid down debt, and we extended our lending facilities while we're reducing our overall short-term repo agreements. Overall leverage got reduced to 1.5 to 1.7 times. We reduced our bond positions by 85%. We reduced our loan positions by 45%. And today, our loan and bond positions are at the lowest levels we've had in years. From a balance sheet perspective, we reduced our overall balance sheet by over 60% since the end of 2019. We increased liquidity, and today our cash position is significantly higher while our balance sheet is a fraction of what it was. Our cash position as of 4-30 was $517 million with unencumbered assets just under $400 million. Our mortgage company, which continued and still continues to support homeowners through this difficult period, work with borrowers on forbearance programs and agreements to help alleviate the hardship caused by COVID-19. We're really proud of the hard work that the company's done in light of these difficult circumstances. In our origination business, as prices fell on non-QM and prime jumbo loans, we stopped originating all non-agency products. Our focus today and going forward in the near term will be on Fannie Mae, Freddie Mac, and Ginnie Mae loans. We will continue to provide credit to homeowners and focus on supporting our customers while focusing while increasing our borrower retention efforts. On the ancillary business side, Covias, Avenue 365, E Street, and Guardian continue to support our origination and servicing business. We expect to see growth in those divisions as we enter into a more normalized state as we go forward. Our advanced business, we've increased our advanced capacity and commitments by $1.8 billion, raising our total financing lines to $5.25 billion, which we believe gives us plenty of capacity to fund advances as we go forward. Keep in mind in 2015, we had over $11 billion of advance capacity, and at that time we were funding $8 billion of advances. Our team has a ton of experience in this business and we're highly confident in our ability to deal with higher advances. In some of the government programs that have been rolled out, the Ginnie Mae PPAP program, helps to support the mortgage servicing community by providing financing up to 100% for principal and interest. That is a good thing for mortgage servicers to the extent that you wanted to use it. FHFA recently announced that servicer obligations will be capped at four months during the forbearance period for P&I. Again, another positive development. As we go forward, we'll maintain discipline, focus on assets which are low leveraged, term financed, as well as serviced by our new res and Shell Point partners. We'll maintain higher levels of liquidity than you've seen in the past while focused on our operating business and opportunistic investments that we see. We look forward to growing our book value once again and providing terrific investment returns for our shareholders. Finally, I want to wish everybody well and a big thanks to our team for all their hard work during these difficult times, because I will tell you that we've been working 24-7 to do all we can to get back to where we believe we should be. With that, I'm going to refer to the supplement, which has been posted online, and I will begin with page four, actually. We're going to go right to our Q1 company and financial highlights. For the quarter, we had a gap net loss of $1.6 billion, or $3.86 per diluted share. This includes mark-to-market and impairment of $2.24 and realized losses of $1.92. Our core earnings were $198.4 million, or $0.48 per diluted share. First quarter common stock dividend of $0.05 per common share, which correlated to a 4% dividend yield as of March 31, 2020. Cash on hand as of March 31 was $360 million. I just alluded to the fact that today, or as of 4-30, we had $517 million of cash, again, building up our liquidity positions. on encumbered assets for $390 million. Our net equity as of 3-31 is $5.2 billion. Book value per common share as of 3-31 was $10.71. Our book value during the quarter decreased by about 34% from 16-21 to again 10-71 from December to the end of March. Page five. Going back to my earlier comments, this really was a tale of two quarters for us. Prior to the 13th of March, we were on track for a great quarter. Core earnings were slated to be $0.65. Our book value was between $1,572 and $1,589. Our mortgage company was going to make between $125 and $150 million. Origination volumes, $12 billion. And our overall leverage was three and a half times. As we fast forward and you can see the impact as a result of COVID, we lost 17 cents in core earnings. Our book value went down by $5 as we had some large sales of assets. Our origination and servicing income went down by $67 million, and our origination volumes tailed off a drop as we pulled in the reins. Overall reduction in leverage, 1.7 times as a total company through 331. Page six. We put this slide in last time, and I just want to illustrate what we think a theoretical book value could be for us as we think about the growth in our operating business. And if you go to the left side of the page, if our operating businesses make, and let's take the low end, $300 million, and we say those companies traded a 5PE, that would create enterprise value of $1.5 billion. Our current book equity on our operating businesses are about $400 million. off-balance sheet value of $1.1 billion, which would create an extra $2.73 per diluted share or an implied book value of $13.44. So if you look to the right side of the page, you could see on-balance books, on-balance sheet value, $4.5 billion, and the total would be something around, give or take, $6 billion. So again, I just want to illustrate what we think the value of our operating companies could be as we go forward. Page seven. As we adapted to COVID and the macro environment, we sold $27.9 billion of assets through the end of April, reducing our investment portfolio to $12.7 billion. We reduced our mark-to-market exposure dramatically. We reduced our total leverage in our investment portfolio to 1.5 times, and that's down from 3.5 times. When you look to the right side of the slide, we executed on our liquidity plan. Cash on hand now, again, $517 million. And as we pointed out earlier, we added financing capacity of $1.8 billion in our advanced business. Page 8, as we reposition the company today and we think about the go forward, again, we sold $27.9 billion in securities. That includes non-agency securities, agency securities, and loans. Our mark-to-market, once again, has been decreased dramatically. We reduced our repo exposure. And even in the height of the crisis, we priced a $450 million season non-agency deal. If you look to the right side of the page or go forward, we expect by the end of May that 75% of our non-agency loans and securities will be more term financed with limited or no mark-to-market exposure. Our investment strategies going forward will be driven by term financing solutions and focus on assets which are truly complementary to origination and servicing businesses. And 85% today, 85% of our loans and securities are currently serviced by either New Res or Shell Point. Page nine is our typical call rights slide. I'm not gonna spend a lot of time on this. Today we continue to control $80 billion of call rights If you recall, we announced during Q1 that we made a large sale of non-agency securities. Included in that were roughly $17 billion of call rights, and we'll continue to work with our partners on not only the $80 billion, but also the $17 billion that was sold during the quarter. Service or advances, page 10. Our team has an unparalleled experience in managing large portfolios of advanced balances. Advances are one of the highest quality assets you can get in the mortgage market. They are the top of the waterfall. Since 2015, we have recovered 100% of the advances on our portfolio. Following the acquisition of HLSS in 2015, we had peak advance balances of $8.7 billion, and that was funded with over $11 billion of debt. Since then, we've successfully managed these balances down through servicing and and term financing, we've completed 15 advanced securitizations for $6.1 billion. And we believe by working with our servicers, not only Shell Point and New Res, but other services, Cooper and Aquin and others, will continue to manage these balances down. And as you can see on the bottom part of the slide, you can see the $8.7 billion going to $3.5 billion today. Page 11. We brought this slide back out. Service order advance balances today are $3.5 billion. That's down from $3.8 billion at the end of 2019. That's financed with $3 billion of debt, 1.9 of which is in the capital markets. The LTV of 86%. includes no advancing or no advanced facilities on Ginnie Maze at this time, and we expect that to come online, and I'll talk to that in a little bit. Our advanced balances as of March 2020 are 11% Fannie and Freddie, 3% Ginnie, and 86% PLS. Again, the Ginnie advances are not financed on any lines. After March 31st, I pointed out earlier, we increased our advanced capacity by $1.8 billion, and we've extended some of our maturities there. Page 12, total advanced capacity, $5.25 billion. A couple of things to point out on this slide. We're currently working with Ginnie Mae on some advanced financing, which will result in an extra $75 to $100 million of additional liquidity. And in a stress case, that would create an extra $300 to $350 million. We expect this advanced financing to come online hopefully in the next 30 to 60 days. Today, based on the new Ginnie programs, as I pointed out earlier, Ginnie provides 100% financing on P&I for loans in forbearance. And on FHA, they announced last week that they're going to limit servicer obligations to advance P&I to four months while the loans are in forbearance. A couple of things to point out here that I think are very important. In a base case scenario, we project that we will only need an extra $120 million in equity to fund servicer advances. In a stress case scenario that goes out many, many months, we believe that the amount could increase to $390 million. Page 13, our MSR business. MSR is one of the few fixed income assets that will rise in value when interest rates rise. To talk to that, when you think about yesterday's announcement from the Fed and Treasury that they're going to issue $3 trillion of debt this quarter, we do believe with rates at historical lows that it is a great time to think about MSR investments. Obviously, we have a large portfolio there. We took a reasonably large-sized markdown in the quarter as a result of our faster long-term speed projections and wider discount rates, as well as some higher delinquencies. On the right, when you think about our MSR strategy, we continue to work on recapture. That is a very, very big thing. We're working on recapture with Cooper. We're working on recapture with New Res and we have some subservicing agreements where we're going to be lead generators and work on recapture with them. We have a lot of upside there from current levels. As you think about the current market, roughly 70% of the market today is a refi market. Our recapture percentages on refis should be significantly higher than that on a new purchase loan in the market. Page 14, why are we different? On the left side of the page, a couple things to point out. One, on our MSR financing, 50% of our MSR financing is in capital markets term notes with limited mark-to-market exposure. The other 47% is with banks and variable funding notes with, again, limited mark-to-market exposure. So really nice term structures. We continue to work with our banks on extending some of those facilities. The bottom part of the page, I think really what differentiates our MSRs from the industry, our average loan size is 140,000 versus an industry of 212. We have very seasoned loans and more credit impaired loans in the industry, 81 months season versus 39. Our FICOs are 719 versus 748. And the refinancing population we think is give or take about 30%. One other thing to point out today is when you think about the credit box, with virtually no non-QM origination today. The jumbo market pulling back banks, a couple of the large money center banks announcing that they're getting out of the origination business around HELOCs. I do think the credit box is tightening. What does that mean? Obviously, we'll be there to provide credit for our customers, but what I do believe it's going to mean is slower speeds as we go forward. Page 15. Our mortgage origination and servicing business, that is under the brand of New Res as well as Showpoint. The origination business today is well capitalized, and the margins in the origination business are some of the widest margins we've seen in years. As I pointed out, we shifted our production to just Fannie, Freddie, and Ginny Loans. We've exited non-agency and non-QM. and a multi-channel approach provides flexibility so we can take advantage of various rate environments. Most importantly, we continue to focus on helping homeowners navigate through this crisis. Our experience in special servicing, I believe, is second to none. We continue to work with homeowners. We continue to implement new forbearance programs, and we continue to work on creating digital functionality in our online portals to educate and help homeowners. Finally, during the quarter, we had a very good profit, as I pointed out, $90 million. That is down from $150 million. We think that the run rate there will be significantly higher. Today, 95% of our employees are working from home and doing a great job, and we're currently in the process of adding another 500 jobs as we navigate through this crisis. Page 16, just a couple quick things here. One is we estimate production to be something between $40 and $50 billion for 2020. And as I pointed out earlier, our gain on sale margins are at some of the recent wides that we've seen in a long time. Age 17, when we think about the direct-to-consumer origination business, this is where we're going to be spending a lot of time and continue to add resources. We need to be better at recapture. We think we will be better at recapture. This channel is going to help us do that. And we're very excited to see the growth here. If you look at the end of Q3, we had $1.2 billion of quarterly funding. We expect by the end of Q3, we're going to be at 4.6. A lot of that is going to be around our recapture business. Page 18. I do think we have a best-in-class servicing operation. We have Jack Navarro, who runs that business, who's on the phone. Him and his team do a fabulous job. Keep in mind, again, 95% of our employees are working from home and in this very difficult environment and doing a great job working with homeowners to provide comfort and get them through these difficult times. Our pre-tax net income for the quarter was $30 million, and we estimate our servicing portfolio to be something between $300 and $300 billion at year end. On the special servicing side, this is something we're very proud of. We have over 40 different institutional clients. This includes the GSEs. This includes the money center banks. This includes whole loan investors. Jack and his team are very well regarded in the industry. Again, they do a great job. As delinquencies rise, SMS is well-positioned to work with customers through its special servicing expertise. We work closely with FHFA, Ginnie Mae, and other regulators to provide positive outcomes for borrowers that have been affected by COVID-19 and, quite frankly, even before COVID-19. We've implemented online digital tools to support our forbearance requests, and we continue to expand capacity as we manage post-forbearance solutions. A couple more slides. On page 20, just a quick update on COVID and how we think about forbearance. As of April 30th, 2020, 200,000 borrowers in our portfolios have been granted forbearance. Of those 200,000 borrowers, 60% that were current in March have made their April payment and are still current. And of all the loans, 7% of all the borrowers in our portfolio were granted forbearance through April 2020. On the ancillary service business, I alluded to this before. I'm not going to spend a lot of time on it. As you may recall from prior earnings calls, we have an investment in Covias that's run by Rob Clements and John Surface. And basically, it's an origination and servicing solution company that provides all kinds of different services to our mortgage company as well as third-party mortgage companies. We have a title and appraisal business. And then we own a company called Guardian, which does field services and provides property pres and REO management services to banks and servicers. Finally, page 20 to our focus. I think the one thing to take out of this is we want to get back to where we were before. We want to get our book value back to our $16 or $17. I gave you an illustration before why we think that our book value is understated. We'll continue to do anything and all we can to protect and grow book value. A couple other things, the bond portfolio, the loan portfolio in this environment will remain much smaller. We're going to be opportunistic where we can, and risk management remains job number one. With that, I'll turn it back to the operator, and we can open up the line for questions.