Rithm Capital Corp.

Good day and welcome to the new residential third 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 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 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 New Residential's third quarter 2021 earnings call. Joining me today are Michael Nierenberg, Chairman, CEO, and President of New Residential, and Nick Santoro, Chief Financial Officer of New Residential. Also with me today are Sanjeev Das and Barron Silverstein, Chief Executive Officer and Chief Operating Officer and President, respectively, of New Resident Caliber. 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 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. Good morning, everyone. Thanks for joining us today. When we look at our company today and look back over the recent history, I'm super excited where our company is and what this is going to mean for our shareholders as we go forward. The combination of our investment portfolio and operating business lines should continue to drive higher earnings as we go forward. The ability to manufacture our own assets through our different operating business lines, thus creating earnings for our company, is a true differentiating factor for us. This past quarter, we grew our core earnings from 31 cents to 44 cents. and we increased book value from $11.27 to $11.35, despite the fact that the 10-year note ended the quarter essentially unchanged versus the end of Q2. With the macro outlook looking like higher rates ahead, the Fed likely to announce the beginning of tapering tomorrow, and inflation seems like it's here to stay for a while, our portfolios are in great shape to take advantage of this environment. Our MSR portfolio should do extremely well. and sees much slower speeds in this scenario. During the quarter, we closed our Caliber transaction, which makes our mortgage company one of the top five players in the space. The addition of great talent, complementary origination business lines, and a terrific technology platform really transforms our business. During the quarter, we announced the acquisition of Genesis Capital, which is a market leader in the industry of providing loans to developers and real estate investors for the development and fixing of single-family homes. We believe the integration of this business into the family of our operating companies will be a very good acquisition, which will not only create high-coupon, short-duration assets for our balance sheet, but will also strengthen and help grow our SFR business. We expect to close this transaction in December. Regarding the SFR business, also known as the single-family rental space, we are now up to 2,500 units, and while home prices are up roughly 19% on the year, We still believe that housing supply issues, along with the robust rental market, should provide a very favorable backdrop for the business. On the investment portfolio side, we are beginning to see a slower amortization, which will be great for our MSR portfolios, as I mentioned earlier. Our call business continues to be robust, and our loan and securitization business is in full gear. Overall leverage for our business is roughly one to one and a half times away from our agency portfolios. and that is one of the lowest levels we've seen in years. When we think about our financing, roughly 99% of all of our financing has no daily mark-to-market triggers, again, away from our agency business. With that, I'll now refer to our supplement, which has been posted online, and I'm gonna begin on page three. When you look at our evolution as a company, in 2013, NRZ was created to be an acquisition vehicle to purchase XS MSRs. Over time, we've grown our XS MSR business through acquisitions of HLSS, large portfolios of MSRs from Citi, getting fully licensed. And as you look at the timeline, 2018 really transformed our company when we acquired Nures. 2019, we acquired assets from DITEC. And then as we fast forward into 21, the acquisition of Caliber and Genesis creates what I think are wonderful operating businesses, which will continue to provide high-quality assets for our balance sheet, again, thus driving higher earnings as we go forward. Page 4, Q3 highlights, gap net income $146.1 million, or $0.30 per diluted share. Core earnings, $209.9 million, or $0.44 per diluted share, again, up from $0.31 in Q2. Third quarter common dividend, $0.25, 9.1% dividend yield, and that's as of the end of September. Cash and liquidity, roughly $1.9 billion total. Net equity, $6.6 billion. Book value on the quarter, up from $11.27 to $11.35, total economic return 2.9%. During the quarter, we raised $465 million in a preferred stock offering. And again, we closed the acquisition of Caliber, and we announced the acquisition of Genesis Capital. Page 5, Caliber. We announced this deal in April, got it closed in August, and the integration not only is well along the way, quite frankly, it began at the announcement. When you think about returns for our shareholders, we raised our common stock dividend by 25% quarter over quarter, and again, our economic return of 2.9% during the third quarter. The acquisition of Genesis. which is one of the leaders in the so-called business purpose lending, also known as the fix and flip business. As we think about that, we think that company will likely provide something between $2 and $2.5 billion a year of high coupon, short duration, good read assets for our balance sheet. And again, with Robert Wassman and his management team, I really believe that we're bolstering our SFR business and should do really good things there. On the recapture side, and as we get into the deck a little bit further, we'll talk more about that, the continued focus on recapture rates, not only on the Caliber side but also on the New Res side, continues to increase, thus slowing amortization and creating more retention opportunities on our MSR portfolios. From the balance sheet perspective, roughly $40 billion in assets under management, and again, non-daily mark-to-market away from our agency portfolio is roughly 99%. Call right strategy remains very, very strong. We called $636 million in collateral in Q3, $1.9 billion year-to-date, and our call population roughly at $50 billion now, where 60% of that population is currently callable. So again, as delinquencies go down and advanced balances decrease, we're going to be able to call more and more of that collateral. Page six, just a little bit of a summary of our business as we think about it. Origination and servicing in the mortgage company, as you think about some of the other operating businesses, Genesis Capital is an origination business as well. But overall, the way to think about the company today is MSR portfolio between excess, full, That sits both between the mortgage company and in NRZ. It's a little bit north of $600 billion right now. When you think about our agency portfolio, we keep a core portfolio of agency securities. One is to do some hedging around our MSR portfolio. The other part is we need for Goodread assets and 40-year compliance. Our portfolio of residential mortgage loans is really driven by our call strategies. We're not out going in the market and competing for mortgage loans. And again, going back to my opening remarks, when you think about our company, our ability to manufacture assets for our balance sheet truly differentiates us, I think, from the rest of the pack. And then finally, on the bottom part of the page, when you think about so-called business purpose lending, Genesis Capital, bridge loans, renovation loans, and construction loans to the residential housing market. Page seven, just a quick summary of Genesis Capital. It's really on seven and eight. The acquisition of Genesis Capital gives us roughly $1.4 billion of high quality performing loans. Coupons are roughly 7% to 8% on that portfolio, short duration in nature. So we're really, really happy with those assets. And obviously, we intend to grow that. And as you think about that business, it sat inside of Goldman Sachs. We think that the possibilities for our company quite frankly, and with Robert Wassman and his leadership team are endless. And then couple that with our SFR business. We're really excited about that. Page eight, business purpose lending. As you think about it, it's a large addressable market, a little bit less than half a trillion dollars. When you think about home ownership rates in the U.S., they're kind of always fairly stable in the low 60s. You are starting to see what we think going forward is going to be a large purchase market. Sanjeev and Barron will talk to that a little bit. But there is a shortage of homes for sale. Obviously, construction and development has been pretty robust over the course of the past few years. And with the shortage of housing, we expect that to continue. When you think about some of the recent developments, Law changes in California, for example, you're going to see more development, we think, on some of the smaller lots there. So we're very focused on that. When you think about HPA, you know, HPA is up roughly 20% year on year. At some point, housing becomes a little bit less affordable for a lot of folks. And as we think about that, the rental market is going to remain extremely strong. Thinking about tax rates and the geographic population shifts that are going on, i.e., folks moving from some of the high-tax states to Texas to Florida and some of the other areas. We think there's going to be a large opportunity for us to provide capital in those areas. And then finally, the growth of our SFR business. Page 9. I'm not going to spend a ton of time on this because I've hit this, but really, again, the way to think about NRZ today, which I think is very different than where we've been over the years, really, we're an investment company. Start with that thesis. We have a great investment portfolio led by Charles Sorrentino and his team. On the operating business, we have a great mortgage company led by Barron Sanjeev and their team. We'll do roughly $175 billion in origination this year, and we intend to pick up market share as we go forward. And as we add other business lines that are going to create assets for our balance sheet, we think we're going to be able to use those assets to grow cornings as we go forward. So very excited about the possibilities ahead. Tailwinds, page 10. You know, we think that we are in great shape. You know, I get on this call this morning and I said to our board yesterday during the meeting, very, very excited about the prospects for our company, where we stand. Our pool of capital, $1.9 billion of cash and liquidity. One of the highest numbers that we've had probably ever, quite frankly. We are going to retain more capital on balance sheet today and probably forever as we go forward. So just to throw that out there. When we think about yields, the 10-year note, we believe, is going to continue to increase. Yesterday, we had some meetings. We brought in a couple of economists, John Riding and Conrad de Cuatros. And we spoke a lot about inflation. We spoke about the macro picture. We spoke about the global economy. And I think everybody is in the belief that rates will continue to rise. Goldman Sachs has actually pulled forward some of their rate increase forecasts on the Fed. So we think that we're perfectly situated to take advantage of any increase in rates. And as you think about that and our large portfolio of MSRs, we should be in great shape again. Purchase originations are expected to increase. I'll let Sanjeev and Varun talk about that. Our non-agency origination is continues to increase as well. When you think about non-QM, we shut down non-QM during the pandemic. I think our 2022 projections are probably something between $3 and $4 billion in non-agency production. And that's a very profitable business line. You think about borrower strength and delinquencies, they continue to decline. And then overall, I think when you look to the right side of the page and think about where we are, we are a top five mortgage originator and servicer in the U.S., When you look at the fragmented nature of this away from the banks, the amount of market share that's out there is we think is something around 50%, and any small increase there will obviously help our origination business but enable us to pick a market share. Page 12, just taking you through real quickly some of our performance stuff, and then I'm going to turn it over to Sanjeev. On the MSR portfolio, a couple things to point out here. As of the end of September, 635 billion UPB. MSRs go up in value as rates rise. Hold that thought. When you think about our new res caliber servicing portfolio, we basically service roughly 70% of our own. We still have some subservicing with Mr. Cooper, Auckland, and a couple other smaller players in the industry. 100% of our MSR financings are now non-daily mark to market. And here's a good stat for everybody. Today, only 29% of our full MSR portfolio is in the money to refinance. You go back to Q2 of 2021, that was roughly 40%. Just to throw a couple of amortization numbers at you real quick. Q3 2020, On the NRZ portfolio alone, amortization was $509 million. Q3 2021, our amortization number on the NRZ portfolio alone is $250 million. So you've already seen a decrease of roughly 50% from the highs in Q3 2020 to where we are in Q3 2021. So when you think about higher rates, potential for mortgage company earnings to decrease a little bit here, The MSR portfolio should kick in in a big way, and as those go up in value, that's only going to add to our book value as a company. Page 13, again, MSR portfolios continue to see slower speeds. I'm not going to beat a dead horse there. Page 14, call rate activity, as I pointed out earlier, we called 26 deals in the last In the third quarter, $636 million in collateral. I think Q4 is probably on track to do about the same. And again, our call rate population, roughly 50 billion today, with roughly 60% of that currently callable. We still need delinquencies to decrease and advanced balances to decrease. On the SFR side, we've been pretty cautious, quite frankly. Today, we have roughly 2,500 units. Just to give you a sense, we backed up pricing over the course of the past couple weeks. We put in some higher cap rates just to see what would happen in our acquisition vehicles. And quite frankly, we saw lower acquisition rates. So we continue to be very, very focused on that business, maintaining prudence, looking at proper BPO values just to make sure that the market is not too frothy. We continue to grow that business. And again, the addition of the Genesis Capital folks is going to make us a much better, much smarter business there. On the long-term opportunity, as we think about the investment side, I look at the EBO business today with the acquisition of Caliber, our GMA portfolios are comparable to that of some of our peers in the industry. Our overall P&L numbers, however, today are much lower than some of our peers in the industry. So I think there's a fair amount of upside there. As you think about non-QM, I mentioned that business again. We expect to do roughly $3 to $4 billion in the non-QM channels next year. And then when we think about other opportunities and loans, whether it be in our call right business and other areas, and our own ability to manufacture assets, we're very, very excited about what lies ahead. Service herd advance balances, I'm not going to spend a lot of time there. Virtually unchanged. Financing is extremely efficient there. and we continue to see lower and lower levels on the forbearance side. On the mortgage company side, I'll just close my comments and then turn it over to Sanjeev. Really, really excited about where we stand. We have a lot of work to do on a go-forward basis. There's a large spend on the technology side. We have a lot of work to do on the expense side. Our expenses, when I think about where we are and If you think about an annual run rate of roughly $2.5 to $3 billion of expenses, if we could take out roughly 10% to 20% in expenses, that's roughly $1 a share. So there's a lot of work to do there. I'm confident that we're going to get there. I do think we're a market leader. The acquisition of Caliber makes us a far better company. And with that, I'll turn it over to Sanjeev, and I'll be back for Q&A. Sanjeev?