Rithm Capital Corp

NYSE:RITM

Earnings Call Transcript 2017-Q4

[Operator]

Good morning. My name is Darla, and I will be our conference operator today. At this time, I'd like to welcome everyone to the New Residential Fourth Quarter and Full Year 2017 Earnings Call. [Operator Instructions] Thank you.

I would now like to turn the conference over to Mandy Cheuk from New Residential. Please go ahead.

[Mandy Cheuk, executive]

Thank you, Darla, and good morning, everyone. I would like to welcome you today to New Residential's Fourth Quarter and Full Year 2017 Earnings Call.

Joining me here today are Michael Nierenberg, our CEO; Nick Santoro, our CFO; and Jonathan Brown, our CAO. Throughout the call, we're 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 suggest that you download it now.

Before I turn the call over to Michael, I would 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 would like to turn the call over to Michael.

[Michael Nierenberg, executive]

Thanks, Mandy. Good morning, everyone, and thanks for joining our call this morning. Obviously, some exciting news down in Dallas, so we'll get through our call. I know the Nationstar guys are doing their call at the same time.

So as we look back on 2017 and the fourth quarter, on all fronts, we had a very good year. All of our segments performed extremely well. The way that we view the company is a very unique one, which is different than other mortgage REITs, and quite frankly, virtually impossible to recreate in today's environment. We put the company in what we believe to be a great position as the new tax bill and other initiatives from the administration will likely cause the Fed to raise rates 3 to 4x this year and lead to higher rates.

Our balance sheet contains $500-plus billion of mortgage servicing rights, one of the few investments, which will increase in value as a result of higher rates. If you couple that with our $150 billion of call rights, this -- our portfolios- make us very excited for the future. The recent acquisition of Shellpoint in the fourth quarter provides us with additional optionality around our portfolios, including recapturing our MSR portfolios as well as the potential growth of our servicing business. I mentioned this as the current investing climate is not great. The abundance of capital is causing most asset classes to be fully priced. While saying that, we have a portfolio that should continue to pull forth and well for our shareholders. Our current liquidity of $500-plus million today puts us in a great position to take advantage of any opportunities that come our way. I'll now refer to our supplement, which has been posted online.

So I'm now going to begin on Page 2. Part of the beginning part of our presentation is a little bit of a highlight reel, then we'll get into some of the numbers and then open up the call for questions. When you look at New Residential today, again, $530 billion UPB of mortgage servicing rights, one of the few asset classes that will rise and go up in a rising rate environment. We also have $145 billion UPB of call rights. We try to target mid-teens-type returns on all of our investments, although as I pointed out earlier, a little bit difficult right now as asset classes are fully priced. When we think about interest rate risk, we actively manage our portfolio to help protect against rate changes. And with the Fed expected to raise rates again, I do believe we are in a great position as we begin 2018.

For '17, total return was 26%. We increased our dividend 2x. And when we think about the opportunities, while they may not be apparent today in all asset classes, the housing market is a very large one, $25 trillion. And when you look at the unsecured consumer debt, unsecured consumer debt in the U.S., it's $2.5 trillion. So again, while they may not be something exciting to do today, we believe we're well positioned to take advantage of any market dislocations or things that may come our way.

On Page 3, we try to show 2017 or activity. And just to give you a sense, we deployed $3.3 billion of capital in 2017, $1.6 billion was related to servicing-related investments. A little north of $700 million was around our bond portfolios and RMBS, and then we deployed $917 million in residential and consumer loans. When we look at our portfolio, we continue to grow it. Again, we're $530 billion-ish right now. We've acquired a lot of servicing in 2017. And then when you look at our call strategy in 2017, we called $4.7 billion of deals, which was our highest amount of deals we called since we began our call strategy.

Bottom-right side of the page, 26% total return in 2017, 24% return on equity, 17% increase in book value and again, 2 dividend increases.

Page 4 just talks about -- since we began to grow the company in 2013, 2014, just a couple of highlights. One is, in 2014, we completed a refinancing on our SpringCastle portfolio that was $2.6 billion. Just to give you a sense today, that portfolio is about $1.3 billion. That's been a great investment for the company. 2015, we acquired HLSS for $1.4 billion. And in conjunction with doing that, we acquired call rights of $145 billion from Ocwen. 2016, we grew our MSR portfolio by $170 billion, and we became fully licensed in all 50 states by Fannie and Freddie. And then 2017, we agreed to acquire Shellpoint in the fourth quarter. We acquired a lot of mortgage servicing rights from a number of different counterparties. And then we also made a strategic investment with 3 other partners to acquire up to $5 billion of consumer loans as well as have a piece of equity for the company to prosper.

Page 5 is really our portfolio, and these are net equity amounts. So if you look on the right side of the page, our MSRs, both excess and full, we have a net equity investment as of 12/31/17 of $2.3 billion. Our servicer advance portfolio's current equity is $159 million. Again, that will continue to come down over time as servicer advances continue to get reduced by both Ocwen and Nationstar. Our residential securities and call rights, we have $1.4 billion of net equity. What we did on this slide this time is we broke out our residential and consumer loan exposure. Residential loans, $524 million of net equity. Consumer loans, $129 million. And then our placeholder of cash as of 12/31/17, $296 million.

Financial performance for 2017 fourth quarter. GAAP net income, $288 million or $0.93 per diluted share. Core earnings, $189 million or $0.61 per diluted share. And we continue to pay our dividend of $0.50 or $154 million.

Full year 2017 GAAP net income, $958 million or $3.15 per diluted share. Core earnings of $861 million or $2.83 per diluted share. We paid dividends of $609 million, which correlated to $1.98 per diluted share.

Page 7, fourth quarter as well as subsequent highlights. We continue to acquire MSRs both during the fourth quarter and into the first quarter of 2018. As you know, we announced the acquisition of Shellpoint. Part of that transaction was we acquired $15 billion UPB of mortgage servicing rights, and then we also acquired $17 billion of mortgage servicing rights from other counterparties. And just last month, we paid Ocwen a restructuring fee of $280 million to obtain the remaining rights to MSRs on our legacy Non-Agency portfolio, that totals $87 billion. We did this while we wait to transfer the PSAs into our name as we work with trustees, rating agencies and others. Just this past week and as well as in January, we priced 2 Non-Agency mortgage securitizations backed by mortgage servicing rights. Total cost of funds on those 2 transactions on a weighted basis was 3.6%, that was a great result for the company. Again, fixed rate, term financing around our MSR portfolios.

As we look at the Non-Agency business, we continue to call Non-Agency deals. We called 36 Non-Agency deals during the quarter. We completed a $727 million Non-Agency securitization in January, and then we also purchased $880 million of Non-Agency RMBS, bringing our equity as of Q4 '17 to $1.4 billion.

I pointed out earlier, advance balances continue to come down on servicer advances, only $159 million of equity. If you go back to 2015 when we acquired HLSS, the combination between each Ocwen and Nationstar servicer advances was about $8.3 billion. It's currently down to about $4 billion, and that's really indicative of a homeowner that's feeling a great job done by our servicer counterparties and truly the seasoning of the portfolio.

Shellpoint, again, we announced in 2000 -- in the fourth quarter. Our consumer loan investments continued to perform extremely well for us for approximately 20% return. SpringCastle, again, that's a legacy investment, it's about 90% IRR. And then on the residential loans, what we typically -- what we do there, unless there's some higher coupon loans or residential loan portfolio, we'll continue to grow as a result of our call activities. And then early in Jan, we raised $482 million of equity to help fund investments.

Page 8, this is a quick slide. Most of you have seen this already on Shellpoint. We agree to acquire Shellpoint in November for $190 million. The way to think about this is we have: one, Shellpoint has an origination business, which gives us optionality on our recaptured portfolios. I pointed out we also acquired $15 billion worth of MSRs. And then there's a lot of other things that could come out of this. Shellpoint is rated by S&P, Moody's and Fitch. They're approved by Fannie, Freddie & Ginnie. We expect as a result of the Nationstar announcement to be able to -- to be fully licensed by Ginnie Mae shortly, so we're very excited about that. That could give us a foray into acquiring Ginnie Mae MSRs, and then -- and again other optionality around that.

As far as our portfolios, I'm not going to spend a lot of time going through the slides in our portfolios. I think in light of the announcement by Nationstar, what I'll do is I'll turn it back to the operator, we'll open up for questions and then go from there. Operator?

[Operator]

[Operator Instructions] Your first question is from Jessica Levi-Ribner with B. Riley FBR.

[Jessica Levi-Ribner, analyst]

Can you talk a little bit about the economics that you've gotten on the call rights and the loan securitizations and what you purchased the $882 million of Non-Agencies at?

[Michael Nierenberg, executive]

Sure. The call rights, the way to think about that is -- I need to find my slide -- the -- in the fourth quarter, we purchased, give or take, $800 million worth of Non-Agency MBS at approximately $0.70. The way that we think about it, we have accretion on the underlying bond portfolio, and we do securitization. And we marked down our delinquent loans or, call it, nonperforming loans, and the average gains have been something anywhere from 1.5 to 2 points. It depends on per deal. Certain deals that have higher delinquencies, we're going to see lower economics. Other deals that have lower delinquencies, you're going to see higher economics. As we go into a higher-rate environment, which we are, to give you a sense, the weighted average coupon on our underlying calls is approximately 5%. So just to kind of frame that for everybody. So we're still very optimistic on our call business. Obviously, higher rates could lead into the economics, but higher rates will likely lead to lower delinquencies, so your securitization gains may be higher.

[Jessica Levi-Ribner, analyst]

Okay. So -- and the execution on the January securitization, do you know what you netted yet?

[Michael Nierenberg, executive]

I'll tell you at the end of the Q, at the end of the quarter. You should assume it's something anywhere from 1.5 to 2 points.

[Jessica Levi-Ribner, analyst]

Okay. And...

[Operator]

[Operator Instructions]

[Michael Nierenberg, executive]

Sorry, Jess?

[Jessica Levi-Ribner, analyst]

In terms of the Nationstar announcement this morning, can we expect any immediate impact beyond the Ginnies?

[Michael Nierenberg, executive]

No, if you think about our business, one of the things that what -- how we try to position the company over the course of the past few years is to be a real capital provider to the servicing industry, have a number of different counterparties, be very supportive of them whether it be Ocwen, Walter, Nationstar, PHH, and I think we've demonstrated that. Obviously, Nationstar will have a new owner as they go forward, but they're still a great partner. They service $300 billion of mortgage loans for us, whether that be subservice or where we own the excess. So I would anticipate them continuing to be a partner, a good partner of ours as we go forward.

[Jessica Levi-Ribner, analyst]

Okay. And then one last one just around kind of acquisition opportunities that you're seeing. I mean, you have a lot of dry powder on the balance sheet today, what can we expect? And I know -- and I say that knowing that the environment is tough and you've made a lot of comments around that, but is there anything kind of on the horizon?

[Michael Nierenberg, executive]

We always look for what I would call strategic investments or strategic acquisitions that we think will benefit our shareholders. We continue to rake the fields for corn, and we're out there in the markets and looking at everything. I mean, there's nothing specific I can point to you today. But where we sit as a company and our success over the past few years, I would expect something to happen at some point. I just don't know when. The markets will -- higher rates will likely lead to some kind of dislocation in the market. You see the volatility in the stock market. You see rates rising. I do believe, as we go through this year, if interest rates continue to their upward trajectory, they even see more consolidation around the mortgage origination business as origination volumes come down.

[Operator]

[Operator Instructions] Your next question is from Bose George with KBW.

[Eric Hagen, analyst]

This is Eric on for Bose. Forgive me if you said this, but can you just tell us the amount of core earnings from the quarter that reflects the call rights executed for 4Q?

[Michael Nierenberg, executive]

I believe it's $0.04.

[Eric Hagen, analyst]

$0.04, right. And then just given the move in interest rates that we've seen so far this year, can you just give us a sense for the valuation changes you've seen on MSRs? And then if you could just comment maybe across the portfolio on mark-to-market changes, that would be really helpful.

[Michael Nierenberg, executive]

Sure. So for the fourth quarter, our full MSR portfolio was up a little under $92 million and our excess MSR portfolio was up a little under $40 million. So when you look at the combination of those 2, it's $0.43 in GAAP earnings.

[Eric Hagen, analyst]

Great. Maybe you can comment just quarter-to-date, sorry, so far in 2018?

[Michael Nierenberg, executive]

I can't comment quarter-to-date yet. I would say they're up marginally, right, but we'll be able to give you more color. What you've seen on the MSR, the valuations in MSRs is that some of the banks are in buying cleaner MSRs, so you're seeing valuations actually increase. And I would expect that to continue not only through the first quarter, but throughout the course of the year to the extent that the 10-year Treasury continues to rise. So I think the way that we're currently positioned and the way I wanted to frame our call today, yes, I think the company and the team has done a great job over the course of the past few years. But this is not about a highlight reel, this is about 2018 and going forward and how we position the company. And if you take a step back, $530 billion worth of MSRs correlated to a total investment amount of something between $4.5 billion and $5 billion and our call rights, couple that with $500 million of liquidity, we're in a great, great position to continue to execute around our strategies on our existing portfolios without actually having to go and deploy a ton of capital that's today. While saying that and going back to Jess's questions, we're always looking at different things from an investment perspective. And as everybody knows, our portfolios do pay down over time, so we need to continue to, again, deploy capital. But right now, we're in no rush to deploy capital as we look for opportunities that we think are going to be accretive for shareholders.

[Operator]

And your next question is from Ken Bruce with Bank of America.

[Kenneth Bruce, analyst]

A couple of questions. First, you kind of talk in the -- or I guess, over the past few quarters, we've been talking about the size of the overall Non-Agency servicing market. And I guess I'm always a little surprised when you keep pulling in large transactions, I guess, even in the first quarter. What -- maybe just kind of scope out how much of the addressable market is still available to you and what was a similar surprises to where the servicing is coming from.

[Michael Nierenberg, executive]

Specifically, Ken, on the Non-Agency side?

[Kenneth Bruce, analyst]

Yes, yes, on the Non-Agency side.

[Michael Nierenberg, executive]

I think the way that we view it is we have -- I mean, I think that the legacy Non-Agency market is probably something between $450 billion and $500 billion of outstandings. We control, if you think about it this way, with our call rights 1/3 of that market. The banks in general, as you probably know, have cleaned up most of their legacy exposure around mortgage servicing rights. I think any -- I think the ability to acquire legacy Non-Agency PLS is going to be much lower today just because there's not that much out there. There'll be some, as I think some of the -- as the banks continue to settle with some of the regulators around or some of the settlements that were agreed to a few years ago and the banks get out some of the legacy servicing, but I don't foresee a ton of it coming our way right now.

[Kenneth Bruce, analyst]

Okay. So it's really just more bank holding on to what they've got versus their -- versus anything else?

[Michael Nierenberg, executive]

Yes, I think a bunch of it is still wrapped up in settlements. And there are certain servicers that -- there are certain approved servicers by the different regulatory bodies that are able to service some of the stuff. And even in Shellpoint, Shellpoint services portfolios for some of the banks. So when you think about Shellpoint to the extent there are some of these portfolios and they are approved by a number of different banks and regulators, if anything does come out, I could -- I would anticipate those folks being in a great position to be able to grow that.

[Kenneth Bruce, analyst]

Right. And is that one of the areas that you -- I mean, you've referenced margins in the squeeze, the returns have been squeezed a bit. Is that included in the Non-Agency servicing area?

[Michael Nierenberg, executive]

The kind of, I'll call it, the less clean servicing, banks don't really want to be in less clean servicing. Banks want to acquire customers as do we. When you think about our customer profile, we have something between 2.5 million and 3 million customers. But overall, spreads, whether it be Non-Agency mortgage bonds, whether it be residential mortgage loans, whether it be nonperforming loans, that by resi -- by homes, everything is extremely well bid because it's just a very large abundance of capital out there. So the way that we're approaching it is we say, okay, our portfolio continues to perform extremely well; we're in a higher rate environment; our MSR portfolio should do great; our call business with a weighted average coupon of 5% should continue to do better, although you could see margin squeeze as rates rise, particularly in the front end. So yes, everything's well bid, but we're going to be patient here and try to be very strategic around how we deploy capital. But there's nothing that's that interesting right now.

[Kenneth Bruce, analyst]

Right. And you've mentioned that you anticipate some work or consolidation to occur on the -- in the primary market just given rates up in the originators being squeezed. I mean, how active do you want to be in being a catalyst for that consolidation? And what strategic benefits do you think that New Residential gains from stepping into an operating role as it has to Shellpoint?

[Michael Nierenberg, executive]

What I would say is, I think it's likely we'll be in the middle of more consolidation. When I think about the operating business, the operating business is hard. I mean, it's been very hard the past number of years. I do think the winds are shifting a bit. And to the extent that we could be a great partner of somebody and it makes sense for either us or obviously for both parties, I would intend and I believe that we'll be part of something there. While saying that, you just can't anticipate because you don't know what's going to happen, but I truly believe that you're going to see a lot of consolidation -- a lot more consolidation that will occur in 2018 as the industry gets cleaned up.

[Operator]

Thank you. I would now like to turn the call back over to Mike Nierenberg for any closing remarks.

[Michael Nierenberg, executive]

Well, thanks for all your support. Obviously, 2017 was a good year. We're not about the highlights here. As we look forward, we will do all we can to continue to put up good returns for our shareholders. And again, we appreciate your support, and have a great day. Thanks.

[Operator]

Thank you. This concludes New Residential's Fourth Quarter and Full Year 2017 Earnings Conference Call. You may now disconnect.