New Residential Investment Corp

LSE:0K76

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the New Residential Investment Corp. Third Quarter 2019 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker for today, Kaitlyn Mauritz, Investor Relations. Please go ahead, ma'am.

[Kaitlyn Mauritz, executive]

Thank you, Carol, and good morning, everyone. I'd like to welcome you today to New Residential's Third Quarter 2019 Earnings Call, and thank you for joining. Joining me here today are Michael Nierenberg, our Chairman, CEO and President; and Nick Santoro, our Chief Financial Officer. Throughout the call this morning, we are going to reference the earnings supplemental 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 made today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. I encourage you to review the disclaimers in our press release and earnings supplement regarding forward-looking statements and 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'd like to turn the call over to Michael.

[Michael Nierenberg, executive]

Thanks, Kait. Good morning, everyone, and thanks for joining us today. So for us -- the third quarter was a very good one for us. The quarter, more than any other quarters, saw the different segments of our businesses contributing in areas where others were a little bit more challenged.

During the quarter, treasury rates rallied by 35 basis points, the 10-year closing at approximately 1.65% versus a 2% yield at the end of Q2. However, the mortgage market did not see the same. During the quarter, mortgage rates fell by only 10 basis points during the quarter. So effectively agency mortgages got cheaper, refi incentives were a little bit lower during the quarter.

Our robust risk management and hedging strategies helped protect book value. During the quarter, we saw a slight increase in book value. Our investment portfolios performed extremely well.

Where we are today, we're really starting to see the earnings power of our mortgage company. It's really starting to ramp up, and we're very excited to see the continued growth in our new resident Shellpoint franchise.

The completion of the Ditech acquisition, which happened subsequent to the end of Q3, creates great scale for us as well as more capacity to originate loans and improve our recapture rates on our MSR portfolios.

The lower rate environment has enabled us to reduce our borrowing costs, saving our company approximately $75 million on an annual run rate, and we will continue to focus on ways to increase that number even more. We do believe we will see 1 to 2 more cuts from the Fed this year, which should create further savings in our financing costs.

On our call business, lower delinquencies coupled with lower advance balances should help provide a favorable backdrop for call velocity as we go forward. As we look forward, yields will likely remain low, presenting a challenging investing environment not only for us but for the industry. The focus on our operating businesses, coupled with our disciplined approach to risk management, should help provide our shareholders with good investment returns as we look forward. I'll now refer to the supplement, which has been posted online, and I'm going to start on Page 3.

So this is our -- kind of our highlight slide. Market cap at the end of Q3 was $6.5 billion. We have $41 billion of assets. Our dividend yield was 12.8%. Our book value since inception is up 63%. We've generated 147% total shareholder return since inception. And we paid out a whopping $3 billion in dividends since inception.

When you think about our platform, I think we have a very different platform. One is, we have a great investment portfolio that includes MSRs, bonds, call rights, loans. And as we look at some of the other things that we're doing now, our big focus continues to be on capturing the whole mortgage pie, if you look at the right side of the page.

Page 3, financials. GAAP net income for -- in the quarter of $225 million or $0.54 per diluted share. Core earnings, $207 million or $0.50 per diluted share. Our third quarter dividend of $0.50 per common share, again resulting in a 12.8% dividend yield as of the end of September 30.

Book value, $16.26, that's up from $16.17 at the end of Q2. Total economic return of 3.6% during Q3, and we raised $438 million in our first-ever preferred stock offerings. There were 2 of them during the quarter, the approximate cost of funds a little bit north of 7%. On the bottom left quadrant, you can see, we have $7.2 billion in net equity, and then all of the other stuff on the right. Our 20.9% total shareholder return to 2019, we're very proud of.

When you look at Page 5, our investment portfolios. $3 billion net equity or 42% of our portfolios are in mortgage servicing rights. The effective levered yields in those today are somewhere between 12% and 15%. Our advances are 15% to 25%. And again, as I pointed out in my opening remarks, we take a much more disciplined approach to our risk management around our MSR book, hedging that fully.

On the residential securities and call rights, a little under $2 billion in net equity at the end of the quarter. That's 28% of our portfolio. Targeted lifetime net yield to 12% to 15%. Obviously, with the market where it is, there's very little activity -- investment activity for us as we see levered yields in the bond portfolio of something between 5% to 6%, if we were to invest capital today.

On the residential loans side, net equity of $1.4 billion. It's a little under 20% of our portfolio, targeted lifetime yield north of 13%. And then on the consumer segment, very small part of our business today, as those flows continue to amortize. We're not seeing a lot of new activity there or opportunities. We ended the quarter just from a cash and liquidity standpoint a little bit over $700 million. That was due to having enough capital to fund our Ditech purchase, which occurred on October 1.

Page 6, this is a new slide for us. When we think about our portfolio, we have a number of folks that have truly dedicated 100% of their time to how we hedge our business. We actively manage and hedge our portfolio to protect our book value, as we showed you during the quarter.

On the left part of the page, if you have a look, positive duration businesses: operating business, which includes our origination business; call rights; whole loans; legacy bonds; and agency bonds. All have positive duration. The negative side of the -- the negative duration part is in mortgaging servicing rights. The balance there coupled with our robust hedging, again, led to an increase in book value during the quarter.

When we look at our stability in book value in 2019, we started the end of the year in December or January at $16.25 from a book value perspective. At the end of Q3, we're roughly in the same place. But a lot of work being put in on how do we protect our assets.

Page 7, again, another new slide. The markets have changed, and so have we. If you look to the left side of the page, in 2013, truly an investment company. Every -- on our mortgage servicing rights, we rely truly on third parties to do all the work. We had excess MSRs in conjunction with Nationstar. We had a residential mortgage-backed securities, mortgage loans and some consumer loans, which was the SpringCastle acquisition. If you go to the right side of the page today, not only do we have the same asset classes but we've added a number of things, notably our mortgage origination capability, our mortgage servicer, ancillary mortgage services, again, consistent with our theme of capturing the whole pie. As we go forward, we'll continue to be opportunistic and try to figure out ways to grow earnings in different areas.

Page 8. Looking at recent market drivers and the impact on our business. Declining LIBOR, I pointed out, helped lower our funding cost. We project for -- on an annual basis right now to save about $75 million, with the Fed's having 1 to 2 cuts, we believe in the rest of fiscal 2019. Mortgage rates are low. That should continue to result in favorable origination climate for us.

When you think about new res in 2018, in the entire year, they originated $7 billion of mortgages. This year, we project we're going to be something between $22 billion and $23 billion of origination. So significant growth there, not only in origination side quite frankly but both on the servicing side and most importantly for shareholders in the earnings side. The consumer's healthy and that helps our overall bond portfolios as well as our call business.

Page 9, our Ditech acquisition. What did we get? On the left side of the page, $62 billion in MSRs. And on other financial assets, we got some servicing advances, some mortgage loans and then an interesting business, which is really a recovery business, which we're spending a lot of time and which we think could be -- add some significant upside as we go forward for our -- from an earnings perspective.

On the operating side, operations in Pennsylvania, that's where Ditech is headquartered. We're building out our correspondent and wholesale business. We have a lot of upside in our retention business. And then on the servicing side, we picked up ops in Arizona, which now gives us the ability to be on West Coast time. And then on the employee side, 1,100 new employees. How we pay for it? On the right side of the page, $200 million in cash and our other financing facilities, including loan warehouses and MSR and servicer advance facilities.

Bottom part of the page. As we go forward, what does our mortgage company look like? $650 billion of owned MSRs, $40 billion of balance sheet, 4 million customers. From an origination standpoint, we believe we're going to be something between $40 billion and $50 billion of origination next year. Servicing. On service we will have $300 billion of UPB by the end of 2020. We'll have a bi-coastal presence of 4,000 employees.

Q3 highlights. Very little capital deployed overall. I think during the quarter, we deployed about $170 million or so of net new equity. Things we did which we're excited about, we grew our origination and servicing businesses by 200% and 100% year-over-year. We acquired a field services provider called Guardian Asset Management. We issued $438 million of preferred equity in 2 separate offerings. We surpassed $3 billion in dividends declared since inception. And again, we lowered our overall cost of funds by about $75 million, we think, on an annual run-rate basis.

Now I'll take you to the operating business on Page 12. Again, the past couple of quarters when we've been on our earnings call, we've been talking about capturing the whole pie. At least this is a great snapshot of what our business looks like. We have origination, performing loans servicing and then special servicing in our Shellpoint business. And if you look at the ancillary services, not only delivered by Shellpoint but also, I pointed out last quarter, we made an investment in Covius where we own 25% of that company. We're excited to see the third-party growth there, not only from us but hopefully, from other industry participants. eStreet, Avenue 365, Guardian are all part of the Shellpoint family. And then we have a relationship with Matic on the insurance side.

Overall, we think that the growth in earnings with extreme focus on these business lines should help offset the lower yields we're seeing in the market from an investment standpoint.

Page 13, on origination. I pointed out in 2018 that NewRez originated $7 billion in mortgage loans. This year, we think we're on target to do $22 billion to $23 billion, significant increase in origination. What does this really mean? One is, higher earnings; two is, our ability to recapture more of our MSR portfolio at a $600-plus billion portfolio should help pay dividends for our shareholders. We have a lot of room to grow, we have a lot of work to do but we're really excited about our origination business.

On the servicing side, our theme over the past couple of quarters has been to control our own life. Clearly, with counterparty risk out there, that's extremely relevant to the performance of our overall portfolios. Having Ditech and their talented employees as part of the family is something that I think will be really good for us.

So on the servicing side, again, we expect 2020 to end at about $300 billion in servicing. We will have a special servicer in Shellpoint, our clean brand of NewRez. And again, we're excited for the growth that we're seeing in that business. And most importantly, the profitability in the service we're providing to the consumers.

Now I'll take you through on Page 16 quickly to highlights from the end of Q3. We settled on $45 billion of MSRs. Those were agreed to in Q2. Each and every one of those MSRs has prepayment protection for approximately 1 to 8 -- 12 to 18 months. Our MSR portfolios totaled $593 billion as of the end of Q3 compared to $576 billion at the end of Q2. During the quarter, we issued 3 capital markets notes. We refinanced effectively our servicer advances $1.2 billion, resulting in a reduction in cost of funds, and a maturity extension and the cost of fund savings approximately was about 70 to 80 basis points per deal.

In the Non-Agency space, we sold $1.2 billion in Non-Agency securities. Why? Levered yields of 5% to 6% not core to our overall investment strategy around our call business. We successfully executed on our call right business. We called 38 deals, $1.3 billion UPB, which is about 22% quarter-over-quarter higher. We completed 2 securitizations of loans for about $976 million. On the residential loan side, we did one non-QM securitization for $380 million and one RPL securitization for $429 million. We also funded $520 million of non-QM origination from NewRez.

Other things, again I pointed out we raised $438 million in 2 separate offerings on a preferred stock. About 7 -- roughly the overall cost of funds a little north of 7%, which was -- the second one was 38 basis points tighter than our inaugural offering. Then across the portfolio, again, we saved roughly $75 million in financing costs on an annual run-rate basis.

Post Q3, closed Ditech, $1.2 billion. And we get a couple of securitizations. One, $1.7 billion RPL securitization; two, $796 million collapse; and another $400 million advance securitization.

Page 17, our MSRs. On our MSR portfolio, the thing I want to point out is a couple of -- is this: when you -- actually, let's just -- let's go to Page 18. Look at the left -- the bottom-left part of our page. When we look at our MSR portfolio, there's a couple of things to note here. One is our average loan size is $159,000 versus the industry which is $182,000. We have a much more seasoned credit-impaired portfolio than the rest. As I pointed out, our newer production MSRs all have prepayment protection ranging from 12 to 18 months. And then when we think about our overall portfolio, only 24% is currently refinanceable based on the rate environment that we're in. 70 -- roughly 75% of our MSRs that we have on our balance sheet have seen this level of mortgage rates as well as lower mortgage rates, which dates back over the past 3 years.

Page 19, our call business. Roughly $42 billion are callable. That number is pretty consistent. As delinquencies and advance balances continue to come off, we hope to call more deals. Roughly 41% of the entire mortgage -- legacy mortgage market we have call rights on. Non-Agency's bond portfolio, again, not a lot to report there. We did sell some bonds, performance is very good. The overall market itself is extremely well bid with high-grade corporates performing extremely well. And all other fixed-income assets other than agency mortgages performing well. The Non-Agency bond portfolio continues to perform well. On the loan side, we've been fairly accurate acquiring some RPLs over the course of the past few quarters. I pointed out subsequent to Q3 that we did a $1.7 billion securitization. Our loan book from an overall risk standpoint is down since the end of Q2 by about, I would say, roughly 50%. And the overall returns have been super.

And really the thesis there is, we're buying some RPLs that haven't been serviced particularly well. We transfer servicing to our special service at Shellpoint. And if you look, the -- on the upper-left part of the page, one pool we bought, we took significant delinquencies from 69% current to 80% current in 6 months. So the Shellpoint's been doing a great job there, improving overall performance as well as providing a great service to our consumers.

Page 22. We have a pretty large securitization business, and it's very diversified. We do servicer advances. We do our call business. We do non-QM. And we do some MSR financing. So overall, 2019 has been very, very active for us. You could have a look at Page 22. And then finally, and then I'll open up for Q&A, our focus. First and foremost, in this kind of rate environment, we think the most important thing we could do right now for shareholders is stabilizing book value. And I think the team has done a great job doing that.

From an investing standpoint, we're going to be more -- we're going to continue to be opportunistic. Again, with yields -- with a 1.75% 10-year note and there's not much yield in the marketplace, we need to be extremely disciplined. And I pointed out before, we invested roughly about $170 million of net equity in Q3. We'll continue to take that same approach as we go forward.

Our operating business, very, very focused on growing recapture, growing origination, growing our servicing business and alleviating ourselves of, what I would call, counterparty risk, so taking as much control of our life in-house as we possibly can. We need to continue to protect the value of our assets. And overall, risk management, as I continue to point out, extremely important to us.

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

[Operator]

[Operator Instructions] Our first question comes from Bose George from KBW.

[Bose George, analyst]

Can you remind us how much equity will be deployed in the Ditech transaction, the ROEs there? And also, just a little color on the Ditech portfolio would be great, just like the loan size, cost to service, any differences from your portfolio?

[Michael Nierenberg, executive]

Sure. So let me address the assets that we bought first. The MSRs, the Fannie, Ginnie and PLS MSRs are smaller balance, a little bit more higher delinquent in nature. I think when we look at our cost of service, we think about it the same way because whether it be NewRez or LoanCare, who are currently servicing those portfolios, give us a cost per loan to service that loan. And overall, that cost per loan is consistent across our entire portfolio. When we think about the return on equity, we're hoping -- I would say this, on the MSR acquisition, Ditech took the hedge risk throughout the time that we agreed to do this transaction until it was funded. And the bond market rallied like crazy so, overall, the multiples we acquired these MSRs that were extremely attractive for our business. When we think about the return on equity of the business, I pointed out, we're picking up 1,100 talented employees. We're getting a West Coast presence in our Arizona operation. We're picking up a recovery business that we're extremely excited about. I can't tell you now because we're -- we close on this thing on October 1. The overall ROEs, I think, we're expecting to be north of 20% on this acquisition.

[Bose George, analyst]

Okay. And then actually just in terms on the MSR itself that you're acquiring. Is there going to be any sort of mark up or down, just based on the closed versus where you guided?

[Michael Nierenberg, executive]

Yes. They will be marked up. As I pointed out, the bond market rallied significantly. The overall multiples, we acquired those are, give or take, something a little bit south of a 2 multiple, give or take between the different product mix. Obviously, each thing is valued separately. So you'll see a markup on that asset.

[Bose George, analyst]

Okay. And then just on the MSR hedging, can you just walk through the strategy a little bit. How much is derivatives? How much is the on balance sheet agencies? And just sort of the philosophy of that?

[Michael Nierenberg, executive]

So the bulk of it is, we have been pretty vocal about the balanced nature of our portfolio. Coming into -- at the end of Q3, I think our loan book was about $7 billion. Our bond book was about $8 billion. And then we have a large agency book now that we haven't had in the past. So we see leverage ratios on our balance sheet, our leverage ratios are in the, I think, the mid-3s right now as a result of the agency pools that we put on our balance sheet versus our MSRs. So we have -- so our strategy is a couple. One is, we have agency mortgages against the MSR. I pointed out earlier that agency mortgages or mortgage rates themselves rallied by only 10 basis points. So you saw widening in the basis, which means that the refi incentives for homeowners is a little bit lower in the quarter versus the rally we saw in treasury rates, so that's why we use mortgages. On the other side of that, we have swaps where we have receivers against that portfolio, which protects us in a rallying market. So it's really just I would say swaps and mortgages, coupled with the long duration that we have in our overall portfolio. And I think we illustrated that on one of our slides, I'm not sure what page that was.

[Bose George, analyst]

Yes. Okay. That's helpful. And actually, one last one. The MSR mark, the negative $228 million, can you disaggregate that? Just what part of it was the -- just the run off of the portfolio versus the move-on rates?

[Michael Nierenberg, executive]

No. The MSR mark was lower than that in the quarter. Nick will...

[Nicola Santoro, executive]

Sure. The -- a majority of that, Bose, related to amortization. So approximately $170 million of the $228 million that you're referencing was amortization and the remainder was mark. Our net mark for the quarter was a negative $45 million.

[Operator]

Our next question comes from Giuliano Bologna from BTIG.

[Giuliano Anderes-Bologna, analyst]

What I wanted to kind of touch on first was on the originations front. You guys are targeting about $40 billion to $50 billion next year. Is there any sense of the kind of margin that you could generate because there's significant kind of recapture and replenishment cost savings on the margin side there?

[Michael Nierenberg, executive]

Yes. I think -- listen, it's -- the easy path to growth is to do more correspondent and wholesale. So one of the things we were working on this morning even prior to the call was, how do we think about increasing our overall gain on sale and making us, what I would -- putting us I think in a tier that's comparable with some of our peers in the marketplace. So we have a lot of work to do there.

I think you're going to see more correspondent as we go forward, a little bit more wholesale. And then we're looking at a lot of different retail channels. So I think the growth, overall, will be significant for us, but we have to be prudent. Because I'd rather do less volume and make more money for shareholders than do more volume and make less money. Big thing is, again, we have a $600 billion MSR portfolio. So keeping that and protecting our balance sheet, I think, is really, really key.

The other side of that is when you think about our origination business and servicing business, now that we're fully into the ancillary business lines, we want to continue to see a growth in the earnings and revenue there. And partnering with Covius and, again, hopefully getting some of our industry peers and friends involved in this third-party business I think could be really significant for overall book value as we look down the road.

The one thing I -- just to point out on book value, when we acquired Shellpoint last year, the company made $30 million -- or $34 million I think at the -- in fiscal 2018. This year, we're on a run rate to make between 100 -- give or take about $150 million in true earnings. So huge growth, not only in what we're doing in the business but more importantly, for shareholders and earnings.

[Giuliano Anderes-Bologna, analyst]

That makes a lot of sense. And the way that I was kind of trying to look at it was from -- also from a replenishment perspective. Because you can also -- your MSR portfolio granted, this is before Ditech, is probably about $6.4 billion on your balance sheet? But if you're able to originate $40 billion to $50 billion next year, you could replenish a little under 10% to kind of 12% on the high-end, which could take away most of the amortization internally, which would be a great stabilizing effect in the portfolio.

[Michael Nierenberg, executive]

It's always the earnings work. I mean I think it was about protecting book value and providing earnings for shareholders. So yes, we're on board.

[Giuliano Anderes-Bologna, analyst]

That sounds good. The only other pieces are around kind of scaling up the internal subservicing. Is there something the type of margin you can generate on the business? Because obviously, you're taking that profitability and bringing it in-house, so there's some accretion potential there, especially as you scale up another $120 billion or so in the next 5 quarters?

[Michael Nierenberg, executive]

You mean on the Shellpoint servicing side? Yes, I think the way to look at this Shellpoint business is, it's truly a third-party business. Shellpoint was really created as a special servicer. And there's 2 things, one, it's very countercyclical if you think about it. So should we get into a scenario where a recession or the consumer rolls over, that business should continue to do extremely well. If we don't, the business continues to operate extremely well and very profitable. And Jack Navarro and his team are -- they work with third parties in the industry, not just us.

[Operator]

Our next question comes from Doug Harter from Crédit Suisse.

[Douglas Harter, analyst]

Michael, just a little bit more color on that -- on your goal for a 20% return on Ditech. Just wondering kind of the pacing to get there? Is that [indiscernible] near-term kind of [indiscernible] ultimately achieve that target?

[Michael Nierenberg, executive]

You broke up a little bit. But maybe I could take it in steps. One is on the MSR portfolio, based on the acquisition price we acquired those, we think the levered returns will be north of 20%, as I pointed out. On the overall origination business, where we have a lot of room to grow, I think that -- I mean just to give you a sense, by November 15, which is in a couple of weeks, all Ditech and NewRez employees be in the same building. So we've done a significant amount of planning prior to us getting awarded this deal, working alongside the company, in anticipation of hopefully winning this deal. So I think to that point, we're -- I would say we're ready to roll and we are rolling now. But like anything, it takes a little bit of time to get going. And we still have a lot of work to do.

But going from $7 billion of origination to $22 billion or $23 billion is a significant step for the company. And doubling that volume next year will be even a more significant step. As I just pointed out in the earlier comments, as long as we're making money, that works. If the volume -- if we're doing more volume and you're not seeing a real return, we'll end up throttling it back, doing less volume but more profitable volume. So we have to really kind of pay attention to that.

[Douglas Harter, analyst]

And then kind of operationally on the servicing side, as you integrate the Ditech, are you planning to sort of continue to use Black Knight on the Ditech portfolio? Or kind of how do you plan to kind of roll that into the Shellpoint platform?

[Michael Nierenberg, executive]

Overall, listen, we don't want to have all our eggs in one basket. I think that's a safe thing to say. But the Shellpoint NewRez guys do a great job for us on the servicing side. Clearly, they've grown pretty significantly, thus -- that's why we use other third parties for some of the servicing. But controlling our own life and being able to offer a homeowner a better solution is something that we prefer to do. And not -- from a counterparty, it's not that we're concerned about counterparty risk with the LoanCare guys. And they do a great job, and we have a great relationship there. But just being able to offer our consumers products, get the ancillary business, have recapture, that's really our ultimate goal. The other thing to point out is, if you buy a pool of mortgage servicing rights, it's not like -- and I know you know this, but we don't flip on a switch and say, okay, 30 days later, it's -- we're transferring over to Shellpoint or NewRez. It takes -- this will occur over the next 6 months.

[Operator]

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

[Timothy Hayes, analyst]

First one, can you just touch on capital allocation? You highlighted the returns across your asset classes, and it sounds like you expect the pace of deployment to be pretty modest, at least in the near term. But what do you view to be the most attractive use of capital today? And where do you actually see the portfolio growing? And how do you think about the buyback in this context with your stock trading at a slight discount to book and a 12.7% yield?

[Michael Nierenberg, executive]

Great question. So I think the investing environment for what we all do in fixed income in a legacy mortgage market, it is not that interesting. A couple things just to point out. If you look at loan volumes, for example, this year, and RPL, year-over-year, since 2018, we saw roughly $85 billion of loans sold into the marketplace. 2019, year-to-date, $42 billion has been sold into the marketplace. So obviously, a huge drop on an annualized basis. And I would expect that to continue as the GSCs and the banks continue to clean up their legacy RPLs and NPLs.

So overall, those markets should remain extremely well bid. So when -- I think on last earnings call, we get asked, why are we investing in these loans? We've been able to generate very good returns. But I think, over time, you're going to see the returns on that business probably go down, just because there's less product and people have plenty of capital to deploy. The Non-Agency bond business, over the course of the past few years, we bought bonds that were consistent with our call strategy. Last quarter, we sold some bonds because levered yields are 5% to 6%. So if we could sell [ better not quarter or our ] call strategy, if we could sell assets that are 5% to 6% kind of levered returns, well, we own them, obviously, significantly cheaper, redeploy that capital into something else, we'll do that. So going forward, the stock remains attractive. Depending upon where we are on a percentage to book, we will continue to be as opportunistic I think as we've ever been.

And the most important thing I want to point out on this is that we need to protect our book value. And if we could protect book value, whether we trade at a 10% dividend yield, a 12% dividend yield, I don't know that there's any magic there. The one thing I would point out is that, when you look at whether it be NRZ or some of our friends and peers out in the marketplace, 1.75% 10-year notes, dividend yields of 8% to 14%, to me, it seems crazy. So there's really no value given to the managers out there. So we'll see where we go. But going forward, we're going to protect book value. We're going to look for opportunistic things to invest in. I can't tell you what those are right now because I -- we look at everything, but there's nothing that's jumping at us right now. So it could be where we would maintain more cash, look at stock buybacks, but I guess there's nothing right now on the table.

[Timothy Hayes, analyst]

Okay. I appreciate the color there. And you clearly -- you made it clear that protecting book value is your top priority, and you've done a very good job at that. But looking at core earnings, $0.50 this quarter, covered the dividend, but the lowest quarterly number you've put up in quite some time, and your outlook for capital deployment in the overall investment environment's a little bit, I'd say, meek. But just wondering how you think about core earnings and dividend coverage going forward as reflecting that environment and -- but given a little bit steepening in the yield curve and all the other investments you've been making?

[Michael Nierenberg, executive]

We're going to have to grow at, quite frankly, in our operating business. I think Doug asked about ROE on the Ditech acquisition. We're going to have to -- that's where really, really where we're going to have grow it.

I mean think about it this way. A year ago, we had the Shellpoint acquisition, roughly $30 million in earnings; this year, $150 million in earnings. If we could get that on a steady run rate higher and think about some other things, I think we'll grow our way into a higher core number. But if we don't want to do anything stupid, I mean we've all seen this thing play out in the marketplace. And I think when you listen to, for example, Jamie Dimon talking about quarterly earnings and how to manage a business to quarterly earnings, we don't want to do anything stupid in this environment because the risk returns are absolutely skewed to the downside. So growing our operating business, we have a lot of people focused there. That company has a little over 4,000 people. On the NRZ side and Fortress side, we have 60 dedicated professionals working on risk management models and everything else with a big investment in the business. But again, it's -- there is no free lunch. There's nothing easy out there that we think is very cheap right now. So we'll be very disciplined about capital.

[Timothy Hayes, analyst]

That make sense. And I guess I'll just pick on this a little bit more. But I guess my question is, it sounds like you have a lot of confidence in the investments you're making in the operating platform and being able to grow earnings over time through those businesses. But are you willing to maybe see core earnings go down a little bit before they go up and kind of keep that dividend steady? I know it's a Board decision, but just wondering how you think about that.

[Michael Nierenberg, executive]

We talk about it a lot. Could core earnings go down before they go back up? Absolutely. Because as you think about higher-yielding investments burning off and to the -- again, going back to Doug's question about how long does it take really to ramp this stuff up, we have to monitor it. I can't -- I'm not going to promise higher or lower dividends at this point. I do think, no matter if our dividend was $0.50, $1, or $0.10, trading at 12% or 13% dividend yields in a 1.75% 10-year rate environment is crazy.

[Timothy Hayes, analyst]

I would agree with that. And then just last one for me. Do you have the core earnings contribution from call rights this quarter?

[Nicola Santoro, executive]

It was $0.02 for the quarter.

[Operator]

Our next question comes from Trevor Cranston from JMP Securities.

[Trevor Cranston, analyst]

As you guys are looking for places to deploy fresh capital, and you think about kind of the growth you're expecting on the origination side over the next several quarters, can you comment on whether or not you guys have explored entering into agreements with the agencies where you might be able to retain the credit risk on your loan originations, and if that's something you might be interested in doing going forward?

[Michael Nierenberg, executive]

Yes. I think as far as -- I mean I think we did volume of $5.9 billion or $5.7 billion in the quarter. As our business grows, which it has, obviously, those conversations will happen. And whether we do credit risk transfer bonds, we're a little bit small right now. That's why we're really excited about the runway and our ability to grow versus our other peers or friends in the marketplace. So that part, we're extremely excited about.

I think everything's on the table, Trevor. I mean I -- but we are clearly in the operating business now. And that's a bigger segment from where we were a few years ago. And we've done that obviously for a couple of reasons, to control counterparty risk but most importantly, right now, is to help figure out alternative ways to grow earnings in this difficult rate market.

[Trevor Cranston, analyst]

Okay. Got you. And then on the sales of the Non-Agency securities this quarter, you mentioned that they were sales of bonds that were sort of noncore to the call rights strategy. Can you say roughly how much of the remaining Non-Agency bond portfolio you would consider kind of not core to the call rights that you might look at selling opportunistically?

[Michael Nierenberg, executive]

Yes. Most of it is. Our bond portfolio is a little bit south of $8 billion, I think. From an overall market size, it's between $7 billion and $8 billion. Most of our stuff is core. We did, over the course of the past 1.5 year or so, acquire some fixed rate AAA pass-throughs that we thought had a good spread to where mortgages were at the time. So those are different than our call strategy but levered mid-teens type returns. But most of the stuff we have now I think is core to our call strategy.

[Trevor Cranston, analyst]

Got you. And then just last question. On the agency MBS you guys have on balance sheet now, can you just give any additional color around the bonds you guys are holding in terms of if they're, like, low loan balance or if they're generic? Or just any additional color on those holdings would be helpful.

[Michael Nierenberg, executive]

They're fairly generic. They're -- for the most part, there's -- they're Fannie 3s, 3.5 and 4s. And again, we use those, we think as a hedge versus our -- a lot of our -- some of our newer production MSRs that we've been paying up points for low loan balance.

[Operator]

Our next question comes from Matthew Howlett from Nomura.

[Matthew Howlett, analyst]

Mike, I'm just looking at the Slide 9 on $200 million UPB targeted. I mean that's an ambitious target. What are you seeing on the servicing acquisition front? Does that contemplate some big acquisitions, sort of like the Ditech size? Or is it just -- you're just going to win more the flow-type product, given maybe there is a lower bid out there now for the MSRs?

[Michael Nierenberg, executive]

No. It's really -- it's the Ditech acquisition and it's really our own production as we go forward. It's not -- we have not -- we agree to a couple of these larger MSR acquisitions with prepaid protection in Q2 that funded in Q3. But overall, I think this is more geared to our own production pipelines.

[Matthew Howlett, analyst]

Yes, it's just more internally.

[Michael Nierenberg, executive]

Yes. Exactly. Could that, I mean, could it be lower? Absolutely. With Ditech, I think, and the transfer, right now, we're at about $250 billion. It's not all going to be boarded this year. But -- and then we couple with next year's production, we think we'll get -- I think the point to make to everybody is, we don't need to be the biggest. That's not the goal here. It's to be the most -- to be as profitable as we possibly can. So that number is $200 billion or $300 billion or whatever the number is, and as long as we're providing the proper service to the homeowner, that's really the goal.

[Matthew Howlett, analyst]

Got it. And then that's my next question, on the recapture. Where do you, I mean, what's the target? Where do you like to get up to? How will Ditech help you with the recapture going forward? And how should we look at that and think about that?

[Michael Nierenberg, executive]

So I would say, right now, recapture rates are lower than we'd like. We're spending a lot of time, whether it be on data analytics, models and most importantly -- or not most importantly, but importantly, the amount of personnel we have focused on that part of the business. So when you ask about Ditech, we pick up a significant amount of, what I would call, very good quality folks that have been in the mortgage business for many years. So that part's going to help us on recapture. Overall, recapture rates, if you go back a few years back, we were in the -- probably the mid-30s, and depending upon the product side. Now your refi stuff is kind of okay, but your -- the overall numbers are in the lower 20s. So we got a lot of room to go. And part of this whole thing on our operating business, it's great to tell you that we've made a lot of money this year in our operating business, fabulous. It's great for shareholders. But what's really important, I think, for us is to go forward around increasing recapture, growing origination and driving more profitability through our business.

[Matthew Howlett, analyst]

Got it. And on that, do you expect sort of CPRs on the -- I know you break it out in the Q but will they be higher in 4Q and so, like, some of the banks are saying. And then, would you expect them to come down and subside in 2020? Just how do you think about just the overall refi outlook?

[Michael Nierenberg, executive]

Yes. We think speeds at a little higher now as we go forward for the next few months. And then we expect at some point to see them level off. And that's kind of consistent with how we look at our overall book, although it's a little bit different than the broader market.

[Matthew Howlett, analyst]

Got it. And then last question, Mike. I mean you mentioned with the dividend yield at 12%, you sort of pointed out. And then I noticed you did the 2 preferred at just under 7%, the last one came in lower. So when you look at capital, is that more of a realistic or just a clearly cheaper source to target more just preferred equity now, given where your common dividend yield is?

[Michael Nierenberg, executive]

Yes. I mean, look, we don't have a need for capital, but it's a very valid point. I mean if you get issued -- I mean the problem with the retail preferred market is, it's a little bit -- it's much smaller than common. I mean if there was something significantly large that we needed to do, we'd explore -- obviously, we explore our all options. The Ditech thing was $1.2 billion. We didn't raise equity and we're still [indiscernible] bunch of cash and liquidity on our balance sheet.

So our planning around liquidity, and I think Trevor or Tim asked a question about our bond portfolios, we have a lot of liquidity on our -- we have a $40 billion portfolio. If you can't generate liquidity from that, you have to take a step back and think twice. So we have [indiscernible] lines today. If we need to raise a bunch of money, we could do that off our balance sheet.

[Operator]

Our next question comes from Henry Coffey from Wedbush.

[Henry Coffey, analyst]

Great quarter. And you guys spent an enormous amount of time with me this quarter, helping me really get to understand the business. So I wanted to thank everyone on your IR team for that. Just number one, I'll start with the tough question. As you look at book value and dividend, your earning a dividend on a GAAP basis. You've got good access to capital. You've got a well-hedged portfolio. How do you balance dividend versus book value? I mean is there a point where you have to reduce the dividend to grow the book value? Or do you sort of look at those 2 and say, look, I need to defend both?

[Michael Nierenberg, executive]

I would say, we're all warriors. We will try to defend both as much as we possibly can. But as I pointed out in some of our earlier remarks, we don't want to do anything stupid. So I can't tell you whether the dividend's going up, it's not going up. But I can tell you whether it's going down. We got to see how the quarter plays out and what we're doing in the operating business, and the market moves so much, right? When you think about rate. 10-year treasury bounces between 2% and 1.40%, right? And this could happen in the matter of a couple of days. So we really just don't know until we get closer to the end of the quarter, where we're going to end up falling out on this. But during that quarter, we have to make sure that we protect our book value.

[Henry Coffey, analyst]

And then, just a kind of technical question. 140 -- $154.8 million in investment gains. How does that break out in terms of sale of Non-Agency call rights gains, sale of agency trading in general terms?

[Nicola Santoro, executive]

Approximately $100 million of that came from sales both Non-Agency and agency securities. And the remaining was primarily sale of the RPLs.

[Henry Coffey, analyst]

And then -- okay. And then in terms of looking at your operating business, is the focus going to be on building out a mortgage originator? Is it an opportunity to acquire non-QM and related assets that you can then hold on balance sheet or -- and fund with securitizations? Is there a focus on having to integrate and cut cost? What's the overall strategy in terms of how this thing creates -- the operating business as a lump creates value for NRZ?

[Michael Nierenberg, executive]

I think it's going to -- I mean forget about the financial aspects of it. Having a better recapture business, if you go from 20% to 30% or 20% to 35%, that's going to help our overall results in our MSR portfolio. I think the growth in our operating business and creating something that -- just to give everybody the math. I mean we paid roughly $200 million for Shellpoint. There'll be some earn-out for management. So let's say, you get to a book value of about $250 million. When you look at a company that's generating roughly $150 million of EBITDA that valued at $250 million, it's probably worth 3x that. And if you think about that, on our balance sheet from a book value standpoint, 415 million shares outstanding, you're understated by a fair amount, so all of a sudden your book value is really at least $1 higher.

So there's a lot of, what I would call, opportunity around some of the things that we're doing there. We're not looking to be the biggest and baddest mortgage origination business. If we could do something that's key to our business that works for shareholders, we're going to continue to do it. But it's -- all the stuff is -- we're not all over the place, that's something I want to point out as well. We're not running around just to deploy capital, to deploy capital. Strategically, the Shellpoint acquisition has been a good one. Reducing counterparty risk and making a lot of money for shareholders sounds like a good thing.

[Operator]

Our next question comes from the line of Kevin Barker from Piper Jaffray.

[Kevin Barker, analyst]

On Bose's question regarding the Ditech MSR, and you mentioned that you got them for less than 2x servicing fee. Now I understand Ditech, it's smaller balance stuff, so it has lower revenue. When you think about the profitability on that MSR, where do you think the MSR should be valued, just given the lower revenue you would expect, just given the lower balances on the UPB?

[Michael Nierenberg, executive]

They'll probably up in value about 30 to -- $30 million, $40 million approximately, just from a value perspective.

[Kevin Barker, analyst]

On the overall portfolio, what, probably what?

[Michael Nierenberg, executive]

On the -- by the time we said, oh, I guess it's a little under $60 billion. I mean keep in mind, like, when you look at the breakout there's $5 billion of PLS, which is mostly MH servicing. There is $21 billion of Ginnie Mae's and there's $34 billion of conventional. So it's mixed. Obviously, the Fannie multiples are higher than the Ginnie and the Ginnie is higher than the PLS.

[Kevin Barker, analyst]

Okay. And then regards to the MSR this quarter. It held up really well compared to what we've seen across the market. Was there anything specific adjustments that you saw or better performance within your MSR compared to what we saw from most of the industry this quarter?

[Michael Nierenberg, executive]

Yes. I mean here's what I'd tell you. I mean if I -- we looked back, and we did a bunch of regression analysis going back to lower rates, how many of these folks have seen 1.40% 10-year rate, and 75% of our portfolio is in that bucket. On the new production, MSRs acquired from third parties and I pointed out, we funded $45 billion in the quarter, all of those have prepayment protection. Our CPRs are 3.2% slower than the industry. Our net prepayments were 77% of the industry or 4.5% slower net-net.

So overall, when this company was started, the credit-impaired nature of the MSRs that were acquired was consistent with the thesis that we've got in all kind of rate scenarios that the asset will perform extremely well, and we're seeing that now. But it's not like we haven't marked down our book. $425 million since the end of last year is a fair amount of money.

[Kevin Barker, analyst]

Yes. Were there any specific drivers this quarter that held up? Was it the discount rate with rates lower? Or...

[Michael Nierenberg, executive]

Discount rate is a little bit lower. I mean, quite frankly, do I think they should be lower? The answer is, yes. But it's all these other things, right? Again, 75% of our portfolio has seen this level of rates, and they're older than 3 years. We have lower gross prepayments, lower net prepayments. We did increase some of our speeds on some of our stuff as we look forward for the next -- for the near term. And then we'll see what happens there. From a refinancing perspective, again, only 24% of it is eligible for refinance today. And then the new production stuff again, it's -- it all has prepaid protection.

[Kevin Barker, analyst]

Okay. And then with the MSR portfolio growing to -- or the servicing portfolio growing greater than $600 billion here on a pro forma basis and a lot of it going more towards agency or Ginnies, how much of that do you think is refinanceable, just given where it sits on different servicing platforms? And given the Ditech origination platform and the NewRez platform, how much do you think you can actually target to be refinanceable?

[Michael Nierenberg, executive]

Again, it's, right now, based on current industry standards, right? Underwriting from Fannie and Freddie and some of the stuff we're doing in our Q, we estimated it to be about 24% or 25%. Where we go and what kind of GSE reform we see going forward could open the door little bit more, if you see more PLS. But I would think -- another point, Kevin, is that when you look at our portfolio, we have a large amount of PLS. And the PLS stuff is originated back from anywhere from '03 to kind of '08. And a lot of these loans are just stuck in these pipelines. And a lot of these borrowers are delinquent at times. And -- but there's $125 billion out of our total servicing portfolio that's PLS. That's a significant amount. Now if we could clean up the legacy PLS market, which we've been trying to do and will continue to try to do, the $125 billion could see some faster prepays, but that would help our call business as well. So there's an offset there.

[Kevin Barker, analyst]

So you're saying there's some alternative products that you can offer to those types of borrowers?

[Michael Nierenberg, executive]

Yes. We just don't know. I mean we're not stretching the boundary on any of our origination stuff. We've seen that play out over the years, obviously. So even on our non-QM product, we do a significant amount more. The answer is, yes. But we're extremely cautious around this stuff. We want to offer products to people that they're able to afford and pay. But we did -- with the right credit boundaries. So depending upon what happens to GSE reform, that may change things. But right now, we're steady as she goes.

[Kevin Barker, analyst]

Okay. And then with your origination business, you're starting to grow gain on sale quite a bit. Does that start to impact your taxes or some of the REIT eligibility? And at what point would you start to have to maybe restructure some of the revenue or where it's coming from in order to keep the REIT eligibility?

[Michael Nierenberg, executive]

Right now, we got plenty of runway to continue to stay a REIT. Obviously, if our origination business continued to grow or servicing business from an op standpoint continue to outpace our investment portfolio with a 20% corporate tax rate, maybe you rethink that. And we're always looking at different things. But I think for now, it's -- we're going to continue down the path and maintain our REIT status.

[Operator]

Our next question comes from Stephen Laws from Raymond James.

[Stephen Laws, analyst]

You hit on this a little bit in your response to Henry's question, Mike. But really, I want to touch on the ancillary services opportunity, how integrated is that? A lot of it's new. How should we track whatever the right metric is, whether it's penetration or number of services. And just as importantly, a lot of that's done through partnerships, which doesn't go to your income statement. So how do we think about the value you're creating in some of these minority investments that maybe aren't reflected in book value as those businesses grow?

[Michael Nierenberg, executive]

Great question. So our -- the likelihood is we're going to continue to try to grow with our friends at Covius. Those guys, and it's going to -- they're going to run the company. It'll be a third-party business. We won't see any earnings from that. But the goal there would be to create a real services company that trades at 15x EBITDA or you pick some kind of large multiple. Because if we keep that internal in our own mortgage company, we'll never realize for shareholders the true value of what that revenue stream could be. So for example, right now, we own 25% of Covius with the ability to grow that to 70% -- a little under 70%. If there's a way to create a vehicle with other industry folks where people could own it as well, quite frankly, I think that's really the opportunity create more best value for shareholders.

So if that -- for example, if you own 25% and earnings go to $100 million a year, and it trades at 15x then that's $1.5 billion, wow, wait. Our shareholders are going to be the winner there. So that's roughly another $1 a share, give or take. If you look at our Shellpoint acquisition, as I pointed out earlier, I think there's another $1 of -- at least $1 of implied book value gain there. So the couple of things there plus what our stated book value, not counting any -- giving any credit for our call rights, I think our book value is significantly understated. So it's really -- you'll see the results in distributions or book value creation. Distributions [ outgrows ] book value creation now.

[Stephen Laws, analyst]

And then kind of looking at the $40 billion origination target or stated projection for next year. The mortgage rates haven't dropped as quickly as interest rates. We've seen some widening there. What mortgage rate assumption have you used for next year to get to that $40 billion, and kind of is there a rate we should watch on the high end or low end that would make that $40 billion significantly more or significantly less? Are there any inflection points maybe on the high end where that volume, all the refi cuts off, or if mortgage rates keep dropping, we see a level where all of a sudden, a significant amount of origination opportunity turns on from the refi? Kind of love to get you to frame kind of your thoughts on mortgage rates as we look out for, say, the next 12 months.

[Michael Nierenberg, executive]

Stephen, I don't know what the magical rate is. I think it's really our ability and desire to capture some share of the market that we currently don't have. So if you stayed in this rate environment, which is very possible we could stay in this 1.75% 10-year note through the rest of the year, I just don't know, right, as the market is so volatile based on the geopolitical stuff that's going on. I think that it's really just capturing more market share. So rates can move up a little bit, maybe go down a little bit. I think we have just a large amount of growth initiative and runway to go. Keep in mind, again, last year's $7 billion of origination, this year, $22 billion or $23 billion. Yes, rates have dropped a ton, right? Last November, 10-year rate was about 3.30%, now it's, give or take, 1.75%. But I think you can stay in this benign rate environment, we could actually capture more market share from others. That's really what we're focused on.

[Stephen Laws, analyst]

Right. And one last question, kind of bigger picture. You touched on -- you mentioned GSE reforming in your response to Kevin. But are there any couple of issues that you think could -- significant positives coming out of GSE reform, whether it's redefining QM or the QM patch expiration and then at the same time, are there 1 or 2 GSE reform discussions taking place or anything that you think might pose a headwind to the business? I know that's a bigger -- hard to predict out of Washington, but any comments around the topics you're watching closely in GSE reform?

[Michael Nierenberg, executive]

All right. Listen, everybody keeps talking about the patch. For years, everybody was talking about non-QM. And now it's a little bit non-QM but if we're doing $300 million or $400 million a quarter, that's great. But there needs to other alternatives for homeowners to the extent that they can't get an agency mortgage. So when and if the patch comes off, that'll create an opportunity for private capital. Should the GSE's go on their own, I think that'll create opportunities for private capital. So I think there's a lot of good stuff that'll come. I don't know when it's going to come. Obviously, you're getting into an election year next year, and I don't think anything happens between now and then, other than maybe the patch. But there's a lot of good stuff that could come out of this which is going to have a need -- require a need for large amounts of private capital. And I think we're perfectly situated to take advantage of that.

[Operator]

Our next question comes from Doug Harter from Crédit Suisse.

[Douglas Harter, analyst]

Just following up on the earlier question about REIT status. I guess -- how do you and the Board think about what the right payout ratio is now that more of the profitability is coming from operating businesses versus kind of the investment portfolio?

[Michael Nierenberg, executive]

I think we'll continue to pay out what we're currently doing on a percentage basis. I don't think there's been any shift. And I don't think we will have any shift at this point. So obviously, we always want to maximize our capital structure for our shareholders and earnings and dividends. But for now, Doug, there'll be no shift.

[Operator]

We have no further questions in queue at this time. I'll turn the call back to Michael for closing remarks.

[Michael Nierenberg, executive]

Well, that was a long one. Thanks for everybody's questions. And I look forward to updating everybody with our Q4 results. Have a great weekend. Have a great holiday season and thanks for all your support. Take care.

[Nicola Santoro, executive]

Bye-bye.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.