New Residential Investment Corp

LSE:0K76

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, and welcome to the New Residential Second Quarter 2020 Earnings Conference Call. [Operator Instructions].

Please note, this event is being recorded. I would now like to turn the conference over to Kaitlyn Mauritz with Investor Relations. Please go ahead.

[Kaitlyn Mauritz, executive]

Great. Thank you, Jason, and good morning, everyone. I'd like to welcome you today to New Residential's Second Quarter 2020 Earnings Call, and thank you all for joining us.

Joining me here today are Michael Nierenberg, our Chairman, CEO and President; Nick Santoro, our Chief Financial Officer; Jack Navarro, President and CEO of the Servicing division of NewRez; and Andrew Miller, who runs our MSR portfolio. 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've 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 be found in our earnings supplement.

And with that, I'll turn the call over to Michael.

[Michael Nierenberg, executive]

Thanks, Kate. Good morning, everyone, and thanks for joining us. As we continue our recovery from the early days of COVID-19, I'm happy to report that we've made great progress on many fronts. We have more cash on our balance sheet today than ever before. We closed the quarter with over $1 billion of cash and liquidity, and the company has never been better capitalized. We termed out and reduced our daily mark-to-market exposure of our investment portfolio. 95% of our investment portfolio, away from the agency mortgage-backed securities, are non-daily mark-to-market or has a mark-to-market holiday. We made sure we have a surplus of capital to handle any additional amounts of advanced financing if needed. So far, to date, our advanced needs have not increased at all.

In fact, due to prepays and better performance, we've actually had a net positive result in advances, which have required less cash and actually positive cash for our company. We grew book, and we'll continue to focus on earnings and book value growth in both our investment portfolios and our operating business. The earnings power of our mortgage company is one that has plenty of room to grow, and I feel that we've only scratched its surface. When we acquired NewRez in 2018, the company made $38 million in pretax income.

Along the way, we acquired the assets of Ditech, which are now fully integrated and expect the company to make upwards of $800 million in 2020. The company today has over 5,500 employees and is an important player in the mortgage ecosystem. Our focus on customers and helping them through hardships caused by COVID-19 is something we take very seriously, and are very proud of.

Our partnership that we recently announced with Salesforce will help our customers with a better experience. This partnership will also help us in our direct-to-consumer business. The direct-to-consumer channel is very important to our recapture efforts and customer retention. As we get better, and we have plenty of room to improve, our profits will increase, and our MSR amortization will be lower.

On our investment portfolios, the non-agency mortgage markets have lagged the tightening we have seen in the corporate market and expect some normalization of spreads over time, which should lead to increased values in our portfolios.

During the quarter, we sold a small amount of non-agency bonds that are not core to our investment strategies. The securitization markets are open. During the quarter, we completed 3 deals, which include MSR financings, RPL financings and nonperforming loan financings. We will continue to do term securitizations, locking in lower cost of funds and term financing across our entire portfolio. We still have $75 billion to $80 billion of call rights. When the arbitrage comes back and spreads tighten, we will get back in the game in calling deals.

Our MSR portfolio today are seeing some of the lowest pricing we have seen in years. They are one of the few asset classes that go up in value when rates rise and are a great offset to our origination business. So what does all this mean? Our company today is stronger than ever.

Our earnings potential is one that should grow over time. I'm confident that we will continue to be able growing book, creating more earnings and getting the dividend back to a normalized run rate and hopefully seeing our share price back in the double digits.

I'm now going to refer to our supplement, which has been posted online, and I'll begin with Page 2. Page 2 is really just a little bit of a snapshot of our business. Origination servicing, that's part of our mortgage company. And then we have our investment management business, which is no different than what it's ever been.

When we look at the company today, our market cap is $3.1 billion. Our investment portfolio was $18.5 billion; net equity, $5.3 billion. And on a pro forma run rate, we expect our servicing business to have $325 billion of servicing at year-end. We project originations to be between $45 billion and $50 billion in 2020, and pretax income for the mortgage company of almost $800 million.

Page 3. For the quarter, GAAP net loss of $8.9 million or $0.02 per diluted share. That's due to the faster amortization we saw on our MSR portfolios. We do think, over time, that will normalize. Core earnings, $140 million or $0.34 per diluted share. Pretax income from the mortgage company, $205 million. We paid a second quarter dividend of $0.10, that was up from $0.05 when we cut our dividend in the first quarter.

Dividend yield as of June 30, 5.4%. Cash on hand as of June 30, north of $1 billion. Net equity, $5.2 billion. Book value, $10.77 per diluted share, and that's up from $10.71 at the end of 3/31/2020. Reason not higher, again, faster amortization on our MSR portfolios.

Page 4. New Residential's road to recovery. Coming out of COVID, we set forth a number of objectives, and I just want to highlight a few of them. One is strengthen our cash position to capitalize on opportunities amidst the ongoing volatility. We're able to play offense and defense. Again, $1 billion of cash on our balance sheet, more cash than ever before.

Lower our risk profile, lower our leverage. As I pointed out earlier, 95% of our investment portfolio away from agency mortgage-backed securities have no daily mark-to-market or have a margin holiday.

Continue to build out a great origination and servicing company, our mortgage company. Again, in the quarter, $205 million in pretax income, that's 127% increase quarter-over-quarter.

Protect our MSR through recapture. The way we're going to do that is grow our direct-to-consumer business. Volume quarter-over-quarter is up 44%. And as I pointed out earlier, we have a lot of work to do there and a lot of room to grow. And our recent announcement of our relationship with Salesforce should help us a lot there.

Create additional liquidity for advanced financing. Coming through COVID and looking at the forbearance numbers, we estimated some numbers that, quite frankly, were higher than we needed. We ended the quarter with $2.2 billion of unused capacity for advances.

And then finally, loans in forbearance decreased quarter-over-quarter from a peak of 8.4% to 7.8% and we continue to work with our homeowners who are dealing with COVID-19 hardships.

Page 5. Again, more cash on our balance sheet than ever before. What we tried to illustrate here is if we took some of that capital, and we deployed it in the market at a 15% return, our core run rate for Q2 would have been a little bit under $0.40 per diluted share on a core basis.

Page 6. This is a sheet we'd like to talk about our implied book value. Stated book value $10.77. If you look at our operating company and put some multiple on the earnings, if you take our earnings for -- our pretax earnings estimate for 2020, which we estimate to be between $750 million and $800 million, and put approximately a 3 multiple on that, that will give you enterprise value of something a little bit north of $2 billion. If you take that and then if you add the implied value of that $4 per share, our implied book value is between $14 and $15 per share. Stock closed last night at approximately $7.80 something cents.

Page 7, reduce the risk and leverage. 95%, again, of our investment portfolio is no daily mark-to-market. The team has done a great job reducing our daily mark-to-market exposure. Entering to long-term financing facilities, some of our facilities even go out 2 years on some of our loan portfolios. Again, we took out extra protection around advances in anticipation of potential higher advanced needs. Didn't need that in the quarter. We're going to keep that extra $2.2 billion, and we'll see what happens down the road. We want to be prudent and make sure we're very conservative here.

And again, on the securitization side, we issued 3 deals in the second quarter, and we recently did another deal in the third quarter. On our MSR portfolio, 99% of the portfolio has no daily mark-to-market exposure. We completed an MSR securitization of $265 million during the quarter; that comes off bank lines, that's term, and we'll continue to do more MSR securitizations down the road. And we extended our existing financing facility with one of our largest lenders through the end of the year. Servicer advances, I'm not going to spend a lot of time on again because nothing has changed in the quarter.

On the loan portfolio, today, 91% of the portfolio has no daily mark-to-market. We expect by the end of Q3, that number to be closer to 100%.

On the non-agency portfolio, approximately 85% of the portfolio has no daily mark-to-market exposure. The other 15-ish percent as of 46 LTV, and that's comprised of either interest-only strips and some [ feel ] like instruments.

Page 8, our balanced portfolio investments. How do we think about our company? Our investment portfolio is no different than it's ever been. It's much smaller. It's much better financed than it's ever been. We expect some kind of recovery in the future on our MSR portfolio. Servicer advances, again, not a lot of -- there's been no change there. And then loans and securities are much smaller today than they've been in the past. When we think about our loan and security portfolio with a 60 basis point 10-year note and a 2 -- and a 15 basis point 2-year note in rates, kind of in the same place, quite frankly, than where they've been even when we go back to the first quarter. We're not going to deploy a lot of capital in levered assets with a mid-single-digit type return.

Our origination and servicing business continue to be a primary focus. The return on equity in that business has been very, very good. As we sit in this robust housing market, robust refinancing market, we want to make sure that we continue to perform extremely well there. And you saw the results in the first quarter. When we look at our mortgage company, since we acquired NewRez in 2018. 2018 earnings at the end were $38 million. Today, again, it's going to be approximately $800 million. The origination volumes have gone up from approximately $10 billion in a year to -- which should be about $50 billion this year, and our servicing portfolio should end the year, give or take, about $300 billion.

So what are the -- some of the important thing for our company this year. One is recapture. You're going to hear that word today. And as we go through the rest of the year, it's something that's very important so we can minimize our MSR amortization and retain our customers. Continued scale and market share growth across all of our channels. And margins today in the origination business have never been better. From a servicing perspective, continue to de-risk our servicing counterparties. One of the things that I pointed out earlier in my opening remarks, we acquired the assets of Ditech. Ditech had serviced a number of assets for us. Some of those -- that integration is fully complete. And we actually -- we have some servicing transfers coming up from PHH over the course of the next quarter.

Third-party servicing growth. Shellpoint, our special servicer is very, very well-regarded in the industry. We have about 25 to 30 different third-party clients, and that will continue to grow as we deal with the current COVID-19 pandemic. And then as we think about technology, continued use and growth of our proprietary digital processes to drive efficiencies and customer experience. We've made a lot of tweaks to our website portal to help our customers get through this -- the hardships that they currently experience.

So how do we think about ourselves today? Page 10. We've repositioned the company. We're focused today on, obviously, our investment portfolio as well as our operating business with low mortgage rates, high margins, elevated refinancing activity. We're going to continue to focus on our origination business. As I pointed out earlier, we think we've only scratched the surface. We have a lot of room to grow. We're one of the new kids on the block, and we look forward to actually improving our company. Again, we have 5,500 dedicated professionals across our company who are doing a great job with most of them working remotely.

As we think about volatility, we're going to retain a lot more cash than we ever have. We have $1 billion of cash. I gave you an earlier illustration about if we deployed some of that capital at a 15% return, our core run rate for the quarter would have been $0.40. Portfolio on the investment side, term financing, reduce daily mark-to-market wherever we can. Any additional acquisitions that we do down the road will likely be financed in the term markets.

As we think about forbearance requests, again, I pointed out Shellpoint has a great reputation in the industry. Jack Navarro and his team do a fabulous job leading that side of our organization and working with our customers. On the advance side, again, $2.2 billion in excess capacity, nothing really to talk about there. And then I spoke about the digital nature of what we're trying to do.

Now just -- I'm going to flip to Page 12 on the origination side. Pretax income for the quarter, $181 million. That's an increase of 201% quarter-over-quarter. Production, again, about $50 billion. And obviously, the return on equity as we turn over our capital, approximately 200% in Q2. Gain of sale margins continue to be robust for us and everybody else in the industry.

Page 13. This is one of the most important things that we continue to focus on. I keep harping on this again, recapture in our direct-to-consumer channel. We have almost 4 million customers in our ecosystem on the servicing side. We need to keep as many of them as possible. We need to provide better service. And one of the things -- and our main focus here in the direct-to-consumer channel will hopefully pay off as we retain more customers. We drive down our MSR amortization, and we continue to create great profit for our company as direct-to-consumer margins are very robust.

On the servicing side, Page 14, $24 million in pretax income in Q2, servicing portfolios increased 74% year-over-year. Again, we estimate our servicing portfolio to be between $300 billion and $325 billion at the end of the year, and our return on equity is about 44% for the quarter.

Page 15. This just talks about helping homeowners during this hard time and obviously, always. Over 185,000 forbearances granted in 2020 year-to-date, that's more than 60x 2019 volumes. Our servicing business will continue to work and help homeowners move from forbearance to permanent solutions, whether it be repayment plans, deferments, loan mods, whatever we need to do to help homeowners we'll continue to do. And again, Jack and his team do a fabulous job.

Now I'm going to spend a little bit of time on our investment portfolio. I'll talk about MSRs on Page 17. Our MSR portfolio today, $610 billion as of the end of Q2, faster prepayments, faster amortization as a result of this refinance -- this refi market as well as the purchase market. We expect that to abate over time. Think about it this way. The offset between amortization on our MSR portfolio and the origination business is a very, very good hedge. So as the origination business tails off at some point down the road, the gain on sale that you'll see in the MSR business should be very, very significant. I pointed out earlier in my opening remarks that MSR values today are at some of the lowest levels we've seen in years. And we'll talk about that a little bit more during Q&A.

Page 18, our own portfolio, how do we compare our portfolio to the industry? This is a slide we talk about frequently on our earnings calls. Our prepayment speeds are 20% slower than the industry average in June. Why is that? Our average loan size is smaller than the industry. Our average loan size is 133,000, industry 215,000. We have a much more seasoned portfolio than the industry, 79 months weighted average from origination. The industry is 38 months. Our FICO score is more credit impaired, 721 FICO versus 749 and our refinanceable population is much smaller than the industry at 33% versus 72%.

How do we think about the MSR business? 60 basis points, 10-year notes, one of the few fixed income instruments that will go up in value historical pricing at some of the more recent lows we've seen in years, I think there's a ton of upside as we think about the MSR business.

Page 19. On the loan side, we set out coming out of -- or we're not out of COVID, but coming out of March, to get rid of as much as of our daily mark-to-market financing. As I pointed out, by the end of this quarter, we should be almost 100% of non-daily mark-to-market financing. The loan business today is $2 billion. We will add if we think the absolute returns make sense for our cost of capital, if not, we'll continue to focus on other ways to increase our earnings across our portfolio.

On the non-agency residential security side, I pointed out that roughly 85% of our business is non-daily mark-to-market. We still have our call rights. The only difference in this portfolio today versus where we were pre-COVID is much, much smaller. Returns overall. Again, we're not going to go out and deploy a lot of capital in levered returns in the mid-single-digit servicer advances.

On Page 21. I'm not really going to spend any time. I think there's been no change whatsoever since last quarter. And I pointed out, again, it's been a positive event as we've gotten in more cash than cash that actually had to leave the system. And then finally, on our COVID stuff, as we think about forbearance. Forbearance numbers continue to decline. We don't know what the future brings. I don't know that anybody does. We're going to make sure we have enough cash on hand to deal with our servicer advances and helping customers through this.

And with that, I'll turn it back to the operator, and we can open it up for questions.

[Operator]

[Operator Instructions] First question comes from Doug Harter from Crédit Suisse.

[Douglas Harter, analyst]

Michael, talking about that illustrative example of deploying cash. Can you give us a sense as to kind of what that time frame might be for deploying cash? And I know you said you didn't like kind of the securities right now, but what assets would you want to deploy into?

[Michael Nierenberg, executive]

So as we think about the cash deployment, the one thing I would say is during the quarter, as we came out of Q1, we reduced our agency positions to next to nothing. During the quarter, we've added about $6 billion to $7 billion of agency mortgages. As we get through the quarter, we'll likely deploy more capital into agency mortgages. The one caveat I'd add is Fannie 2.5 are trading $1.045 and $1.05 prices. At some point, I do think rates are going to go up, and we need to be mindful of that and how we think about the agency business versus our MSR business.

So when we -- pre-COVID, we had agency mortgages against our MSRs. Today, we have agency mortgages against our MSRs. And however, the difference today is pricing on MSRs is much, much lower. So I think cash deployment will likely come in the form of agency mortgages. Right now, I don't -- we don't see a lot of value in many other things that we'd want deploy capital in, and it's very likely that we'll sit with more cash on our balance sheet today than we have in recent past.

[Douglas Harter, analyst]

And then also, I guess, how do you consider share repurchase in that equation given the discount to book that you currently trade at?

[Michael Nierenberg, executive]

It's -- I would say anything and everything is on the table as we think about driving our share price higher. And getting back to, again, my opening remarks, a double-digit stock price. Book value, we think, is understated. We put that slide in there. Closed the quarter at $10.77. When -- if you think about it this way, if amortization really slows down at some point and the mortgage company, let's say, does less volume, a 1 churn on our MSR portfolio is worth about $1.5 billion or $4 in book value.

So if you think about it today, $10.77 even if the mortgage company broke even, and the MSR value was a 4x instead of a 3x, you're talking about roughly $4 a share in book value or something close to $15 versus a approximately an $8 stock price. So we think there's a lot of room to grow. And we -- our theme and my theme is truly the road to recovery. It bothers us tremendously that we are trading where we are. Our customers, or the capital that's allocated to us, we have a fiduciary responsibility to drive high returns for our shareholders, and we're going to continue to do that. So whatever we need to do there, we're going to do.

[Operator]

The next question comes from Bose George from KBW.

[Bose George, analyst]

Actually, just a follow-up on Doug's question in terms of capital or cash liquidity use. You have the high-cost debt that you guys took out and which is prepayable at any time. What are your thoughts about paying some of that back?

[Michael Nierenberg, executive]

So a couple of things. One is we're going to carry higher cash and reserves today than we have, right, until the world normalizes. As we think about the cost of capital, the loan itself is an 11% coupon. If we were to raise equity, barring the warrants that were issued along with that loan, so separate the warrants for a second. If we were to raise capital, going back to historical dividend yields, our dividend yield would be something around 12%. So the loan itself at 11%, yes, high cost capital. But at some point, we'll likely refinance that with something else.

So what are our options? One is there's unsecured debt. As those markets continue to tighten, it's something that we look at daily but we will carry more capital on our balance sheet. I'm not going to -- we're not going to just go out and do this term loan and then turn around and pay it back a month later because we think the world is safe, we just don't know. So in general, we're going to carry more cash. We're not going to pay back the loan today, and we're going to do whatever we can to drive our share price higher.

[Bose George, analyst]

Okay. Makes sense. Just switching over to mortgage volumes, you guys guided to $45 billion to $50 billion for the year. The -- what was the run rate in June? You noted that the volume was a little lower this quarter because of April. Just curious if the June volume suggesting a run rate that kind of gets you to that $25 billion to $30 billion for the back half of the year?

[Michael Nierenberg, executive]

Yes. So on -- April was lower. March was -- we pulled back in March, obviously, as we got out of non-QM, for example, and pulled back on some of our -- on our channels. So March and April were a little bit lower. June is going to be a little bit under $4 billion. I think that was where the number came out. And July volumes are robust, and we think that's going to continue. The one thing I want to be clear about is it's not about doing $40 billion or $50 billion. It's about how much money we can make for shareholders. And I think that's the most important thing. But June was a little bit under $4 billion.

[Bose George, analyst]

Okay. And the gain on sale margins in July remain similarly elevated?

[Michael Nierenberg, executive]

Yes. They're very robust. I would say the -- we're starting to see a little bit of tightening on the correspondent side. But the direct-to-consumer, the third-party originated stuff, our JV business, very, very robust margins.

[Operator]

The next question comes from Stephen Laws from Raymond James.

[Stephen Laws, analyst]

Kind of following up on Doug and Bose's question, but just want to gain on sale margin, clearly much higher for the direct-to-consumer from your slides. Can you talk about what's driving the increase in volume there? What initiatives and efforts have you guys made? And what have you had to do that can continue to drive that mix higher to increase the blended mix across the origination platform?

[Michael Nierenberg, executive]

So on the direct-to-consumer side, if you think about it, again, we have roughly 4 million customers. We need to be able to retain all these customers. With the amount of incoming phone calls we have and the amount of personnel we have in the company today, which is far greater than the amount of personnel we've ever had, we think we're going to do a better job. The relationship with Salesforce that was announced is something that we think is going to help us with that process.

Things are going to be much more automated and the process will be much more seamless than a so-called manual process via the telephone. We have a lot of work to do. We're very focused on our marketing efforts. We're going to hire a new Chief Marketing Officer in the markets, now working on that hire. We need to do a better job on our web portals. We need to do a better job just overall. We do a good job now. Volumes are elevated, processing loans, not only for us, for the industry, and this is why you're seeing such robust margins on some of these channels is not the easiest thing based on the volumes.

I saw this morning, Fannie Mae came out and announced that they think there's going to be $3 trillion of mortgage production this year. So high volumes for us, better service for our customers, more automation, more affiliate relationships like the ones we announced with Salesforce. And I think the combination of all of those should enable us to get to a much better place and do more in the direct-to-consumer channel and retain more customers.

[Stephen Laws, analyst]

Great. And this maybe is a little more on the macro side but ties in to your origination business. As you've narrowed the products, you mentioned that kind of moving away from non-QM. Since that decision, you've seen the government announce the QM patch will be extended. There's talk you could even take the -- up to 48% on DTI. How does that change your origination channel? Are you looking at stuff outside the non-QM? Or is this QM patch you going to expand things to really cover everything you want to do? And then around that, think about the upcoming election and recent ruling by the Supreme Court that could end up impacting the FHFA as far as who runs that, being a presidential appointee. Can you talk about any positives or negatives that either could benefit or hurt you guys as you think about the changes taking place in the...

[Michael Nierenberg, executive]

So on -- from a macro perspective, on the geopolitical side, I can't help anybody there. We don't have any control on what's going to happen with CFPB and FHFA and what we need to do is continue to perform for our customers and continue to do what we need to do there. I don't know -- when you think about the patch and non-QM, we're in the moneymaking business, our mortgage company, as I pointed out earlier, has a lot of room to grow. We pulled back on non-QM when quite frankly, there was no liquidity in the markets. We pulled back on agency mortgages when there was no liquidity in the market. That's what put us in this position that -- then that we're in -- we're in a much better spot today, probably better than ever, but that's what put us in this position.

So I think we'll focus where we can on things that we -- that make sense. The agency business is something that makes a lot of sense now. We do -- we are evaluating the non-QM business again. It's not something that we're going to just jump back in unless we think we have robust gains. Similar to my earlier comments that we have $77 billion in call rights. Some of those deals are in the money, but we're not going to call them until we think they make a lot of sense. So we'll be strategic around it, but I think the focus is going to -- on the origination side, it will continue to be on the agency side.

[Stephen Laws, analyst]

Great. And lastly, on the forbearance, down, I think, 60 basis points, if I remember the numbers from the slide deck, to high 7%. Kind of your outlook there, risk Bull and Bear case around that number? Kind of how do you think about it? I know the table showed you guys pulled down kind of some forecast from a worst-case scenario, but do you think the forbearance risk is bigger in the near term? Or is it more from a bigger economic slowdown in 2021?

[Michael Nierenberg, executive]

I have some thoughts. Jack Navarro, who is my partner and our partner is on the phone. The Cares Act, I mean, if you're going to get another bill, that could be helpful, I think, to homeowners. We really don't know at this point. But Jack, anything you want to add from a commentary...

[Jack Navarro, executive]

Yes. Michael, I would -- I would just say that there's 2 very sort of significant ways that we're thinking about today. One is the very clear and direct trends on the portfolio that we have today. And that is basically that the number for new forbearance request has come down significantly on a daily basis. There still are some, but they've come down significantly. And the number of people who have said their hardship is over and they're ready to move to a permanent solution have increased and the overall number of forbearances has gone down. So those trends are pretty clear. You see them in the advances, you mentioned that earlier.

But the other thing I might add is that we'll see the special -- and again, not -- I'm not an economist, and I'm not trying to talk like one, but we'll see the special unemployment insurance expire in July, and we obviously see an increase in sort of COVID activity around the country. So we have -- we're going to have to see how those things play out, and we're trying to just be very vigilant across the enterprise at Michael's direction on these issues, and we're sort of the head of the spear on the servicing operation. But there's no indication today that these trends are -- the positive trends are going to change. That's what we're living with today.

[Operator]

The next question comes from Kevin Barker from Piper Sandler.

[Kevin Barker, analyst]

So Michael, can you give us an idea of what your numbers look like for direct-to-consumer originations in the month of June? And then how that's progressing through the month of July? I just want to reference back to your estimates for $6 billion of direct-to-consumer originations in the fourth quarter, which is approximately a double from what you're doing right now in the second quarter.

[Michael Nierenberg, executive]

Yes. June, we did $1.2 billion. So when we're talking about in the fourth quarter, as we get better around that channel and recapture. We think the fourth quarter numbers of whether it's a $4 billion or $6 billion, we think those numbers are real, and we think we're going to be able to hit them.

[Kevin Barker, analyst]

So what do you think you're going to -- if you did $1.2 billion in June, where do you think that's going to end up in July? Is that going to be north of $1.5 billion? Or are you close to that run rate already?

[Michael Nierenberg, executive]

We think we're going to be about -- our target is to be at $2 billion by September.

[Kevin Barker, analyst]

Okay. And then what gives you confidence that you're going to be able to hit that number? Is it that there is continued refi demand at the levels that we saw in the second quarter? Or is there specific recapture rates that are going to jump because of marketing programs or different targeting programs that you're doing?

[Michael Nierenberg, executive]

It's a little bit of everything. We got -- we'll be -- I think we'll be better around our lead conversion. We've added some -- we've changed some of our leadership, quite frankly. In the origination business. Baron Silverstein joined us as President, working alongside Bruce and Jack. There's -- we're going to be better. We need to be better. I mean you hear me say that every time we talk about the company. We make a lot of money in the company. But again, I think we're only scratching the surface. Whether we do $2 billion or $3 billion, I know from an analyst standpoint, you look in to fine-tune the estimates. It's hard for us to tell.

If the refi market goes away and the purchase market goes away, our MSR multiple will go from a 3x to a 4x. We'll make an extra $1.5 billion, and book value will be [ 15 ]. None of us have a crystal ball. But the way that we think there's a lot of offsets to the profitability we're seeing in the mortgage company. If the mortgage company stays where it is, you'll continue to see higher levels of amortization on our MSR portfolio. But we're really happy originating mortgages and keeping the MSRs at today's valuations.

[Kevin Barker, analyst]

Okay. And then going back to Slide 6. You're estimating that approximately $4, $5 of additional value or a little over $4 of additional value from the origination franchise. But the market typically puts very little multiple on those types of earnings. Just given the volatility associated with it and what we've seen out there. But it seems like your comps are improving significantly. Do you think it -- do you think you'll eventually get credit for that $4 in book value in the market? Or do you feel like it's -- it might be better as a separate entity?

[Michael Nierenberg, executive]

It's a great question, Kevin. I think for us, we will -- NewRez is stand-alone, by itself. I mean if there's a way to create more shareholder value, we'll always look to do that. So whether it's a 3x or 2x, if you look where Penny trades or if you look where Cooper trades and think about those companies, I don't know that we're there yet. But at some point, I think we'll get higher multiples for these businesses that continue to make money.

To your point, on the origination side, you typically don't get the same valuations because it's a much more volatile earnings stream. But again, the offset to our $4 is $4 in gain on our MSR portfolio that we marked down north of $1 billion over the course of the past few quarters. So I like the way we're positioned. I like -- I love the valuations where some of these things are. I think they're extremely attractive. The crystal ball today for any of us, I think, is a very, very foggy one because none of us know what's going to happen. And again, going back to Stephen's question, whether you get another bit -- whether you get more money into the system from another bill when the Cares Act ends at the end of this month, I mean, it all remains to be seen how this whole thing is going to play out. That's why we're carrying a lot more cash today.

[Operator]

The next question comes from Henry Coffey from Wedbush.

[Henry Coffey, analyst]

Is it an oversimplification to say that you've got basically 2 businesses, an investment business where you're going to be focused mainly on agency and keeping your eye open for opportunities and then the origination servicing business where you see a lot of growth, and that business is -- you're going to keep pouring capital into that business. Is that the simplest way to think about it?

[Michael Nierenberg, executive]

Yes and no, Henry. We have a $600 billion MSR portfolio. When we acquired NewRez, over the years, we've actually -- we've had some very good acquisitions, right? We did the HLSS deal in 2015. We developed a very good partnership with Ocwen. We did the deal with New Penn, NewRez in 2018. We did Ditech in 2019. All of these were strategic around MSRs, advances. As we got more into the operating business, however, that operating business is there to support our portfolios. When you look at our credit portfolio on the non-agency side, I got to find it in my notes, but a large amount of our credit portfolio from our issuance is serviced by Shellpoint and NewRez. That we take a lot of comfort in because, again, Jack and his team do a great job around the servicing side of that business.

So the -- it's -- while it's a stand-alone business, it does support our investment portfolio. My main thing around our investment portfolio today is we are not going to go out and just deploy capital to 5% levered return. It just doesn't make sense, right, for our cost of capital. I think somebody asked -- whether it's Bose before, about the loan, the term loan.

Deploying capital to 5% when you're paying an 11% coupon on your debt doesn't make a lot of sense. We'll lower that cost of debt and pay that off. I think over the course of the next, whatever, 6 to 12 months once we have a clearer picture of the world. But they do stand-alone, but they do work together. I think it's the best way to think of it.

[Henry Coffey, analyst]

And then you talked a little bit about MODs last time. There's been some discussion in the press, but no verification from anyone that as we get to the tail end of this whole forbearance equation, that we'll get something HAMP or HARP 2.0, where some form of streamlined refinance, so someone who's been in forbearance for 3 to 12 months can then get out there and take advantage of really low interest rates. And obviously, it would be good for the borrower. It would be good for the economics of the mortgage, and it would be good for you. I don't know who loses, but is that a reality? Or is that just some discussion in the press?

[Michael Nierenberg, executive]

It's nothing that I am aware of today. Would it be surprising? The answer is no. There's -- when you think about the origination world today, it's alive, it's well, it's robust. Yes, processing times take a little bit longer because of the sheer volumes that everybody is seeing. And with the Fed buying all these mortgages, I'm not sure that they need to do anything more than that. But I just don't know. But I think everything is on the table right now. It depends what happens down the road.

[Operator]

The next question comes from Trevor Cranston from JMP Securities.

[Trevor Cranston, analyst]

One more follow-up in terms of capital deployment opportunities. Can you talk about what you're seeing in the third-party MSR market, whether it's flow or bulk? And if you see that as somewhere you could potentially be looking to deploy capital given how those servicing multiples are today? Or if you guys are primarily just focused on retaining what you can generate through the origination business right now?

[Michael Nierenberg, executive]

I think it's twofold. One is we're not seeing a lot of MSRs come to market -- in the bulk market. The one thing I would say is we have been -- we've acquired a few large packages of bulk MSRs over the course of the past couple of years. Mortgage banking and mortgage bankers are in the business to originate mortgage loans and refinance mortgage loans. So unless we are able to acquire these assets I think at levels below where we would originate them ourselves, we're not going to be that [ axe bearer ], again, unless they are cheaper than where we think we can originate, because we're going to continue to focus on our own origination business. While saying that, 2x on 2 handles and low 3s on agency MSRs and private label MSRs are very, very attractive. But I just think the one thing to note is mortgage bankers will continue to refinance loans they create, and there's no reason for us to jump in that pool again. We've learned, quite frankly, unless this stuff gets much cheaper.

[Trevor Cranston, analyst]

Okay. Got it. That's helpful. And then in terms of the change in the fair value of the MSR this quarter, can you give the split in terms of how much of that was due to realized payoffs this quarter versus the change in expected prepays and change in market multiples going forward?

[Michael Nierenberg, executive]

It's a little bit of everything. What I would say is we've increased our speeds -- our speed assumptions for down the road. One is we've lowered some of the recapture rates on certain assets we have in our portfolio. And then multiples, when we look at conventional multiples and we look at Ginnie multiples, our conventional -- our conventional business is much larger than our Ginnie business. Ginnie multiples, the way that -- where we are in the mid-2s on the conventional side, we are in the very low 3s. So overall, we're like a 3x, which is, again, some of the lowest levels we've seen in many, many years. So we love where we sit there.

I don't know that amortization is going to slow down anytime soon because we're in this robust housing market and a robust refi market, that's why we're going to capitalize on the origination side. But when that does slow down, we think that the MSR stuff is going to go up a fair amount. That's why we're excited to create it where we are right now.

[Operator]

The next question comes from Giuliano Bologna from BTIG.

[Unknown]

Congratulations on a great quarter. I guess jumping on the origination side to fine-tune some of the questions that have been asked before. I'm just curious what kind of margins you're generating on the direct-to-consumer side of the platform versus, kind of, JV retail and some of your -- some of the correspondent as well, just to try and get a sense of where the margin is coming from, how much of a difference there is from DTC.

[Michael Nierenberg, executive]

On the direct-to-consumer side, we're seeing gain on sale margins at roughly 400 basis points. These are gross numbers. On the retail side, they are even higher than that in, give or take, 500 basis points. This is why the point that we continue to hammer home is that we need to get better in that direct-to-consumer channel. Because not only is it going to help us retain our customers, it's going to drive a lot more earnings through our -- through the system for shareholders.

On the correspondent side, you've seen a tightening of spreads there. You're starting to see MSR multiples increase versus where we were at the end of Q2. And as a result, you're probably, give or take, in the 25-ish basis point range. I think during the tough times we saw in March and April under COVID-19, I think we saw highs of, give or take, 60-odd basis points. But the net number on the correspondent stuff is probably, give or take, 25 basis points right now.

[Unknown]

That makes a lot of sense. And then kind of thinking as we go forward, obviously, a lot of loans come up forbearance. You've already had a lot of contacts with those customers as they come off. Is that part of the strategy in terms of growing your direct-to-consumer margin once people have kind of reperformed for a few months that you can go out and hopefully recapture that refinance? Or are you trying to find -- is it just more portfolio-wide recapture that will drive the volume this year?

[Michael Nierenberg, executive]

I think it's more portfolio-wide. I mean people that are in forbearance will work with and provide mods and other solutions to help them stay in their homes. But the broader portfolio is where we're focused.

[Unknown]

That makes sense. And one last quick one on thinking about kind of how you're hedging out the portfolio as a whole. Obviously, MSR values are close to -- at some of the lowest levels we've seen in a long time. But do you have any kind of hedging to rates moving lower? Or are you -- and how are you hedged in terms of rates moving higher? Or are you kind of leaving that optionality open at this point?

[Michael Nierenberg, executive]

We're doing both. We have agency mortgages, which hedge our MSR business. We have north of $6 billion of agency mortgages against our MSRs today. We are monitoring rates at the end of March, 3/31. The 10-year treasury was 66 basis points. Today, it's about 60 basis points. So it's essentially unchanged. I think the difference -- what we're seeing today versus the end of March is that the mortgage basis has tightened. So rates have done nothing, but the mortgage basis has tightened because the Fed continues to buy a lot of mortgages. But we'll continue to monitor in a higher -- in a lower rate environment at some point, for example, Fannie 2.5% are only going to go up so much more than where they are right now, just from an absolute return perspective for fixed income investors.

So we're monitoring both ways. We're probably more biased to think rates are going to go higher at some point. I don't think it's necessarily today, but I think we're protected both ways. The other thing to point out is we are -- we do have a loan and bond portfolio that have duration. We have agency mortgages. We have loans. We have bonds. But at an overall 3x on MSRs. We think there's less risk there today than there was, obviously, a couple of quarters ago.

[Operator]

The next question comes from Tim Hayes from B. Riley FBR.

[Timothy Hayes, analyst]

First question, can you just talk about your off-balance sheet investments in operating companies a bit more, how those companies have been performing recently? And then I think I posed this question last quarter, but at what point do you think it makes sense to internalize these investments and further bolster the on-balance sheet operating company?

[Michael Nierenberg, executive]

So on the -- what I would call the off-balance sheet stuff. Avenue 365 and eStreet, which are title and appraisal company, they are and have been part of the Shellpoint NewRez family. There's been no change there. As we do more volume there, obviously, the appraisal business will grow. The title business will grow and the overall earnings from those businesses will grow. The third-party where we've made other acquisitions, Guardian, where I think the upfront payment was between $6 million and $7 million.

Total with earnout is about $25 million. That's going to make between $20 million and $25 million of EBITDA this year. They are in the property pres business, obviously, with foreclosure moratoriums and REO moratoriums out there the earnings will be impacted negatively. But if you think about it, overall, total purchase price, give or take $25 million and $20 million to $25 million of EBITDA this year in light of the foreclosure moratoriums, it's been a great investment. And the guys that run that do a great job.

Covius, we have $64 million into that. That's $20 million of equity. There's $44 million of debt. They have been impacted again by similar things as Guardian has. They had -- they provide a broad suite of, what I would call, tech-enabled solutions to originators and servicers. Obviously, a little bit harder to get out there from a travel perspective and create more from a sales standpoint and drive more revenue, but that company should do between $20 million and $30 million of EBITDA this year.

So all in all, those 3 business -- it's really 2 off-balance sheet businesses for the most part, should continue to do fine. We'll do better once we come out of this kind of COVID-19 world. Those are really the -- probably the 2 largest off-balance sheet investments.

[Timothy Hayes, analyst]

Got it. And then yes, just the second part of that question, I guess, was at what point do you think it makes sense to internalize these investments or further your stake in these companies?

[Michael Nierenberg, executive]

Well Guardian, we own 100% of. Covius, we own 26% of. We'd like to see -- so Guardian, we own. And Covius, depending upon how they do. We're very fond of the management team there. I've been pretty vocal about that, Rob Clements and John Surface, who are great partners of ours. But as their earnings grow, we have optionality to increase our ownership to the extent that we want to do that.

[Timothy Hayes, analyst]

Got it. Okay. And then just one more from me. On the dividend, respecting that it's a Board decision, you made some comments earlier about, hopefully getting that higher in the not-too-distant future. And I know you recently raised it, but it's still well below the core earnings run rate this quarter. And just given that you have a very strong liquidity position and don't really need to be more defensive there, arguably. Just wondering how you see the dividend trending in the near term or if you think it makes sense to kind of keep it at this level while there's so much uncertainty ahead?

[Michael Nierenberg, executive]

I think it's a little bit of both. Does it make sense to keep it at this level? If we thought we'd get back to book value, and get paid for it. It's something that, again, it's a Board decision. It's something that we would discuss. We don't want to just put capital out there because you are in an uncertain world. $0.10 versus our normalized run rate of $0.50. Obviously, there's a big delta there. We want to continue to get through a couple of quarters of, what I would say, very strong earnings and grow our earnings.

Our main thing is, we came to the market and our book value was truly $15. I used the MSR example of $4 per share. So $10.77 plus $4, let's say, it's upper $14 and the stock was traded at $8. You'd have to think that the stock -- the equity is very, very cheap. But again, we don't want to just put out capital without getting credit for it. And I do think that in a 0 interest rate world, which is kind of how we're all operating in, I don't know that the mortgage REIT space, whether it's us or any of our other friends and peers out there, should be trading at 10% or 12% dividend yields in this environment. So we'll monitor it.

I'd like to see our -- I want -- we want to get back to book value. I mean it's something that's very important. I think for everybody, specifically our shareholders because we want to perform for shareholders. It's as hard as you think about the world that we're in and what's going to happen. So I know that's a pretty broad, vague answer and I gave you nothing.

[Timothy Hayes, analyst]

No. No, it's good. I get how you're thinking about it. So I appreciate that. And then just one more quick one, and I'll jump off. Do you have a book value update as of today?

[Michael Nierenberg, executive]

It's pretty similar, I would think, where we closed the quarter, give or take, might be slightly higher because MSR values are a little bit higher right now.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Michael Nierenberg for any closing remarks.

[Michael Nierenberg, executive]

Well, we appreciate everybody's support, obviously, in this crazy world we all live in, I hope everybody stays well. We look forward to performing for our shareholders and updating you throughout the quarter and on our next earnings call. Have a great summer. Thank you.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.