Rithm Capital Corp

NYSE:RITM

Earnings Call Transcript 2019-Q1

[Operator]

Good morning. My name is Lashana, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Residential First Quarter 2019 Earnings Conference Call. [Operator Instructions] Thank you.

I would now like to turn the conference over to Ms. Kaitlyn Mauritz of Investor Relations. You may begin.

[Kaitlyn Mauritz, executive]

Thank you, Lashana, and good morning, everyone. I'd like to welcome you today to New Residential's First Quarter 2019 Earnings Call. Joining me here today are Michael Nierenberg, our Chairman, Chief Executive Officer and President; Nick Santoro, our Chief Financial Officer. Throughout the call this morning, we are going to reference the earnings supplement that was posted to the New Residential website this morning. If you have not already done so, I would encourage you to download this 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 now I'd like to turn the call over to Michael.

[Michael Nierenberg, executive]

Yes, thanks, Kate. Good morning, everyone, and thanks for joining our call. Before I begin, I want to welcome Kate. Kate recently joined us and will be heading up our IR efforts for the company. We're thrilled to have her. So when you see some of the changes to the supplements that are posted online, we can thank Kate for those.

For the quarter, what I'd like to start is really by talking about the earnings power of our company. We've always tried to show how our portfolios perform in different interest rate scenarios, and this quarter truly showed how the diversified nature of our business continued to work well in all rate scenarios. During the quarter, we saw 10-year Treasury yields fall by 25 to 30 basis points, fixed income assets rally, spreads tightened. What does all this mean? Our bond portfolios, loan portfolios, consumer portfolios and our origination business lines performed extremely well offsetting the slight decline we saw in our MSR business.

On the MSR business, we have added hedges against our MSR asset where appropriate. Keep in mind, not only do we have hedges, all of our MSRs have recapture agreements with our servicing partners. We've also seen an increase in production at our originator, which will lead -- which should lead to more earnings in the future and a greater sourcing of assets for our balance sheet.

On the subservicing side, we've taken steps to minimize our counterparty risk. We now have subservicing agreements with LoanCare, which is a new counterparty to us, which is owned by Fidelity. We have renegotiated some of our subservicing agreements, lowering fees and increasing our ancillary revenue.

During the quarter, we raised capital based on our pipeline of investments. Unfortunately, the open investments take time. To minimize the drag on earnings, which we estimate at something close to $0.03 per share, we paid down debt. Our liquidity position today is terrific, and I see no reason that we will need capital anytime soon based on our current pipelines of deals and investments. On the investing side, risk rewards are tilted to the downside. While saying that, with the Fed on hold, we believe fixed income assets will continue to perform well. I pointed out in the past our desire to capture the whole pie regarding the mortgage asset. This morning, we announced an agreement to partner with Covius and Aquiline on an ancillary services business.

To summarize, NRZ had a terrific quarter, and the balance of our investments should continue to provide a sustainable earnings stream and dividend for our shareholders as we look into the future.

I'll now refer to our supplement, which has been posted online. I'm going to begin with Page 2, and I'll just take you through a couple of bullets on each page. On Page 2, our market cap today is currently approximately $7 billion. We have $33 billion in total assets. Our dividend yield is a little bit south of 12%. Since inception in 2013, we've grown our book value by 65% while paying out $2.7 billion of dividends. And our total shareholder return since inception is 147%. We're very proud of the results of this company.

Page 2, earnings. GAAP net income, $145.6 million or $0.37 per diluted share. Core earnings of $204.3 million or $0.53 per diluted share. Again, we have plenty of liquidity and capital on our balance sheet. If it was all deployed at the time of the capital raise, it would add approximately $0.03 to our core earnings.

First quarter common dividend, $0.50 per common share. And again, our dividend yield is a little bit south of 12%. During the quarter, our book value grew from $16.25 to $16.42. Our total economic return of 2.9% is comprised of $0.17 in -- increase in book value and our $0.50 dividend that we paid out per share. And as I pointed out earlier, we raised $752 million of common equity during the quarter, and I did participate in the capital raise.

Page 4. We talk about our portfolio and why our company is different than the rest. Across the top part of the page, we try to lay out our net equity investment. On the MSR and servicer advance business, we have $3.5 billion of net equity; on our securities and call rights, $2.1 billion of net equity; on our loan business, $780 million in net equity; and on the consumer business, $118 million in net equity. And again, I'd like to refer to these numbers and give you a couple of thoughts. One is on the MSR business, clearly, when rates fall, MSR values are -- typically will fall as well. The offset to that, as I pointed out in my opening remarks, our securities, our loans, our consumer loans -- and I'll get into the some of the numbers after, far outpaced the define that we saw in the value of our MSR asset.

As we think about the market today, clearly, what we saw in the month of March when the Fed basically signaled that they are going to be on hold throughout the course of the year, at least for now based on their statements and the data that they are seeing, the way that we think about it, the consumer is very healthy. The housing market is stable. What does that mean to us? A healthy consumer leads to lower delinquencies and defaults. And as I go through each segment of our business, you'll see how our bond portfolios and our call business continued to see lower delinquencies and lower defaults.

On the housing side, there will be more opportunity for origination in our origination company at NewRez. Therefore, there will be more assets that will be created for our balance sheet. And with the Fed on hold, we anticipate this to lead to lower volatility and tighter credit spreads.

Page 6. This is a page we put in, in each deck, at each earnings call -- and again, this really illustrates the power of our company. The diversity of our different asset classes, our MSR business, our Non-Agency security business with call rights, loans and then our consumer loan business. And again, there's always going to be offsets. Assuming that rates move, you'll have certain business lines that will do better than others depending upon whether rates rise or fall.

Page 7. When we talk about headwinds, we think about the MSR business. Mortgage rates have fallen. Today, the mortgage rate is, give or take, about 4.20%. I believe that's down from 4.55% at the end of the year. And if we think about a 4.20% mortgage rate, approximately 10% to 13% of our portfolio is refinanceable. Now that compares to approximately 30% for the broader market. Why is that? We have a lot of legacy MSRs that are a little bit more credit-impaired in nature. So overall, when you think about the MSR portfolio, the refinanceable universe is actually quite small.

Mortgage rates would have to decline another 60 basis points for the refinance population to increase above 30%. When we look at our loan and bond portfolios, seasonal loans are less likely to refinance given the lack of incentive to the borrower. These loans have been outstanding for quite a period of time, and many of these borrowers have seen lower mortgage rates than they currently are seeing now. The flip side to that is we have an origination business that we could offer mortgage loans to the extent that they do refinance, we'll be in a good position to recapture that loan.

On the ancillary business side. Increase in refinancing equals more mortgage origination. New Residential benefits from our mortgage origination through our ownership of NewRez, which was formerly New Penn Financial. Again, the recapture capacity of our business, when it can [ deploy ] mortgage [ care, ] our MSR cash flow increases our gains on sale. And really, the way to think about it's an insurance policy for our overall business.

Page 8, the highlight reel. Since inception, NRZ is up -- our total return is 147% since May of 2013. Our book value continues to grow, and that's something that we take a lot of pride in, in our economic. Total economic return continues to do extremely well. One thing I want to point out on book value with the Fed on hold -- and this was a change in -- obviously, a change in language that we -- what we had seen in the past. One of the things we're very, very mindful of, how to protect our overall book value and to continue to try to grow that as we go forward.

Page 9 talks about the diversified portfolio and our opportunistic investments. You can see, since 2013 book value of $10 a share, today it's $16.42. We did have a hiccup in the fourth quarter of '18 when the markets melted down, and we recaptured some of that in the first quarter of '19. Market cap approximately $7 billion, if you look on the bottom and see some of the highlights of some of our acquisitions.

Page 10. Focus on maximizing the full value of the mortgage asset. I'm not going to read through each one of these points. Couple of things to note, we have a $550 billion mortgage servicing right portfolio. That equates to about 3 million different mortgage customers. As we go forward and think about our business, one of the things we're truly focused on is the mortgage customer. How can we be more helpful to the mortgage customer? How can we offer more products? And then the counter to that, when we think about our overall business, if you originate more mortgage loans, there's more ancillary revenue to go around. So when I spoke on the last earnings call, I said we want to be able to capture the whole pie. And this morning, we announced our equity investment in Covius along with the private equity firm Aquiline.

Page 11 talks a little bit about Shellpoint. I think a couple of things to highlight on this page. Bottom right, overall volume and production for them for the first quarter was up 4%. Last year, they did between $7 billion and $8 billion of production. This year, we expect them to do something close to $15 billion in a steady state, based on where we are right now. So you'll see a nice increase in production. A good chunk of that, we have a huge focus on recapture. Recapture origination volume of $400 million, a little less than $400 million in the first quarter, is up 40% quarter-over-quarter. Big numbers. We expect that to grow going forward. Again, that is to say another insurance policy, if you'll have it, for our MSR business.

Non-QM volume was down a little bit. Again, that was due to the meltdown in December. And then when you think about the Non-QM space, we originated $600 million of loans that we -- for securitization. And I'll talk to our securitization in a minute. On the Shellpoint side, total servicing asset is $142 billion, that is up 30% quarter-over-quarter. And when you think about that, Shellpoint, they service loans for us and other third parties, and we expect that business to continue to grow.

Page 12. Just a quick slide. I'm not going to spend a ton of time on the Covius thing, and I'll wait until we get Q&A on that. The bigger picture here is a small investment into a -- one of the leading provider of tech and kind of ancillary services for the mortgage business. The gentlemen that run that, Rob Clements and John Surface. These folks ran EverBank. I know them for many, many, many years. Wonderful people, do a great job, and we're thrilled to partner with them as well as with Aquiline.

Now I'm going to begin on Page 14 just to give you first quarter highlights and then going forward. And then I'll talk about our portfolios. During the quarter, we acquired $22 billion of MSRs for total dollar amount of $276 million. That is a gross amount pre-financing. Our MSR book, as I mentioned before, totaled $547 billion as of the end of March and that was compared to $539 billion at the end of December. Servicer advances, I'm not going to spend a lot of time because as the consumer and mortgage [ heals ], you're going to continue to see less and less equity in the servicer advance business. Today, servicer advances are at $3.3 billion. When we first made -- began making investments in this asset class, I think there was something close -- a little north of $8 billion.

On the Non-Agency front, we acquired $411 million of fees in legacy Non-Agency mortgage securities, that's for our call strategy during the quarter. We also called 19 deals worth -- with a dollar amount of $910 million in UPB. We completed 2 Non-Agency securitizations: one on fees and performing loans and one in RPLs. On the residential loan side, we acquired $1.4 billion of loans, $690 million of those were purchased in the secondary market, and those were reperforming loans. The rest were through our call business.

One of the things we're focused on is having more current cash flow out of our existing loan portfolios. The performance of our portfolios continue to improve as current loans have increased by 10%. During the quarter, we completed 2 non-QM securitizations for $600 million.

Consumer loans. Two quick things, their performance there has been terrific. I just want to spend a quick second on the Prosper front. Our warrants will be earned by the end of May. At that point, we'll own about 6% of Prosper. Where that goes and where they go with that company will be interesting as we go forward. We're very focused there to see if there's any synergies or if there's any cross-selling that we could do with our existing customers in the NewRez-Shellpoint business.

Away from that, we raised $752 million of proceeds. Again, that's based on our pipeline of investments, currently sitting on plenty of liquidity. No need to raise capital anytime soon based on the investments that we're working on.

The point I would make on the deal front, deals are -- getting deals done quickly is very difficult. We do look at a lot of deals, and we're hopeful that at some point in the near future, we'll be able to deploy a bunch of the capital sitting in our balance sheet.

On the subservicing side, I mentioned we reduced our counterparty risk. We opened up a subservicing relationship with LoanCare, which is owned by Fidelity. And then again, liquidity side, we closed the quarter with $341 million of cash plus excess liquidity in some of our financing vehicles. What we did again, going back to my opening remarks, we did pay down debt, so our leverage ratios are pretty low as we end the first quarter, and that was just to reduce the cash drag, and again, that's about $0.03 per share. Post Q1, last week, we bought about $25 billion of MSRs for MSR business.

Let me just take you quickly through the portfolios, and then we'll open up for Q&A. On the MSR side, again, when mortgage rates rally, typically MSRs go down in value for our business. Away from the change in subservicing fees, our MSR book was down something around, give or take $100 million. With the change in subservicing fees, we're actually up $27 million on the quarter. We sped up some of our prepayment assumptions. And again, recapture is going to be huge for us as we continue to work with our different servicing partners on our overall portfolio as well as the hedging I pointed out earlier.

Call rights business. During the quarter, as I pointed out, we called 19 deals, $900 million. We did 2 different securitizations. Big point here, 60-day delinquencies declined again. They are down to 12.6%, 10% decline quarter-over-quarter and 20% decline year-over-year. Why do I bring that up? One is, it means we'll get more performance out of our existing bonds. Two is, it's going to help with our call strategy.

On the right side of the page, you can see our call strategy. Currently, $45 billion are callable, a little bit less than $120 billion. And again, we'll do all we can to continue to increase velocity there.

On the Non-Agency bond portfolio, $411 million face was acquired in a quarter, again, that's for our call business. We also invested in some cheap AAA bonds earlier in the quarter. Overall, we have a 20-point discount in our bond portfolio, that helps drive our collapse strategy. And we believe that 50% of our legacy Non-Agency portfolio will be -- which is currently callable, and that number will continue to increase over the next couple of years.

Looking at the bottom right, 16% improvement in delinquency ratio year-over-year, and default rates have dropped by about 6%.

On the loan side, not a ton to talk about. The loan book has grown over the course of the past couple of years. We had invested capital in a couple of different RPL deals. When we bought loans, we work with different subservices on that, the Shellpoint guys and others. And the returns on that business have been very, very good. Market is very, very competitive on loans. The last week, [ Rural's ] sold about $3 billion. We did not participate in that option, just from a price perspective.

On the consumer loan page on Page 19, $118 million total capital there. We'll own 6% of Prosper by the end of the year. SpringCastle is our legacy deal. We will be in the market refinancing that deal in the next week. We'll be able to have another $1 billion deal that will hopefully lower our cost of funds on that deal. And then overall equity, just to give you a sense, Prosper is at roughly -- a little [ out ] $40 million and SpringCastle is $80 million of the -- I know it doesn't add up to $118 million, just take 1 off each, but returns on both of those have been very good.

Servicer advances. I'm not going to spend any time. If you take a look at Page 20, you could see the decline in servicer advance balances. That was a great investment for us, but it's going to be less emphasis, as there is less of a need unless you're going through a recession for the servicers to advance on delinquent loans.

Page 21 just talks a little bit about our securitization platforms. We did 4 different deals in the first quarter. We're in the market now. One of the things we're very focused on and I have been pretty vocal is doing term financing on as much of our business as we possibly can. We're currently in a market with $1 billion financing on our Freddie Mac MSRs. We continue to -- as we acquire more and more MSRs, we'll continue to turn those out in the marketplace. After we're done with this deal and the deal we'll likely do in May, I think the total amount of our population that is not financed in the term market on the MSR business will be less than 5%.

Page 22. What differentiates us and how do we think about things going forward? Again, our hard to replicate portfolio. I'm really proud of our results in this quarter because it was a hard quarter. I mean when the Fed came out and the bond market rallied like crazy and what we saw since the end of last year and we're still able to put up what I think are very good earnings for our company. I'm very proud of our portfolios and the hard work of our teams. So we focus on capturing the whole pie. We announced an investment in Covius.

When we think about opportunistic investments, not that easy right now. The markets are flushed with cash. We're in the middle of certain things that we're working on which we hope to execute in the near future. Can't really go into details there. Our track record continues to speak for itself. When I bring up shareholder focus: one, protect book; two, continue to maintain our earnings and dividends; and then as I pointed out, we'll raise capital -- I participated in the capital raise to make sure that I'm in it with you.

With that, I'm going to turn it over to the operator, and we'll open up for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Bose George with KBW.

[Bose George, analyst]

So just first with the Covius acquisition, can you just talk a little bit about how much ancillary revenue you could potentially bring back [ certain in-house ] through this? And is there also kind of a third-party opportunity here as well?

[Michael Nierenberg, executive]

Yes. Good question, Bose. Thanks. The -- first of all, when we think about our earnings and we look at our earnings projections going forward, there's no credit for the Covius investment in our earnings going forward. Two, we look at Covius as a third-party provider to the industry. This is an equity investment in them where we hope that their earnings will continue to grow. Again, we're big believers in the leadership of that business with Rob and John. And just to give you a couple of quick things. We invested $20 million of equity, and we have a little bit of debt in the company. The $20 million of equity and the debt gives us about a 20% ownership in the company. Keep in mind, Aquiline owns a bigger share than we do. Over time, we have the opportunity to grow our presence in the company, grow our ownership. But the way that we look at this is it's an investment in Covius and it's an investment in the management team as a third-party business. And we hope that they can grow it, and we could -- the value of our equity ownership will go up over time.

[Bose George, analyst]

But just in terms of the revenue and sort of sizing or timing of stuff coming over, is that some -- a bit more gradual in terms of the benefit to your earnings from the increased ancillary revenue?

[Michael Nierenberg, executive]

Yes. I think there's a couple of points there. One is the earnings will stay in that company. Two is, if you think about Shellpoint and NewRez, we already have an appraisal business. We already have a title business. We already have an ancillary services business. This kind of adds to the overall suite of products that we can capture within our origination business. But those numbers, to the extent that the revenue grows in the company, obviously, our equity valuation will go up. So we're excited. We think it's going to get going sooner rather than later. But I do want to make sure that you understand we have some of these products in our existing business. And when -- on some of our renegotiation on our subservicing contracts and getting more ancillary revenue from our subservicing partners, we're already seeing the fruits of some of that come back today.

[Bose George, analyst]

Okay. That's helpful. And then just wanted to ask about -- just updated thoughts on hedging the MSR potentially. I mean this quarter, obviously you guys did well. I mean spreads tightened on credit, which helped. But just generally, how are you thinking about protecting against falling rates?

[Michael Nierenberg, executive]

So with the Fed on hold, I mean, if you go back over the course of the past couple of years, everybody thought the Fed would keep raising rates, and we see a much higher rate environment. Obviously, in the MSR business, that's great for MSRs. During the quarter, even coming out of year-end, our loan books were longer from a duration standpoint. So we use that as a hedge versus our MSR book. Our bond book is long, and we also have credit spreads there, so that was used as a hedge against our MSR book. We actually -- and our recapture agreements kind of help with the MSR. Now that Powell and the Fed came out and basically said they were on hold, we've actually put on a bunch of hedges against the MSR in the mortgage space. One thing I want to point out, as we put on more and more hedge against our MSR, the core earnings will go up because you're buying mortgage assets against your MSR. So I think to the extent that -- and we believe we'll remain in this kind of low-volume environment at least for now. To the extent we remain in this low-volume environment and we add more mortgage hedges, which we are and will be doing, down the road that will lead to higher core earnings.

[Bose George, analyst]

Okay. And just the mortgage hedges, are they agencies or just any color there?

[Michael Nierenberg, executive]

I would assume they are agencies. Some of our -- the duration in some of our offsetting businesses could be longer in nature, which would offset some of that. But in general, the hedges against the MSR book is going to be in agencies. Could be in swaps, could be in derivatives. But for the most part, I would think of it as mortgage product.

[Operator]

Your next question comes from the line of Tim Hayes with B. Riley FBR.

[Timothy Hayes, analyst]

Can you touch on your outlook for the mortgage banking industry in general and the opportunities you could see there? You highlighted your expectations for lower vol ahead and the tailwind from lower rates. But for the past several quarters, you've been talking about how you expect volatility in that universe could present opportunities for you to invest, which is largely why you have been raising capital. So just wondering if you still expect overcapacity issues to present opportunities? Or if you expect fewer opportunities ahead?

[Michael Nierenberg, executive]

I think there will be more opportunities. I think the -- listen, the mortgage business is really hard. We all know that. I mean you look at the industry, there's few men standing at this point. I think the way that see if we have capital, to the extent that we can increase our origination business, we're going to do that. That will help us not only with providing more assets for our balance sheet, but it also provide us with more, hopefully, income around that part of the business. The servicing side, Jack Navarro and I have been pretty vocal on this, that business has grown tremendously. They are at $142 billion. That will likely grow to something, I think over time, give or take about $200 billion. We are evaluating our subservicing partners on the other side to try to increase the roster of subservicing partners. So it's not all captive to one. But I think there'll be more opportunities. Obviously, the origination business will benefit from lower rates, and we're seeing that. We're also seeing that in the income in our overall earnings as a result of the acquisition of Shellpoint. So net-net, we're optimistic. I do think you'll see more consolidation though.

[Timothy Hayes, analyst]

Okay. That's helpful. And then you kind of just touched on this, but what is your appetite like for M&A and additional strategic investments following this Covius deal? Are you still actively looking for ways to play in the ancillary business space? Or does Covius kind of check the box here and any additional investment or acquisition will be more tailored around recapture?

[Michael Nierenberg, executive]

Yes. I think the biggest thing I would say is, if we think it's accretive for shareholders, we're going to acquire things. A big thing -- a big part of where we sit now, liquidity is good, asset prices are reasonably full. I think they will probably still do a little bit better from a spread perspective and a price perspective. But to the extent that opportunities rear their head, and we look at a lot of M&A, we have a team of 4 that are actually focused on M&A, we're going to try to execute around. It's hard to do deals though. I mean we raised capital with the intention of deploying the capital sooner because we're in the middle of certain things. It's hard to get things done, but we're confident that we will.

[Timothy Hayes, analyst]

Understood. Okay. And then on the Ditech subservicing, can you just maybe touch on how much of that has been moved at this point? And if you've been able to recognize the amount of cost savings that you anticipated and kind of mentioned on your last conference call as you renegotiate or negotiated some of these contracts?

[Michael Nierenberg, executive]

Sure. On Ditech, as of May 1, 345,000 loans out of 550,000 loans have been transferred. There's 205,000 loans remaining. By July, there will be a small handful of loans remaining there. The big thing for us is, first and foremost, and this is not about NRZ or quite frankly Ditech, it's really about the homeowner, we want to make sure that anything we do around servicing transfers is not disruptive to a homeowner. We have transferred MSRs from Ditech to LoanCare as well as Shellpoint.

[Timothy Hayes, analyst]

So just to be clear, those are the only 2 counterparties to speak that you've moved the MSRs to?

[Michael Nierenberg, executive]

At this point, yes.

[Timothy Hayes, analyst]

Okay. Understood. Okay. And then just one more on Covius. Can you just maybe talk about the -- I know that your -- it's an equity stake. You're not getting any earnings necessarily as they -- from moving some -- or as they grow, but do you expect -- I'm just looking for the value add from day one. Maybe are there any dividends that you expect to be paid from that agreement? And then also are your counterparties that you're working with currently already partnering with Covius and outsourcing some functions to them?

[Michael Nierenberg, executive]

The answer to the second question is some of the counterparties that we have currently work with Covius at this point. It's a real company. Again, Rob and John are very real people and do a great job. The way to think about the investment, we have some equity in it. Which is, again, it's $20 million, not to belittle $20 million, and then there is some debt. The coupon on the debt is going to earn 11%, and then that will drop after a couple of years. So really, the way that we thought about this is we want to capture as much of the mortgage or the homeowner as we possibly can. We can't only do it in Shellpoint-NewRez because they are not our only servicer. We buy MSRs from other people, and we have servicing relationships with a number of people.

So the idea is let's capture as much of the stuff as we can of the ancillary revenue. It's a true third-party business. We are not running that company. We will have board seats, but they are going to do their thing. We're going to hopefully help them grow that company. And services businesses, when you think about the way they trade versus a financial services company, what I would say is they trade at a higher multiple of PE. So the idea is we put some capital in, hopefully Rob and John do a great job growing it. We earned some coupon on our debt. And then over time, the equity valuation that we have grows substantially. Because we could, one, increase our equity ownership, one; and then two is, if we don't, the $20 million could grow as they continue to grow the business.

[Operator]

Your next question comes from the line of Doug Harter with Crédit Suisse.

[Douglas Harter, analyst]

I understand you can't go into the exact specifics, but if you could just help us characterize some of the deals that you're looking at. Are they on the kind of the MSR side, large, larger deals, smaller deals? Just help us kind of think about the capital deployment?

[Michael Nierenberg, executive]

Well, Doug, the one thing I can't tell you is what we're working on. I would think about anything, for the most part, that we're working on is consistent with our prior investment strategy. So it's nothing -- it's not like -- I joke sometimes that when you look at the value of assets, they sell everything and go buy Breyers ice cream. That's not what we're doing here. We're focused on financial services assets and/or companies that are consistent with what we have been doing over the course of the past 6 years since the company was founded.

[Operator]

Your next question comes from the line of Matthew Howlett with Nomura.

[Matthew Howlett, analyst]

Mike, you've always been vocal in the past about credit spreads got really tight and how the market was inflated. It sounds like this time around you have ways around it. First, I just want to hear your overall view when credit spreads get this rich. And then I'll follow up with a question.

[Michael Nierenberg, executive]

Yes. I think on the credit spread side, we have room to get tighter. I mean we're not at the tights of what we have seen. In the market, where a regular issue of debt in the term market is based on our assets that we securitize. I actually think stuff will go tighter. I think you're in a low-vol market. The markets are flushed with cash. If prepayments continue to pick up, particularly around a lot of the credit side, you will see more mortgages produced. But those are agency mortgages, typically longer duration. So the need for short-duration assets will continue to be extremely high, and I just don't think there's enough of them out there. So I think spreads will likely go tighter.

For us, if you think about it, unfortunately, your dividend yield is between 11% and 12%. If our dividend yield was 6% or 8%, obviously we'd buy a lot more than we currently invest in today. But we don't want to be dilutive to our shareholders, and we don't want to just buy assets to buy assets. So I think stuff is going to do better. But again, when I pointed out early -- in our earlier comments, the risk/reward is, in our opinion, tilted to the downside, but that doesn't mean stuff's not going to do better.

[Matthew Howlett, analyst]

Right. Have the MSRs cheapened a little bit with the rates? Is that why you're active post-quarter?

[Michael Nierenberg, executive]

MSRs have cheapened a little bit, that's why we bought the $25 billion last week. We have relationships with certain mortgage originators. And there's certain agreements we have on prepayment protections and things like that. Quite frankly, I think we were on a leverage yield basis in the MSRs space. It's actually fairly attractive right here. And from my earlier comment, if we put -- as we buy more, what I would say, in-the-money MSRs and we hedge them with mortgages, you're going to see -- you're likely going to see a bigger bang for the buck over time in our earnings stream.

[Matthew Howlett, analyst]

Great. And then just a second one, as NRZ evolves to -- well, it looks like more of an operating business. What's the risk or rewards? I mean just talk a little bit about that evolution. Is it about putting -- hiring just good people to run these businesses? Are you using Fortress, Softbank as an ability? Just talk a little bit about as you evolve into these operating companies, what are the challenges? What are the rewards of doing that?

[Michael Nierenberg, executive]

Sure. I think -- good question, Doug. The Shellpoint acquisition in July was made for a couple of reasons. One is, it's an -- again, that company itself is an insurance policy for all of our subservicing partners out there. So the idea about acquiring them to the extent that MSRs have to move, and you're seeing this now in the Ditech situation, has proved to be a good thought process. We don't want to run a very levered mortgage company, and we won't do that. Most of our financing is typically around asset level. When you look at the earnings from that company, they have been terrific. We haven't broken out segment returns yet, but I think earnings year-over-year will at least double from where they were in 2018.

The management team there -- I know Bruce Williams for a long time, he's a wonderful person, and they do a great job, and they have a ton of experience. Operating companies are hard, though. I'm not going to say they are not. We have plenty of people there who are very, very focused on it. We have a very robust compliance group. We have -- there's a bunch of people doing different functions there. On the Covius thing, again, it's really an investment in others. So we're not running that company. And that's really our only operating business, I think. So overall, we're still an investment company, we're still going to try to put up returns around our core business. The Shellpoint acquisition gave us scale and protection as well as now contributing to earnings. So we're thrilled about that. But as you know, you've got to be all over this stuff from an operating standpoint, and we are.

[Operator]

[Operator Instructions] Your next question comes from the line of Kevin Barker with Piper Jaffray.

[Kevin Barker, analyst]

In regards to some of the comments around dry powder and your ability to continue to utilize some of the cash you have in your balance sheet to continue some of the investments, how do you view leverage at this point? I think with the balance sheet where it is, is about what? 3.7x debt to equity? Can you just quantify where you're comfortable putting that and quantify how much dry powder you have today?

[Michael Nierenberg, executive]

We reported cash of a little bit south of $350 million. We paid down debt, so our leverage ratios are below 3 at the end of the quarter. Those leverage ratios will go up as we add more agency mortgages to our business to hedge out our MSRs. So on the leverage side, that's how -- where I think we'll end up seeing more leverage. Again, we continue to do more term financing around as many of our assets as we possibly can, including our -- almost our entire MSR business. The 3 areas where you'll see leverage are one, agency mortgages, which -- there's a ton of capital there; our Non-Agency bond book; and then the loan book until you actually do securitization to work out some of those loans.

On the dry powder front, being that we paid down debt and we have capital on our balance sheet, I don't -- as I look at our runway and think about the deals that we're working on, I know something different comes up that we're not seeing now or anticipating. We have no need for equity right now. We have plenty. So even on all the deals that we're currently working on, they will be funded with our dry powder, with the liquidity facilities we have. So the net of all that should be continued strong earnings, I would say. So plenty of powder and leverage will run -- moderate leverage will go up as a result of the increase in our agency mortgages against our MSRs.

[Kevin Barker, analyst]

And then book value held up pretty well. I'm sorry if I missed it earlier, but was there a change in the fair value of mortgage servicing rights actually going up versus what happened last quarter and the moving mortgage rates at this time around?

[Michael Nierenberg, executive]

No. The servicing rights, they actually went down, and part of it acted to -- when you think about the valuation, there's a large escrow component as you look at the forward rates. So the asset itself was lower in value. Andrew and his team did a great job renegotiating some of the subservicing fees. So the net-net on the quarter in the MSR business was actually up, and that helped contribute to our book value increase. The bond book helped contribute to our book value increase, and our loan book helped contribute to our book value increase.

[Kevin Barker, analyst]

Just a follow-up there. Could you add a little more color on the negotiation of the servicing fees? And what that entailed? And maybe quantify that?

[Michael Nierenberg, executive]

Sure. I mean what we're seeing, if you think about it, you agree on a contract at a set fee for one of our counterparties to service one of the mortgage loans. And what happened as we have extended certain contracts and lowered subservicing fees, and actually in doing that, we've also acquired or captured some of the ancillary revenue that we weren't acquiring in the past. So part of it's the evolution of the business and our business and our portfolios and us working with our counterparties. That's really what it is.

[Operator]

There are no additional questions at this time. Michael, I will turn it back to you for closing remarks.

[Michael Nierenberg, executive]

Super. So thanks, everybody, for participating. We look forward to continuing to do what we do as a business, which is be in the investor business and providing stable earnings for our shareholders. We thank you for all your support, and have a wonderful day. Thanks.

[Operator]

Ladies and gentlemen, this does conclude today's conference.

You may now all disconnect.