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New Residential Investment Corporation (NYSE:NRZ)

Q4 2013 Earnings Conference Call

March 20, 2014 10:00 AM ET

Executives

Sarah Watterson - Director of IR

Wesley Edens - Chairman

Michael Nierenberg - President and CEO

Susan Givens - CFO and Treasurer

Analysts

Charles Dyson - Keefe, Bruyette & Woods

Paul Miller - FBR Capital Markets

Matt Howard - UBS Financial Services

Michael Klein - Citigroup

Operator

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Residential Investment Corp. Fourth Quarter and Full Year 2013 Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the call over to Sarah Watterson. Please go ahead.

Sarah Watterson

Thank you, Stephanie and good morning everyone. Welcome to New Residential’s fourth quarter and full year earnings call. Today, we have prepared remarks from Wes Edens, the Chairman of New Residential, Michael Nierenberg, the CEO of New Residential and Suzy Givens the CFO of New Residential, Jon Brown, the CAO will be joining management for the question-and-answer portion of this call.

We posted earnings supplement on the New Residential Web site this morning. If you not already done, so we would suggest that you download it now.

Briefly before we begin, please let me remind you that statements made today are not historical facts and may be forward-looking statements. These statements are by their nature uncertain and differ materially from any actual results. We encourage you to read the forward-looking statements disclaimer in the presentation as well as the risk factors described in New Residential’s filings made with the SEC. I would also like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in New Residential. The webcast and audio-cast is copyrighted material of New Residential and may not be duplicated, reproduced, or rebroadcasted without our consent.

With that, I’d like to turn the call over to Wes, please.

Wesley Edens

Great, thanks Sarah and welcome everyone. Just a few remarks and then I will turn it over to the management team to walk through the quarterly and annual results. So let’s start by referring to the supplement that Sarah mentioned, Page 2, the New Residential overview.

Just as a bit of background, we are a publicly traded mortgage REIT for the market capitalization of $1.7 billion. Our focus is investing across the entire spectrum of the U.S. housing market. It’s a very large market, one of the largest debt markets in the world of $20 trillion. We seek to generate mid-teens returns primarily through investments in residential mortgage-related assets and then we’re appropriate to make opportunistic investments in other related sectors, most notably in the consumer finance sector that we made one large investment in last year. The bottom of the page, show the main sectors that we invest in. Approximately 62% of our equity capital is in the servicing related assets, 21% non-agency business, and about 17% in other investments, again most notably the consumer loans.

Next page, just a little bit of history on our Company which has only been around in its standalone form since the middle of 2013. We actually began investing in mortgage servicing rights back in 2011, while part of Newcastle. That investment program was a very successful one in the history of those investments that are still in the books of how New Residential have performed terrifically and the increasing focus of our investment activities in that sector and the non-agency business is what led us to announcing in the first part of 2013, in January 2013, that we’re going to seek to become a standalone public enterprise and in fact it is exactly what happened in mid-May.

On the investments side there’s a couple of notable highlights along the way. Last April we announced a strategic investment of $241 million to acquire a portion of our consumer loan portfolio, along with another related company at Fortress, Springleaf. That has been a terrific investment. Michael will talk about that a little bit. Later in the year, two other notable areas that we just started to spend time on. In November we announced that we had bought our first -- made your first investment in the non-performing loan sector. This is an area that I think in particular is going to be an active area in the market and the way that we try to access these type of investments is to first make a modest investment to make sure that we understand exactly what the investment characteristics and dynamics are of that market and if it makes sense then to expand thereafter. But again Mike will talk a little bit about that.

And then lastly like end of the year we made an investment in servicer advances, $3.2 billion in total servicing advances that we bought from Nationstar, the performance of that investment although early is a promising one, and one we think to discuss with incremental investments to go.

Next page the pipeline of opportunities which is something everybody is very focused on, today my view on the residential market is still one of the most interesting markets in the world. There’s a lot of competition, there’s a lot of different participants in it, but it is a very vast market and is in a real state of flux. In particular the GSEs there has been a lot in the news, but the various bills and thoughts that people in Congress have about what they should do with the GSEs. I think that it is very likely that there’ll be a different role for the GSEs in in-housing over the next several years. And that’s notable because today they really are all of the housing market financed in the U.S. Over 90% of the mortgages in the U.S. are provided by the GSEs or HUD collectively. So any kind of a material change to their position with regards to that would have a material impact to the market, those kind of interruptions can meet the great opportunities, there’s a number of different things that we are focused on right now that we think have some real promise.

On the non-performing loan side HUD has really stepped in to become the lender of choice to some of the more hard leveraged borrowers, new borrowers, new entrants in the market, as a result they have more non-performing loans. Their balance sheet today $660 billion basing out of non-performing loans. We anticipate sales in excess of $30 billion from NPLs by HUD and the banks over the course this year. The potential for real supply to increase immediately if the GSEs decide to sell their NPLs, so there’s a lot of prospective activity and that’s what really led us to make our first kind of toehold investment in the sector and trying to determine whether or not something we think that’s interesting.

Lastly just the topic that is in the papers still virtually every day is that regulation and reputational issues of the banks continues and I think that while you’re much closer to the end of it than the beginning, with respect to from of the impact of some of the litigation and what not. I think the banks will continue to sell NSRs albeit we think that at a slower pace, and if you go back to the chart that we’ve used many times in the past to look at what the state of the servicing market was a couple of years ago. The banks dominated the mortgage servicing rights, alright they have the $10 trillion of mortgage servicing, and roughly 91% of it was owned and managed by the banks. That has come down to 77% and we think I think that it’s still going to continue to come down, again at a more measured and slower pace perhaps but the regulatory pressure, the cost of actually complying with those regulations just make this a very unattractive asset for the banks along with the capital standards and we think that there is continued good opportunities there.

Page 5 it just looked different -- a little bit of a disaggregation or a snapshot of what the portfolio looks like. And you can see how much we have in assets in that investments and in the targeted investment yield, ranging from 15% on the low side to 35% are in higher actually is through consumer loans, but a blended average of about 19%, the highlight page on Page 6, last thing that I’ll talk about, just to go through with this first and foremost we had a very good year from an earnings standpoint. Total return on capital 29%, well above our targeted mid-teens return, one thing I would like to say about that is although I know people are very focused on core and they’re focused on it for the right reasons because they’re looking for the repeatability of the cash flows, but our core earnings have been very stable and in addition to that though of course we look to make money. And a 29% return on capital last year is something that represents a terrific accomplishment by the team on behalf of shareholders. We feel great about that going into this year.

On the service and related assets we had a very good year in terms of investing in additional MSRs and the advanced assets that we bought at the end of the year which I think will be a very stable source of investments. Also there are longer duration investment which I think is great in terms of the performing the mission of having long-term stable earnings to build off of.

On the residential side we made some important decisions to diversify or we’ve looked to diversify first on the NPL side and then on the non-agency markets, something Michael is expert at and talk about we actually had a very good year, we’ve made some very good decisions in terms of what we bought and sold and the financial results were terrific. And then lastly the consumer portfolio which again I’ve said a number of times is idiosyncratic portfolio we don’t necessarily expect to fund one that’s repeatable though of course we’re very interested in and look forward and the returns on that have been terrific. In conclusion really a very, very good year, very good financial results and with that let me turn it over to Michael.

Michael Nierenberg

Thanks Wes. Good morning everyone. Some of the things I’m going to say probably I’ll repeat a little bit of what Wes said. I’m going to start in our flipbook at Page 6 and just give you a little bit of a summary. Our first year as a public company as Wes mentioned was a fantastic one, we paid $0.495 in quarterly and special dividends and our annualized return on equity since the spin-off was approximately 30%, so great numbers. In our core servicing related business most of our acquisition activity occurred in the beginning and the end of the year. In January while still part of Newcastle we agreed to acquire approximately 200 billion of excess MSRs from Bank of America, these MSRs were boated throughout the remainder of the year and so far their performance has been great. Speeds have been slower, returns have been higher and we’re thrilled with some of our early investments there.

Our first servicer advanced investment which we did in December marked our entrance into that asset class. We invested alongside with three other third-party investors to purchase approximately $3.2 billion of servicing advances. We believe our returns in this sector will be primarily driven by our ability to obtain attractive financing through term structures, as well as shrink the existing advance balances as a percentage of the unpaid principal balance of the outstanding mortgage loans. After a little over one month of performance, we feel very confident that both of these drivers are on the right track and so far performance has been a little bit better than what we expected.

In my first quarter at New Residential, we were very focused on diversifying our platform and minimizing any potential market-related or interest rate risk. Although I believe there will be many more servicing trades that will happen throughout this year, New Residential has the ability to invest broadly across a broad range of opportunities we think which will generate 15 plus percent returns at any given time. In November, we purchased, as Wes mentioned we purchased our first pool of non-performing loans with the market of approximately 600 plus billion of non-performing loans out there and we think coming to mark will be 30 plus billion of NPLs. We plan on being active participants in this sector and I’ll talk a little bit our investment a little bit later.

One of the things I wanted to mention and this goes back and Susan will talk about this later and Wes mentioned a little bit about core. In December, with the Dutch Government announcing their intention to sell ING’s mortgage portfolio which was approximately $11 billion of non-agency mortgages, we were a little bit concerned about spreads as we got into year-end and not necessarily in 2014 but more as we got through December, so we thought it will be prudent to sell some assets, raise some cash to put us in a better position to invest at lower price points. So, we sold assets on an average of about $0.69 and we reinvested in other securities at $0.62 realizing gains of approximately $41 million for that portfolio.

Now I am going to take you through some of our investments, talk a little bit about that and then after that I’ll turn it over to Susan. So, in our flipbook I am on Page 7. So far we’ve invested approximately 600 and this is as of 2013, $683 million in pools of approximately 300 billion of MSRs. Our mix is approximately 55% agency and approximately 45% non-agency with about 10% of that HARP eligible. And the HARP programs are scheduled to end at the end of this year although we don’t know but we believe they will likely end at the end of this year. We believe approximately 85% of our portfolio is credit impaired, which should continue to lead to great performance, slow speeds and really we’re not expecting any surprises there as far as the portfolio. To-date the investment has already returned 28% of the initial investment. It is generated $187 million of total cash flows including $41 million in Q4 and the lifetime return to-date is approximately 17%.

We continue to focus on opportunities in the sector. There is a lot of noise around the regulatory front. Coming from a bank, I do believe that these assets are truly non-core to many of the banks out there and while the regulatory pressures are high we do believe that the banks will continue to sale MSRs throughout the course of this year and into 2015. And today we see a pipeline of approximately $300 billion and I’ll talk a little bit later about a couple of our, some of our activities that we did recently in Q1 of ’14.

On servicer advances, I am now on Page 8, in December we mentioned earlier, we agreed to buy $3.2 billion of servicer advances along with three other co-investors that related to $54 billion of mortgage loans. At the time we sized the investment to be kind of a mid-teens type of return, as I mentioned earlier, so far early performance has been terrific and we believe that we’re going to achieve those returns and hopefully do a little bit better. The keys there again are around the financing structures and the ability of Nationstar as our partner to recover previously made advances and lower the amount of advances versus the outstanding versus the unpaid principle balance of mortgage loans. So far they have done terrific and our returns have been pretty much spot on.

We also like this investment as we think the tenure is really more of a longer duration and that is we believe the tenure to be in the three to four year range. So far advanced balances have come down as a percentage of UPB by approximately 1% which is a little bit ahead of our projections. Not only is this good for NRZ, this is also very good for Nationstar as they lower their interest costs as well. We recently announced that we were exercising our options to call $2.8 billion of servicing advances, call that investment number two of which 1.1 billion has been funded. Today NRZ owns about 33% of the entity that owns transaction one and transaction two but after it all said and done we expect NRZ to own roughly 40% to 45% of that entity. And one other point I want to mention is that this week we closed on a $2.1 billion servicing advance deal which lowered the cost of funds on for us from 3% to 2.4%, so, a lot of good news there.

If you flip to Page 9, I’ll talk a little bit more about the non-performing loan business and kind of our approach to it. As Wes pointed out, we made a couple of small investments in the NPL market, part of it is to diversify our investment portfolio staying with our core mission around servicing and servicing related assets with the banks and HUD and other institutions holding $650 billion of NPLs approximately and our expectation of 30 billion to come to market this year. We’re really excited about our opportunities in the space and we think we’re going to be able to achieve returns and again in that space in the mid-teens. Our early investments in this sector have yielded returns of north of 20%, it is early and your early results tend to be a little bit better. However we’ll continue to be very detailed around that.

Just to give you a little bit color of how we think about that. Every time we look at a pool of loans, every single loan that we purchase is a sign to resolution strategy at the time of purchase. We get loan level weekly updates from our servicers on every loan. We compare liquidation time lines to our original projections and our original underwriting to see what they currently look like. Our desire is to increase borrower contact day one, do more re-performing loans and the keys to increasing returns are again re-performance, short sales and payoffs. We’re currently working with three servicers at this point on our portfolios. And we expect to again make that a larger part of our business going forward as we think the pipelines will continue to for this opportunities to invest capital in the mid-teens in the future.

If you flip to Page 10, on our non-agency business, the non-agency business has been core to our investment thesis and we’ll continue to invest in the asset class going forward. Again assuming returns are there, the asset classes has a very good performance in the first quarter of this year with different assets up anywhere from 1 to 3 points. As I mentioned earlier we took some gains or really raised cash in the fourth quarter to protect ourselves against any spread widening that may have occurred as a result of the $11 billion portfolio hitting the market in December. Since then we’ve made -- we've reinvested a bunch of capital into the sector at kind of mid-teens type returns. So we’re comfortable where we are. Going forward depending upon what the asset class does, we’ll have to monitor how we think about that sector.

I mentioned our December gains, I mean I am sorry, I mentioned our sales in December, we sold our assets at $0.69 we reinvested at $0.62, the other thing I want to point out is that almost our entire portfolio is floating rate and when you think about the market today and especially in light of yesterday’s market reaction from the Fed. We do believe that we are well positioned in any REIT environment and really should benefit from -- should rates rise from here. So we’re very comfortable with where we are.

The other thing I want to point out is as part of our servicer advance transaction what we did as we acquired the call rights in 800 different mortgage deals approximately which is about $95 billion to $100 billion of balances of mortgage loans. So we expect that to be in the future we expect to affect some -- the ability to call some of these mortgage deals and do some securitizations down the road. So we’re very excited about that returns there should be terrific.

On our agency portfolios, I think the one thing that the way that we think about the agency ARM business or agency portfolios. We try to keep them as short duration as possible our effective duration is approximately 0.8 years. We’re not making any duration bets in that sector and one of the things we did subsequent to the end of Q4 with the expectation that rates would rise. We actually shortened the amount of time for months to the next reset from approximately 15 months down to approximately 11 or 12 months. Again should rates rise we feel very comfortable with where we are there, we’re not making duration bets as I pointed out we’re about 0.8 from a duration standpoint. Speeds continue to be on our sides, speeds are slowing down. It is a very seasoned portfolio of agency ARMs.

And then finally before I turn it over to Susan I want to spend a minute and just talk about our consumer loan portfolio which is on Page 12. The initial investment was approximately $241 million that was to purchase an interest in $3.9 billion of the consumer loan portfolio from HSBC. Since that purchase we own approximately 30% along with two other partners. Since that purchase we’ve received cash back of approximately $109 million, reducing our equity investment to approximately 132 million.

One of the things that’s interesting about this, when the deal -- when these assets were purchased in April there was a term securitization done in May and one of the things we’re evaluating today is the ability to refinance that securitization. And we believe that in refinancing that securitization not only we’re going to be able to take out the remaining part of our basis, but we believe that we’re going to be able to take out our basis plus some and then cash flows in the future, we expect to be approximately another 200 plus million dollars. So our targeted return on that as we say in the presentation is approximately 35%. It is a great investment as Wes pointed out, we’d love to do more of those investments they are not always there, we’ll continue to look for them but for now it’s something that we’re extremely happy with.

So with that, I am going to turn it over to Susan.

Susan Givens

Thanks Michael. I know we’ve touched on the financial results on some of the previous pages, but I’ll provide a quick overview and give a little more detail behind our results for the quarter and for the full year. All-in-all we had a really strong quarter and a really terrific year. On Page 13 we’ve summarized the financial results for Q4 and for the 12 months ended 12/31. We’ve also shown the results from the time of the spin-off on May 15th to December 31st to provide some additional clarity. When looking at the results you should keep in mind that we announced the servicer advances transaction in late December, so our 2013 results really don’t include any significant contribution from that investment. But you’ll obviously start to see those results running through our financials when we report Q1 results.

In the fourth quarter of 2013, we generated GAAP income of 81 million or $0.31 per share, up pretty significantly versus last quarter when we reported GAAP income of 63 million or $0.24 per diluted share. The increase was primarily the result of 41 million of gains realized on sales of non-agency securities. As Michael mentioned earlier, we made the strategic decision to sell some of our non-agency securities at the end of the year. Our view is that it was prudent to sell some of those assets going into the year-end and we were able to successfully sell securities at an average price of 69% of par.

Core earnings for the quarter were basically flat to the last quarter at 37 million or $0.14 per diluted share. It’s worth noting that our average un-invested cash balance during the quarter was a little north of 150 million, so if we had invested that cash on October 1st we would have expected our core earnings to be about $0.02 per share higher or $0.16 per diluted share.

On December 17th we declared a common dividend of $0.25 per share or 63 million, which included a regular dividend of $0.175 per share and a special cash dividend of $0.75 per common share. For the 7.5 months since the time of spin-off, we’ve generated GAAP income of 228 million or $0.89 per diluted share. Core earnings for that same period were 95 million or $0.37 per share. In total in 2013 we declared common dividends of $0.495 per share or 125 million. As we’ve noted earlier, since the spin-off our annualized return on equity has been about 30%. We’ve a lot of exciting things happening in the business and we look forward to updating you on our progress in the coming quarters.

And with that, I’ll turn it over to the operator for Q&A.

Sarah Watterson

Stephanie, we’d like to now turn the call over to questions-and-answers please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Bose George with KBW.

Charles Dyson - Keefe, Bruyette & Woods

Hi. This is Charles Dyson in for Bose today. Just had a question first on the consumer loan portfolio and I think we saw the core earnings come through a little bit lower that we’ve seen in 3Q and 2Q. I just wanted to ask may be what the driver was there, whether the portfolio is running awful faster than anticipated or if it’s just the lower yield as compared to 3Q, what’s going on there?

Susan Givens

Yes, no, there really wasn’t any change in the core earnings on the consumer portfolio, I mean the only difference in the core earnings is really as we talked about we sold from the non-agency securities so our interest income was a little bit lower as a result of that and then obviously the un-invested cash that we talked about.

Charles Dyson - Keefe, Bruyette & Woods

Okay, that’s helpful. And then just a question for you on that Springleaf deal, if you could just provide a little more color there on exactly the structure whether it’s in securities or whole loans and then what the returns might look like there, both levered and unlevered?

Michael Nierenberg

The existing deal there is an existing securitization in the marketplace so it’s a debt structure that’s in the marketplace today. We have the ability to -- there is a call date in May, we have the ability to call the transaction to the extent that we feel it’s, obviously it’s a good investment for us and our partners so that’s something that we’re very much focused on. And then the likelihood would be we’d call the transaction and then issuing a new securitization or a new financing into the marketplace. Our targeted returns are in the still in the 35ish plus percent area, and that’s the way that we’re thinking about that.

Charles Dyson - Keefe, Bruyette & Woods

Okay. And then just lastly in terms of capital right now and looking forward to investments you’re trying to make going forward. Can you give us an idea of the excess capital you might have right now and if you need to raise capital going forward to fund investments like the Springleaf deal and then other investments you’re thinking about making?

Susan Givens

Yes, I think as we show in the presentation at the end of the quarter we had about 157 of available cash. I think we feel very good about our cash position and feel like given kind of the composition of our balance sheet we have many opportunities and options with respect to raising debt or doing other things to kind of finance acquisitions as we look forward.

Charles Dyson - Keefe, Bruyette & Woods

Okay, thanks.

Operator

Your next question comes from the line of Paul Miller with FBR.

Paul Miller - FBR Capital Markets

Thank you very much. Can you touch base a little bit because I think I know I’m confused about when you clean up calls which you talked about can ought to lot of value and then when did you decide to just to sell the assets like you did in the fourth quarter?

Michael Nierenberg

Sure. To the first question Paul, on the cleanup calls many of these deals were issued in kind of ’03, ’04, ’05 throughout ’07, part of the servicing advance transaction we acquired the right to call approximately 800 mortgage deals. The unpaid principle balance in those 800 mortgage deals is approximately $95 billion to $100 billion as these deals factor down and you get closer to the cleanup call to the extent that we feel the collateral from an investment standpoint is attractive to New Residential will likely affect the option to call those transactions they need to hold the loans on balance sheet or do a term securitization. So, that’s the way that we’re thinking about that and a lot of those deals were done with higher coupon collateral, so if you think about it logically you’re able to buy 5.5% or 6% coupon collateral at par and then either do securitization or finance it the returns should be terrific for us.

As it relates to the non-agency securities going through the fourth quarter thinking about dealer balance sheets coming from -- again coming from a bank and thinking about pressures on how big you could actually carry from a balance sheet standpoint and then couple that with the Dutch Government selling ING’s $11 billion portfolio, we just thought it would prudent to sell some assets, raise a little bit of cash potentially to reinvest in lower dollar priced assets and as a result we were able to take gains of approximately $41 million. Today, when you look at our portfolio, our portfolio is higher from a market value standpoint and where it was at the end of Q4. We actually have done a fair amount of purchasing of non-agency mortgage securities.

Paul Miller - FBR Capital Markets

So, when -- I know one of the investment theories in this and you’ve talked about it was during the cleanup calls, when can you start doing some of these cleanup calls? Do, we have to wait another year or you’ve been doing them slowing now?

Michael Nierenberg

You know I mean we’re currently evaluating a number of deals. So, I think you could expect we will be doing some of this activity likely in the second quarter beginning in the second quarter.

Paul Miller - FBR Capital Markets

Okay. And then for Springleaf because I don’t understand the Springleaf, the relationship as much as I should, does Springleaf do non-residential does Springleaf -- I thought Springleaf was just a consumer servicer. Did they do both residential and consumer loans?

Michael Nierenberg

Yes. Part of their legacy portfolio they have a large or they have a mortgage portfolio as part of the their legacy portfolio which is approximately $9 billion and subsequent to Q4 one of the activities that we participated and they sold a little bit under a $1 billion of an existing mortgage securitization that we purchased along with another party, so reduced their puttings by approximately a $1 billion. They do service mortgage loans but they are really primarily a consumer company.

Paul Miller - FBR Capital Markets

Okay. And then and with NRZ I know where a lot of people would like to see is the diversified servicing base, like not just with Nationstar and Springleaf. Can you add any updates to that, are you still working on that very hard?

Michael Nierenberg

We are, I would tell you that Nationstar is still our primary partner. One of the things that we haven’t announced yet but we got confirmation yesterday, New Residential actually purchased a pool of $4 billion of a private label servicing. We are going with a different party as the servicer. However, Solutionstar which is part of Nationstar will be doing all the REO work around their portfolio because they do a great job there and it’s beneficial to them. We have another servicer that we’re actually working with and it should be a terrific transaction for New Residential. So we are…

Paul Miller - FBR Capital Markets

So, at this point the servicers you’re working with at 3 or 4 now?

Michael Nierenberg

This is I would say this is, it is part of the same servicer as one of our non-performing loan pools. Right now, I would say we’re at 3 and we currently evaluate other servicers as well.

Paul Miller - FBR Capital Markets

And as your goal -- I mean do you have a set goal to be at 4, 5 or 6 by the end of the year or are you just going have to revaluate that as we move through the year?

Michael Nierenberg

I don’t think we have a set goal, I think our job in kind of running the Company with Susan and our colleagues is obviously they try to put up terrific returns. If we could put up terrific returns with Nationstar as our primary partner, great. To the extent that we need to diversify, we will and we’ve started to do that. So, I think what you can expect from us as we go forward and I do believe the pipeline despite the fact on MSRs, the regulatory environment is extremely hot just to use a word. I do think that we are going to see a number of servicing transactions. I think I’m more optimistic today than I was probably at the end of the third and fourth quarter because we really didn’t see a lot of servicing transactions other than 2. So, what that means to us to the extent that we need to have a different servicing partner, we’ll evaluate that our primary partner is still Nationstar and this field that we’re currently doing, I like the fact that Solutionstar which is part of Nationstar will be on the backend and our primary servicer will be somebody else.

Paul Miller - FBR Capital Markets

Hey guys, thank you very much.

Michael Nierenberg

Thanks Paul.

Operator

Your next question comes from the line of Matt Howard with UBS.

Matt Howard - UBS Financial Services

Hello, guys. Thanks for taking my question. I guess just a bigger picture question you are about a year old as a public company here and I think the genesis of the spin in the first place was to acquire or at least get it a yield that given yield and so it was commensurate with the risk that you’re taking particularly with the service, excess servicing rights and now advances. I mean, look at it now you still sort of trading with lot of the agency highly liberties and see mortgage REITs out there that. I mean what’s the -- when you look at a year back do you feel like -- I guess what’s the direction you are going to take the company is there things that could you do to potentially get a better valuation, with the stock price here and the lower cost of capital, I mean at the end of day that I guess is what we are all strapping for?

Michael Nierenberg

Yes, I think some of the things as Wes pointed out earlier in the call we are a pretty new company. I am pretty new. Susan is pretty new. We’ve done a lot of marketing to kind of tell our story over the course of the past few months and participated in a number of different conferences Sterne Agee, CS conference as well as at a Goldman conference, doing a lot of one-on-ones. So, I think part of it is that we are new and we are out there telling our story. I think we have to put up results. I think if we put up results every -- and we have so far and we need to continue to do that and then I think the stock price will probably take care of itself.

Matt Howard - UBS Financial Services

So do you think that effectively that so have to show up at least a you think a better book value performance, better interest income performance or only of the guys to be cutting their dividends and rising rates, you guys should be sort of the outlier that you think that’s the way you think the market rewards you with a lower cost of capital ultimately, it just got to be performance and just going to be track record?

Michael Nierenberg

I think it’s all of the above. The one thing about our Company which I think we all really love and again I do think at some point the Fed is going to be in play. Our non-agency portfolio is almost entirely floating rate, so rates back up, we should do well there. Our agency ARM portfolio has an effective duration of 0.8 or the months to roll are approximately 12 or 13 months to roll. Our excess MSR portfolios should do better and better as REITs continue to back up, speeds continue to slowdown. So we love that. We announced obviously the servicing advanced transactions and we continue to look for other opportunities. If you are thinking about the mortgage market it’s a $10 trillion market. There is always something happening in the marketplace. You have to be patient around capital, but I think we’re pretty optimistic that we’re going to be able to grow the Company prudently and hopefully continue to grow our core earnings and grow earnings overall.

Matt Howard - UBS Financial Services

The track record so far has been great. Do you think the NPL strategy, these are very attractive strategies would consider they have -- how big that market could be when the GSEs if they do begin selling, I mean, is there any risk -- but the servicing and the advances those are real steady and reliable cash flows that go out years, is there any risk of diluting those cash flows with some non-agencies that the market may perceive as a little bit more volatile and use a little bit more leverage on? I mean, is there any risk of blending those two together?

Michael Nierenberg

I think and one of the things we try to do in our supplement and in these calls is to be as clear as we can on our asset mix. So I personally don’t think as long as we are clear on what our investments thesis is I don’t think there is a risk of diluting them. I will say with non-agency prices up a lot over the course of the past year, we continue to evaluate what assets are attracted from an investment standpoint. So to the extent that the returns that are not there for shareholders, there is a strong likelihood that we won’t invest a lot of capital in that type of asset.

Matt Howard - UBS Financial Services

Right, it’s nice to have that flexibility with the model. And last question, can you take a kind of a stab at how you see this whole non-bank servicing landscape shaking out, I mean at Washington, Loskey in New York. Any guess on how it’s all settled out and how the servicing landscape ends up looking here down next few years?

Michael Nierenberg

I think if you look at it the -- listen, I can’t and we can’t comment on Loskey or any of the other things that go around and around the regulatory front. I do know coming from the bank that the banks want to continue to sell MSRs. You are likely not going to see MSR transactions that are $100 billion or $200 billion. However, you will continue to see banks sell MRS that are non-core to their business. When you look at the non-bank servicers and you look at performance and if you think about the tax payor the non-bank servicers typically do a much better job than the banks do around delinquent servicing, so I think the trend will continue. It’s going to be -- the transaction sizes will be smaller. But again we in the past month or two months, we’ve actually acquired roughly $5 billion of POS which is something that we didn’t do quite frankly in the fourth quarter in New Residential. So I think we’re reasonably optimistic. I think there is a lot of obviously headline risk. Transaction sizes will be smaller but we think we’re pretty excited about the opportunity to continue to do focus on kind of the non-core assets from the banks.

Matt Howard - UBS Financial Services

And just to be clear and I guess as it relates to Nationstar, the Nationstar does a better job with keeping borrowers in their home and mitigating losses then Aurora and some of the other banks did, is that performance -- is that clear that you’ve seen?

Michael Nierenberg

Yes, we believe that to be the case and I do think that’s something that when those statistics continue to softer through the folks to the regulatory bodies and they think about the tax payor. We’re hoping that the dust will settle a little bit and you’ll start to see more of these transactions occur.

Matt Howard - UBS Financial Services

Great, great. Thanks Mike.

Michael Nierenberg

Thanks.

Operator

(Operator Instructions) Your next question comes from the line of Michael Klein with Citigroup.

Michael Klein - Citigroup

Can you talk about your interest in purchasing additional mortgages loans from Springleaf? I know they have about 8 billion loss, like you’ve said and also I am not sure if you mentioned, can you talk about the expected returns to expect to achieve on what you’ve bought so far?

Michael Nierenberg

Sure. We’re obviously very interested in purchasing additional loans from Springleaf or quite on any other counterparties assuming that the invested returns meet our hurdles. We think that -- I can’t tell you what the returns are because we don’t know what the markets are going to bear over the course of the next few months. We did purchase a existing mortgage securitization in a pool of approximately a little bit under a $1 billion in mortgage loans. We do believe the returns are going to be I think something north of 20% all said and done, and when we’re done with what our strategy is around those securities.

So we’re excited about obviously other opportunities. I think when you think about the loan markets, the credit boxes from the banks are really, really tightened up. The banks are only going to make for the most part QM loans or they’re going to make non-QM loans to folks that are whether be in their high net worth groups et cetera. So we do think there will be a lot of opportunities for folks like New Residential to go out and set up loan programs and either acquire from existing holders of mortgage loans or actually work with others to buy mortgage loans.

So I think we’re excited about the opportunities in the loan market. Again, I pointed out earlier, that the mortgage market is roughly $10 trillion, so there is always something that’s happening that I think is going to afford us the ability to deploy capital along with our investments thesis of 15 plus percent returns.

Michael Klein - Citigroup

Great, thank you.

Operator

At this time, there are no further questions. I will like to turn the conference back over to Michael Nierenberg for closing remarks.

Michael Nierenberg

Well, thanks everybody. We appreciate your participation. Have a great day.

Operator

Thank you. This concludes today’s conference. You may now disconnect. Speakers’ please hold the line.

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