New Residential Investment's (NRZ) CEO Michael Nierenberg on Q4 2016 Results - Earnings Call Transcript

Feb. 21, 2017 2:25 PM ETRithm Capital Corp. (RITM)8 Comments
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New Residential Investment Corp. (NRZ) Q4 2016 Results Earnings Conference Call February 21, 2017 8:00 AM ET


Mandy Cheuk - Investor Relations

Michael Nierenberg - Chief Executive Officer

Nick Santoro - Chief Financial Officer


Bose George - KBW

Michael Kaye - Citi Group

Jessica Levi Ribner - FBR

Brock Vandervliet - Nomura Securities

Trevor Cranston - JMP Securities

Fred Small - Compass Research

Ken Bruce - Bank of America


Good morning. My name is Matthew 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 2016 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, you may begin.

Mandy Cheuk

Thank you, Matthew and good morning everyone. I would like to welcome you today to New Residential's fourth quarter and full year 2016 earnings call. Joining me here today are Michael Nierenberg our CEO; and Nick Santoro, our CFO.

Throughout the call we are going to reference to the earning supplement that was posted to the New Residential website this morning. If you have not already done so, I would suggest that you download it now. Before I turn the call over to Michael, I would like to point out that certain statements made today will be forward-looking statements. These statements by their nature are uncertain and may differ materially from actual results. I encourage you to review the disclaimers in our press release and earning supplement regarding forward-looking statements and to review the Risk Factors contained in our annual and quarterly reports filed with the SEC.

In addition we’ll be discussing some non-GAAP financial measures during today's call. A reconciliation of these measures to the most directly comparable GAAP measures can be found in the earning supplement.

And now I would like to turn the call over to Michael.

Michael Nierenberg

Thanks, Mandy. Good morning everybody and thanks for joining us today. You know, some of this is all news obviously in light of our recent acquisition of the Citi MSRs and our equity raise where we went through some of the numbers. However, you know, we are extremely excited about the way that our company is positioned now and the results that we had last year for the company and for all of our shareholders.

Last year was a good year for us and it was obviously a good year for shareholders. We continue to execute on our core business plan, which is to focus on MSRs, non-agency securities with call rights and servicer advances. Going forward, our strategy will be the same.

I'll talk a little bit about servicer advances in a bit, as we've taken measures to protect the company against rising interest rates as it relates to the servicer advance business that we have.

The way that we're set up, we have positioned our company and our portfolios for the current market environment, which should continue where we believe our portfolios should continue to perform extremely well.

Last year we had a very active year, we grew our non-agency portfolio by 200%. We went from approximately $350 million at the end of 12/31/15 to a little bit north of - you know, give or take around $1 billion of investment – net investment value at the end of 2016.

When you look at our portfolio today, based on mark-to-market, we haven't realized this. we have an unrealized gain in our portfolio of approximately $130 million. Our MSR portfolios for the year grew by $260 billion. This includes the City announcement. Again, trying to stay very focused on our core businesses, thinking about the current rate environment, and how we view the future.

In our servicer advance segment of our business, we took all measures we could to lock in longer-term fixed-rate financings. So we converted a lot of our LIBOR financing to fixed rate financing and then we extended terms on those financings.

Last year, we issued for example, five-year term financings, which has been the first time in quite some time when anybody has been able to issue that around the servicer advance population.

So all in all, a very good year for the company, for our shareholders and I am now going to refer to the supplement which is been posted online.

If you look at page 2, clearly a lot of numbers across the page, but just to take you through some of the metrics. 2016, we had a 44% total return. Our stock price was up 29%. Our year-over-year growth in GAAP earnings was up 61%. Our year-over-year growth in core earnings was up a 11%. Our ROE for 2016 was 17%.

We deployed $1.5 billion of capital throughout the course of the year. Our book value increased by 7% and our lifetime dividends that we paid out for the company are currently at $1.3 billion.

On the bottom left, if you take a look, we currently owned either excess MSRs or MSRs on approximately $600 billion of MSRs. Based on you know, our forecast for raise and you know, and the street forecast for raise in believing that the Fed will likely go two or three times this year, this asset continues to perform extremely well.

We continue to execute around our call business. We currently have call rights on approximate $160 billion of the legacy non-agency market. We believe that to be about a third and we continue to expand our relationship with a diverse group of non-bank servicers which now include Nationstar, PHH, Ditech and Ocwen.

Page 3, our financial performance for the fourth quarter, we had GAAP net income of $225 million or $0.90 per diluted share. Our core earnings were $155 million or $0.62 per diluted share. We paid a fourth quarter dividend of $0.46 per common share.

For the full year, our GAAP net income was $504 million or $2.12 per diluted share. Our core earnings were $511 million or $2.14 per diluted share and our full year dividends totaled $1. 84 per common share.

And then on the bottom right, you could see we try to give you comparison from '15 to '16, as you can see, we have thrown a couple numbers out. GAAP net income for 2015 was $269 million, 2016, $504 million, core earnings $389 million for '15 versus 511 for '16 and our dividends we paid $355 million in '15 versus $443 in '16.

Page 4, what we tried to do here is just show you our trajectory around our dividends and how we, you know, how we think about the business. Again, we paid out $1.3 billion in total lifetime dividends since Q3 of 2013. We've taken our dividends from $0.35 to - in the first quarter of '17 we announced a dividend increase of $0.02 to currently we're paying a dividend of $0.48.

Page 5, taking you through 2016 and some subsequent highlights. During and after Q4 I mentioned we acquired $267 billion UPB of mortgage servicing rights, the approximate purchase price of $2.2 billion. Some of those numbers will amortize a little bit lower depending upon when we actually settle these transactions.

We purchased $72 billion of mortgage servicing rights from PHH, and we also purchased $97 billion of mortgage servicing rights from Citi. Again, both of those will settle in '16. We believe the City MSR purchase, we're hopeful that that will settle in the first quarter. We believe that the PHH MSR transaction will hopefully settle early in the second quarter.

On our servicer advance business. As I mentioned earlier, we continue to term out and extend maturities converting our LIBOR financing to fixed-rate financing. For example, during the quarter, we refinanced $1.4 billion of floating rate debt with $500 million of three-year debt, $400 million of five-year debt and then we also did another $500 million of three-year debts. So we converted all this floating rate debt, which was shorter-term maturities in nature to three, four and five year maturity

On a non-agency securities with call rights, in the fourth quarter we executed clean-up calls on 14 different deals totaling $417 million. We did our ninth non-agency securitization around our call business for $274 million and our net equity, as I pointed out earlier increased from $374 million at the end of Q4 of '15 to $960 million at the end of Q4 of '16.

On the consumer side, our SpringCastle transaction, we completed a $1.7 billion refinancing of that in October '16. We took our cost of funds from 4.5 to 3.6. We released some liquidity. We lowered our effective expense rate by about $15 million on an annual basis.

So again, that transaction continues to perform extremely well. And then post in Q1 of '17, we announced our Citi deal and we raise $834 million to help fund that for Citi MSR and other things that we're working on in our business.

Page 6, what we wanted to do is just take you through a walk on our balance sheet, including the current transaction that we announced. If you take a look, the excess MSR bucket at the end of 12/31/16, these are all market values pre-debt. At the end of 12/31/16, we have $1.5 billion to $1.6 billion of excess MSRs, $659 million of MSRs.

Our gross servicer advance business is $5.8 billion, I'll talk about that in a little bit how advanced balances have come down, since we did the HLSS Excess transaction, two years ago. Our residential securities with call rights are a little bit under $5 billion. Our residential loans, which we continue to acquire through our call transactions a little bit under $1 billion dollars.

Our consumer loans which are now grossed up on our balance sheet are now at $1.8 billion. If you recall in '16 we acquired more equity, which caused us to gross up the entire transaction on our balance sheet and then we ended the quarter with $291 million in cash.

To the right side, the walk on the MSR portfolio, $1.6 billion of excess and then if you look at our overall acquisition of MSRs, including that we're going to add approximately another $2.3 billion of MSRs, which totaled give or take about $3.8 billion to $3.9 billion.

As I pointed out earlier, that number will be lower as by the time we settle the Citi and PHH transaction, it will have some amortization on that portfolio. And then we did our equity raise in Q1 of '17 which gives us a cash position of approximately $631 million gross, and there some reserves there, so I'll explain that in a bit.

Page 7, again, this is just a walk on our cash, I think the more relevant if you take a look to the right side of the page, cash on hand 12/31/16 net of reserves is a $110 million, proceeds from the equity raise which were - which again these are net numbers of $239 million, the gross number is 834, but the net number when you add that up after taking out reserves and future funding is 239.

Proceeds from our financing gives us investable liquidity there of a little – give or take around $400 million, then you add back the reserves on that, how you get to the $631 million number.

On page 8, this is our balance sheet today, and again, these are net numbers now inclusive of our projected financing in and around these asset classes. So as of 12/31 pro forma adjusted excess MSR is $931 million, that includes existing debt and some anticipated debt financing.

Our MSR bucket is one point, a little bit under $1.2 billion, again that's assuming roughly 50 LTV financing on MSRs, as you would gross that number up, so that number becomes roughly $2.2 billion, plus the gross number on our excess MSRs again that brings us to give or take about $3.8 billion.

Our servicer advances, the team has done a fantastic job financing that business. We currently have equity of only $69 million in that business. Our residential securities and call rights $1.1 billion. And our residential and consumer loan portfolio is $324 million and again our cash number grows at $631 million.

I'll now flip to page 10, just to talk a little bit about our MSR portfolios, in some of our recent searches, if you take a look on the upper left side of the page in Q4 we acquired roughly $65 billion of MSRs again, those are after amortization from both Walter and WCO. WCO was a REIT that was managed by Walter.

We also acquired $13 billion of MSRs from FirstKey. We acquired some more flow and other things from Walter and another $5 billion and then two big ones we announced one at the end of December was the PHH, that was about $70 billion and then we announced the City deal.

We think that these MSR transactions they were a little bit different from our legacy MSR transactions where we owned credit impaired, very, very seasoned MSRs. These MSRs on the on the City and the PHH are seasoned.

They are not credit impaired. They are very good MSRs. They will continue to perform extremely well in arising – rising rate environment, and they also offer a great offsets to our call strategy which we'll talk about a little bit.

Page 11 is our standard page, it just shows our excess portfolio, why its different, looking at our next CPRs, so I am going to, you know, I'll scan through that page.

Page 12, our servicer advance business, just to give everybody a sense on that, current portfolio roughly $5.9 billion. When we acquired the HLSS transaction in 2015, the amount of advances we had on our balance sheet at that time were a little bit south of $9 billion, today we have $5.9 billion.

The Ocwen portion of our servicer advance portfolio is $4.4 billion. So if you think about it, approximately 25% lower in two years. The Nationstar part of that - of our advance business is $1.5 billion, which is down almost 50% when we acquired that a couple years ago.

So overall, as we go forward, I do believe servicer advance balances will continue to come down. What this really means for a business is that this will make our callable transactions more callable, as advances come down and delinquencies tend to trend lower and we'll talk about our call business in a bit.

So on page 12, if you just looked at the right side of the page I mentioned this is a couple times, we refinanced a bunch of our debt from floating rate financing to fixed-rate financing, termed out debt from anywhere from three years to five years. And then on the left you can see the metrics on our advance business.

Page 12 again, it just reiterates what we've done, today we have 98% of our advance that has maturities greater than one year and of that roughly 96% are fixed rate. We think that's prudent in light of the rising rate environment that we are currently in and with the Fed in play likely in margin throughout the course of the year.

Page 14 is our, it shows the economics around our non-agency securities and how we – when we call deals and how we think about that. Page 15 talks about our non-agency securities and our call rights. We do believe over time that essentially each and every deal will get called. We think at the call date, that number will be approximately between something between $90 billion and $120 billion. So using a round number of a $100 billion averaging something two points is shown on that is roughly $2 billion, is the way that we think about it.

Again, delinquencies continue to come down. Advances continue to come down. The key drivers on the right side of the page for us to call more deals. Our delinquencies coming down and servicer advances coming down.

16, is our consumer portfolio, again, I don't think you're going to see a lot of activity in and around that, now that we've termed that out. The quick metrics on that, two initial investments was roughly $297 million, that includes our equity purchase of this year.

We received $583 million of distributions, plus the current valuation of $208 million, so on 297 we have a profit of approximately $500 million, which is roughly a 92% return, so- or IRR. A terrific transaction, obviously would like to do more of those. So we'll keep our eyes out for that.

On 17 is just – we did some surveys of the markets as we think about interest rates, just to give you a couple of quick snippets. The 10 year treasury at the end of 2015 was 227 at the end of 2016 was roughly 245. If you think about it, we've had periods during '16 where the tenure treasury touched I believe something around 150.

So there was a lot of volatility throughout the course of the year, the real net of it is the 10 year treasury was only up a little bit less than 20 basis points. Mortgage rates at the end of '15 was 401, at the end of '16 was 432.

Non-agency mortgage spreads continue to do well. I mentioned earlier we have unrealized gains in that portfolio of approximately hundred $130 million and I then think the real mover in '16 versus '15 was the S&P, S&P closed '15 at 2044, '16 was 2239.

So page 18, just talks a little bit, we get asked this question quite a bit, how do we think about our portfolio in various interest rates. I'll just take you through the slide real quick. Excess MSRs and MSRs clearly in a higher interest rate will do extremely well.

Our new purchases in MSRs again, they are seasoned, very clean MSRs that will rise in value, should rates go up, if they don't go up it is a great offset to our call business because we issue fixed rate debt. So if rates rallied for example, our call population becomes worth more money.

Lower interest rates, our excess will be fine. You know the newer production stuff will obviously suffer a little bit. Keep in mind on all of these MSRs we have, we captured agreements with our servicers and we are able to bring in recapture - third-party recapture agents in the event that recaptured numbers are not to our liking.

Currently on this Fannie, Freddie populations our recapture percentages are about 30%. We underwrite this stuff somewhere between 25 and 30, so those numbers are very good.

Non-agency securities and call rights, higher interest rates, again, just to talk about that, almost all of our portfolio was floating rate in nature. So you're going to get higher net interest income on the bond portfolios, when we issue fixed rate securities, you will have lower income.

So lower interest rates will be better for the issuance of fixed rate debt around that population, higher interest rate will be better for the bond portfolio impacted negatively on the call rights stuff.

Servicer advances we lock in, almost all of our financing is now fixed rate. So we think that's neutral and the consumer portfolio that's been outstanding for quite some time and we think that’s neutral.

So overall this portfolio we think is set up in a great, great way for the future. The way that the forward curve is looking and we just need to execute around you know the investments that we made.

Finally, the past - the next couple of pages. 2016 very good year, diversification of our servicing partners and that we now have 4 plus, some smaller ones. We continue to grow our MSR portfolio. We accelerate our call strategy.

During the year we set out to be licensed in all 50 states. We're currently licensed in all 50 states. This gives us the ability to acquire MSRs and work with different servicing partners and then I mentioned earlier our different metrics around return in equity et cetera.

2017 looking forward, quite frankly it going to be more the same away from our servicer advance business. It’s executing on our MSRs, executing on our call strategy. Those two things should keep us pretty busy throughout the course of the year and hopefully pay - payoff extremely well for shareholders.

So I will now turn the call back over to the operator. We'll open it up for questions.

Question-and-Answer Session


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

Bose George

Good morning. Got a couple of questions. First, in terms of earnings, it’s a little hard to map, you guys did obviously very strong $0.62 this quarter. Can you just talk about what you think the run rate earnings is, and you know, the $0.62 what was the main driver of to beat over that run rate?

Michael Nierenberg

So the numbers $0.04 is roughly a mark on our MSR portfolio or excess MSR portfolio. If you recall going back, I think it was in '15 when rates rallied a bunch, our incentive income around our servicer advance business based on the forward curve came down.

This quarter, we got the benefit because the forward curve rose. So as a result, we picked up roughly $0.07 or $0.08 on our servicer advance population to the current run rate its give or take in and around $0.50ish per quarter, is the way to think about it.

Bose George

Okay, great. Thanks. And then in terms of rate sensitivity, the slide on page 18 is helpful. But I was wondering, if you could quantify that a bit more, like if rates fell 25 basis point or 50 basis point, what do you think that does to pro forma book, including the PHH and the City MSRs?

Michael Nierenberg

I have the numbers, I don't have them in front of me. I could - actually we could do this after the call. But the way that – and we haven't mapped out, but the way your City MSRs will come down your PHH MSRs will come down, keep in mind, Bose, a big part of this is our you know, a big part of the way that we think about this is our recapture provisions as well.

So if we underwrite say to between 25% and 30% overall from a recapture perspective, we are estimating that one of every three loans will recapture. A drop of 25 basis points we believe is worth about one CPR on our overall – we call it a new production portfolio.

But the offset is - the offset between our new MSRs and our call population, we think matches up extremely well. But I could take you through more finer numbers after this call, I just don't have that one in front of me.

Bose George

Okay, great. Actually that’s helpful. And the second, one on the clean-up call, you know, just with the rate move this quarter, you know, its really, presumably the value of that - the clean-up call option goes down, when we look at the slide that shows that opportunity, is the decline in value really that it gets pushed out, so the IRR goes down, but the sort of the step that you can call you know, remains unchanged?

Michael Nierenberg

Yes. It is how we think about it. We currently – just for example, in the month of February we called $900 million in loans, so where you know, we're going to be in the market shortly with a new term securitization around the call population.

If you think about the non-agency business, and you look at spread, our non-agency securities, just to give you sense from 12/31 of 2015 non-agency's spreads were approximately 295 basis points. If you look at where we are today, for example, our non-agency's spreads are 195 basis points.

So overall, when you think about our population, the bond portfolios is up a fair amount, when we issue term securitizations, despite higher rates you're going to be able to issue them at tighter spread. So overall, the net impact of that is less then you would expect in a rising rate environment.

So spreads are tighter, right. So overall, your cost of funds will remain fairly constant, then where we would have issued let's say a year ago because spreads are 100 basis points tighter.

So if you think about short rates, you know, the two-year treasury for example right now is 119, a year ago in 2015 at the end of the year was 1.05, the difference is LIBOR is upper fair amount, but the net of that is tighter spreads on the non-agency securities, higher cost of funds, the net impact is very minor if anything at all.

Bose George

Okay, great. Thank you.


And you have a question from Michael Kaye with Citi Group. Your line is open.

Michael Kaye

Morning. Could you just talk about banks exiting mortgage servicing, you know, we saw one happen which you took advantage of, do you see more banks exiting or is that kind of more of a one-off opportunity?

Michael Nierenberg

I think that bank, you know, quite frankly, I think the bank – the transfer of MSRs from the large bank to folks like us or other non-bank servicers, I think its contemplated run [ph] in its course I think. I think what you are going to see Michael going forward in a rising rate environment you should see some consolidation run at mortgage banking industry, and gain on sale with the government programs now running off, will likely be less.

So I think there could be some opportunities from some of the smaller mortgage bankers for us to work with them. You saw that in a couple of our transactions in Q4, as well as in Q1 of this year. So I think that will be our source of product as we go forward.

Michael Kaye

Great. Just one other quick question. During the quarter you grew in your transactions, you are now you know, grown your MSR portfolio pretty massively, I think it was over $250 billion worth of the recent announcements, we've seen other players get tripped up you know, growing too big, too fast.

Could you just talk about what you're doing inside New Resi in terms of compliance getting ready to monarch [ph] all these different servicing partners and also your discussions with the regulators? Thank you.

Michael Nierenberg

Yes, that’s a great question. For us we have - we have a very robust compliance group here at Fortress. We've also added a number of employees in and around the NRZ platform. On the compliance front, we are in constant dialogue with all of our friends in DC from FHFA to Fannie and Freddie around servicing transfers.

I think a couple of very important things to point out, the PHH transaction, there was no transfer of MSRs off the PHH platform. So effectively for us its just a pure economic ownership transfer from PHH to us.

On the City transaction, the initial settlement of that transaction will be purely economic and then Nationstar will likely be the sub-servicer and that will acquire - and that will occur over the course of the next year.

So our big thing is making sure that we work closely with our sub-servicers you. We've pointed out over the course of the past couple years, we felt it was very important to establish relationships with a number of servicers, we've done that. We've also hired third-party contractors.

For example, there's a company called Navigant, who was basically a full-time service provider to us around the compliance function. So we built that out in a very robust fashion.

We'll continue to do that. There is constant dialogue with all of our friends, again, you know what it would be from a regulatory standpoint, as well as the folks at Fannie and Freddie on our business.

Michael Kaye

All right. Thank you very much…

Michael Nierenberg

All set where we are.

Michael Kaye

Thank you.


And your next question comes in line of Jessica Levi Ribner with FBR. Your line is open.

Jessica Levi Ribner

Hey. Good morning. Thanks so much for taking my question.

Michael Nierenberg


Jessica Levi Ribner

Is there – I see that you extended out your financing for a lot of the portfolio, is there an eye towards extending it out even further, meaning 3 to 4 year kind of range?

Michael Nierenberg

I think you know, based on the forward curve if we could extend our maturities and term out our – whether it be our advance business or anything else, we will continue to do that. It is our expectations that the Feds going to at least two times, maybe as many as three and again that’s surely based on where we see the economy and listening to some of our market oriented friends as well.

So protecting ourselves against higher interest rates is something that we've you know, taken very seriously. The other part of that is, we do have some strategic hedges around our debt, which should protect us in a higher rate environment. So when you look at some of our GAAP numbers even throughout the course of the Q4, we had a little bit a lift around that.

So yeah, I mean, locking in fixed rate financing is very, very important to us, term financing is better because it gives us the ability to focus on other parts of our business.

Jessica Levi Ribner

Okay. Thank you. And then, in terms of your resi loan portfolio, especially those that you get when you collapse the call rights, how do we think about kind of how you are thinking about that portfolio in terms of holding those loans, do you look to monetize them and what do you view at those?

Michael Nierenberg

Well, there is couple of points. One is on our – when we acquired these transactions there was usually a percentage of real estate owned that were non-performing interest [ph] houses effectively. We try to get those out the door as quick as possible. You know, we've hired - now that we've accelerated our call strategy, I pointed out we are calling $900 million this quarter.

So think about that versus our typical run rate of $300 million, if we're going to end up growing that, so we've hired eight - another team of - we've added another three resources to that business to get homes out the door, working with property managers, going to see houses or self, it’s a pretty labor-intensive business.

On the non-performing loan side, we work with our servicing partners to try to get you know, whether we do loan mods for people or whether we do principal forgiveness. We do anything and everything we can to help the consumer stay in their home and do loan modifications.

And that's a really important thing and once we get those performing then we could either securitized those or sell off the loans to the marketplace. So that's really our strategy there. We have done a couple one-off transactions where we've acquired loans.

You know, quite frankly, right now where loans are trading it’s not as - we don't believe it’s as fruitful for our shareholders, there is other areas that we could deploy capital. So it will grow, but and so will the team around it.

So again, loan modification is doing everything we can to help consumer stay in their homes and then REO [ph] getting that out the doors as quick as possible.

Jessica Levi Ribner

Okay. Thanks so much.

Michael Nierenberg

Thanks, Jess.


And you have a question from Jason Weaver with WED [ph] Securities. You line is open.

Unidentified Analyst

Hey. Thanks for taking my question. Given the rates and also the answer to a prior question there, I see that the advance rates on the City portfolio are somewhat higher. Can you talk about what you see is appropriate leveraging here and where you see that moving?

Michael Nierenberg

Yes. I think we have set out, we've done a couple of term MSR notes particularly on the PLS where I believe our advance rates are something around 60% or 65%. We did that and I believe it was '14 or '15.

On the City portfolio, with another kind of new production portfolios, we'd like to cap at least for now our MSR financing at 50%. We don't want to run a hugely levered business just to give you a sense on leverage ratios, after putting on MSR financing of about 50% should be something between 1.7 and 1.8 overall.

So when we think about leveraging our portfolio, we want to run the lowest levered business and obviously provide you know the best returns as possible for our shareholders. So I don’t believe that - we don't see it going above 50% right now.

Unidentified Analyst

Fair enough. Okay. And just one more, I wonder if you could talk about what if any changes you see for NRZ and the manager as a result of the SoftBank [ph]

Michael Nierenberg

There was no change, I think the - you know, NRZ is an important part of - obviously of Fortress, but as a result of this you know, acquisition by SoftBank its really just – you know there's a lot of fun there, that could be interesting things to do. But for NRZ it is just business as usual, there is no change at all.

Unidentified Analyst

Fair enough. Thanks again.

Michael Nierenberg

Thank you.


And your next question comes from the line of Brock Vandervliet with Nomura Securities. Your line is open.

Brock Vandervliet

Thanks very much. I just wanted to go back to the question that Bose asked, in terms of trying to better dimension some of your operating or your core performance. The servicing revenue that we see I guess is broken out listed on page 27 of the deck, $118 million, does that include those marks that you talked about or is that just the operating servicing fee?

Michael Nierenberg

I am sorry, the $118 million, where do you see that Brock?

Brock Vandervliet

Yeah, $118 million servicing revenue on slide 27?

Michael Nierenberg

Brock, that includes the mark from the full on our portfolio.

Brock Vandervliet

That does? That does, okay. What would you - what would you consider to be the core operating revs there X marks?

Michael Nierenberg

The mark that flow through for the quarter was approximately $104 million.

Brock Vandervliet

Okay, got it. All right, that makes sense, much more so with what we've modeled, okay. And Mike you called out I think really for the first time, obviously the $900 million called is a huge number, but you called out that linkage with lower servicing advances in a greater ability to execute these calls. Could you just kind of review that relationship?

Michael Nierenberg

Sure. So as servicer advances and delinquencies come down, the call population becomes more economical. And I pointed out earlier that when we first acquired you know, the HLSS advances or the Ocwen advances, couple that with the Nationstar advances, I believe that the amount of that portfolio was something between $8 million and $9 billion, its currently 5.9.

So when you think about the overall cost around servicer advances, when we call a transaction we pay out for all these advances at par. If you don't have to pay them off at par the deals become more economical. So the more servicer advances that are outstanding, the less economical those deals are.

Brock Vandervliet

Got it. Okay. All right, thanks for taking my question.

Michael Nierenberg

Anytime. Thanks, Brock.


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

Trevor Cranston

Hi, thanks. A follow up on the question about financing for the newer MSR portfolios, can you talk a little bit about sort of what financing options are out there for new MSRs you know, in terms of issuing notes versus sort of like warehouse line or secured debt from bank counterparty and also how much debt do you see in that financing markets? Thanks.

Michael Nierenberg

I'll take the last part first, the amount of debt is pretty – it’s very encouraging and a lot of that comes from our bank friends. We set up - we closed on a facility last week that was a very large one and I think that as there were number of banks that want to work with us and provide MSR financing.

When we currently - our goal quite frankly is to lower - get lower cost of financing obviously and do something around the MSR asset that’s more term in nature. For example, tomorrow there's a group of us that are going down to Washington to meet with you know, FHFA to discuss different ways that we can potentially improve the financing market around the MSR asset class. And a lot of that has to do with you know, how do banks and others get comfortable around being first in the waterfall around secured lien not being subordinated to the others.

So we're working hard at that. The depth is very large, typical cost of funds is being something around LIBOR plus 400 area and you know we've been able to go out a little bit more term in nature, but ultimately what we'd like to do is solve for a longer-term, non-mar to market, lower cost of funds facility which would obviously drive more the earnings around the asset class.

Trevor Cranston

Got it. Okay. And then a question on the securities portfolio, you mentioned that spreads had come in at decent amount over last year and even a decent amount into the first quarter here. Are you guys going to still be looking to add to that portfolio meaningfully and does it continue to makes sense with tighter spreads, specifically on deals if you guys control the call rights on those?

Michael Nierenberg

You know, if in fact it enables us to call the transactions, we'll continue to deploy capital there, even though yields are lower, you know, we are very – and this is no secret because we've been focused on this and I've been mentioning this on pretty much every earnings call, we're doing all we can to accelerate call rights.

You know, you know but it drove from $300 million last quarter, whatever you know, give or take at $900 million this quarter and as we look at the future, we are going to be more aggressive, advances are coming down, so economics with tighter spreads continue to improve, so to the extent that there were lower dollar price bonds that enable us to call these transactions we'll continue to deploy capital there.

It’s less interesting quite frankly today then it’s been and the competition is pretty vast out there. You know a lot of the large money managers continue to deploy a lot of capital there. But we'll continue to search for opportunities there.

Trevor Cranston

Okay, thank you.


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

Fred Small

Hey. Good morning. Thanks. Just I don't know if I came up on any of the questions before on the core earnings, but can you sort of say or break out how much of core earnings were related to the call rights in the fourth quarter?

Michael Nierenberg

That was $0.04, it came through from accretion [ph] from collapses for core.

Fred Small

Okay. And I think that's where - it's when you've disclosed that before, that sort of where it's been and might talked about the run rate before, is that fairly linear as the UPB goes up, I know there are sort of some puts and takes on how it gets recognized versus the amount UPB?

Michael Nierenberg

Yeah, it varies. I mean, certain deals where we're going to make more money, it depends on how many bonds we have it at discounts on other deals. I mean, the one area I want to point out, the non-performing loan sector continues to perform extremely well, right.

There is a lot of capital that’s being deployed there, as well as into the re-performing loan sector and part of it is if you think about you know, these large bank settlements, that have been agreed to with different regulatory entities, there's a bunch of principal forgiveness or loan modifications that need to happen as a result of that.

What that's done effectively as it creates for us, you know, when you think about it, you know, if we were to call every loan we could today its between $30 billion and $40 billion, that’s the amount that's in the appropriate on a factor date.

So think about it this way, we control roughly $40 billion of loans, with spreads doing better on the non-performing loans space and spreads doing better on the non-agency space, effectively it will enable us to call more transactions. I think that's part of the driver in our ability to do more here.

The bigger strategy continues to be if we could work with industry participants and figure out more of a global thing, I think that would be a much better thing. The team here is had conversations with the rating agencies and with bond trustees in and around trying to figure out different ways that we could accelerate these call timelines.

But some of the deals, you know, as it comes back to the economic will vary whether you make a point, two points, five points, it all depends on how much is delinquent and how much is not delinquent, how many bonds you have, et cetera.

Fred Small

Got it. Thanks. And then just one follow-up on that, is there sort of an – well, two follow ups, maybe one, is there sort of an average level of advances or delinquencies, however you want to think about it, where the economic start to make more sense on a specific deal - on a specific group of deals?

Michael Nierenberg

You know, again, a big part of it is the bond portfolio, because we have bonds that we own on a weighted average price of give or take $0.70 odd that is a big driver. As you think about accretion in the quarter, in any particular quarter and as you think about the deals, it’s hard to pinpoint that exactly.

I think we have that slide that shows if delinquencies go down by 2% and advance balances go down by X percent we'll be able to call a certain amount more, I do think we're going to be active.

We're currently trying to figure out if we can work with some of the banks that have agreed on some of the settlement, thus again, we control a population of you today 30 billion to 40 billion of loans and I don’t think anybody controls that kind of population where we could work with third parties on. So it's going to vary.

Fred Small

Okay. And then just a follow-up on that, just on average what percentage of the underlying bonds in the deals you've called to date or in the fourth quarter does NRZ own?

Michael Nierenberg

On every deal we typically own bonds that we call, because again, that helps with call economics, because there's delinquencies. I'd have to get back to you, maybe we can do a follow up on that, what we did in like for example the fourth quarter on the deals and we could show you how many bonds we own, we could go back to that. That would be a follow up…

Fred Small

Okay, great. Thanks a lot.

Michael Nierenberg

Thank you.


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

Ken Bruce

Thanks. Good morning, Mike. A question relates to I guess, you touched on a couple different times the issue on advances and trying to – you know, you expect that to come down over time. Can you remind us or maybe kind of address kind of what this – what you believe this you can do with servicers to try to help to expedite getting those advance dollars down, you kind of touched on the delinquencies as being a key part of that. But could you kind of remind us what they can do.

And then maybe separately, does the situation with Ocwen, does it look any better today you know, now that they kind of sounds like they're working through some of the regulatory issues that they have?

Michael Nierenberg

Okay, first question, on the servicer advances, you know, we don't control that part of the business. The servicer itself, you know, whether it would be Ocwen or Nationstar they control their own advances. They are in the specific pooling and servicing agreements, they have certain things that they could do to either call back advances or not.

Keep in mind, as delinquencies - over time these deals were issued between 2003 and '07 call it, so let's say a weighted average date of issuance is for a rough you know, for taxes [ph] Is 2005 these deals were outstanding for 12 years now.

So you'd think over time the delinquencies would come down, as delinquencies come down or loans get liquidated, advance balances come down. That will be - I think that'll be a bigger driver going forward versus to say servicer having the ability to call back advances.

Clearly you know, those do so, because it costs them money to have advances outstanding, meaning, Ocwen and Nationstar. But I think from for both companies, the language that’s in the pooling and servicing agreements is how they service their loans. For us we don't really have influence on that. Obviously we always want to make sure that advanced balances are as low as possible, but they have to service according to the guide.

As to really Ocwen in their financial health, you know, quite frankly ritual [ph] for them. I mean, we have a very good working relationship with Ocwen and having Ocwen healthy I think is a very important thing for the industry, really do.

I mean, more is better. There's not that many folks that are out there. We have relationships with kind of the big four, but we're very happy for them. And you know, I would hope over time we can continue to do more business with them.

Ken Bruce

Right. And maybe just on the first point, I think back – there is a little bit of a dated question, just in terms of timing, you kind of identified or just highlighted that there needed to be some industry issues resolved to help to expedite the - getting the advance balances down, is there any update on that or are there - is there anything that you can do to just kind of again try to work on that as a large piece of your balance sheet?

Michael Nierenberg

Yes, the number of our team have gone down and met with the rating agency, met with Yvonne trustees, had extensive conversations with council. So we continue to work on that. There have been a couple deals over the course of the past year, which have got modified, the call dates have been modified.

So we're going to continue down that path. I don't think it’s a dead end by any means, but it's something that there continues to be a lot of work and will be a big focus in '17 for us.

Ken Bruce

Thanks and appreciate all the information you provided in the supplement into the quarter. Thanks, again.

Michael Nierenberg

Thank you.


There are no further questions at this time. I'll turn the call back over to the presenters.

Michael Nierenberg

Well, thanks again everyone for all your support. We appreciate it. '17 hopefully will be a very good year for all of you and all of our shareholders. So we'll continue to do all we can to execute around our business. And thanks again. Bye-bye


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

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