Rithm Capital Corp.

Good day and welcome to the new residential second quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then 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 Moritz, Investor Relations.

Please go ahead. Great. Thank you, Betsy, and good morning, everyone. I'd like to thank you for joining us today for the New Residential Second Quarter 2021 Earnings Call. Joining me here today are Michael Nirenberg, Chairman, CEO, and President of New Residential, Nick Santoro, our Chief Financial Officer, Bruce Williams, CEO of New Res, and Barron Silverstein, President 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 review the risk factors contained in our annual and quarterly reports filed with the FCC. 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. Good morning, everyone, and thanks for joining us. The second quarter for our company was a very good one. While the markets are challenging, we maintained book value and created stable earnings. When you think about our actual book value, it grew quarter over quarter before our capital raise related to the Caliber purchase. Our core earnings were in line with Q1, taking into account $0.03 in dilutions. So if you take away the dilution, our core earnings were actually $0.34. I feel very strongly that our company is positioned extremely well for all interest rate environments. The Caliber acquisition, which we announced early in the quarter, is a game changer for our company. and, quite frankly, the industry. We are now in a position to compete against anybody. We will be able to offer many different products to homeowners across all of our channels, further helping with the dream of homeownership. The excellent leadership of both companies, the personnel of both companies, the technology on the caliber side, and the sheer scale of our business will enable us to drive results for shareholders for years to come. While we believe that interest rates will rise to the extent they rise slowly or stay around these levels, Our production machine, coupled with the excellent recapture rates in the combined company, will enable us to grow our portfolio of MSRs. We are super excited about our operating business. On the investment portfolio side, the team continues to do a great job. Our financing business has never been better. We have essentially moved most, if not all, of our financing away from daily mark-to-market other than agency MVS. Our call business is back to pre-COVID levels, and our EVO business continues to grow. Essentially, going forward with this level of rates, we will focus on our own what I would call proprietary portfolios, call rights, EBOs, and MSRs. We will remain patient on capital deployment with this level of rates and where credit spreads are in the markets today, seeking to deploy capital opportunistically. On the single-family rental business, we have been acquiring homes and currently have 1,400 homes. Looking forward, we intend to really grow this business and have hired a great leader and management team that we will announce in the upcoming weeks. Regarding our macro view, the strong economy will force the Fed's hand at some point, and we should see higher rates ahead. As mentioned before, we are ready for anything, and should we stay here, our operating business will create higher earnings. The signals from Chairman Powell and the committee yesterday are that while the economy has improved and they will maintain asset purchases, the clock on tapering has begun. Regarding our earnings and our stock price, we feel very confident on our ability to maintain and drive higher earnings in the future through a combination of our operating companies and investment business lines. While our stock price has taken a head in recent weeks, our book value currently at $11.27 after our capital raise with our earnings potential will hopefully help our equity right itself. I'll now refer to the supplement, which has been published online. I'm going to start with page three. When you think about our company today, going back in time, we've paid $3.7 billion in dividends since inception. Current book equity, $6.1 billion. Shareholder return, 92% since inception, and a market cap of approximately $5 billion. On the investment portfolio side, we have $25 billion in assets, and we are the largest non-bank owner of mortgage servicing rights. On our mortgage company, and these numbers are specific to New Res only, during Q2, we did $23.5 billion in origination, pre-tax income of $75.4 million, and we maintain our status as a top 10 non-bank mortgage originator. Our servicing portfolio, $305 billion. Pre-tax income, $32.3 million. And again, the same. We maintain our status as a top 10 non-bank mortgage servicer. Page four, new residential. How do we set ourselves apart? I'd like everybody to think of us as an investment manager with complementary operating businesses. So what does that mean? When we think about our portfolios, we have call rights. We have our MSR portfolios. We have EBOs, which are linked to our mortgage company and our MSR portfolios. When we look at the operating side, we continue to hunt for opportunities and think about ourselves as opportunistic investors. On the MSR portfolio, we believe that when and if rates rise, and we do believe they will rise, we have significant upside opportunity, which will help drive higher book value, more cash flow, and net-net higher core earnings as we go forward. Our balance sheet has never been stronger. We have plenty of cash, plenty of liquidity, and when we think about the Caliber purchase, we expect to end after that purchase with about $1.1 billion of cash and liquidity and growing. When we think about our ability to create new investments, think about the operating machine. We'll likely be a top three or four mortgage originator in the country with a combination of New Res and Caliber. And when you think about non-QM or other products, we just recently announced we're rolling out ARM products to homeowners. We believe that we can create whatever products that will help homeowners and help drive higher earnings for our balance sheet. Our diversified portfolio of income-generating business and assets, again, will further add to our ability to create earnings as we go forward. And then when we look at our track record, Our track record of delivering returns to shareholders is, I pointed out before, 92% since inception. Page 5, our financial highlights for the quarter. Gap net income $121 million, or $0.26 per diluted share. Again, this reflects a dilution of $0.03 from the equity offering that we did to fund the Caliber purchase. So essentially, you could think of that as roughly $0.29. Core earnings. 146.6 million, or 31 cents per diluted share, same. Think about it as 34 cents per diluted share pre the equity offering. Common stock dividend, 20 cents, consistent with where we were, 7.6% dividend yield as of the end of June. Cash on hand at the end of June, $956 million, and again, net equity of a little bit over $6 billion. When you look at book value, Our book value today, $11.27. That reflects dilution from the equity issuance of $0.16. So that would put you at $11.43 versus prior quarter at $11.35. Our total economic return for the quarter, 1.1%. And then when we look at our equity offering to fund the caliber purchase, we raised $522 million in April. Page six is just a simple walk on book value. Again, 1143 pre-capital raise, 1127 post-capital raise. Page seven, how do we think about our results? I think the company today is positioned to perform in any rate environment. Again, the announcement of the caliber acquisition, which we hope to close early this quarter, will enable us to originate, expand our recapture percentages, and drive higher earnings in any rate environment. If rates rise significantly, our MSR portfolio is poised to gain pretty dramatically. When we look at that in the quarter, we deployed $1.1 billion in our call strategies and EBO strategies in our loan business. Our balance sheet, daily mark-to-market exposure stands at just 1% of our total portfolio. On the New Res side, we increased our refinance recapture rates to 40%. That's up from roughly 28% in the previous quarter. Our direct-to-consumer channel, while the gain is modest, we actually had a gain in the quarter despite the fact that rates backed up in Q2. Our call rate strategy, we saw the highest amount of call rate collapses in the quarter since Q4 of 2019. We called $666 million in collateral. In our MSR portfolio, we continue to shift from bank financing and mark-to-market to non-mark-to-market and in the capital markets. Our current MSR financing profile is at 71%. And again, all of these numbers are specific to NRZ and New Rest. Page 9, the Caliber Acquisition. How are we paying for it? As I pointed out earlier, we expect to have $1.1 billion of cash and liquidity after funding the acquisition. We're paying $1.675 billion to purchase Caliber. The funds are as follows. Cash and liquidity, including the proceeds from our April equity raise. Equity from the sale of agency securities, which has already occurred. And then from Caliber, Caliber has cash and liquidity. There'll be a dividend out from Caliber to Lone Star, the parent. And that will result in a reduction of both the purchase price and the cash and liquidity at closing that's on Caliber's balance sheet. And again, we expect to end post that acquisition with $1.1 billion of cash and liquidity. Page 10, how do we think about the combined company? 2021 projections, $173 billion of origination. That is the combined company. Our total servicing portfolio is a little bit under $500 billion. Here's where we think we're going to see some real game-changing results for our company. When you look at the upper right side of this slide and you look at the retail JV and direct-to-consumer, that will be roughly 50% of our overall production. When you think about gain on sale margins and compare retail and direct-to-consumer to the correspondent and wholesale channel, we should see significant lift in P&L as we go forward and continue to grow those channels. When we think about our recapture opportunity, again, more customers. Calibre's recapture numbers have been terrific. The recapture numbers on the new red side, as I pointed out earlier, went from 28% to 40%. So all in all, great results as we drive more recapture through the system We're going to see higher earnings, more cash flow from our MSR portfolio, and more customer retention. Page 11, the combined platform, 3.2 million customers in a full MSR portfolio, 700 direct-to-consumer loan officers, 1,700-plus retail loan consultants, 540 retail branches, 5,000 wholesale broker partners, 900 correspondent lenders, and 60 third-party servicing clients. We have it all. Now we just have to execute once we close this deal. Page 12, synergies from the combination of the two companies. I'm not going to go through every bullet here, but the way to really think about this is, one, on a revenue side, we're going to have increased volumes. We should have economies of scale, and I keep harping on the improved recapture, which is going to lead to more cash flow and more earnings. From a cost perspective, as we drive more, what I would call digitization, and we drive more technology through our entire system, and the team at Caliber from Sanjeev and others around the technology side have done a really good job, so we're really excited about the prospect around the Caliber technology platform. We will implement that across our entire company, and as we go forward, we think we're going to see significant gains from a technology standpoint, and clearly we all have a lot of work to do around that front. Capital, we will improve the cost of funds on a lot of the financing stuff that's done on both sides. From a capital market standpoint, I think we're second to none in our ability to execute, and we also have diversified sources of capital. Strategy, again, we're going to expand our product offerings. We're going to cross-sell across our customer base. And we think we have untapped opportunities in data and analytics and how we think about our customer base. Page 13, markets your opportunity. The one thing I want to point out here, while we all talk about volumes in the market, I think the thing to really highlight here is the bottom right side of the page. As we go through a higher rate environment, and I pointed out earlier, we think the combined company at 21 will do roughly $170 billion. Think about it this way. If we did an extra 1% in market share, and it's a large market, that would add $36 billion in production. If you think about $36 billion in production, and if we have a product mix of roughly 50% between retail and JV, and you think about the margins there, The net of that, it's just going to add more earnings to our company. So, again, super excited, super excited to gain market share. And, again, we have everything we need at this point. Page 14 just talks about our friends and peers on the street in the business. If you look at the middle column, you know, when you talk about product mix and you talk about products that we're currently doing and you think about servicing and special servicing and ancillary services and being a REIT, We have it all. Again, now it's going to be up to us to execute, drive higher earnings for shareholders and get that stock price up. Page 15, I'm not going to spend a ton of time on this. Similar in nature to what I pointed out before, our platform, N10 Mortgage Platform, we have a lot of work to do. The Caliber side, as we think about the digital platform, again, a great job there that will be implemented and we'll continue to expand on that. When we think about our customer for life strategy, very, very important. How do we retain our customers? We're going to have to drive higher recapture rates and have customer service that's second to none. Technology, continued investments in technology will help grow our business from a growth standpoint and a profitability standpoint. Page 17, our portfolio, our investment portfolio. A couple things as we rip through this. One, leading mortgage originator, not going to spend a lot more time there. Call rights. We still have $80 billion of call rights. Think about this. We have proprietary call rights on $80 billion of the legacy non-agency market. Nobody has that. Our Ginnie Mae EBO opportunity. We have a $50 billion portfolio of Ginnie Mae collateral. There will be more ability to drive earnings through our EBO business. And we also are looking from the investment side to source more EBOs in the market. I mentioned before our single-family rental strategy. Currently have 1,400 homes. Going to have a great announcement in a couple weeks on a new management team that's going to run that. We're going to target $5 billion in acquisitions over the next five years. And from a financing perspective, again, I think we're second to none as we think about our capital markets and our ability to finance our balance sheet. From an investment standpoint, page 18, in the quarter and beyond the quarter. Called $666 million, as I mentioned before, in legacy non-agency deals. During the quarter, we purchased $650 million of agency securities and $241 million of EBOs. We securitized $271 million of residential loans. We grew our SFR portfolio by 600 units with an average cap rate of 5.2%. Post Q2, we sold $5.4 billion of agency securities. We sold $880 million of residential loans. Our MSR portfolio on page 19 totaled, as I pointed out earlier, $490 billion at the end of June. 100% of our MSR financings are non-daily mark-to-market. On our new origination, New origination during the quarter was 2.96% compared to 2.79 during Q1. So when you think about this, what we're trying to articulate here is as our portfolio changes over time, yes, this WAC is a little bit higher than the 2.79 during Q1, but as we believe rates will rise, The desire of homeowners to refinance these lower interest rates will be lower and lower, again, leading to more cash flow, slower speeds, and higher earnings over time. On the servicing portfolio, currently 55% of the NRZ servicing portfolio is being serviced at New Res or SMS. Keep in mind we have third-party relationships with our friends at Cooper, loan care, and a couple others. And then we also believe, again, that recapture rates, slowing speeds will lead to further gains in cash flow in our MSR portfolio. Page 20 is really just a summary of our MSR portfolio and how we think about our financing. It's currently at 71% in the capital markets. We priced seven securitizations since the dark days of COVID in March of 2020. 21, as you think about our MSR portfolio and our origination platform, improving recapture rates. Have a look at the bottom right side of the page. So a change, a 10% change, or actually let's start with a 5% change. A 5% change in recapture rates on our portfolio will lead to a change in market value of 4% or 2 cents in earnings per common share. So clearly a huge focus on recapture, huge focus on data and analytics, huge focus on what we're doing on the digital side to drive higher recapture and, again, more earnings for shareholders. Page 22, our call right business. Again, I'm not going to beat a dead horse here. Largest amount of calls since Q4 of 2019. We expect this to continue as delinquencies trend lower and advanced balances remain muted. When we look at page 23 and think about our investment opportunities, our loan business will, again, target our own, what I'm going to refer to as proprietary collateral, call rights, EBOs, As you think about the broader world and where credit spreads are, going out for us to buy loans is just not that interesting. Our call write business is very interesting. The EBO business is very interesting. When we think about the agency mortgage market, during the early part of 2021, we saw a shrinking GSE footprint. To the extent that things change with the GSEs, that'll provide a what we think is a pretty robust pipeline of opportunities for us to deploy capital in what we'll call agency-eligible securities. What you saw also in the first two quarters is the agency's pullback on non-owner-occupied, so that could create another opportunity for us in conforming balanced non-owner-occupied loans. Non-QM will continue to be a growing part of our business as we go forward, particularly as we think about higher rate environments and, again, a potential for a shrinking GSE footprint. Page 24, our SFR business. 1,400 units currently. Average base is 209,000. Geographic exposure, if you look to the bottom left part of the page, mostly southeast, a little bit in the southwest and the midwest. Targeted net lifetime yields 12% to 15%. Average underwritten cap rate, 5.2%. You know, if you think about housing supply, and I know a lot of what I would call peers and different types of firms have announced entering this space, and some folks have done a great job already in this space, I think the opportunity is large, and we're excited about what this business will, can, and will become And again, we'll look for an announcement at some point during the month of August on our leadership team. Servicer advance balances, not to spend a lot of time here. They've decreased from $3.4 billion to $3.2 billion. Average amount of capital continues to shrink there. You know, the team here has done a great job financing that. Keep in mind, going back to 2015 when we acquired HLSS, we had $11 billion of advances outstanding and score $11 billion of financing with $8.3 billion of advances outstanding. Page 27. I have Barron here. Barron, why don't you take us through these next couple of slides, and then we'll turn it back to the operator and open it for some questions.