Earnings Call Transcript
Rithm Capital Corp. (RITM)
Earnings Call Transcript - RITM Q2 2021
Operator, Operator
Good day and welcome to the New Residential Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. I would now like to turn the conference over to Kaitlyn Mauritz, Investor Relations. Please go ahead.
Kaitlyn Mauritz, Investor Relations
Great. Thank you, Betsy. And good morning, everyone. I'd like to thank you for joining us today for New Residential's second quarter 2021 earnings call. Joining me here today are Michael Nierenberg, Chairman, CEO and President of New Residential; Nick Santoro, our Chief Financial Officer; Bruce Williams, CEO of NewRez; and Baron Silverstein, President of NewRez.
Michael Nierenberg, CEO
Thanks, Kait. Good morning, everyone. And thanks for joining us. The second quarter for our company was a very good one. While the markets are challenging, we maintained book value and created stable earnings. When you think about our actual book value, it grew quarter-over-quarter before our capital raise related to the Caliber purchase. Our core earnings were in line with Q1, taking into account $0.03 in dilution. So if you take away the dilution, our core earnings are roughly $0.34. I feel very strongly that our company is positioned extremely well for low interest rate environments. The Caliber acquisition, which we announced early in the quarter, is a game changer for our company and, quite frankly, for the industry. We are now in a position to compete against anybody. We will be able to offer many different products to homeowners across all of our channels, further helping with the dream of homeownership. The excellent leadership of both companies, the personnel of both companies, the technology on the Caliber side, and the sheer scale of our business will enable us to drive results for shareholders for years to come. While we believe that interest rates will rise, to the extent they rise slowly or stay around these levels, our production machine, coupled with the excellent capture rates in the combined company, will enable us to grow our portfolio of MSRs. We are super excited about our operating business. On the investment portfolio side, the team continues to do a great job. Our financing business has never been better. We have essentially moved most, if not all, of our financing away from daily mark to market, other than agency MBS. Our call businesses are back to pre-COVID levels, and our EBO business continues to grow. Essentially, going forward with this level of rates, we will focus on what I would call proprietary portfolios: call REITs, EBOs, and MSRs. We will remain patient on capital deployment with this level of rates and where credit spreads are in the markets today, seeking to deploy capital opportunistically.
Baron Silverstein, President of NewRez
Thanks, Mike. Good morning, everyone. Turning to slide 27. For the origination division at NewRez, we ended the second quarter with $75.4 million pre-tax income and funded volume of $23.5 billion. Some themes in the broader market, such as increased competition and ongoing margin pressures, impacted our performance during the quarter, but we continue to deliver across all of our channels on a number of aspects such as growing recapture and our product set. Besides these market headwinds, we continue to build and grow our business and are well-positioned to take advantage of future market opportunities. For example, we've grown our direct to consumer business with record funded volume of $6.4 billion, which is a 12% increase quarter-over-quarter in our sixth consecutive quarter of increased production. We announced last quarter the relaunch of our non-QM business, which continues to gain momentum, and we locked over $100 million in June alone. Our non-agency jumbo business is back to pre-COVID levels with over $250 million in quarterly lock volume, and we also added our 19th JV partnership. We have additional JV announcements coming in the third quarter as well. The other important point is gain on sale margins. While gain on sale margins have decreased 12 basis points quarter-over-quarter, we're beginning to see a flattening of the decline of margins. Our direct to consumer business margins dropped 10 basis points from March and remained range-bound in the low 300 for the past three months, including July. For our JV channel, margins dropped 25 basis points in June, but flattened in July. This is the first reduction we have seen since 2020, primarily driven by the change in purchase volume from refinance volume. Margins in the wholesale channel dropped from March to April but have also remained range-bound for the entire quarter, including July. This similar theme in our corresponding channel, where margins were pressured by approximately 12 basis points in the second half of the quarter, and a flattening occurred in mid-June and July. However, given the size of our corresponding channel, which is 60% of overall volume, it is a significant driver of quarter-over-quarter margin decline. As mentioned, given interest rate changes in July and the removal of the FHFA adverse market fee, we've already seen the ability to take back some margins and are looking forward to that in the months to come. Lastly, we are really excited about the opportunity to combine the NewRez and Caliber platforms. Michael talked a lot about that. We believe that the two companies will have significant benefits that will accelerate our objectives and goals for both origination and servicing efforts and continue to gain market share. Turning to slide 28, our DTC, or direct to consumer channel, remains a huge focus for NewRez and NRZ and continues to present a long-term opportunity for our company. Our process changes have taken hold, which can be seen in our increased fundings, but also in our refinance recapture statistics with a 44% increase quarter-over-quarter. While we have improved our churn times and enhanced our scale and capacity, the importance of our brand awareness and recognition to further build customer loyalty is also critical to our success. This is seen by a 25% increase in NewRez originated refinance recapture. In April, we launched our new brand, and I invite all of you to visit NewRez.com to see our improvements in our digital marketing consumer experience. The message is that as we get better connecting to our consumers, our DTC platform will only continue to grow. Turning to slide 29, just some quick highlights on our other channels. Our joint venture business continues to perform well in any market environment and originated a billion dollars for the quarter, which was flat quarter-over-quarter even with higher interest rates. Additionally, we saw a return to normalization with purchase transactions, which comprise approximately 80% of funded volume versus 54% in the first quarter. We announced our newest joint venture mortgage company, Coast One Mortgage LLC, in partnership with other companies, which is our 90th JV partnership, and we welcome them to the NewRez family. In our wholesale channel, we continue to grow our platform by adding new customers, new broker relationships, and building out our branches while also focusing on non-agency products, including non-QM, which comprise 20% of our overall market volume in the second quarter. In our corresponding channel, we continue to add new customers, approximately 40, with a focus on best efforts where we can add additional margin while also creating operational efficiencies to improve customer relationships and introduce new products such as non-QM through our non-delegated clients. So when I think about our performance in the second quarter, both in terms of funding units and other metrics we use to evaluate performance, we continue to see great progress. Turning to slide 30, for the servicing division, we ended the second quarter with $32 million of pretax income, which is a 2% increase quarter-over-quarter. We also added a table showing historical servicing pre-tax income, which has proven to be a balance to the volatility in origination PTI. Our servicing business is a core strategy for NewRez overall. We ended the second quarter with an aggregate servicing portfolio of $306 billion and approximately 1.7 million customers, representing modest growth quarter-over-quarter. The cost per loan continues to increase slightly, which was impacted by the COVID-19 pandemic as we continue to achieve loss mitigation solutions for homeowners to retain their homes. Since the CARES Act was first enacted, we've helped over 250,000 homeowners navigate the COVID pandemic, with over 160,000 loans resolved from forbearance, and our active forbearance rate sits at about 2.2%, which is down from 3.5% in the first quarter. Our focus remains on working every possible method to engage these homeowners and all available loss mitigation programs, including a series of newly introduced Fannie, Freddie, and Ginnie modification programs. Our numbers are in line with the industry, and we're doing continued good work, but we acknowledge there is more to do to help homeowners.
Kaitlyn Mauritz, Investor Relations
We will open the line for questions.
Operator, Operator
We will now begin the question and answer session. The first question comes from Kenneth Lee from RBC Capital Markets. Please go ahead.
Kenneth Lee, Analyst
Hi, good morning, and thanks for taking my question. Just one on the gain on sale margins. You saw some improvement within the JV and the DTC channels. Just wondering if you could elaborate and talk about what's driving that improvement. Thanks.
Michael Nierenberg, CEO
We've seen a flattening. The message is delivered. So less decline than we saw in each one of the channels. In our JV channel, margins dropped 25 basis points in June, but they've flattened and we haven't seen any reduction in our JV business at all since 2020. In our DTC business, we've also seen a reduction, as I mentioned, 10 basis points from March, but they remain range-bound for the last three months, including July.
Kenneth Lee, Analyst
Got you. Very helpful. And just one follow-up, if I may, in terms of the estimated 2021 origination volumes for the combined Caliber and NewRez. I am wondering if you could talk about some of the key assumptions you've had there driving that estimate. Thanks.
Baron Silverstein, President of NewRez
Right. You need to look at each of the underlying channels that make up our estimate. On the retail business and the JV businesses, there is no overlap. In our view, that's 100% accretive. On the DTC business, it's the same. They are managing their servicing portfolio, and we are managing ours. Looking at the third-party channels, based on our analysis, there is very limited overlap. That was a significant pleasant surprise as we looked at both of those third-party channels. For example, Caliber is in direct to broker, and NewRez is not, and the overlap between both of the channels has been very limited. Our current projections are based on our view of interest rate markets for the remaining five months of the year and our pro forma view of the overlap between the two companies.
Kenneth Lee, Analyst
Very helpful. Thank you very much.
Michael Nierenberg, CEO
Thank you.
Operator, Operator
The next question comes from Bose George with KBW. Please go ahead.
Bose George, Analyst
Hello, good morning. First, I wanted to ask about the EBO opportunity. In that slide, where you give the portfolio size that it's $700 million, is that the portion of EBOs that you've already purchased and that are on your balance sheet already? Going forward, can you help us size it? You've got $50 billion of Ginnie Mae MSR, which seems like a sizable opportunity, and we just saw your Cooper book $180 million of gains this quarter. I'm just curious what we could see from that opportunity.
Michael Nierenberg, CEO
The $700 million we have is on our balance sheet. When we look at the broader opportunity in origination, we believe we are in a great credit cycle. Should things change, there will be some potential opportunities to buy out loans. Regarding the EBO business and the numbers we quoted, having a $50 billion Ginnie Mae MSR portfolio, it is hard to tell exactly what that number will be. If you compare that $50 billion to Cooper or Penny, our Ginnie Mae exposure will likely grow over time.
Bose George, Analyst
Okay, so for now, this $700 million you've repurchased is from the 90-day delinquent stuff out of that debt pool. So, to the extent there's more, it's essentially if more flows into the delinquent bucket, is that correct?
Michael Nierenberg, CEO
Correct. The $700 million on our balance sheet has a steady flow that we are buying out. The numbers are sizeable on an overall weekly basis, and there is a steady flow that continues to come onto the balance sheet.
Bose George, Analyst
Great, thanks. And then, just a follow up on the question about gain on sale. In that footnote, you say that the gain in the DTC and JV excludes the recapture of MSR. So, is that just saying that the gain essentially would have been 100 basis points higher, but instead that piece was just flowing through the servicing to replace the last MSR?
Michael Nierenberg, CEO
Yes. That is correct. Our number of bookings comes from the operating business, and the capture is in our MSRs and other areas on the mortgage company side. If you look at what Cooper does, their MSRs are part of their overall origination business.
Bose George, Analyst
Okay, great. Thanks. And then, actually one last quick one: could you give an update on your book value quarter-to-date?
Michael Nierenberg, CEO
It's pretty constant. As of today, it's pretty similar to where we were prior to the end of Q2.
Bose George, Analyst
Okay, great. Thanks.
Michael Nierenberg, CEO
Thank you.
Operator, Operator
The next question comes from Eric Hagen with BTIG. Please go ahead.
Eric Hagen, Analyst
Hey, thanks. Good morning. The servicing book looks like a mix of higher coupon season loans, and of course, there's a fair amount of new loans that you guys have originated over the last year or so with lower coupons. I'm wondering how the recapture rates and the strategy around targeting certain borrowers differ depending on the seasoning and note rates, especially in environments like right now where rates are low.
Michael Nierenberg, CEO
Baron, do you want to take that?
Baron Silverstein, President of NewRez
Yes. We are targeting based on a number of different factors, including what we call trigger leads, which are based on consumers that may be interested in refinancing or even looking to buy a home. Our biggest marketing strategy continues to be focused on borrowers that are in the money. We look at current coupons and, based on the overall size of the NRZ MSR portfolio, we're talking about approximately a million customers that we continue to target.
Michael Nierenberg, CEO
Eric, the one thing I would point out when you look at where we were a year ago compared to today is not just with the team on the NewRez side but also with the team that Sanjiv assembled. I think one of the slides points out data and analytics and technology gains. As we continue to improve data and analytics, we are identifying homeowners ready to refinance, which is reflected in NewRez's numbers going from 20% to 40%. This will add significant lift. Looking at our core earnings going forward, I believe our higher recapture rates, along with a potential slowdown in speed if we enter a higher rate environment, are going to significantly enhance our core earnings and the overall value of the company.
Eric Hagen, Analyst
Got it. That's helpful, thanks. Then one on the capital structure. Considering Caliber has no unsecured debt, I'm wondering how you guys think about that capital structure and the appetite for additional leverage as you combine the platforms?
Michael Nierenberg, CEO
When we look at our capital structure, we have not put on much corporate debt. As the operating businesses continue to grow, we will evaluate the best way to fund the business. Currently, as a result of the equity raise we did in April, we expect to have about $1.1 billion in cash and liquidity by the end of Q3. We really don’t have a need for more cash or liquidity right now. However, we will always evaluate based on market conditions. Having more capital, while some shareholders may see it as a drag on earnings, can provide opportunities for acquisitions and protect our balance sheet during downturns.
Eric Hagen, Analyst
Got it. That's helpful. Thank you very much.
Michael Nierenberg, CEO
Thanks, Eric.
Operator, Operator
The next question comes from Trevor Cranston with JMP Securities. Please go ahead.
Trevor Cranston, Analyst
Hey, thanks. Actually, a follow-up on the question about the improved recapture rate this quarter. Obviously, there was a nice spike, and that's something you guys have been really focused on. I was wondering if you could comment more specifically on what sort of came together that allowed that to grow this quarter and how we should think about the potential for continued improvement in that rate in the near term.
Michael Nierenberg, CEO
I don't want to have any excuses, but I believe we are just getting better and better. We have a strong focus and have brought in some really great marketing people on both the NewRez side, which has made us a better company and improved our recapture rates. Looking back to 2018 when we acquired Shellpoint, their production numbers were about $7 billion. With the Caliber acquisition, the combined company is projected to do $170 billion. We've had growing pains, but we are constantly improving. I believe we are prepared to compete against anyone, and we are focusing on achieving higher core earnings as we continue to grow our MSR portfolio. Our target is to reach $0.40, $0.50, or even $0.60 in core earnings, with book value continuing to grow and our stock reaching its true potential of $15 to $20.
Trevor Cranston, Analyst
Got it. Okay. And then on the SFR business, you talked about expanding that operating platform and bringing in some new management to run that. Where do you anticipate capital coming from to fund continued growth over the next couple of years? Is it coming from another area of the portfolio, which you're anticipating may be more of a runoff, or how should we think about that?
Michael Nierenberg, CEO
It could come from other areas of the portfolio. The financing of that asset in the capital markets is efficient at this point. We have currently 1,400 homes and just under $100 million in equity. By the end of Q3, we expect our cash and liquidity to be between $13 million and $15 million, and we believe we have ample capital to continue growing without the need for additional capital. If we do think about unsecured debt or capital markets, we would consider that if we needed to capitalize a very large portfolio.
Trevor Cranston, Analyst
Okay, got it. And then one last one, just to clarify on the early buyout opportunity. When you mentioned the size of the servicing portfolio, does that include Caliber, or does bringing the Caliber portfolio change the sizing of the EBO opportunity in any way?
Michael Nierenberg, CEO
Yes, it does not include Caliber. With Caliber, the opportunity grows exponentially.
Trevor Cranston, Analyst
Great, appreciate the comments. Thank you.
Michael Nierenberg, CEO
Thanks, Trevor.
Operator, Operator
The next question comes from Kevin Barker with Piper Sandler. Please go ahead.
Kevin Barker, Analyst
Good morning. Could you give us an update on your expectations for earnings for Caliber versus your previous expectations when the deal was announced? I believe you estimated somewhere around $295 million in operating income in 2022. Do you feel like Caliber is still on that runway, or do you think anything may have changed given the competitive dynamic in the origination market?
Michael Nierenberg, CEO
Here’s a couple of points. The one thing we haven't discussed on this call is synergies. Looking at the financing of Caliber, our team has had discussions about this, and we realistically believe, synergy-wise, from the financing alone, we think we will be able to pick up around $50 million a year. Overall synergies are expected to be between $150 million and $200 million on an annual basis. In terms of gain on sale margins, we sized it based on 2018/2019 numbers. I don’t see any change in our outlook for '21 or '22. If anything, with Sanjiv and Baron and the complementary teams on both sides coming together, we anticipate seeing more growth moving forward.
Kevin Barker, Analyst
Could you unpack that a little bit more? You mentioned $150 million in synergies due to financing. Is that on top of the $36 million that you laid out originally? Can you clarify if you said $150 million to $200 million?
Michael Nierenberg, CEO
The synergies we expect will be between $150 million and $200 million total on an annual basis. Relating that to 450 million shares outstanding, it's a sizable increase to core earnings and overall earnings for the company. Part of that will come from synergies, part from financing, and part from other areas of optimization across both organizations.
Kevin Barker, Analyst
We are looking at a market similar to 2019/2018, as you described, plus the synergies of $150 million to $200 million, along with the $36 million initially stated. Are we potentially looking at operating income from Caliber north of $400 million in a normalized origination market?
Michael Nierenberg, CEO
I believe your initial assumption around Caliber's operating income is consistent with where we are headed, because again, the deal was underwritten to 2018-2019 numbers. Added to that the $150 million to $200 million in total synergies gives us a clear view on how we expect to achieve much higher core earnings.
Kevin Barker, Analyst
Thank you. That's helpful.
Operator, Operator
The next question comes from Stephen Laws from Raymond James. Please go ahead.
Stephen Laws, Analyst
Hi, good morning.
Michael Nierenberg, CEO
Good morning.
Stephen Laws, Analyst
Just a follow-up on the SFR side, targeting mainly the southeast. That's a competitive sector and environment. Can you talk a little bit about your sourcing? Can you quantify any capital allocation or unit growth metrics we could look to for 6 or 18 month targets?
Michael Nierenberg, CEO
We will have more to come on that in a couple of weeks as we make a broader announcement, including a new brand we have ready to roll out. Currently, we are doing approximately 50 to 70 units a week. We have a broad sourcing team working on this now, along with technology partners. We purchased a company called Guardian, which is a property preservation business, which works well with our SFR business. Over the next few years, we expect to reach $5 billion in acquisitions. We're open to partnering with large home builders to jump-start certain initiatives. So there will be more to come. We have the new management team, who will come with a proper plan and headcount to support business growth over time.
Stephen Laws, Analyst
I appreciate the color. Switching to the calls and potential gains there in $656 million for the quarter. Can you discuss the accretion or the ROE on that expected as you fully refinance those loans and how we should think about the call volumes and potential upside on returns over the next couple of years?
Michael Nierenberg, CEO
Let me have Nick comment on that in a moment. The call activity can be a little episodic. However, the loans that have been stuck in the pipelines for many years are starting to come out now. If we look at the deals we've issued over the past few years, recent results in our call business were quite frankly fantastic. I expect we will return to a steady state where we were in 2018 and expect to do around $300 million a quarter. Looking at ROE, we typically factor in about a couple of points, and the last one was better than usual, but I would average about two points overall.
Nick Santoro, CFO
For this quarter, we generated approximately $0.03 from the call strategy. The mix of income from calls today is different from what occurred in the past. Given where our portfolio stands today, more income will come from the securitization side. As Michael mentioned, we made a loan sale in July, which will reflect in our earnings in the third quarter.
Stephen Laws, Analyst
Great. Thank you very much, Nick and Michael.
Michael Nierenberg, CEO
Thanks, Stephen. Stay well.
Operator, Operator
The next question comes from Henry Coffey with Wedbush. Please go ahead.
Henry Coffey, Analyst
Good morning, and thanks for taking my call. I have some small questions first and then one larger question. Regarding the JVs, what incentives do the companies have for joining up? Are most of them home builders, or are they independent operators? Can you provide some thoughts around that?
Michael Nierenberg, CEO
Most of our JV partners are realtors across the U.S. They join JVs to monetize mortgage origination income through their retail sales force, which is how it really works. They do the joint ventures to facilitate leads and referrals to our loan officers.
Henry Coffey, Analyst
Are these companies generating leads for you?
Michael Nierenberg, CEO
No, these are real estate brokers working directly with consumers aiming to buy homes. They provide referrals to our loan officers within our joint ventures.
Henry Coffey, Analyst
On the wholesale front, any comments on where gain on sale margins are going in July and August, given we've seen stability recently?
Michael Nierenberg, CEO
We've seen stability throughout the quarter. Following a drop from March to April, we observed steady margins in our wholesale channel for the rest of the quarter, including July.
Henry Coffey, Analyst
Michael, for you, a big question. This process is going to take time. If you had to pick one primary ingredient you could accelerate, would it be time? It takes time to merge the businesses, and for interest rates to increase, etc. What is the logical trigger for seeing an increase in the dividend?
Michael Nierenberg, CEO
Henry, that's a great question. When I take a step back to assess our company today, I notice our equity price. When we announced the Caliber deal, we raised capital around $10.10, and stock prices are now back to the $11s. We're seeing book values of about $11.30 after everything. I'm frustrated with the current equity price considering we have a strong operating business with unique proprietary channels. We’re also focused on recapturing shares through our investment and operating businesses for better valuation. I'm confident we'll achieve a dividend increase once we finalize the Caliber closing. We need to assess things at that point and hopefully bring good news for stakeholders. It is indeed a critical time for us to progress with both our investment company and operating businesses.
Henry Coffey, Analyst
Is this something we can follow up on in the fall, or should we wait until next year when you have fully digested everything?
Michael Nierenberg, CEO
You can follow up with me anytime. I am very frustrated with where we are trading, with a book value of $11.40 or $11.30 and the results we are showing. I want our stock to reflect proper valuation. We'll do our best to ensure we reach our potential.
Henry Coffey, Analyst
Great. Thank you.
Michael Nierenberg, CEO
Thank you.
Operator, Operator
This concludes our question and answer session. I would like to turn the conference back over to Michael Nierenberg for any closing remarks.
Michael Nierenberg, CEO
Thanks to everybody for your support and your questions. I would like everyone to think about the results, the book value we continue to drive, and where I think we're headed. Stay well, and have a great rest of the summer. It goes quickly; don't rush time, Henry. I look forward to catching up with everyone soon. Take care.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.