Rithm Capital Corp.

Good morning and welcome to the new residential third quarter 2020 earnings conference 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. Please note this event is being recorded. I would now like to turn the conference over to Caitlin Moritz, Head of Investor Relations. Please go ahead.

Great. Thank you, Alyssa, and good morning, everyone. I'd like to welcome you today to New Residential's third quarter 2020 earnings, and thank you all for joining us. Joining me here today are Michael Nirenberg, our chairman, CEO, and president, and Nick Santora, our chief financial officer. In addition, we have members from the New Res management team, including Bruce Williams, CEO of New Res, Barron Silberstein, president of New Res, Kathy Donzillo, CFO of New Res, 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'd encourage you to review the disclaimers in our press release and earnings supplement regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC. 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 also be found in our earnings supplement. And with that, I'll turn the call over to Michael.

Thanks, Kate. Good morning, everyone, and thanks for joining our Q3 earnings call today. As we look at the uncertainty in the world and the overall investing environment, our focus continues to be to fortify our balance sheet, lower our cost of funds and all of our financings, and take advantage of the great opportunities we are seeing in our operating business. We do not see great opportunities on the portfolio side today, and we'll maintain higher levels of cash and liquidity while being patient and being opportunistic. The earnings power of our company today between the investment portfolio and the operating business is extremely powerful. To illustrate, core earnings before amortization for the quarter are $1.52 per cents per diluted share. Of course, you can't look at this in isolation. However, a slowdown in amortization and a pickup in market share in certain origination channels should lead to higher core earnings. The quarter was a good one on many fronts, as we did eight securitizations, lowering our cost of funds on advances and loans, and refinance a term loan we did in May, lowering our cost of funds by 475 basis points as we issued our first unsecured debt deal. These financings will add $50 million of savings per year or if you think of it this way, an incremental $50 million of earnings per year. With interest rates and mortgage rates at historically low levels, you couldn't ask for a better origination market, and our operating business continues to get better by the day. Our focus on helping borrowers through hard times is one of the core values of our company, and I'm proud to say that our team does great work there. While we had a great quarter in our mortgage company, I feel we have just begun, and I'm hopeful that our market share will continue to grow even into a higher interest rate environment. I say this as we are still relatively new in the operating business and have plenty of room to improve. It is our belief that as we grow our DTC channel, we will pick up market share, slow down our amortization on our MSR portfolio, and drive book value significantly higher. This will help our MSR portfolio as recapture rates will rise and again drive higher earnings for the company. On the portfolio side, We're back in the call business. We have issued call notices for the month of November on up to 400 million of different non-agency deals. If you recall, we haven't done any calls since the early days of COVID, and this is the first time that we've issued some call notices. On the investment activity front, we were fairly muted during the quarter, away from our financing activity. The non-agency and loan positions are essentially all, for the most part, non-market-to-market at this point, relatively small as we see the risk reward being very low in this current interest rate environment. During the quarter, we sold about $600 million in non-agency bonds and a little under $300 million of loans, and we purchased some agency MBS to offset our MSR portfolio. Before I turn to the supplement, I'd like to leave you with a few thoughts. We are committed to maintaining a disciplined approach during these uncertain times and will maintain higher levels of cash and liquidity. I remain confident in our ability to drive book value higher. As we grow core earnings, we look forward to growing our dividend. With many mortgage companies going public today and over the past few weeks, we'll continue to drive towards unlocking value in our operating business and seeing our equity trade where it should. I'll now refer to the supplement which has been posted online, and I'm going to start with page two. As you look at this slide, what we tried to do here is highlight our operating business and obviously our investment portfolio. Since inception, we've paid $3.4 billion in dividends. We have book equity of $5.3 billion. Our total shareholder return has been 40%, and our market cap at the end of 9-30 was $3.3 billion. When you look at assets as of 9-30, $20.2 billion in assets. We have an MSR portfolio a little bit under $600 billion, which we believe will offer great returns for shareholders when and if interest rates rise. As we think about the origination and servicing sectors, this year we project to do approximately $60 billion of origination. Our year-to-date pre-tax income so far is $554 million, and our year-to-date ROE is 189%. When you look at the servicing division, 310 billion UPB as it relates to the servicing portfolio. Pre-tax income year-to-date, $85 million, and an ROE of 54%. For the quarter gap net income, $77.9 million, or 19 cents per diluted share. Core earnings of $131.6 million, or 31 cents per diluted share. For the origination and servicing division, $342.6 million of pre-tax income. Quarter of a quarter, that's up 67%. Our common stock dividend of 15 cents per common share. We increase our dividend by 50 cents. Dividend yields 7.6% at the end of September. Cash on hand at the end of September, $841 million. Today, we have a little bit under a billion dollars of cash and liquidity. Net equity, again, $5.3 billion. When you look at book value, before the write-down, not the write-down, before the write-off of the discount on the term loan that we refinanced, book value was $11.01. Taking into account the write-off of the term loan discount, that knocked us down by 15 cents to $10.86 per, from a book value perspective. Total economic return, 2.2% during the quarter. And again, representing a $0.09 increase in book value per common share. And again, reflecting a $0.15 dividend. Page four, just to take you through a quick book value summary. I'm not going to spend a lot of time on here. The one thing I do want to point out are two things. One is, again, you can see on the bottom of the page, the 1101 book value before we wrote off the term loan discount of $0.15. Big number here. Have a look at the MSR amortization. It costs us $1.23 and a quarter. Obviously, the origination business is doing extremely well. The offset to that is we have higher levels of amortization. When and if that does revert, and I'll get into this later in the presentation, we believe that we're going to be able to capture more market share in our origination business. MSR amortization will slow down, and the ending results should be higher core earnings for our business. Page five, an important one. Some of the parts greater than the whole. If you look to the upper left side of the page, we believe our implied book value today is $16 to $19 per share. Our walk on the right side, which will get you there, and essentially what this shows is if and when we unlock value in our mortgage company, with mortgage companies trading roughly at five times EBITDA, That's going to be worth anywhere from $5 to, give or take, $5.50 to $7.50 per share, based on a give or take an $11 book value that should get you somewhere between $16 and $19 per share from a book value perspective. I mentioned earlier in my opening remarks, liquidity. We are going to carry higher levels of liquidity today as we don't know what the world is going to bring us as we look forward. Couple things to point out here. Core earnings, $0.31 per diluted share. We are holding, at the end of September, $841 million of cash and liquidity. If that was deployed, you'd see an incremental $0.03 to $0.04 per common share or get you to the $0.34 to $0.35. The other thing to note, the term loan, which we took out in May, which was 11%, and we refinanced into six and a quarter, that closed at the end of Q1. at the end of Q3. If, in fact, we did that earlier in the quarter, that was worth an extra two cents per share. Page seven, talking about leverage, I mentioned again in our opening remarks the fortifier balance sheet. If you have a look here, a couple things. One is we did eight securitizations in the quarter. They ranged anywhere from MSR notes to non-performing loan deals to advanced deals. and, again, refinancing the secured term loan into our first unsecured term loan. We refinanced our Spring Castle deal, which is our consumer deal. We also closed on a new GDMA MSR and advanced facility. So, overall, great work by the team reducing our cost of funds, reducing our leverage, locking down longer-term financing, and essentially driving extra revenue to the bottom line or extra earnings. Page 8, delivering results. Two, three accomplishments. One, we want to navigate from a position of financial strength. What does that mean? We have $1.9 billion of unencumbered assets on our balance sheet, of which $841 million of that is cash and liquidity. And again, that was as of 9.30. Today, we hover around $1 billion. We want to continue to grow our origination platform, scale, and profitability. Increase funded origination volume up 118%. pre-tax income up 72 percent quarter over quarter. As I pointed out, one of our key missions is to continue to help homeowners. The percentage of homeowners or borrowers in forbearance has decreased to 5.5 percent in October from 7.8 percent in July. We want to continue to lower our overall leverage and risk profile. We reduced our daily mark-to-market exposure to just 3 percent of the total investment portfolio. The areas where we do have mark-to-market exposure Our LTVs in those facilities are typically around 50%, so very, very low leverage overall in our business and much more longer-term financing. When we think about our additional term financing, again, we priced eight securitizations, and we're going to save $50 million a quarter. Finally, we want to generate attractive risk returns for our shareholders. We raised our common dividend by 50 cents in the quarter. On the investment portfolio side, on page nine, Our increase in investments was driven by the purchase of agency securities. We purchased an extra, or we purchased about five-ish billion of specified pools in agency MBS to hedge out our MSR portfolio. When you look at the loan and residential security portfolio, again, we sold a little under $300 million of residential loans, and we sold about $600 million of residential non-agency securities. How do we think about that? We just see the risk return as being very low right now. We want to continue to button down our balance sheet and levels themselves are back towards pre-COVID levels around many of the credit assets that we sold. When we think about additional opportunities as we look forward, I pointed out we're turning back on our call business. We're going to continue to add agency MBS as needed to hedge out our MSR portfolio depending upon our view of interest rates We've begun purchasing out FHA EBOs that are in forbearance, and then we'll continue to grow our MSR portfolio through our origination and servicing business. Page 10, when we think about our MSR business, just to frame for all of you, over the past year to two years, one to two years, we've written down our MSR portfolio, about a billion dollars, We do think MSR valuations are at historical lows. Obviously, they've been lower, but we're towards the lows. As interest rates rise, MSRs will increase in value. To give you a sense, the way that we quote MSRs, if you think about a servicing strip of 25 basis points, a three-multiple would equate to 75 basis points in price or three-quarters of a point. If, in fact, and we saw this, you know, even less than a year ago, if MSR multiples went up one turn or went from a three multiple to four times that 25 basis points, that would be an increase in value on our MSR portfolio of $3.60 per diluted share. Again, I point this out because at some point, we do think origination volumes will come off. And as a result, we think our MSR portfolio, which we'll continue to add to, will provide great returns for shareholders and, again, help drive a higher book value. On page 12, on the MSR side, again, I'm not going to spend a ton of time on this. A couple things I want to point out. When we think about the percentage of our portfolio that's refinanceable, I think past quarters we hovered around 30%. Now we believe it's around 40%. For the industry, we believe it to be something around 75-ish percent. What differentiates us from the industry when we think about our MSR book? One is the season nature of our portfolio. Our portfolio is seasoned at approximately 91 months or a little bit under eight years. That is a big deal. The credit impaired portfolio and the combination of the credit impaired portfolio and the seasoned portfolio should lead to higher valuations and slower speeds as we go forward as we get out of this refi wave down the road. When you look at page 13, a couple things to point out here, which I think are important. One is on the loan side, when you look to the left, essentially the entire business is no daily mark to market. Total equity in the loan book today is $798 million. When you look at the bond book on the right, $663 million of total equity. We point out 85% of that is no daily mark to market. As I mentioned earlier, the other 15% are really limited to what I would call some IOs, non-agency IOs and other things which have something around a 50 LTV. So overall, once again, fortifying our balance sheet, locking down our financing, maintaining higher levels of liquidity should lead us to great results as we go forward. Page 14, servicer advances. Quite frankly, not a ton to talk about. Servicer advances are kind of where they were pre-COVID, to be frank. During that March period where things were extremely uncertain, we expected much higher levels of advance balances. We took out excess capacity from some of our bank friends. There's been no need for any additional financing around the servicer advances. On page 15, the improvement in servicer advances, the delinquencies came in much better than our original projections. We have a much more positive outlook driven by the limited number of new forbearance requests and higher forbearance resolutions. And during the quarter, we recovered $141 million of advance equity during Q3. Page 16, COVID-related forbearance balances or percentages have continued to decline. We're down to 5.5% from a peak of 8.4%. Now I'm going to go through our operating business, and then we'll open up for some Q&A. When we think about our operating business, NRZ and New Res, which is formerly known as Shell Point Partners, came together in July of 2018. In my earlier opening remarks, when I say we're kind of new in the operating business, the management team, and when you look at Jack and you look at Bruce, have been around for many years. and done a great job building out different origination and servicing businesses. When we purchased the company in 2018, at the end of the year, origination volumes were about $10 billion. Servicing at the time of acquisition in that July period was about $30 billion. If you think about it today, it will be between $55 and $60 billion of origination, And on the servicing side, we'll be north of $300 billion in servicing. So tremendous growth, but measured growth. There are a lot of things all of us can do to improve, and we continue to work towards that. When you think about our platform, it's a differentiated platform. We have multi-channel. We have four different channels that we operate across. Some will benefit in different environments. Again, the big focus continues to be around the direct-to-consumer channels. When you look at our origination and servicing strategies, we have the ability to scale originations across all four of these channels. The direct-to-consumer channel, as that grows, is going to help with recapture. It's going to help with retention on our MSR portfolio and gain on sale, and the direct-to-consumer channels remain robust while they are coming in a little bit here. Our third-party servicing platform, I do believe, is one of the best in the industry. That's under the Shell Point brand. And we have well north of 50 different customers on that platform, and that will continue to grow. As we think about our potential to capture additional value, we're working on brands, the four channels. So we have a huge commitment to this business, not only to originate loans in what I would call the best origination market any of us have ever seen, but also to really grow and have a full-rounded mortgage company. Financial performance. 2020 pre-tax income, $639 million is up 470%. Our target for the year is going to be something close to $900 million of pre-tax income. Year-to-date ROE, 142%. And when we think about revenue year-to-date, it's $1.2 billion or up 190%. So tremendous growth, measured growth, but a lot more work to do. When you look at page 19, and we talk about the growth, which I just alluded to, pre-tax income up 22 to 24 times. Servicing portfolio, six-time increase in the servicing portfolio, and then origination and gain on sale margins continue to be extremely robust, and that division continues to perform very well. Page 20, when we think about the multi-channel platform, Again, I can't harp on the direct-to-consumer stuff enough. That is a big part of our business. Again, retaining our MSR clients and lowering our amortization is going to be a huge win for our company, and there's a ton of focus there. The offsets to that, again, is great origination gains. If you look at the four different channels we're in, again, direct-to-consumer, JV, retail, wholesale, and correspondent. Page 21. Origination activity and business highlights. Record profitability for the quarter, 312 million, or up 72% on the origination segment. Annualized ROE of 291%. When you look at Q3 lock volume, it's $21.8 billion or up 122%. And then again, our year-end estimate is something between $55 and $60 billion of origination. Page 22, I'm not going to harp on this because I've spoken about it 50 times already. Significant increase in lock volume on the direct-to-consumer channels. This is what we are extremely focused on, our entire management team, all of us, to get better there. And again, it's not only to get better there around the origination gain side, but it's also to protect what we think is our industry-leading MSR portfolio. On page 23, servicing activity and highlights, $30 million for the quarter, up 24%. Annualized ROE, 54%. The portfolio has increased 56% year over year, and we estimate to close the year at about $300-ish billion of assets. Page 24, I mentioned one of our core values in our company is helping people, helping homeowners during COVID, helping homeowners, quite frankly, anytime. So when you look at the statistics, 18,000 new forbearance requests in the quarter, down from 174,000 in Q2. Active forbearances are now just 36% of the population impacted by COVID. And then 50% of the overall forbearances, which is over 100,000 homeowners, have been resolved. So great work by the servicing team during these hard times. Finally, Wrapping up page 25, then we'll open up to Q&A. Obviously, our operating partners are here today. So one is we do believe in our ability to drive attractive risk-adjusted returns. Clearly, we got kicked in the teeth in March. I think we've rebounded extremely well. I think our book value is extremely understated. I think the value of our equity is extremely understated, and we are going to do anything and everything we can to get – to get back to those pre-COVID levels on the equity price and hopefully down the road on our dividend. MSR is historically low valuation. There's a lot of room to improve. We have a ton of cash and liquidity on our balance sheet. We'll continue to maintain that through this tough period. Our management team, when we talk about experience and we look at the operating side, a ton of experience. Bruce has been doing this for 30 plus years. Jack is 30-plus years, 30 years. You know, Barron is here for 25 years, and Kathy's probably 25 years as well. So you've got a nice old team here. With that, I'm going to turn it back to the operator. We'll open it up for questions.