New Residential Investment Corp. (NYSE:NRZ) Q1 2019 Results Earnings Conference Call May 1, 2019 8:00 AM ET
Kaitlyn Mauritz - Investor Relations
Michael Nierenberg - Chairman, Chief Executive Officer& President
Nick Santoro - Chief Financial Officer
Conference Call Participants
Bose George - KBW
Tim Hayes - B. Riley FBR
Doug Harter - Credit Suisse
Matthew Howlett - Nomura
Kevin Barker - Piper Jaffray
Good morning. My name is Lausanne and I will be your conference operator today. At this time, I would like to welcome everyone to the New Residential First Quarter and 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
I would now like to turn the conference over to Ms. Kaitlyn Mauritz of Investor Relations. You may begin.
Thank you, Lausanne, and good morning everyone. I’d like welcome you today to New Residential’s first quarter 2019 earnings call. Joining me here today are Michael Nierenberg, our Chairman, Chief Executive Officer and President; Nick Santoro, our Chief Financial Officer. Throughout the call this morning we are going to reference the earnings supplement that posted to the New Residential website this morning, if you are not already done so, I’d encourage you to download this presentation now.
Before I turn the call over to Michael, I’d like to point 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 earnings supplement regarding forward-looking statements to review the risks 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 to the most directly comparable GAAP measures can be found in our earnings supplement.
And now, I’d like to turn the call over to Michael.
Thanks, Kate. Good morning, everyone and thanks for joining our call. Before I begin, I want to welcome Kate. Kate recently joined us and will be heading up our IR efforts for the company. We’re thrilled to have here. So when you see some the changes to the supplements that are posted online, we could thank Kate for those.
For the quarter, what I’d like to start is really talking about the earnings power of our company. We've always tried to show how our portfolios perform in different interest rate scenarios and this quarter truly showed how the diversified nature of our business continues to work well in all rate scenarios.
During the quarter we saw 10 year treasury yields fall by 25 to 30 basis points. Fixed income assets rallies spreads tightened. What does all this mean? Our bond portfolios, loan portfolios, consumer portfolios and our origination business lines performed extremely well, offsetting the slight decline we saw in our MSR business.
On the MSR business we've added hedges against our MSR asset where appropriate. Keep in mind, not only do we have hedges, all of our MSRs have recaptured agreements with our servicing partners.
We've also seen an increase in production at our originator, which will lead - which should lead to more earnings in the future and a greater sourcing of assets for our balance sheet.
On the sub servicing side, we've taken steps to minimize our counterparty risk. We now have sub servicing agreements with loan care, which is a new counterparty to us which is owned by Fidelity. We have renegotiated some of our sub servicing agreements, lowering fees and increasing our ancillary revenue.
During the quarter, we raised capital based on our pipeline of investments. Unfortunately deals and investments take time to minimize the drag on earnings which we estimate at some add, something close to $0.03 per share we paid down debt. Our liquidity position today is terrific and I see no reason that we will need capital anytime soon based on our current pipelines of deals and investments.
On the investing side, risk rewards are tilted to the downside. While saying that with the Fed on hold, we believe fixed income assets will continue to perform well. I pointed that out in the past our desire to capture the whole pie regarding the mortgage assets. This morning we announced an agreement to partner with Covius and Aquiline on an ancillary services business.
To summarize, energy had a terrific quarter and the downside of our investments should continue to provide a sustainable earnings stream and dividend for our shareholders as we look into the future.
I'll now refer to our supplement which has been posted online. I'm going to begin with page two, and I'll just take you through a couple bullets on each page. On page two our market cap today is currently approximately $7 billion. We have $33 billion in total assets. Our dividend yield is a little bit south to 12%.
Since inception in 2013, we've grown our book value by 65%, while paying out $2.7 billion in dividends and our total shareholder return since inception is 147%. We're very proud of the results of this company.
Page two, earnings. GAAP net income $145.6 million or $0.37 per diluted share. Core earnings of $204.3 million or $0.53 per diluted share. Again, we have plenty of liquidity and capital on our balance sheet, as a result deployed at the time of the capital raise it would add - it would add approximately $0.03 to our core earnings.
First quarter common dividend $0.50 per common share. And again, our dividend yield is a little bit south at 12% percent. During the quarter, our book value grew from 16.25 to 16.42. Our total economic return at 2.9% is comprised of $0.17, an increase in book value and our $0.50 dividend that we paid out per share. And as I pointed out earlier, we raised 732 million a common equity during the quarter. And I did participate in the capital raise.
Page four, we talk about our portfolio and why our company is different than the rest. Across the top part of the page, we tried to lay out our net equity investment. On the MSR and servicer advance business, we have $3.5 billion of net equity, on our securities and call rights $2.1 billion of net equity, on our loan business $780 million in net equity and on the consumer business $118 million in net equity.
And again, I like to refer to these numbers and give you a couple of thoughts. One is on the MSR business. Clearly when rates fall MSR values are - typically will fall as well. The offset to that as I pointed out in my opening remarks are securities, our loans, our consumer loans and I'll get into some of the numbers after far outpaced the defined that we saw in the value of our MSR assets.
As we think about the market today, clearly what we saw in the month of March when the Fed basically signaled that they are going to be on hold throughout the course of the year, at least, for now based on their statements and the data that they're seeing, the way that we think about it, the consumers are very healthy, the housing market stable. What does that mean to us?
A healthy consumer leads to lower delinquencies and defaults, and as I go through the each segment of our business you'll see how our bond portfolios in our call business continue to see lower delinquencies and lower defaults.
On the housing side there'll be more opportunities for origination in our origination company at New Res. Therefore there'll be more assets that will be created for our balance sheet and with the Fed on hold, we anticipate this to lead to lower volatility and tighter credit spreads.
Page six. This is a page we put in - in each deck at each earnings call. And again, this really illustrates the power of our company. The diversity of our different asset classes, our MSR our business, our non-agency security business with call rights, loans, and then our consumer loan business.
And again, there is always going to be offsets assuming that rates move you'll have certain business lines that will do better than others depending upon whether rates rise or fall.
Page seven, let we talk about headwinds. We you think about the MSR business, mortgage rates have fallen. Today the mortgage rate is give or take about 420, I believe that's down from 455 at the end of - at the end of the year. How do we think about a 420 mortgage rate? Approximately 10% to 13% of our portfolio is refinanceable. Now that compares to approximately 30% for the broader market.
Why is that? We have a lot of legacy MSRs that are a little bit more credit impaired in nature. So overall when you think about the MSR portfolio the refinanceable universe is actually quite small.
Mortgage rates would have to decline another 60 basis points for the refinance pin up [ph] population to increase above 30%. When we look at our loan and bond portfolios, season loans are less likely to refinance given the lack of incentive to the borrower. These loans have been outstanding for quite a period of time. And many of these borrowers have seen lower mortgage rates than they currently are seeing now.
The flip side to that is we have an origination business that we could offer mortgage loans to - so to the extent that they do refinance we'll be in a good position to recapture that loan.
On the ancillary business side increase in refinancing equals more mortgage origination. The residential benefit from our mortgage origination through our ownership of New Res which was formerly New Penn Financial. Again, the recapture capacity of our business lengthens our mortgage debt. Our MSR cash flow increases our gains on sale and really the way to think about it's an insurance policy for our overall business.
Page eight, the highlight real. Since inception energy is up 100 - our total return is 147% since May of 2013. Our book value continues to grow and that's something that we take a lot of pride in and our economic - total economic return continues to do extremely well.
One thing I want to point out on book value with the Fed on hold and this was a change in - and obviously a change in language that we – what we had seen in the past, one of the things we're very, very mindful of how to protect our overall book values and to continue to try to grow that as we go forward.
Page nine talks about the diversified portfolio and our opportunistic investments. You can see since 2013 book value is $10 a share, today at $16.42. We did have a hiccup in the fourth quarter of ‘18 when the markets melted down, we kicked - recaptured some of that in the first quarter of ’19, market cap approximately $7 billion. If you look on the bottom and see some of the highlights of some of our acquisitions.
Page 10 focus on maximizing the full value of the mortgage asset. I'm not going to reiterate each one of these points. Couple of things to note, we have a $550 billion mortgage servicing right portfolio, that equates to about 3 million different mortgage customers.
As we go forward and think about our business, one of the things we're truly focused on is the mortgage customer. How can we be more helpful to the mortgage customer, how can we offer more products and then the counter to that when we think about our overall business, if you originate more mortgage loans, there's more ancillary revenue to go around. So when I spoke on the last earnings call, I said we want to be able to capture the whole pie. And this morning we announced our equity investment in Covius, along with the private equity firm Aquiline.
Page 11 talks a little bit about Shellpoint. I think a couple of things to highlight on this page. Bottom right, overall volume and production for them for the first quarter was up 4%, last year they did between 7 billion and 8 billion in production. This year we expect them to do something close to 15 billion in a steady state based on where we are right now. So you see a nice increase in production.
A big chunk of that, we have a huge focus on recapture. We capture origination volume of $400 million, little less than $400 million in the first quarter, is up 40% quarter-over-quarter. Big numbers, we expect that to grow going forward. Again, that is to say another insurance policy if you - if you'll have it for our MSR business.
Non-QM volume was down a little bit. Again, that was due to the meltdown in December and then when you think about the non-QM space we originated $600 million of loans that we - for securitization and I'll talk to our securitizations in a minute.
On the Shellpoint side total servicing assets $142 billion, that is up 30% quarter-over-quarter. And when you think about that Shellpoint a service loans for us and other third parties and we expect our business to continue to grow.
Page 12, just a quick slide, I'm not going to spend a ton of - ton of time on the Covius thing and I'll wait till we get Q&A on that. The bigger picture here is a small investment into a - one of the leading provider of you know, tech and kind of ancillary services for the mortgage business. The gentlemen that run that Rob Clements and John Surface. These folks ran EverBank. I know them for many, many, many, many years. Wonderful people, do a great job and we're thrilled to partner with them, as well as with Aquiline.
Now I'm going to - I'm going to begin, on page 14 just to give you first quarter highlights and then going forward. And then I'll talk about our portfolios. During the quarter we acquired $22 billion of MSRs for total dollar amount of $276 million, that is a gross amount pre-financing.
Our MSR book, as I mentioned before totaled $547 billion as of the end of March and that was compared to 539 at the end of December. Servicer advances, I am not going to spend a lot of time because as the consumer and mortgager heels [ph] you're going to continue to see less and less equity in the servicer advance business. Today servicer advances are at $3.3 billion. When we first need to begin making investments in this asset class, I think there was something close a little north of $8 billion.
On the non-agency firm we acquired $411 million of season legacy non-agency mortgage securities that’s for our call strategy. During the quarter, we also called 19 deals worth - with a dollar amount of $910 in UPB.
We completed two non-agency securitizations, one on season performing loans and one in RPLs. On the residential loan side, we acquired $1.4 billion of loans, 690 of those were purchased in the secondary market and those are re-performing loans. The rest were to our call business.
One of the things we’re focused on is having more current cash flow out of our existing loan portfolios. The performance of our portfolios continue to improve as current loans have increased by 10%. During the quarter, we completed two non-QM securitizations for $600 million.
Consumer loans. Two quick things. That performance there has been terrific. I just want to spend a quick second on the prosper front. Our warrants will be earned by the end of May. At that point we’ll own about 6% of prosper. Where that goes and where they go with that company will be interesting. As we go forward, we are very focused there to see if there is any synergies or if there is any cross-selling that we could do with our existing customers in the New Res Shellpoint business.
Away from that, we raised $752 million of proceeds. Again, that's based on our pipeline of investments. Currently sitting on plenty of liquidity, no need to raise capital anytime soon, based on the investments that we're working on. The point I would make on the deal front, deals are - getting deals done quickly is very difficult. We do look at a lot of deals and we're hopeful that at some point in the near future we’ll be able to deploy a bunch of the capital sitting on our balance sheet.
On the sub servicing side, I mentioned we reduced our counterparty risk. We opened up a sub servicing relationship with LoanCare which is owned by Fidelity. And then again the liquidity side, we've closed the quarter with $341 million of cash, plus excess liquidity in some of our financing vehicles.
What we did again, to come back to my opening remarks, we did pay down debt, so our leverage ratios are pretty low as we end the first quarter and that's just to reduce the cash drag and again that's about $0.03 per share. Post Q1, less we bought about 25 billion of MSRs for our MSR business.
So let me just take you quickly through the portfolios and then we'll open up for Q&A. On the MSR side, again when mortgage rates rally typically MSRs go down in value for our business away from the change in sub servicing fees our MSR book was down something around give or take $100 million. With the change in sub servicing fees we’re actually up $27 million on the quarter.
We sped up some of our prepayment assumptions and again recapture is going to be huge for us as we continue to work with our different servicing partners on our overall portfolios, as well as the hedging I pointed out earlier.
Call right business, during the quarter as I pointed out we called 19 deals, 900 million. We did two different securitizations. Big point here 60 day delinquencies declined again, they're down to 12.6, 10% decline quarter-over-quarter and 20% decline year-over-year. Why do I bring that up? One is it means we'll get more performance out of our existing bonds. Two is, its going to help with our call strategy.
On the right side of the page, you can see our call strategy currently $45 billion are callable, a little bit less than $120 billion and again, we'll do all we can to continue to increase velocity there.
On the non-agency bond portfolio $411 million face was acquired in a quarter, again that's for our call business. We also invested in some cheap triple AAA bonds earlier in the quarter. Overall, we have a 20 point discount on our bond portfolio, that helps to drive our collapse strategy. And we believe that 50% of our legacy non-agency portfolio will be- which is currently callable and that number will continue decrease over the next couple of years.
Looking at the bottom right, 16% improvement in delinquency rates year-over-year and default rates has dropped by about 6%. On the loan side, not a time to talk about. You know, the loan book has grown over the course of the past couple of years. We had invested capital in a couple of different RPO deals where we bought loans. We worked with different sub services on that, the Shellpoint guys and others, and the returns on that business have been very, very good. Market's very, very competitive on loans, last week well sold about $3 billion. We did not participate in that auction, just from a price perspective.
On the consumer loan page, on page 19, $118 million total capital there, loan [ph] 6% percent of prosper by the end of the year. SpringCastle is our legacy deal. We will be in the market refinancing that deal. In the next week, we'll be able to have another $1 billion deal that will hopefully lower our cost of funds on that deal.
And then overall equity, just to give you a sense, prosper is at roughly a little about $40 million and SpringCastle is 80 of the - I know it doesn't add up to 118 to take one off each. But returns and both of those have been very tense.
Service advances, I'm not going to spend any time. If you take a look at page 20, you could see the decline in servicer advance balances. That was a great investment for us, but there's going to be less emphasis as there's less of a need unless you go into a recession. So the servicers to advance on delinquent loans.
Page 21, just talks a little bit about our securitization platforms. We did four different deals in the first quarter. We're in the market now. One of the things we're very focused on and I've been pretty vocal is doing term financing on as much of our business as we possibly can. We're currently in a market with a $1 billion financing on our Freddie Mac MSRs, we continue to as we acquire more and more MSRs we’ll continue to turn those out in the marketplace.
After we're done with this deal and a deal we’ll likely doing in May, I think the total amount of our population that is not financed in the term markets on the MSR business will be less than 5%.
Page 22. What differentiates us and how do we think about things going forward? Again, are hard to replicate portfolio. I'm really proud of our results in this quarter because it was a hard quarter. I mean, when the Fed came out and the bond market rallied like crazy and what we saw since the end of last year and we're still able to put up what I think are very good earnings for our company, I'm very proud of our portfolios and the hard work of our team. So we focused on capturing the whole pie. We announced an investment in Covius.
When we think about opportunistic investments, not that easy right now. The markets are flushed with cash. We are in the middle of certain things that we're working on which we hope to execute you know in the near future, don’t really go into details there.
Our track record continues to speak for itself and when I bring up shareholder focus, one protect, two, to continue to maintain our earnings and dividends. And then as I pointed out we’ll raise capital. I participated in the capital raise to make sure that I'm in it with you.
With that, I'm going to turn it over to the operator and we’ll open up for questions.
[Operator Instructions] Your first question comes from the line of Bose George with KBW.
Yeah. Good morning. So just first with the Covius acquisition, can you just talk a little bit about how much ancillary revenue you could potentially bring back sort of in-house through this? And is there also kind of a third-party opportunity here as well?
Yeah. Good question, Bose. Thanks. The - first of all when we think about our earnings and we look at our earnings projections going forward there is no credit for the Covius investment in our earnings going forward.
Two, we look at Covius as a third-party provider to the industry. This is an equity investment in them where we hope that their earnings will continue to grow. Again, we're big believers in the - in the leadership of that business with Rob and John.
And just to give you a couple of quick things. We invested $20 million of equity and we have a little bit of debt in the company. The 20 million of equity and the debt gives us about a 20% ownership in the company. Keep in mind, Aquiline owns a bigger share than we do. Over time we have the opportunity to grow - to grow our presence in the company, grow our ownership.
But the way that we look at this is it's an investment in Covius and it's an investment in the management team as a third-party business and we hope that they can grow it and we could - you know, the value of our equity ownership will go up over time.
But just in terms of the revenue and sort of sizing or timing of stuff coming over, so its somewhat more gradual in terms of you know the benefits to your earnings from the increase in ancillary revenue?
Yeah, I think there's a couple of points there. One is the earnings will stay in that company. Two is, if you think about Shellpoint and New Res, we already have an appraisal business. We already have a title business. We already have an ancillary services business. This kind of adds to the overall suite of products that we can capture within our origination business. But those numbers you know, to the extent that the revenue growth in the company, obviously our equity or our equity valuation will go up.
So we're excited. We think it's going to get going you know, sooner rather than later. But I do want to make sure that you understand, we have some of these products in our existing business. And when you know, on some of our renegotiation on our sub servicing contracts and getting more ancillary revenue from our sub servicing partners, we are already seeing the fruits of some of that come back today.
Okay. That's helpful. Thanks. And then just wanted to ask about, just updated thoughts on hedging the MSR potentially, I mean, this quarter obviously you guys did well, I mean, spreads tightened on credit which helped, but you know, just generally how are you thinking about protecting against falling rents?
So with the Fed on hold, I mean, you know, if you go back over the course of the past couple of years everybody thought the Fed would keep raising rates and we'd see a much higher rate environment, obviously in the MSR business, that's great for MSRs.
During the quarter, you know, even coming out of year end our loan books were longer from a duration standpoint, so we use that as a hedge versus our MSR book. Our bond book is long. And we also have credit spreads there, so that was used as a hedge against our MSR book. We actually and our recapture agreements kind of help with the MSR.
Now that Powell [ph] and the Fed came out and basically said they're on hold. We've actually put out on a bunch of hedges against the MSR in the mortgage space. One thing I want to point out, as we put on more mortgage hedge against our MSR, the core earnings will go up, because you're buying mortgage assets against your MSR.
So I think to the extent that – and we believe we'll remain in this kind of low vol environment, at least for now, to the extent we remain in this low vol environment and we add more mortgage hedges which we are and will be doing down the road that will lead to higher core earnings.
Okay. And just the mortgage hedges are the agencies or just any color there?
You know, I would assume they're agencies. You know, some of our - the duration in some of our offsetting businesses could be longer in nature, which would offset some of that. But in general the hedges against the MSR book is going to be in agencies, it could be in swaps, it could be in derivatives, but for the most part I would take it that as a mortgage product.
Okay, great. Thanks.
Your next question comes from line of Tim Hayes with B. Riley FBR.
Hey. Good morning, Mike.
Hey. Can you touch on your outlook for the mortgage banking industry in general and the opportunities you could see there? You highlighted your expectations for lower vol ahead and the tailwind from lower rates. But for the past several quarters you’ve been talking about how you expect volatility in that universe could present opportunities for you to invest which is largely why you’ve been raising capital. So just wondering if you still expect overcapacity issues to present opportunities or if you expect fewer opportunities ahead?
I think there'll be more opportunities. I think the original – listen the mortgage business is really hard. We all know that. I mean, you look at the industry there is few men standing at this point. I think the way that we see it, we have capital to the extent that we can increase our origination business, we're going to do that. That will help us not only with providing more assets for our balance sheet, but it would also provide us with more hopefully income around that part of the business.
The servicing side, you know, Jack Navarro and I’ve been pretty vocal on this. You know, that business has grown tremendously. They're at $142 billion. That will likely grow to something, I think over time and give or take about $200 billion. We are evaluating our sub servicing partners on the other side to try to increase the roster of sub servicing partners, so its not all captive to one.
But I think there'll be more opportunities. Obviously, the origination business will benefit from lower rates, and you know, we're seeing that. We're also seeing that in income in our overall earnings, as a result of the acquisition of Shellpoint. So net-net, we're optimistic. I do think you'll see more consolidation though.
Okay. That's helpful. And then you kind of touched on this, but what is your appetite like for M&A and additional strategic investments following this Covius deal? Are you still actively looking for ways to play in the ancillary business space or does Covius going to check the box here and any additional investment or acquisition will be more tailored around recapture?
Yeah. I think that the biggest thing I would say is, if we think it's accretive for shareholders, we're going to acquire things. You know, a big thing - a big part of where we sit now, liquidity is good, asset prices are reasonably full. I think they'll probably still do a little bit better from a spread perspective and a price perspective, but to the extent that opportunities rear their head and we look at a lot of M&A, we have a team of four that are actually focused on M&A. We're going to try to execute a run [ph]. It's hard to do deals though so, I mean, you know we raised capital with the intention of deploying the capital sooner because we're in the middle of certain things, it's hard to get things done. But we're confident that we will.
Understood. Okay. And then on the Ditech sub servicing, can you just maybe touch on how much of that has been moved this point. And if you've been able to recognize the amount of cost savings that you anticipated and kind of mentioned on your last conference calls as you've renegotiate or negotiated some of these contracts?
Sure. On Ditech as of May 1, 345,000 loans at a 550,000 loans have been transferred. There is 205,000 loans remaining. By July alone there'll be a small handful of loans remaining there. You know, the big thing for us is first and foremost and this is not about NRZ or quite frankly Ditech, it's really about the homeowner. We want to make sure that anything we do around servicing, transfers is not disruptive to a homeowner. We have transferred MSR from Ditech to LoanCare, as well as Shellpoint.
So just to be clear those are the only two counter-parties to speak that you've moved the MSRs to?
At this point, yes.
Okay. Understood. Okay. And then just one more on Covius. Can you just maybe talk about the - you know, I know that your - it's an equity stake, you're not getting any earnings necessarily as they you know - from moving some or as they grow. But do you expect, I'm just looking for the value add from day one, maybe you know, is there - are there any dividends that you expect to be paid from that agreement? And then also are your counter parties that you're working with currently already partnering with Covius and outsourcing some functions to them?
The answer to the second question is some of the counter parties that we have currently work with Covius at this point. You know, it's a real company. These guys - you know again Rob and John are very real people and do a great job. The way to think about the investment, we have some equity in it, which is again it's $20 million not to – but a little $20 million and then there's some debt. To debt, you know, the coupon on the debt is going to earn 11% and then that will drop after a couple years.
So really the way that we thought about this is you know, we want to capture as much of the mortgage or the homeowner as we possibly can. We can't only do it in Shellpoint and New Res regs because they're not our only servicer. We buy MSRs from other people and we have servicing relationships with a number of people.
So the idea is let's capture as much of this stuff as we can of the ancillary revenue. It's a true third-party business. We are not running that company. We will have you know, board seats, but you know, they're going to do their thing. We're going to hopefully help them grow that company.
And services businesses, when you think about the way they trade versus you know, a financial services company, what I would say, is they traded a higher multiple of PE. So the idea is you put some capital in.
Hopefully Rob and John do a great job growing it. We earn some coupon on our debt and then over time the equity valuation that we have grows substantially because we could one day increase our equity ownership, one, and then two is, if we don't that the $20 million could grow as they continue to grow the business.
Got it. It makes sense. Okay, Mike. Appreciate that. I'll jump back in the queue.
All right. Thanks, Tim.
Your next question comes from the line of Doug Harter with Credit Suisse.
Michael. Hey, good morning. I understand you can't go into the exact specifics, but if you could just help us characterize some of the deals that you're looking at you know are they on the kind of the MSR side large - larger deals, smaller deals. Just help us kind of think about the capital deployment?
Well Doug, the one thing I can tell you is what we're working on. You know, I would think - I would think about anything for the most part that we're working on is consistent with our prior investment strategy. So it's nothing, it's not like a joke sometimes that you know, when you look at the value of assets they sell everything and go buy Breyers Ice Cream.
That's not - that's not what we're doing here, we're focused on financial services assets and/or companies that are consistent with what we have been doing over the course of the past six years since the company was founded.
All right. I appreciate it. Thanks, Michael.
Your next question comes from the line of Matthew Howlett with Nomura.
Hey, Michael. How are you doing?
Hey, Matt, welcome back.
Thanks a lot. Michael you've always been vocal in the past of credit spreads cut really tough, now the market was inflated and it sounds like this summer and you have ways around it. First just want to hear your overall view when credit spread get [ph] - get this rich. And then I'll follow up with other question.
Yeah, I think on the credit spread side, we have room to get tighter. I mean, we're not at the types of what we've seen, in the market we're a regular issue of debt, you know in the term markets based on our assets that we securitize.
I actually think stuff will go tighter. I think you're in a low vol market. There's - you know, the markets are flushed with cash, if prepayments continue to pick up, particularly around a lot of the credit side you'll see more mortgages produced. But those are agency mortgages, typically longer duration. So the need for short duration assets will continue to be extremely high. And I just don't think there's enough of them out there. So I think spreads will likely go tighter.
For us you know, if you think about it unfortunately a dividend yield is between 11% and 12%. If our dividend yield was 6% or 8% obviously we'd buy a lot more than we currently invest in today. But we don't want to be dilutive to our shareholders and we don't want to just buy assets to buy assets.
So I think stuff's going to do better. But again when I pointed out early - in our earlier comments, the risk reward is in our opinion tilted to the downside, but that doesn't mean stuff's going to do - not going to do better.
Right. If MSRs cheapened a little bit with the rates. Is that why you're active post quarter?
MSR have cheapened a little bit. That's why we bought you know that $25 billion last week. You know, we have relationships with certain mortgage originators and there's certain agreements we have on prepayment protections and things like that.
You know, quite frankly I think where you are on a levered yield basis in the MSR space is actually fairly attractive right here. And to my earlier comment, if we put – as we buy more - more what I would say in the money MSRs and we hedge them with mortgages, you're going to - you're likely going to see a bigger bang for the buck over time in our earnings stream.
Great. And then just the second one is, as energy evolves to what it looks like more of an operating business. What's the risk of awards, I'm just talk a little bit about that evolution. Is it about putting, hiring just good people to run these businesses or using your fortress [ph] you know, SoftBank as an ability. Just talk a little bit about as you evolve into these operating companies what are the challenges or the rewards for doing that?
Sure. I think, good question, Doug. The Shellpoint acquisition in July was made for a couple of reasons. One is it's an insurance - again that company itself is an insurance policy for you know, all of our servicing partners out there. So the idea about acquiring them to the extent that MSRs have to move and you're seeing this now in a Ditech situation that’s proved to be a good thought process.
We don't want to run a - you know, a very levered mortgage company and we won't do that. You know, most of our financing is typically around asset level. When you look at the earnings from that company they've been terrific. We haven't broken down segment returns yet, but you know I think earnings year-over-year will at least double from where they were in 2018.
The management team there, I know I know Bruce Williams for a long time. He's a wonderful person and they do a great job and they have a ton of experience, operating companies are hard though. You know, I'm not going to say they're not, you know, we have plenty of people there, who are very, very focused on it. You have - you know, we have a very robust compliance group. We have - you know there's a bunch of people doing different functions there.
On the Covius thing, again is it's really an investment in others, so we're not running that company. And that's really our only operating business I think. So overall we're still an investment company. We’re still going to try to put up returns around our core business. The Shellpoint acquisition gave us scale and protection, as well as you know, now contributing to earnings. So we're thrilled about that, but as you know you've got to be all over this stuff from an operating standpoint and we are.
Great. Thanks, Michael.
[Operator Instructions] Your next question comes from the line of Kevin Barker with Piper Jaffray.
Good morning, Michael. Hi.
In regards to some the comments around dry powder and your ability to continue and utilize some of the cash you have in your balance sheet to continue some of the investments. How do you view leverage at this point? I think with the balance sheet where it is, is that what 3.7 times debt to equity. Can you just quantify where you're comfortable putting that and you know, quantify how much dry powder you have today.
We reported cash of a little bit south of $350 million. We paid down debts. So our leverage ratios are below 3 at the end of - at the end of the quarter. Those leverage ratios will go up as we add more agency mortgages to our business to hedge out our MSRs. So that's you know, on the leverage side. That's how where I think we'll end up seeing more leverage.
Again, we continue to do more term financing around as many of our assets as we possibly can, including - almost our entire MSR business. The three areas where you'll see leverage are one agency mortgages, which there's a ton of capital there, our non-agency bond book and in the loan book until you actually do securitizations and work out some of those loans.
On the dry powder front you know, being that we pay down debt and we have capital on our balance sheet, I don't - as I look at our runway and think about the deals that we're working on, something different comes up that we just - that we're not seeing nor we're anticipating, we have no need for equity right now and we have plenty.
So even on all the deals that we're currently working on they will be funded with our dry powder, with the liquidity facilities we have. So you know, the net of all that should be - continued strong earnings, I would say. So on a powder play you know and leverage will run moderate leverage, leverage will go up as a result of the increase in our agency mortgages against our MSRs.
And then [indiscernible] had pretty well, I'm sorry if I missed it earlier, but was there a change in the fair value of the mortgage servicing rights actually going up versus what happened last quarter and the move in mortgage rates this time around?
Yeah. The servicing rights, they actually went down and part of it has to do then when you think about the valuation there's a large escrow component as you look at - as you look at forward rates. So the asset itself was lower in value. You know, Andrew and his team did a great job renegotiating some of the sub servicing fees. So the net-net on the quarter in the MSR business was actually up and that helped contribute to our book value increase, the bond book helped contribute to our book value increase and our loan book helped to contribute to our book value increase.
Just a follow up there, could you add a little more color on the negotiation of the servicing fees and what that entails and maybe quantify that?
Sure. I mean, what we're seeing, if you think about it, you agree on a contract at a set fee for one of our counterparties to service one of the mortgage loans. And what happened as we've extended certain contracts and lowered sub servicing fees and actually in doing that we've also acquired or captured some of the ancillary revenue that we weren’t acquiring in the past. The part of the key [ph] evolution of the business and our business and our portfolios and us working with our counter parties, that's really what it is.
Okay. Thank you, Michael.
There are no additional questions at this time. Michael, I would turn it back over to you for closing remarks.
Super. So thanks, everybody for participating. You know, we look forward to continuing to do what we do as a business, which is be in the Investor's business and providing stable earnings for our shareholders. We thank you for all your support and have a wonderful day. Thanks.
Ladies and gentlemen, this does conclude today's conference. You may now all disconnect.