Rithm Capital Corp. (RITM) Q4 2015 Earnings Report, Transcript and Summary

Good morning. My name is Erica, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the New Residential Fourth Quarter and Full Year 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. Mandy Cheuk, Investor Relations, you may begin your conference.

Thank you, Erica and good morning everyone. I’d like to welcome you today to New Residential’s fourth quarter and full year 2015 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 earnings supplement that was posted to New Residential website this morning. If you have not done so already, 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 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 would like to turn the call over to Michael.

Thanks, Mandy, and good morning everyone. Thanks for joining us this morning. I’m going to review our fourth quarter results, full year results and then speak a bit as to how we are thinking about 2016 in the future. I’m really proud of our team and the results we have achieved as we strive to grow our company, while producing sustainable dividend growth for our shareholders. Last year was a terrific year, which saw us grow our investments in our core business lines. The acquisition of HLSS was transformative in many ways as we grow our MSR investments in servicing advance portfolio, acquired more call rights and acquired a new servicing partner in Ocwen. We also grew our non-agency investments where we only associated call rights and we are well on our way to being fully licensed in all 50 states. From a financial perspective, earnings were terrific. Earnings growth is up by 22% year-over-year, and dividend growth is up by 11% year-over-year, all-in-all a very good 2015 for New Residential. As we begin 2016, and quite frankly late in 2015, we saw a very different investing environment. Bond prices have rallied, equity prices have fallen and the instability we are seeing in the market is creating opportunities we have not seen in years. While saying that, we are maintaining a cautious stand, having plenty of cash in liquidity. I do believe we will have good opportunities to grow our company prudently in our core asset groups, as well as take advantage of opportunistic investments which should come our way in 2016. I will now refer to the supplement which has been posted online. Please flip to Page 2, in trying to simply our company, we focus on three core asset groups which are Excess MSRs, Servicer Advances, and Non-Agency securities with the associated call rights. We currently have a $2.5 billion market value, we traded roughly at 16% to 17% dividend yields, and we paid out $699 million of dividends since 2013, and on a year-on-year basis have grown core earnings in our dividends. Our financial performance has been very strong, for the fourth quarter, our core earnings of $120 million or $0.52 per diluted share. Our dividend is $0.46, or $106 million. Our GAAP earnings for the quarter are $103 million, or $0.45 per diluted share. For the full year, we had core earnings of $389 million, versus $219 million in 2014, or $1.92 per diluted share versus $1.57 per diluted share in 2014. Dividends paid $355 million, or $1.75 per diluted share versus $218 million or $1.58 per diluted share. Our GAAP earnings in 2015, $269 million or $1.32 per diluted share versus $353 million or $2.53 per diluted share, and will get into that a little bit later. On Page 4, 2015 was a transformative year. We purchased HLSS for $1.4 billion, we acquired more call rights to more Non-Agency deals, we called 53 different mortgage deals and issued associated securitizations with those deals and to-date we’re licensed in 38 states and should be licensed in the remaining states by the end of Q1 or early Q2. And again, we announced record earnings and dividends for the company. If you flip to Page 5. New Residential today on the right side. We have capital invested at $1.8 billion in Excess MSRs, $1.6 billion net of $200 million of debt. Our Servicer Advance investment is $365 million, we have Non-Agency, we have investments in Non-Agency Securities with the associated call rights of $447 million. We have investments in residential mortgage loans of $200 million, and as of 12/31 we have $250 million of cash on our balance sheet. As we look back in Q4 and all of last year, Q4, when we thought the markets were turning a bit, our capital deployment in the quarter was fairly muted. I think that the net amount of capital that we invested in Q4 was something around $200 million to $250 million. And some of that was associated with previously committed MSR investments that we had made earlier in the year. On our Servicer Advance business, we significantly improved our advance rates. We extended maturities and we lowered cost of funds. We issued term notes in the market for Ocwen in November 2015. We establish new facilities in December for Ocwen. We increased an existing Ocwen-servicer advance facility from $400 million to $1 billion in November. And finally, we repaid $2.5 billion of HSART term notes at par, and we created additional liquidity of $200 million as a result of that. And if you recall, that happened as a result of Ocwen financial servicer rating getting downgraded. On the Non-Agency side of our business, we continue to execute on our call right strategy. In the quarter, we executed clean-up call rights in 28 seasoned, Non-Agency deals totaling $654 million. We completed $510 million loan securitization in November and subsequent to year-end, we initiated execution of call rights in another 14 seasoned Non-Agency deals of $200 million. In Excess MSRs, as I pointed out earlier, we funded $123 million of previously announced commitments related to $19 billion of legacy MSRs during the quarter. Now, I want to spend a little bit time talking about our portfolio and spend, probably a little bit of extra time on our Excess MSR portfolio. So if you flip to Page 8, our Excess MSRs investments really make us different than others. We own Excess on $400 billion of legacy, credit impaired servicing. As you can see by our portfolio, we have very seasoned MSRs, on average of 109 months. The borrowers, that are associated with these mortgage loans, have seen the lowest in rates many times. More than 50% of our MSRs are Non-Agencies, which tend to have lower prepayments, and cash flow was very steady. We have lower loan balances, higher LTVs and lower FICO scores than the industry. Again, this provides us with very stable sticky cash flows which overtime has delinquencies clean-up, particularly on our Non-Agency portfolio, will give us more cash flow, you simply can’t reiterate this portfolio. On Page 9, I’d like to take you through a little bit on our prepayments. Again, why we’re different, and then you can see on the right side of the page, we picked up point, we went back and looked the last time that mortgage rates were at current rates, just to see what happened with prepayments, and I’ll talk a little bit to that. What you can see here is our portfolio, we paid slower than the industry average. Over the past 12 months, NRZ’s prepayment speeds have been six CPR or 33% slower than the industry average. And when you incorporate recapture, we are seven CPR slower or 39% slower than the industry average. The last time mortgage rates were at – where we had a mortgage rate of approximately 3.65%, if you take a look to March of 2015, the actual prepayment speeds we saw in our portfolio were 15.6% gross or 13.2% net with recapture. Our current estimates today with the same mortgage rate would be 13.5% gross or 11.5% net. As you can see, the last time that we saw rates at these levels, the prepayments – we believe, the prepayments will be very comparable. But the difference in our portfolio today, as a result of the HLSS acquisition as we have acquired $140 billion of private label mortgage servicing, which again prepays slower, as much stickier than regular agency servicing. The last point I want to make on that is working with our servicing partners Nationstar and Ocwen, to recapture provisions we have in place with both servicers are very, very important, and should protect us to the extent that mortgage rates continue to rally more. To give you rough metrics, our recapture rates on our Fannie, Freddie portfolios have average roughly in the upper 20s to low 30s on our Ginnie Mae portfolio, approximately 25% and on our private label portfolio approximately 13%. If you now flip to Page 10, on our Servicer Advance portfolio, NRZ receives a portion of the MSRs, as compensation for the advances that we provide to our servicer partners. The outstanding advance balance today of $7.6 billion is funded with $7.1 billion of debt, that’s roughly a 91% advance rate or LTV and our weighted average interest rate is 2.6%. Our life-to-date return in the portfolio has been 26%. The returns have been terrific and as we go through the – when we go to Q&A you will notice that the amount of capital we have deployed has gone down, as we have improved our financing terms with our bank partners, as well as with the market. And our serving partners work to decrease advanced balances. This number will also decrease over time, as delinquencies come down and we figure out better ways to clean-up the legacy mortgage market. On Page 11, our Non-Agency business with call rights is a huge part of our future, while we have been successful calling deals. Our vision to clean-up the legacy mortgage market with other industry participants of something I feel can happen. We are moving along, and while there is a long hard process, I am very optimistic. Should we be able to accelerate timelines, this would be great for everyone, from servicers to bondholders and trustees. And again on the bottom of this Page, you will see a transaction we did in the fourth quarter, with its representative transaction. And essentially this shows an approximate profit of two points on a $500 million deal that we issued in November. Page 12, talks to how we could accelerate timelines, and if you look at the bottom of the page on the left side, currently the callable balance is $29 billion. Now what that represents, is that the legacy mortgage market, where we owned deals that can be called that have reached a factory gate of approximately 0.1%, which is usually the trigger for call rights. As I pointed out earlier, it is very important for us to try to figure out a way to clean-up the legacy mortgage market and accelerate these timelines. And that’s not and again working with our servicer partners, bondholders in the industry, I think that it’s something that we can do. If you flip to Page 14, we talk a little bit about the start to 2016, we have some metrics on the bottom of the page that shows yields on treasuries, Non-Agency mortgage bonds, the high yield market, the investment grade market and other different indices. The one thing I do want to point out in the mortgage market, if you look at Non-Agency’s spreads from 12/31/2014 to today, they widened approximately 50 basis points. If you look at the high yield spread from 2014 to today, they widened approximately 200 basis points. So what we are seeing overall and then in the mortgage market is very, very good performance, particularly in the Non-Agency space. And the agency space we’ve seen mortgage – Fannie Mae mortgages widened by about 15 basis points, again very good performance in light of the volatility that we are seeing in the market. On Page 15, market volatility should create some great investment opportunities for us. We will be more prudent today than ever before with our cash on our balance sheet and the liquidity that we are able to access in the marketplace. While saying that our core focus continues to be around our three core asset groups, which are Excess MSRs, Non-Agency Securities and Call Rights and Servicer Advances. And we do think in those three asset classes plus in loans to the extent that they do cheapen up quite a bit. We think we will be able to deploy a fair amount of capital throughout the year and create great returns for our shareholders. On Page 16, what we wanted to do is just give you a snapshot of our funding business. And as we think about the funding markets, what I would say is that one, we have two – approximately $2.6 billion of additional funding capacity around our securities portfolio. We have about $1.5 billion to $2 billion of additional capacity on our advance funding business. And in general, I think the funding markets today are open to us and others and the other thing I do want to point out is in light of the news around, the Federal Home Loan Bank, I had mentioned on prior calls that we were applying to become a member of the Home Loan Bank. We have never had any financing with the Home Loan Bank. And at this point, it doesn’t look like we ever will. Page 17, we talk a little bit about our portfolio, why we are positioned, why we think we are positioned well for all types of interest rates. On the Excess MSRs, should interest rates rise, we are one of the few fixed income asset classes that will rise, if insurance rate rises. If insurance rates fall, which they have fallen, we have recapture agreements which should protect our portfolio, as well as the legacy needs of our portfolio. On Servicer Advances, we are protected for a higher cost of financing and via agreements with our servicing partners. And should rates remain low, the financing cost should decline in a lower interest rate environment. And in our Non-Agency securities portfolio with call rights, roughly 98% of the portfolios floating rate, so should rates rise, we will get higher coupons. And if rates remain at these levels, or continue to decline, it will just make the value of our collateral worth more money as we do securitizations. Page 18, is just a slide on our licensing procedure. As we want to be licensed in all 50 states. They desire there, is just to give us more flexibility around our business, to open up more doors with different servicing partners. And to be able to continue to grow our excess MSR portfolio. Finally, on Page 19, 2015 in review. We achieved record core earnings of $0.52 per diluted share in the fourth quarter. We did announce a $200 million share repurchase program. We repaid $2.5 billion of term notes, and we created extra liquidity around our financing, by doing additional financing. We acquired HLSS for $ 1.4 billion, away from HLSS we deployed $600 million across our core business segments. And from a dividend perspective, our dividends on a year-over-year basis is up approximately 11%. Today, we’re positioned for all different interest rate cycles, again we pointed out that we expect to be able to license in all 50 states. We have up to $1 billion of liquidity that we could access via our own portfolio. And again our continued focus will be around our call rights. With that, I’ll turn it back to the operator and we could open it up for questions.

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

Hi, guys, good morning. Actually, the first question is just about cash. Did you guys have excess cash of about $250 million at the end of the quarter, how should we kind of think about what that number should be, normalized?

At the end of the quarter, stated from 12/31, we had $250 million of cash. We made a dividend payment of, little over $100 million at the end of January. We have free cash flow from our business of approximately I think it’s roughly $40 million per quarter. So, and we haven’t really deployed a lot of cash flows in new investments, as we’re little bit concerned obviously about spreads in the marketplace. While saying that, I think a big part to focus on is our ability to access liquidity in the markets via our own portfolio. So we have cash today, we able to access cash via our own portfolio. We have $250 million at the end of fiscal 2015. And we have free cash flow of approximately $14 million per quarter.

Okay, great. That’s helpful. And then actually just in terms of other investment opportunities can you talk about what you see that’s interesting out there, assuming that there is no MSR deals anytime real soon?

We are looking at all the markets, again nervous – for those of us that have done this for a long time. We’ve seen volatility in the markets. We are in a point in time that I think the volatility we are seeing in spreads is higher than what we have seen in quite some time. I do think our focus will continue to be around our core business. For example, on the past few days with the equity markets stabilize for 24 hours. We bought some Non-Agency securities; we are able to get on a levered basis about 17% return. Keep in mind, we have the call rights, so to the extent that we are able to accelerate some of the call rights to returns and that will be terrific. You have seen the CMBS markets collapse, we have not invested any capital in CMBS. I’m using that as a reference point, you have seen the CLO market collapse. Again I’m using that as a reference point. In my earlier comments I pointed out how the high yield market is, at least 200 basis points higher in spread overall. So if one of these things, Non-Agency securities will continue to focus on. They are extremely well big, they probably haven’t widened quite frankly enough relative to I think the rest of the world. We’re seeing a lot of sellers of loans, the loan market continues to trade extremely well. But we will continue to focus on bonds, MSRs and then the Servicer Advance stuff which we didn’t – where we think we have a good edge and we are in a terrific return. So it’s going to be more – probably more the same, we are just going to be prudent about how we deploy capital in these markets.

Okay, great. And then actually there is one more, could you – any color you can give on the type of agreements that could accelerate the clean-up call opportunities?

I think on that is in the mortgage market all of these are governed by pooling and servicing agreements. So it’s going to take a large effort, not only by quite frankly NRZ, but we are going to need other industry participants to go along with us. That’s going to include servicers, that’s going to include trustees, that’s going to include other bondholders. And likely some governmental support and we’ve had discussion and it’s something that we are absolutely committed to doing, because I think it would help everybody and again I’m hopeful that we can bring the industry together to get this done. And I think all the constituents that I mentioned have a vested interest in making this happen. So it’s not something that’s going to happen in 30 days, but it’s something that I think it truly happen.

Okay, great. Thank you.

Thanks.

Your next question comes from the line of Jessica Ribner from FBR Capital Markets. Your line is open.

Good morning, guys. How are you?

Good morning.

Just a couple of questions. I know that you didn’t give an exact breakout of the economics behind the securitization this quarter. But does the two points to three points still stand even in current market conditions?

No. It’s hard to tell. I wouldn’t – as we look forward I’m not, I don’t think any of us here would tell you that you should run all this stuff at two to three points, I think it is going to be condition on the market. The one thing I would tell as you got the 10-year note this morning, 168 or 170 wherever it is right now. The mortgage market is hung in there particularly well. But while saying that, we strive to make as much money as we possibly can on these call deals. That deal that we illustrated is approximately two plus point kind of arbitrage for us. And it’s going to depend on market conditions, we intend, we hope to issue a new securitization either at the end of March or probably at the latest in April. And that deal will be something around $400 million to $500 million. But, again it’s – we can’t tell you exactly what those numbers will be but we think those are based on past performance those are the appropriate metrics.

All right thank you. And then can you give us an update on your buybacks and how you think about maybe increasing the dividend versus given your higher run rate of earnings, it looks like versus executing on your buyback plan?

As it relates to the buyback, I think we have the buyback in place. It's something that we put in place that we think – the way I would think about is, it's almost like insurance for our shareholders in a lot of ways. It's still our intent to grow the company via the longer – with dividends that we think are going to be sustainable for the long haul. And that's probably how I think about it. If our stock trades poorly, which quite frankly in these markets can happen and we think we are trading at a substantial discounted book, I think we will look to execute around a buyback, and that's kind of how we think about it. As far as our higher run rate in dividends, one thing I want to say is that we are committed to doing all we can to maintain dividends and growing dividends. But in this market I think it’s more prudent for us to not rush to spend every dollar we have or tap into every dollar of liquidity that we can possibly access just because the markets are so unstable. When you look at our peers overall in the sectors that we trafficking, everybody trades at a pretty substantial discounted book and you never know from an opportunistic standpoint what's going to come our way so having more liquidity now rather than just rushing to grow dividends I think it’s a much more prudent stance in today's market than what we – the way that we probably would have operated the company in the past.

All right. Thank you very much.

Thanks, Jessica.

Your next question comes from the line of Doug Harter from Credit Suisse. Your line is open.

Thanks. As you look at the servicing advances, you've obviously been able to improve the financing quite a bit and pull capital out. Would you say that you’ve kind of achieved everything you can there or is there any more room to go?

I think there is probably more room. Keep in mind, the amount of capital currently is $300 million odd, the way that will grow is if financing terms get worse. If advance balances go up, or if we acquire new portfolios of PLS, those are really the three triggers. I think on the Ocwen side, I do think there’s room to go, to see advance balances decrease. And keep in mind, we have about $130 billion to $140 billion of private labels servicing with Ocwen. So hopefully, we could work together and that can happen and that will be beneficial for both parties. So that’s kind of how I would think about it. The big thing and I think I pointed this out earlier. For all of us and the market and it’s not just specific to NRZ as, how do we clean up the legacy mortgage market. And going back to over the course of the past, in 2015 we have spent some money with outside legal counsel and had conversations with a number of different folks whether it would be peers on the bond side and/or mortgage servicing partners. If we can clean that up, keep in mind, the likelihood is that the Servicer Advance investment will go away or will accelerate. So your returns will look terrific, but it’s something that you’ll, that will go away over time. So that’s kind of really what we’re focused on.

Great. And then, can you talk a little bit about the returns you saw on the NPL side as you grew that investment this quarter?

Yes. I think, we did one transaction with Fannie Mae. Our equity deployed on that transaction was $57 million. So not a ton, one of the portfolios was purchased, I believe at about $0.55 to $0.56, I believe. And the other was in the low 70s. It was something that was more, we think the returns in that portfolio will be between 15% and 25%. But I would say overall our growth in our loan business will be more centered around our call business than it work for us to be going out and buying large portfolios in non-performing loans. Again, unless they get much deeper, which I don’t really see that happening based on the amount of bidders that are in the marketplace. So it’s a small investment that was made, we think it was a little bit more opportunistic in nature. But I don’t know its intent for us to deploy a ton of money in the non-performing loans space at this time.

Got it. So – the most of the growth there is from the call deals?

Yes. Our loan business will be for the most part around our call deals. To give you a sense over the course of the past three weeks, we’ve probably seen $3 billion to $5 billion of loans that have come to market, that have traded, and quite frankly we haven’t participated in any of those.

Got it. Are the loans – are the prices on those holding up, or they’ve seen weakness…

The mortgage market itself, Doug, trades remarkably well, quite frankly and despite all the volatility that we’re seeing. On the bond side, as I pointed out we deployed a little bit of capital over the course of the last week, probably to the extend $30 million to $50 million of equity in bonds where we own associated call rights, where we think will have significant upside. But that’s, things are trading in the mortgage market particularly well relative to the other markets out there.

All right. Thank you.

Thank you.

Your next question comes from the line of Jeremy Campbell from Barclays. Your line is open.

Hi, thanks, guys. Just wanted to clarify something unanswered of Bose’s question. You said the free cash flow is $40 million per quarter, but you paid $100 million in dividends. Just was $40 million of free cash flow per month or $40 million in excess of earnings?

In excess of our dividend.

Okay, got it. Just wanted to clarify that one. And then, I know the approvals process for Fannie, Freddie and Ginnie can be a little bit tricky. And that you guys think you’re going to have all states locked down by the early 2Q at the latest here. But do you have a rough idea what the timing for MSR license with the agencies?

We’ve engaged all of them, we’re currently, we are working on them, certain agencies will take longer than others. But overall we think it’s going to be, it’s a 2016 event. And keep in mind like if you do a, if we acquire a pool of MSRs with another servicing partner. The transfer dates typically take some time. So, by the time, if we agree on a large portfolio of MSRs, by the time that we agree to fund that, we feel that we’re going to be licensed with everybody.

Got it.

It’s probably more of a mid 2016 event-ish, and again we can’t guarantee timing, as we work with different agencies.

Okay. Great, all my others have been asked and answered. Thanks, guys.

Thanks.

Your next question comes from the line of Trevor Cranston from JMP Securities. Your line is open.

Hi, thanks. Most of my questions have been asked. But I think on the conference call last quarter, you talked a little bit about potentially having some ability to deploy new capital in Servicer Advances. Can you give us an update on many opportunities you are seeing specifically in that market currently? Thanks.

In the quarter we – last quarter we bought, we invested some capital and some Servicer Advance AAA bonds, on the debt side with leverage that yield is something around 15% to 17%. Currently there are no term deals that are issued in the market. As I pointed out a few minutes ago, our growth in our Servicer Advance portfolio will occur again in three ways or four ways if you include our ability to purchase debt in the marketplace on rated transactions. One is if advanced balances grow. Two if we acquire new portfolios of PLS, or three as if advance rates change and we will have to fund more debt. And then finally the last part would be as if we acquire more assets via bonds. But those are really the only ways to grow I would say, over the long-term we'd like to see advance balances for the overall market not just for NRZ go to zero, there is a lot of – there is a lot of talk on mortgage 3.0 where new securitizations issued will be in a way where the servicer is not obligated to advance on the underlying mortgage trust. So we'll see what happens but I think it's something if we grow our portfolio, you will see that happened and I give you the other kind of ways that it can grow.

Okay, great. Thank you.

Thank you.

Your next question comes from the line of Jason Deleeuw from Piper Jaffray. Your line is open.

Good morning and thank you. Just wondering what the ROE profile as of the new investment opportunities that you are seeing, and then, can you kind of help us think about the timing, when you guys would deploy capital into some of these opportunities you are seeing? Do you think it's going to be more opportunistic? How do you think about that in the context of the volatility that we are seeing and potentially could see in the market going forward, so just wanted to get your thoughts on that?

I think that, unless the markets get real cheap or we get really stable, we are not in any rush to deploy capital and that's what I would tell you. Our current dividend yield, which is 16% to 17% and while, it's disappointing to us, it's the market today and unfortunately there is not a lot that we could do to influence that other than to keep doing what we are supposed to be doing. I don't know that there’s a ton of things that are cheap enough in our core asset groups for us to deploy capital today. Sitting on capital and thinking about it from an opportunistic standpoint, centered around our core asset groups, in which again are – it’s really going to be more on the MSR side and on the bond side. I think it’s more prudent than going out and seeing, buying an asset today at 12 or 13 today. We have our stock buyback in place, and to the extent that we needed to use that we would, but overall again, no rush to deploy capital. I do think stock could get a little bit cheaper here, and if we’re wrong and equity markets stabilize and oil stabilize this year at $29 or $30 or rallies a little bit more, then we will make sure that we deploy capital. But here it’s capital preservation, make sure our funding is in great shape and we feel very good about both of those. I think that’s the way that we’re going to approach the business today.

Thanks for that, and then the funding sources for new investment opportunities. Do you think the MSRs with no leverage against them and – do you still see those as a funding source, other funding sources that you’re thinking about?

Absolutely, I mean I think if something came our way, keep in mind, when we acquired HLSS last year, we ended up, the way that we paid for that was we ended up selling Non-Agency securities. We sold a large portfolio of our loans that we had on balance sheet at that point, to pay for that acquisition and then subsequent to that we did some equity. Today we have the same kind of flexibility, I think on our balance sheet. And we point out that we have roughly $1 million of liquidity that will occur via our MSRs, as well as to the extent that we needed to shed some assets in the event, that there was a large opportunistic investment that came our way. That’s the way I would think about it.

Thanks. And then the pace of call rights securitizations during the year, it sounds like we could get one kind of end of the first quarter, beginning of the second quarter. How are you thinking about the balance of the year in terms of future securitizations on the call rights?

I know we talk about this on every call. It’s our goal to accelerate it as much as possible. The amount of callable deals at 10% clean-up call, $29 billion today, the real – and we will continue to do calls as quick as possible. As you get to later 2016 and 2017 and delinquencies clean-up and advance balances come down, that pace of call will get accelerated. But the big upside here for – all of our shareholders as to kind of fix the legacy mortgage market. And that will really help us. I mean you can envision one day where – I know it's out there, but you take the deals where we have $200 billion where we have call rights in $200 billion of legacy on the legacy mortgage deals, call those, reissue all the securitizations. It will be fantastic for the entire mortgage world. And again, not specific to NRZ, so that's really the goal at this point. But you will continue to see the pace of calls accelerate over time. It's just one of those things, advanced balances need to come down and delinquencies need to come down based on the current state of how we call deals today.

Thanks. And it's nice to see the continued good work on the portfolio. So congrats, guys.

Thanks, Jason.

Your next question comes from the line of Michael Kaye from Citigroup. Your line is open.

Hi, good morning. Rates have been so volatile starting out this year, is there any sensitivity you can give us for us to get a sense of what book value probably declined so far in Q1?

The way I would – first of all, on our MSR portfolio, we put in that slide, I think it was on Page 12 or something but just, the way that we're seeing speeds, and again, we gave you the relative – the comparison to March of 2015, when that was the last time mortgage rates were roughly 3.65%. I think we feel pretty good about our portfolio. We're not seeing a huge pick-up in speeds currently. There's a couple reasons. One is you're in the winter time, right? So you have this seasonality effect. But the other point, Michael, is that the average seasoning of our portfolio is 109 months. When you look at our LTVs, our LTVs are much higher than the industry, our loan balances are much lower than the industry. The borrowers, the underlying borrowers in these mortgages have seen the lows in rates many times. So I think, listen, we are always nervous, right? We should be because that's what we should be doing but while saying that, Nationstar, they have a renewed effort around their recapture percentages. Their Fannie/Freddie stuff, hopefully, will creep into the 30s; the Ginnie stuff is 25%; the Non-Agency stuff is 13%, so I think, all in all, that is good. The other thing to point out is, when you look at our $400 billion of MSRs, roughly two-thirds of the market value is in private-label servicing, which, again, has more delinquencies. It's much stickier. And I think that we should be fine. I really do. We do have some sensitivity as we look at our portfolio and the world and how we think about things, and just to give you a sense, if recapture rates go up by 2%, the value of our portfolio would go up by 1.2%. If prepayments are up by one CPR, the value goes down by roughly 2.8. If delinquencies go down by one CPR – 1% for example, the value of our portfolio goes up by 2.7%. So there’s a lot of numbers here, but I guess – the bigger point is we’ve seen these rates before, our portfolio is different, that’s why we love it. We didn’t deploy a lot of capital, in last year, in the MSR business for us, for the reasons that I think we all know. We didn’t find the investment as attractive, yields were lower and a lot of stuff we saw was new production. So we feel very good about that. To give you an estimate on book value, now I just don’t think we could do at this point.

Okay. Fair enough. Just, again, over funding needs this year, is there anything material that needs to get financed or is expiring or needs for financing in the near-term that you might need to come to capital markets for?

No, we have two Servicer Advance facilities that will mature. One is in April, where the paperwork is already in place and that’s already being extended. There’s another one in August, and that’s really is our traditional course of business, I pointed out earlier, we have excess liquidity in our – the funding of our securities portfolio of at least $2.6 billion, quite frankly, if we needed more, we can get more on our advanced financing, there is more and more partners that are coming online, I was in Europe, a week ago, I met with a number of insurance companies who have expressed interest in financing advances. So, we feel very good about our business, where we are from a capital perspective and our ability to fund the future investments of our portfolio.

Is there any plans to issue any corporate debt? I saw Moody’s put out – their ratings recently; just wondered if there’s anything to it?

Yes, that is linked to a potential financing around our MSRs. At this point, we’re not going to issue any corporate debt or term debt. Again, we would likely do some financing around our MSR business to access additional liquidity.

Okay. And then one last thing. I wasn’t sure if you mentioned, did you say or disclose how much share repurchases you did so far this year?

We didn’t. And to-date, we haven’t purchased any. I mean our stock is trading okay, on a relative basis compared to the pack. And unless we get to a substantial – and I’m hoping we don’t, but if we traded at a substantial discount in book, then we will deploy capital and do our share repurchase. But in the meantime, if we find investments that are great for shareholders and will help us maintain and grow our dividend over the long haul, I think that’s the way that we are thinking about the company.

Okay. All right, thank you very much.

Thank you.

Your next question comes from the line of Matthew Howlett from UBS. Your line is open.

Hi, Mike, thanks for taking my question. It seems like I always get on and ask about why the company is getting paid for the cash flow that’s being throw off from the servicing book and just getting – maybe you could just address what we think it could be related to is sort of ties with Nationstar and Ocwen, I know those companies have come under regulatory scrutiny and other things as well. Maybe could you talk a little bit about your counterparties and then the plans when you get licensing to possibly diversify that? You said you could even lower some of the servicing expenses, do you think that – I think ultimately what will help the market value the cash flows at a more appropriate level?

I think – if you think Matt, if you take a step and look back at the mortgage servicing partners we have, we have relationships with two of the largest mortgage servicers in the market that are non-bank servicers. We are very comfortable with both. We think both do a good job. Clearly, the mortgage servicing business and quite frankly, all of financial services, has been under extreme scrutiny from a regulatory perspective, and quite frankly, we would anticipate that to continue for some time. I just think that’s the nature of where we are in life. We are very close to Ocwen. We are very close to Nationstar. We feel good about both counterparties, so there’s no desire to move anything away from either one of them. I think it’s the desire, quite frankly, would be to work closer. If you think about the broader mortgage servicing market, there there’s just not that many mortgage servicers out there that are non-bank servicers because it’s a very, very hard business. And we think in the two that we work with, they do a very good job at it. So I think it’s more of the same. There’s not – there’s nothing, I think, on their part or our part that would change at this time.

Does the diversification will, you think, help sentiment, if you could have the licenses and possibly have diversification where you could shift servicing around, have more partners. Do you think that will – would help or, does the – do these non-banks need to start reporting better earnings and have the regulatory shift? What do you think it takes to change the way the market is treating the value of your servicing, as you point out, it’s defensive. The burned-out borrowers are defensive and you have the recapture in place. What do you think it takes to start valuing those cash flows more at a level that was commensurate with, quite frankly, HLSS, a company that you bought last year?

I think that – look at the bigger picture. The financial services sector, overall, trades at a significant discount when you look at a lot of these whether you look at the money center banks. You take a look at some of those folks; they are trading at 70% a book. You look at the mortgage REITs industry; they are trading at 70% a book, or 80% a book. Overall, I think you need a big shift in how people value financial services, or look at the financial services sector, for us to have a dramatic change in how people are going to value us. It’s hard and I know – we want to trade at a 10% dividend yield; of course, we do. Or an 8% or whatever that number ends up being; it’s not something that we can control. The thing we can control is capital deployment and how we try to make money for shareholders and grow our dividends. And if – and hopefully, over time, if the markets stabilize and when they stabilize will get paid for what we are doing in spades, and that will help see our dividend yields drop. And I think that’s the only way it’s going to happen right now. I don’t think it’s specific to Ocwen or Nationstar or any other servicing partner. One more point, on obtaining licenses, it’s not the – the intent is not just to say, okay, we’re going to move servicing away from our servicing partners. It’s going to give us a lot more flexibility to acquire large pools of MSRs than maybe from another seller, where whatever servicing partner doesn’t want to come invest with us. That’s kind of the way that we’re thinking about that world as well as to protect our shareholders and just give us more flexibility as a company.

Well, it could also be viewed almost like a back-up servicer just in case there was any type of disruption with any of the – your other partners.

That’s right.

And just one last point on the – you said the initiative at Nationstar, which is a bigger of your partners with the recapture, could we start to see that impact this year, is that something near-term, or do you think that’s longer term out as sort of what’s going on over there?

I think they are going – mortgage rates are 365, right? We pointed out that two-thirds of our capital is deployed in private-label mortgage servicing, so as you think about it, that again, that’s going to be more sticky. You’re going to see less prepayments because typically, those have higher advances associated with them and delinquency profile is much greater than those on the agency side. So I think overall, it’s going to be more of the same as we go forward.

Yes. Great. Michael, I appreciate it. Thank you.

Thank you.

Your next question comes from the line of Fred Small from Compass Point. Your line is open.

Hi, good morning. Quick question on the change in the fair value of Servicer Advances during the quarter. Just was a big number. What exactly drove that?

We increased on – this is Nick by the way. We increased our discount rate on the servicer advances, which drove the mark that you’re referencing.

Okay. And where did you increase it, from what to what, and sort of what’s been the historical volatility on the discount rate there? Is there – was it something specific that drove the discount rate increase, or is it, in general, related to other market factors, interest rates, et cetera?

Benchmark rates were higher and the discount rate went from 5.5 to 5.6 there were – when you think about that, the amount of advances that we finance are enormous, right? So any small change is going to affect the so-called valuation of a particular asset. And that’s – so you go $5.5 billion to $5.6 billion and $7 billion you’re going to have some kind of small adjustment on your – in the company.

Okay, cool. Thanks a lot.

Thank you.

Your next question comes from the line of Bose George from KBW. Your line is open.

Thanks. I actually had another – an economy question as well. On the GAAP to core reconciliation, there’s a line item – that limit on RBMS deal accretion related to call deals. I just wanted to understand what that was?

Sure. What that is, and you will also see an adjustment for GAAP as well, is limiting the amount of accretion that we recorded or core earnings that we recorded so you have realizable value of the called securities.

Actually, yes, could you just explain what that means in a little more detail?

Sure. So essentially, what we do for GAAP purposes is when we call a transaction, the GAAP guidance requires you to record the accretion up to par amount. And the second step in the transaction is to actually bring that par amount down to a fair market value. So you are seeing that limit is essentially bringing it back down to the fair market value.

Okay. Great, thanks.

And your next question comes from the line of Ken Bruce from Bank of America. Your line is open.

Thanks. Good morning, Mike and thank you for your comments. My question relates to, in terms of your comments around what has to happen to improve the advanced balances and overall, be able to execute on the call rights. You got a tremendous amount of value in these two buckets and not to say I am skeptical. But your comments around fixing the legacy servicing seems, it like it’s a pretty lofty goal, pretty heavy lifting to start with. And I guess the question is really, what specifically do you think needs to happen in order to see advance balances begin to reduce and get the delinquencies in these legacy pools cleaned up? What do you think – first of all, do you think the current servicers can do that, and what specifically can NRZ do to accelerate that? Thank you.

Thanks. So fixing the legacy mortgage market is a lofty goal. I’m not going to tell you that it’s not, but it’s something we’re extremely focused on and I do think it could happen. While saying that, we love the Servicer Advance investment. As you look at our two servicer partners, where we have exposure to that, advanced balances from 630 to 930 of 2015 dropped from $8.6 billion to $7.6 billion. As we increase our LTVs on our financing, 1%, $1 billion reduction in advance balances releases more equity to NRZ. While saying that, Nationstar, when we first agreed to do the advance deal with them, has taken their advanced balances from roughly $5.5 billion to approximately $2 billion. On the other side, Ocwen we think, has plenty of room to bring those advanced balances down. So if you think about it, $5.5 billion to $2 billion in the course of roughly a little bit over 1.5 years to two years. And as we continue to work closely with Ocwen, we think there’s a ton more room for those guys to go where they could – where we could see advanced balances decrease so we think it could happen. We really do. Plus, the other thing is, Ken, as these loans, I’d point out, are seasoned roughly 10-plus years. Delinquencies will come down over time. Pipelines will get liquidated over time as the regulatory environment eases up and you are able to take – to liquidate a bunch of these loans. So I think that’s going to reduce advanced balances as well.

Good. Okay. Thank you. That was it. I appreciate your color and comments.

There are no further questions at this time. I’ll turn the call back over to Michael Nierenberg for closing remarks.

Well, thanks everybody for the questions and calling in. We look forward to updating you on further progress as we go throughout the course of the year. Have a great day. Thank you. Bye-bye.

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