Rithm Capital Corp. (RITM) Q2 2015 Earnings Report, Transcript and Summary

Good morning. My name is Jake, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the New Residential Second Quarter 2015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ms. Mandy Cheuk, from Investor Relations, you may begin.

Thank you, Jake, and good morning, everyone. I’d like to welcome you today to New Residential's second quarter 2015 earnings call. Joining me here today are Michael Nierenberg, our CEO; and Jonathan Brown, our interim CFO and CAO. Throughout the call, we’re going to reference earnings supplement that was posted to the New Residential Web site this morning. If you have not done so, I’d suggest that you download it 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 investor presentation regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC. And now I’d like to turn the call over to Michael.

Thanks, Mandy. Good morning, everyone, and thank you for joining our Q2 earnings call. We had a terrific quarter and a very busy one. We announced the acquisition of HLSS, which gives us critical mass in our three core areas of our Company; MSRs, Servicing Advances, and Call Rights. During the quarter, away from the HLSS acquisition, we also acquired or agreed to acquire 59 billion of legacy MSRs, again which is separate from the HLSS acquisition, further growing our MSR investments in the company. In the quarter, our non-agency business took on a bigger role as a result of the acquisition of more Call Rights in the non-agency mortgage space. We grew our non-agency mortgage holdings by 35%. During the quarter, we announced record earnings, raised our dividend, and we put the Company on the path for future growth as we seek to grow our core earnings. We are now one of the largest capital providers to the mortgage servicing industry. As we look forward, we’re very excited as the second quarter’s activity puts the company in a great position for continued success. Within MSR portfolio of over $400 billion and the potential for the Federal Reserve to raise rates, we own one of the few asset classes that will likely go up in value as rates increase. Our Call Rights also put us in a very unique position in the marketplace, with the ability to call over $200 billion of non-agency mortgage security. Before I refer you to the supplement, which has been posted online, I want to spend a second and talk about the timing of our earnings release. Corporate acquisitions are not always easy. The closing and integration of HLSS was more challenging than expected. And quite frankly we needed a couple of extra days to tie up all loose ends and finalize numbers. I do want you to know that we’re still on target as we think about the future and while there was a bit of noise in getting this transaction closed, we’re thrilled with the transaction. I’ll now refer to the supplement which has been posted online, and I’m going to begin on Page 2. A few quarters ago, we set out to try and simplify the Company by focusing on three -- on our three core segments. We’ve done that by growing our Mortgage Servicing Rights, Servicer Advance business, and our Non-Agency business. We’ve grown our Q2 core earnings on a year-over-year basis by 13%. Our total return year-to-date is 20%. Life to date dividends paid by the Company have been $487 million. Overall, terrific metrics on all fronts. On Page 3, I want to talk about our financial performance. In the quarter, we had record core earnings of $92 million or $0.45 per diluted share. That compares to Q1 of $63 million or $0.44 per diluted share. Our GAAP income in Q2 was $75 million or $0.37 per diluted share versus $36 million or $0.25 per diluted share. And again in the quarter, we raised our dividend to $0.45 from $0.38, a terrific quarter. I do want to mention that in the quarter, there was a little bit of noise and certain things affected our core earnings -- had our core earnings go to $0.45, and I just wanted to touch on that for a second. Our MSR settlements were delayed a bit, and to the extent that they were settled earlier in the quarter, that would have resulted with an extra penny in core earnings. We also had some one-time acquisition costs of $0.05, and an additional cash drag of $0.01. So overall without these earnings drags, our earnings would have been $0.47 to $0.48 in core earnings. On Page 4, I want to spend a minute as to why we’re different -- why we think that we’re different than other mortgage REITs. Again, we own a very large portfolio of mortgage servicing rights over $400 billion. MSRs are one of the few investments that should rise again in value as REITs go higher, simply because prepayments will slowdown and you’re going to have more cash flow for a longer period of time. Our mortgage servicing portfolio is something that you simply can’t replicate in today’s market. We also -- I also want to be clear that we’ve no intention today of raising equity as our existing portfolio should give us the ability to excess liquidity of up to $1 billion for future investments. In the acquisition or investment, we will hopefully be able to funded with our own balance sheet. The other thing I want to point out as you look at the bottom of the page, again as we own over $200 billion of Call Rights on the Non-Agency Mortgage market and we think the optionality that that gives us over time should help differentiate us from the rest of the pack. On Page 5, it talks about we go through the second quarter and just talk about some of the things that we’ve done, so beginning in April we announced the acquisition of HLSS that was a $1.4 billion acquisition. In April and June, we raised equity to pay for the acquisition, as well as fund other investments. In May of 2015, we increased our dividend by 18% quarter-over-quarter. We also announced record core earnings for Q1 and today we’re announcing record core earnings for Q2. As you look to the right side of the page, the one thing I want to highlight is we continue to do a lot more marketing, work closely with our research coverage, and quite frankly we won't be happy until we see our dividend yield trading in a more normalized range of what we feel is right in the 8% to 10% range. Just to give you a benchmark, HLSS traded between a 6% and 7% dividend yield going back in time. On Page 6, I want to talk about our Q2 highlights. As I mentioned, in April we acquired HLSS for $1.4 billion. In that acquisition, what we acquired were -- was $156 billion of seasoned credit impaired non-agency mortgage servicing rights. We acquired $5 billion of Servicer Advances, and then we acquired some loans which I'll talk about in a little bit. We raised $1.3 billion to $1.4 billion of equity to pay for HLSS and fund our investments. On the Excess MSR side, I pointed out that we acquired or agreed to acquire $59 billion of legacy MSRs in the quarter. We also paid off -- we took out some short-term debt to acquire HLSS, and the short-term debt was around our MSR portfolio, and we pay down $650 million of the $850 million of MSR debt in the quarter. Our lifetime IRR on our MSR portfolio is currently 24%. On the Servicer Advance front, we increased our financing capacity to $11 billion, and we continue to improve the terms of our financing facilities. We are currently in the market today with a $1.5 billion term securitization around Servicer Advances. That deal will increase our advance freights, lower our cost of funds, and effectively the way to think about this is raise equity at a cost of funds of approximately 2.5%.On our Servicer Advance portfolio, our life to date IRR is 28%. On the non-agency side of our business, Non-Agency Securities and Call Rights in the quarter recalled 18 seasoned non-agency mortgage deals, which was approximately $369 million in unpaid principal balance. We then issued $334 million securitization and our life to date on our non-agency securities portfolio has been 44% IRR. We had a very, very busy quarter and the way that we think about the Company is we’re well positioned for all interest rate environments. On Page 7, this gives you a snapshot of our balance sheet and the way that we think about the Company. We currently have investments as you look in Excess MSRs of $1.7 billion, that compares to the end of Q1 of $750 million. Our Servicer Advance portfolio grew from $200 million to north of $600 million. Our Non-Agency Mortgage Securities portfolio grew from $200 million to north of $300 million and then the opportunistic investment bucket that’s really our consumer loans which we’ve spoken about in prior quarters, which we carried a basis of zero, and then we’ve some loans that we continue to acquire as a result of our call activities, and then as of 6/30 we had cash in our balance sheet of $246 million. So again our goal continues to be to simplify the Company, grow our business in our core asset classes, and continue to drive returns for our shareholders. Now if you will flip to the Excess MSR page, I’ll talk a little bit about our performance and again what sets us apart from the rest. Our Excess MSRs continue to perform very well. We grew our portfolio by 67% in the quarter to $415 billion with a market value again of $1.7 billion. Today our Excess MSR represents 57% of our total equity. As we look at the market and we think about acquiring MSRs, we’re very selective. We continued with our investment thesis to buy legacy or credit impaired MSRs, which we feel will have lower prepayment risk and will have a better ability to recapture that borrower to the extent that they refinance or try to pay off that loan. 85% of our portfolio is backed by credit impaired borrowers, with a FICO score of approximately $659 million. 98% of our portfolio is either seasoned or recently recaptured. On average, the portfolio is seasoned by 106 months or almost 10 years. Most of these borrowers have already seen a low in rates. While the second quarter saw speeds and the broader mortgage market increased slightly, we’ve already seen a drop with July prepayment REIT numbers published last week, slower by 10%. As we look at our recapture rates, our recapture rates for the quarter remain steady. For Fannie Mae and Freddie Mac collateral, they were approximately 30% to Ginnie Mae collateral bucket was 20% to 25%, and PLS has been around 10%. And typically on the PLS front most of those borrowers when they prepay its more from a default than it is an electric prepayment. As it relates to our recapture, we’re striving to try to get higher recapture numbers, one of the things that our partners at Nationstar have done, they’ve actually hired a new person to run their origination business with a large focus on recapture. Our lifetime IRR for our portfolio is at 24% and this includes the HLSS portfolio, which we recently acquired. On our Servicer Advances, the investment has been performing extremely well. Our team has done a great job working with our financing counterparties to increase capacity, increase advance rates, and lower our cost of funds. As I mentioned before, we currently have $11 billion of capacity to finance the investment and we currently have $3.5 billion of unused or -- of unused capacity, so to the extent that we acquire more portfolios of private-label mortgage securities, we are in a great place to be able to be fund more Servicer Advances. As we mentioned last quarter, we are still working on a large portfolio of private-label securities with an approximate UPB of $75 billion on the MSR front. The acquisition of HLSS brings our advance portfolio to approximately $8.5 billion of advances with equity invested of $638 million, that’s as of 6/30. Our advances have a 90% advance rate and a cost of funds of 2.2%. 68% of our advances are either fixed rate or we’ve purchased caps which mitigates increases in interest rates. So should short rates rise, we feel like we’re in a great place to be able to mitigate any increases that we potentially will see in interest rates. On the legacy side, pre-HLSS, our advance balances at the time when we announced that deal in December of 2014 have decreased from $5.2 billion to $2.5 billion. Our initial investment of $313 million is currently valued at $161 million and we have already received cash flow of $208 million. Our IRR on that investment has been 28%. As I pointed out earlier, we’re currently in the market with a termed securitization which we hope to price later this week. The effect of that will increase advance rates by about 6% and it is our intention to lower our cost of funds. All in all, we are very happy with the investment and continue to do what we can to increase advance rates and lower our cost of funds. Now I want to spend a minute talking about our Non-Agency Securities portfolio and our Call Rights. As I pointed out earlier, our non-agency business will continue to take on a greater role over the next couple of years as more and more of our call options become in the money, as deals pay down, delinquencies decrease, and advance balances come down. If you take a look at this page, we feel this is a great way to get grounded as how we make the money when we do a deal collapse. And simply, we buy bonds at a discount that accrete to par when we call them. We call the collateral at par plus expenses, we then securitize or sell the loans at a premium. The delinquent loans that we take back are retained on our balance sheet at fair market value and that those get liquidated or modified over time. Since we’ve begun this strategy, we’ve been averaging approximately two to three points of P&L per deal. If you flip to the next page, we attempt to show our pipeline and had a think about this. Today, the notional amount of -- were the UPB of our call pipeline is approximately plus $200 billion. We believe each and every one of these deals will get called at some point in the near future. As we look forward, we project the current balance to be approximately $100 billion at the time of call. If you think about this, two points times a $100 billion is $2 billion, so the optionality that we have in this business is enormous. I'm using this as an example to illustrate how we think about the power of our Company and the earnings potential down the road. As we look at 2015, and looking ahead, we’ve had a very transformative quarter and year so far. We continue to try and realize record core earnings, increasing our dividends, and simplifying our strategy. So far so good. We feel we’re in a unique position with plenty of liquidity. There is no need to raise equity, a robust pipeline and a robust pipeline of investments. We are really excited about the future and delivering results for our shareholders. In the following pages, there is more information on our portfolios for your reference. I'll now turn the call over back to the operator for Q&A. Operator?

Operator, are you there?

Yes, sorry about that. [Operator Instructions] And your first question is going to come from Doug Harter from Crédit Suisse. Your line is open.

Thanks. I’m hoping you could talk a little bit more about the pipelines for the Call Rights? The $100 billion would seem to be quite an acceleration from kind of the pacing that you’ve been going at in terms of Call Rights. And when should we expect to see that pace increase?

Doug, if you look at -- I think it's Page 11 in the deck, we actually show when each one of these or when we think the balances will be callable. Currently today there is $31 billion of securities that are callable. The way that these securities will effect -- eventually be called is when advance balances come down as a result of delinquencies coming down, that could be one way. Two is, we acquire more non-agency securities at a discount, and as you look quarter-over-quarter, I think we increased our non-agency exposure by about 35%, and those are really the two ways that we’re kind of thinking about it. I do think that mortgage market itself at some point will undergo a transformation around the servicing side as there is a lot of new initiatives to have as you look forward for example, we believe that there will be changes on the servicing side working with bondholders and the large non-bank servicers to get to a place where mortgages will be serviced, and there is a little bit more detail on an as collected basis rather than where the servicers are obligated to advance principal and interest. So I think it's going to take time. We currently have call notices in today for another, I believe, 8 or 10 deals. For this month, we have more call notices into the trustee. So I do think it's going to be something that will be more -- you should see the results more in ’16, ’17, and ’18, then I think you will see more so this year.

Great. Thank you.

Okay. And your next question is going to come from Paul Miller from FBR Capital Markets. Your line is open.

Hi, guys. It’s Jessica for Paul. How are you?

Hi, Jess.

One question regarding the non-agency MSRs that you guys are looking at. What kind of timing can we expect with that, and can you comment at all on the negotiations?

Yes, I think this would likely be in conjunction with us and Nationstar. We do believe something will happen, and we’re hopeful that it happened this quarter. So we’ve had some very good productive conversations, I think it’s -- and we’ve gone through the portfolios. We have NDA signed and it’s -- we’re going through different pricing discussions.

And then -- great thanks and one follow-up to that, what's your view of more PLS product coming down the line from banks and other holders?

I think if you take a step back and you say the outstanding non-agency mortgage market is about $700 billion. We have MSRs on between $200 billion and $250 billion today, this other portfolio is $75 billion. There’s probably one or two other reasonable transactions that we can expect at some point down the road, but I can't pinpoint those now. So, I think the runway is probably between one and three more large transactions, and then I think that’s kind of it.

Okay, great. Thanks so much.

Thanks.

Okay. And your next question comes from Bose George from KBW. Your line is open.

Good morning. I shall follow-up with one more on the clean-up call. I’m curious what the impact of rising rates would be either on the callability or the economics of the transactions?

I think it’s -- the way to think about is twofold. It’s a good question in that. As rates rise, your premium collateral theoretically will be lower in price. The counter to that is as rates rise, you’d expect that these deals continue to get cleaned up from a delinquency percentage, so we’re retaining less delinquent loans that we have to market at fair market value. So I think while we -- premium collateral will likely go down in price. I think we still feel good that the delinquency profiles and advance balances will come down, so effectively your expenses are going to be less when you call these deals. The other thing I want to point out is that, once we identify a population of loans or deals to get called, we effectively hedge out that interest rate risk in the market place.

Okay. That makes sense. Actually and then just on that Chart 11, the $31 billion that’s callable today, actually what percentage of that is in the money. So is it the reason that some of that’s not going to be called as you’re waiting for it to sort of be in the money?

Yes, I think it relates more to the Servicer Advance balances that are out, because that’s really a cost that gets paid off when you call those. And that’s really -- that plus the delinquency profile of those deals. We currently have the call notices in on a little bit over $1 billion that we’re hopeful will come to fruition in this quarter.

Okay, great. And then, actually the $59 billion of UPB MSRs you mentioned. How much of that has already been funded, how of that’s on your balance sheet and how much of that is still to come?

About of the $58 billion or $59 billion, $20 billion are already funded and the rest will be funded likely late third quarter, more likely in the fourth quarter.

Okay, thanks. And then actually one more for me, in terms of the cash -- excess cash you noted this quarter, how much billion was the excess cash average?

We raised equity in June, because we needed the cash to fund part of the Ocwen downgrade. I think -- clearly [ph] average Q2 balance was $328 million.

Okay, great. Thanks.

And your next question is coming from Jason Deleeuw from Piper Jaffray. Your line is open.

Thanks and good morning. You guys did $0.45 in core EPS this quarter, it sounds like you had some one-time costs and the run rate is more like $0.47, $0.48 going forward. And then you still have, it sounds like the bulk of the $59 billion of MSRs to come onboard, not sure how much of that actually helped in the second quarter. Can we expect that, that $59 billion of MSRs, is that going to be accretive to the dividend run rate when that fully boards versus what we saw in the run rate for the respective quarter?

We believe that Jason that it will be accretive. Just to give you a sense, if you think about it we funded HLSS in early April on the 6. Each day was worth approximately $500,000 in income to the company. So if you took those six days that would have been an extra $3 million. So one of the things that was a drag on earnings is on core is really the timing of these MSR settlements. While we continue to work closely with our relationships on the non-bank servicing side, we also continue to work with our friends in Washington to try to get this stuff ordered as soon as possible.

Great. And then when we think about this potential $75 billion of UPB related to the MSRs, it sounds like you’re working with Nationstar in this, hopefully third quarter it sounds like some timing. Is that going to be accretive to the dividends since you’ve got a $1 billion in capital, you won't need to raise any more equity. So it sounds like you have plenty of funding looking for it, but should we think about it, as we see these MSR deals such as the $75 billion that we can think about, hey the dividend is going to step up from the run rate that we have been seeing?

While we can't promise a dividend increase, I think we want to be very clear to everybody that we have no intention today of raising equity. We feel that our balance sheet forwards us the ability to raise debt around our balance sheet, because we have no corporate debt really other than repo. We have a $200 million MSR note that we issued to help pay for the HLSS acquisition. But we feel today that with our current assets on our balance sheet the lack of debt any or hopefully any investment or acquisition we do will likely be accretive to the company.

Thanks. And then the last question is on, the Ocwen funding issues, and it sounds like Ocwen maybe trying to resolve some of these themselves without you guys putting them or trying in that, resolve it in a way where they do not have to make the payment to you guys. Can you update us on what exactly is going on there and how you think this issue is going to be addressed following the downgrade on the Servicer rating? Thank you.

Sure. So, when we acquired HLSS, we entered into an agreement with Ocwen. In the agreement it’s stipulated that should Ocwen get downgraded it was our guesstimation that the time that the amount of money that new residential would have to come out of pocket would be approximately $150 million for that Servicer downgrade. In negotiating we set a return in equity similar to what we’re currently earnings in the market of approximately $20% which would have correlated to a number of about $3 million. We agreed with Ocwen that we would receive up to $3 million per month for 12 months or no more than $36 million. We’re currently in discussion with Ocwen on getting that issue resolved.

But to be clear, there is a way for Ocwen to potentially address the issue without actually making the payment to you guys that is one of the options out there?

Not that we’re aware of or not that I’m aware of, and I have our accounts all here now.

Okay. Thank you very much.

Okay. [Operator Instructions] And your next question is going to come from Michael Kaye from Citi. Your line is open.

Hi, good morning. I recall you were working on getting a private letter ruling from the IRS to get the servicing advances to be considered a good REIT asset. Just wondering if there’s any update where that stands?

I can't give you an update right now, Michael. Obviously we do all we can to make sure every asset we have is a good REIT asset, but its really, at this point there’s nothing I can tell you on this call right now.

Okay. How about the Blue Mountain allegations, I believe there was a stand still -- I think a modest [ph] ended last month. Is there any update on where that stands the processing?

Yes, currently just to give you a frame of reference, we have $72 million that’s sitting in escrow. We believe based on our discussions with council, that the Blue Mountain allegations are unsupported by the facts and expect a very favorable outcome in the short-term. The stand still is currently still in place and we continue to work on that. So it’s something that we hope to get resolved shortly. It’s not resolved but we currently have escrow in $72 million. So the way to think about this is, once this gets resolved assuming that we are successful won't get our $72 million back and that would just give us more cash to be able to -- to be used for investment.

Great. Thanks very much.

And your next question is going to come from Matthew Howlett form UBS. Your line is open.

Mike thanks for taking my question. Mike, just address [ph] and give me back that cost of capital, I know long-term you’d like to see that go lower, and now with over half your earnings from HLSS and you pointed out earlier that traded at a significantly lower cost of capital what was independent [ph]. Can you just give us maybe a scenario that where you’d have to raise capital. I think the market, when we look at these when I look at these, the strongly managed structure that sometimes feel like, the manager is in control and these vehicles are just capital raising entities for them. Can you just kind of address that point and give us -- you’ve got a lot of dry powder but any scenario where you’d have to raise capital and maybe could you just talk about how you look at accretion going forward if you do have to raise money?

Sure. Just to be clear and I stated this I think early on in the discussion. We have no intention of raising equity anytime soon. We do believe we have the ability to raise debt around our balance sheet which would make effectively almost any investment that we would consider accretive to our earnings. The only way I could -- I think we believe that we would raise equity or need to raise equity if there was some outsized acquisitions or something that we couldn’t fund or for existing liquidity the way that we see it on our balance sheet. So if you think about it we have 200 plus million dollars of cash right now. We are going to run more -- we are going to have more cash on our balance sheet as the company has grown pretty substantially over the course of the -- since it was fund at Newcastle [ph] in 2013. You take that $200 million, we feel that we could excess over $1 billion or up to $1 billion of liquidity or for own balance sheet, and again we have no corporate debt. So I think the likelihood of us coming to market to issue equity is very, very low. And I think again, any investment that we do will hopefully be accretive to our earnings. So to dispel that notion, we are not a serial equity issuer. We are here to do the best we can for our shareholders and grow our core earnings and grow our dividends.

And Mike that includes, if this $75 billion PLS still does go through the company, will you need to raise external capital to fund it?

That’s correct, Matt.

Great.

We have no intention of raising equity unless there is some outsized acquisition that we couldn’t fund with our $1 billion and change of liquidity.

Got you. And then just maybe long-term, Mike can you just address sort of what, how you see NRZ and you have a big UPB portfolio, it could take a long time running out. You said that there could be some bigger deals closing, but we know the private label market is sort of shrinking. Going for it you see NRZ becoming more into new issue MSR, could get its own licenses. Do you feel like you still have to maintain IRRs down the road? Just sort of long-term, how do you see NRZ shaping up with the state of the MSR market today and whether the non-banks currently fit?

Good question. I think first of all, we are -- and I’ve stated this and we’ve stated this in prior quarters. We will get licensed at some point hopefully here in the near future and I want to say getting license means we’re not running an operation. It just gives us the ability to work not only with Nationstar, not only with Ocwen, potentially with other kind of non-bank servicers. And the reason that we feel its important to us, is as Nationstar has grown their servicing portfolio, we just need to maintain a little bit more flexibility to the extent that we want to acquire a pool of mortgage servicing rights and just have more flexibility to have them sub-serviced potentially somewhere else. So that would address the desire to get license. While saying that, Nationstar is still our primary partner. As we think about the company going forward, we feel there is enough runway in a 400 plus billion dollar MSR book, 200 plus billion dollars of call options and then in our Servicer Advance portfolio as those balances come down, I think we’ll always try to figure out a way to grow another part of our core business. There are some interesting things that we continue to look at today and I do believe they’re in a great place with our liquidity profile and with some of the uncertainty in the market to continue to grow our company for the benefit of shareholders.

Okay. We look forward to that. Thanks Mike.

Thanks Matt.

And your next question comes from Jason Deleeuw from Piper Jaffray. Your line is open.

Hi, thanks for taking the follow-up. A question on the CPRs and the MSRs, did you guys have a lot of credit impaired MSRs and part of the story here is, the involuntary delinquency related CPR rate should decline over time given how mortgage credit is trending. Can you kind of give us a sense for where your CPRs are right now and the MSRs? And what time is the voluntary, involuntary breakout between those two?

On our CPRs, just to give us a sense, our three month gross CPR for the entire portfolio was 16.7% versus a 12 months average of 14.8%. Our three month net CPR as a result of our recapture was 14.3% versus a 12 months average of 12.5% and our three month recapture was in line with the 12 month average of approximately 22%. On the voluntary prepayment, it looks like our voluntary prepayments were approximately 8.7% CRP on a three months basis versus 7.6% projected. So overall we think our MSR portfolio is performing inline. As I pointed out, just to give you guys a familiar reference, the 10 year note at the end of March was 192. At the end of June it was 235. Today it sits roughly at 220. Mortgage rates at the end of March were 3.69% and today they sit roughly at 4%. So we think we’ve seen some of the recent lows in mortgage rates and obviously we don’t really, and if the Fed rates is raised we think the 10-year note could gravitate to higher yields, which would lead to slower prepayments.

Great. Thank you for that. And then the last question is on the dividend and how you guys think about setting it. You did $0.45 core EPS this quarter, your dividend is also $0.45. Can we expect that, your core EPS almost would be 100% paid out or would there be some discount. Kind of help us think from a modeling perspective there. Thank you.

We will typically try to pay out between 90% and 100% of our core earnings, is kind of the way to think about it. This quarter obviously there was a little bit of noise as it relates to the acquisition, in the run rate we should have been give or take $0.47 to $0.48 in core. And as we look forward again we hope to grow core and raise our dividend, but obviously I can't promise that.

Okay. Thanks Michael.

Thanks.

Okay. And this time I’d like to turn the call back over to Michael Nierenberg.

Well, thank you everybody for dialing in. We really appreciate your support. We’re extremely excited about where we are as a company and I think what the future brings. So I look forward to updating you on the next earnings call. Have a great day. Thanks.

This concludes today's conference call. You may now disconnect.