Good day. My name is Jack, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Residential Second Quarter 2017 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. Thank you. Mandy Cheuk, Investor Relations, you may begin your conference.

Thank you, Jack, and good morning, everyone. I would like to welcome you today to New Residential's second quarter 2017 earnings call. Joining me here today are Michael Nierenberg, our CEO, Nick Santoro, our CFO, and Jonathan Brown, our CAO. Throughout the call, we are going to reference the earnings 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 earnings 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 earnings supplement. And now, I would like to turn the call over to Michael.

Thanks, Mandy. Good morning, everyone. Happy summer. So, I'm going to give a few opening remarks, and then I'll refer to the supplement, which has been posted online. So, there is obviously plenty to discuss from our recent Ocwen announcement to the trustee holdbacks and more broadly, the ever-changing macro environment. Our second quarter results were terrific, as our core business lines continued to perform well. Our acquisition of the Full MSR from Ocwen and the subsequent servicing agreement with Ocwen is very good for both companies. The result of this transaction is one which is accretive to our earnings, protects our servicing asset, helps us de-risk and continues to solidify our role as one of the leading capital providers to the servicing industry. Our call business and the acceleration of our calls has been terrific. Our bond portfolio has an unrealized gain of greater than $300 million, as of the end of 6/30. In the MSR space, valuations continue to increase and our investments made earlier in the year have been good ones. While housing numbers have been very strong, our MSR portfolio has performed better than the broader industry, as both the composition of our portfolio and the recapture agreements we have in place with our servicers have led to slower speeds and better performance. In the opportunistic sector of our investment portfolio, the consumer deal that we've done with Prosper has been a very good one. The SpringCastle transaction continues to perform much better than our initial underwriting. I'll now refer to the supplement and I look forward to giving you more details on our business. So, if everybody could flip to page 2, that would be great. Page 2 is really just an overview of our business. We changed the slide a little bit from our…

Thank you. Your first question comes from the line of Bose George with KBW. Your line is open.

Hey. Good morning. You've got a very good quarter. But I just wanted some help in sort of mapping the beat versus last quarter, just some of the pieces. Can you just start with just a clean-up call benefit, I think you said it was $0.09 last quarter. How does that compare to what you guys did this quarter?

Yeah. On the clean-up call, clean-up call has added about $0.06 for the quarter versus $0.09 last quarter. Now, one of the things I want to point out about that is on our last batch of calls that we did around the Wells transactions, we did those in conjunction with another counterparty. So, the overall economics rather than be when we think about economics being something in the 2-point to 3-point range, I believe the economics on that deal were approximately a point for us.

Okay, okay. Great. And then, I mean, there was obviously a big increase in interest income. Just in terms of the difference between last quarter, can you sort of walk through some of the drivers of that?

Yeah. The biggest part of that Bose is on the Ocwen side. Overall, if you take Ocwen out of the numbers, the core business and core earnings were give or take around $0.50 to $0.51. The addition of the Ocwen agreement as we thought about it for Q2 earnings. The way the company was modeled on a go-forward basis, our initial subservicing fee that we were paying was 26 basis points. In Q2, in June, we had multiple quotes that gave us subservicing quotes of 13 basis points. So, there was a change in assumption in the model, which is a retro adjustment. And overall that ended up adding something around $0.50 – low $0.50s. So that's how you go from the low $0.50s to $1.03 or $1.04 for the quarter in Q2.

Okay, great. That's helpful. And then, just in terms of when the lower fee goes into effect? Is that in 2020, when the initial subservicing agreement expires and then the new fee kicks in or just how does that work?

It will go into effect as we fund the initial, as we fund the full MSR. So as the PSAs transfer into our name, the full effect of that will go from 26 basis points to 13 basis points. So once we give Ocwen the money and we get approval from the various trustees, rating agencies, et cetera, your subservicing cost or your servicing costs will go from 26 basis points to 13 basis points.

Okay. Okay, great. That's helpful. Thanks very much.

Thanks, Bose.

Your next question comes from the line of Jessica Levi-Ribner with FBR. Your line is open.

Hey, good morning.

Hey, Jess.

A couple of follow-on questions from Bose. So – and then now with this adjustment from Ocwen, how can we think about the dividend policy and kind of core earnings on a go forward?

I think – or I think, we size our dividend based on the way that we see our future earnings on a go-forward basis, while we don't give earnings guidance, we wouldn't raise our dividend unless we thought we could support it. As we think about this on a go-forward basis, I would assume for now that the dividend policy will remain in effect and we will continue to pay $0.50 on a go-forward basis.

So you don't see core kind of matching this quarter's number, even in the third quarter?

Of the $1.04?

Yeah.

No. The third quarter will be probably a little bit higher as well as the PSAs, again, as we transfer the PSAs into our name, but overall again, we'll continue to pay $0.50 we believe in our dividend and that will correlate to what we think core earnings will be hopefully in the north of $0.50.

Okay. In terms of the advance balances, what drove the decline this quarter?

I think, it's the seasoning of the portfolio, some more clawbacks from the various servicers, as delinquencies trend lower, you will have less advances outstanding and that's really it.

And then on the current cash balance, how do we think about that pro forma for the PHH funding?

Well, PHH is already funded.

Right.

Currently, as of today, we have north of $200 million in cash. When you guys think about our cash balances, we keep various reserves, one for mark-to-market, we have a couple different requirements with FHFA around reserves on our MSR portfolios. But today we have north of $200 million in cash before all our different reserves.

Okay. One last one from me. Just in conversations with the trustees, you mentioned, that you were expecting to call another $1 billion to $2 billion this quarter of bonds. In conversations with the trustees that, of those bonds, do you have any indication of how they're going to reserve, or if they're going to reserve at all?

We're assuming that it'll be normal course business the way they have been reserving. Just to be clear, trustees continue to – trustees take cash flow from the waterfall every month on outstanding Non-Agency mortgage bond deals that are in the marketplace. I think, as it relates to the Wells deal being that we called all these deals, and again I'm not going to speak for Wells or speak to the litigation around that, but being that there is no more cash flow that's going back, we called the deal, we reissued securitizations, I believe what Wells has said that – being that these deals no longer exist, we're going to take X amount of dollars per loan and that's what Wells did. Just to be clear on that deal for NRZ, we owned one mortgage bond that was associated with that deal. So, even though we own Wells deals, there could be times where we call – what call – the way Wells calls, we would call legacy Non-Agency deals if we feel the overall economics work. So, it's our anticipation during the quarter and going forward that we'll continue to be very active around our call business. There will be some nominal amount of holdbacks that the trustees will do to compensate themselves, and hopefully it's business as usual.

Okay. Thank you.

Thank you.

Your next question comes from the line of Kevin Barker with Piper Jaffray. Your line is open.

Good morning, Michael.

Hey, Kevin.

In regards to the Ocwen deal, could you talk about the potential accretion of that deal once all the mark-to-market adjustments on the model have been completed post third quarter, and what the expected accretion will be ex other investments that you're doing?

Yeah. So, are you asking for forward guidance, Kevin?

Not forward guidance, but what your expectation is for...

Yeah.

– incremental investment income off of the Ocwen deal?

I think, it's kind of – again, I think – I don't think, it's any different than what I tried to articulate with Jess. We size our dividend at $0.50, because we believe we can pay that for several quarters as we go forward. Clearly, the deal itself is accretive to how we run our business. Without getting too specific, because I don't want to get specific and then all of a sudden next quarter, you say, well, you said this, and this is what we delivered. We believe based on our current business model and the investments both in Ocwen and everything else that we'll be able to sustain a $0.50 dividend as we look forward. And I think that's kind of without getting too specific around it.

Okay. Look – back of the envelope, just looking at the investment, it appears that of the servicing fees that are – incremental servicing fees that are being generated off the deal, you should be able to attain a ROE above 20% off of that deal versus your current run rate on a core basis closer to 15%. Is it fair to say that the incremental ROE will be well north of 20% on the equity that's allocated to the Ocwen deal?

Yeah. Well, here is the thing, right, we're actually paying – think about it this way for a second, we're paying $400 million for pool of a $110 billion of MSRs. It's not being funded with equity, it's being funded with debt. So, the overall cost of debt when you think about MSR financing, and we have plenty of that is give or take about LIBOR plus 350 basis points to 400 basis points right now. So, with LIBOR being roughly 120 basis points, you're thinking – you'd look at a cost of funds of something between 4.5% and 5%. So, then if you take your 26 basis points, we go from 26 basis points to 13 basis points, so your overall return on equity should be north of 20%.

Okay. That's helpful. And then, could you speak to further details around how much UPB could be impacted from the Wells Fargo trustee holdbacks and the potential impact for the overall Non-Agency MBS market in your view?

Well, talking about it from our perspective, we own $400 million market value of Wells' bonds. Currently none of those are in the money, so we're likely not going to execute any clean-up calls on that. We have clean-up calls in about $18 billion of Wells' outstanding legacy Non-Agency mortgage securitizations. Of that $18 billion I believe we acquired with a partner $5 billion of those call rights where there is no obligation, we didn't pay for them, but there is no obligation for us to call those deals. So, as I think about Wells, if in fact the deals are in the money and we can make it work in light of – depending upon what Wells' strategy on a go forward basis is on holdbacks, we'll accelerate some of those calls. I do think if we all take a step back and think about the legacy Non-Agency mortgage market, this stuff has been outstanding for greater than 10 years. It would be in the industry's best interest if everybody got together to figure out a way to collapse all these deals in conjunction with the trustees, the banks and bondholders because bondholders would have some good accretion other than probably some of the lowest rated holders of notes, and that could be a very good thing going forward. I wouldn't be surprised if we see some momentum towards that as we go forward. I've been very vocal on prior earnings calls to clean-up the legacy Non-Agency mortgage market, it's not just a new residential, I think, it's an industry thing. Obviously in light of when Wells did the $94 million holdback, there was additional litigation that was filed against Wells by a large market participant. So, I just think the net of all this stuff it would be very – it would help the market, if everybody could get on the same page and figure out a way to kind of clean up these deals, lower advance balances, get servicers in the right place, help homeowners, and I think the result would be very good for quite frankly everybody.

Do you see the market being receptive to going along and doing something like that, or you feel like it's a – there's a lot that needs to be done to get there?

Yeah. No, I think – listen, I think, there is a lot that needs to be done. Do I think market participants for the most part would be receptive? I do, but it's a big effort. Everybody has got their own interest. The bottom line is, if you call the legacy Non-Agency mortgage bond market, it'll be very good for bondholders, trustees, mortgage servicers, homeowners, everybody. So, hopefully, we get to a place where that happens. In the meantime, we'll continue to operate our business the way that we're doing, I think, and hopefully generate good outsized returns for shareholders.

Thank you, Michael.

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

Hey. Good morning.

Hey, Fred.

Sorry – on the, I guess, the accounting change in the quarter related to Ocwen, can you just say what the actual dollar figure that flowed into interest income from that was?

Fred, it was $158 million.

Okay. And then...

And there was a change in assumption.

Okay. And is there an offset on that somewhere in the expenses? I think subservicing expense or loan servicing expense moved up a bunch. Is that related to the same adjustment or is that different?

No. In terms of subservicing expense that's just resulting from our increase in our MSR book.

Okay. Got it. So, there is no offsetting adjustment in the expenses on the accounting change with the Ocwen assets?

On a core basis, no. There is some noise in tax on the GAAP basis.

Okay. Got it. And then maybe, can you just explain what the accounting change was exactly? I mean, I understand what the deal is going forward. And so it was just – you had to retrospectively look back and change numbers on the assets you're going to acquire or what's sort of the right way to think about it?

Prior to 6/30 we were assuming that post 2020, the servicing fee of 26 basis point will continue for the life of the asset. At 6/30, that assumption was decreased to 13 basis points and because of the retrospective accounting you essentially have to look back and adjust earnings through the interest income, which generated $158 million increase.

Okay. Got it. Thanks. Do you have an estimate of I guess, what cash earnings were in the quarter?

Cash earnings after our dividend ran about $60 million.

Thanks. On slide 10, where you said that 0% of the deals where you own the Wells bonds, 0% of the deals are economically viable to call. Is that assuming that Wells takes significant reserves when you call the deals or is that just a – you've executed all the Wells deals that the clean-up calls related to Wells deals that you felt were accretive in the first place?

Yeah, it's the latter, Fred, it's overall, forget about Wells holdbacks, if you look at the economics between advance balances and delinquencies, it currently does not work for us to call those deals today.

Okay.

As we go forward, we'll see what happens, but for now, they're not callable.

Okay. Got it. And, I guess, then just a big picture portion of this, when I look at sort of the – I mean, you've diversified counterparties in terms of servicers or sub-servicers that you're working with over the past year. But it seems like a lot of those counterparties are struggling, how do you think about that market and how it evolves over time. Do you think that we need to see additional consolidation there and just given sort of the amount of assets that are out there, how many non-bank servicers you think there can be sort of buyable out there in the market?

Yeah, I think it's a good question, Fred. I think that couple of things. One is, obviously, we have exposure to a number of these different folks. Some have announced changes in their business model as it relates to our relationship with Ocwen. We think the deal with Ocwen is very good for both of us. Ocwen gets a lot of cash. I know Ron and his team are working really hard with the different folks to get themselves sorted in the right way. Nationstar has clearly – those guys have done – Jay and his team have done a very good job. PHH has announced a different strategy on a go-forward basis. And then, Walter is dealing with obviously their own issues at this time. Do I think there'll be more consolidation, I do. As we think about NRZ, which is what we need to think about, the one thing I want to be really clear on and I pointed this out before, we are not going to buy every asset that's for sale just because we own a lot of MSRs. The other thing that we are extremely focused on is performance. So when you think about our MSR asset, how do we get performance out of our MSR asset? One is, you got a roughly a 2.30% 10-year treasury, which is kind of give or take unchanged quarter-over-quarter. I do think underwriting guidelines will get easier from a macro perspective as we look forward. So I think you could see a fair amount of originations. So what do we need to do? We need to work with the best possible servicers and originators to figure out a way to recapture every MSR that we possibly can so we mitigate prepayment risk for the portfolio. So I do think you'll see some consolidation going forward. Yes, we have exposure to a number of different counterparties. We're hopeful currently that a number of them get sorted out. And we know based on conversation and we have very good relationships with all of them that everybody is working hard to get to the right place. So, we'll see what happens. But it's our hope that everybody gets sorted out, but we need to protect our portfolios.

Okay. Got it. And then maybe just one last accounting one on the change in AOCI in the quarter. How much of that was related to – I mean, was that largely driven just by write-ups of Non-Agency book or is there anything else in there?

That's correct. It's – the $150 million of write-ups are Non-Agency.

All right. Great. Thanks a lot.

Thanks, Fred.

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

Hi. Thanks. One more question on the trustee holdbacks and thank you for all the information on slide 10, that's very useful. So when we look at the table on the right that shows the $52 billion of deals that are in trustee litigation and have 0% to 15% factors, can you say how much of your existing bond portfolio are securities that are related to that $52.4 billion? Thanks.

In our bond portfolios, keep in mind, there is not 20 trustees. So it is a reasonable assumption to assume that we have exposure to all the trustees as the way that we show it here. While saying that, we continue to exercise clean-up calls with all of these trustees, including Wells on a monthly basis. I pointed out where we expect to do another $1 billion to $2 billion of deals this quarter. We have some more calls that we're doing, that we did in July. We'll have more calls that we're likely going to do in August. We just priced a Non-Agency deal backed by some Wells collateral on Friday. So business continues. We're mindful of holdbacks. I pointed out earlier that we have reserves of $4.9 million in total of holdbacks related to trustee litigation or trustee holdbacks, I should say. So we'll continue to execute our business in and around these. But I don't see anything that's going to change dramatically as we go forward.

Okay. Thank you.

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

Hey, Mike. Just a follow-up on the Ocwen and the accounting. Earlier you noted that the adjustment was related to sort of a look back on the Ocwen portfolio. As the new pieces come in, what's the accounting adjustment that needs to be made related to the new pieces and – so I was just wondering if it's going to be not as meaningful just because the retroactive piece was, of course, a bigger component?

The accounting adjustment, Bose, came through in two pieces this quarter. There was the $150 million that came through on interest income and you'll see that there's also a roughly $56 million mark that came through on our GAAP and that GAAP mark will eventually come through interest income over time.

And the $56 million mark, was that on the piece of the Ocwen that is already going to be funded or that's been funded in the third quarter?

No. what's going on for the second quarter is the cost of servicing post 2020, subservicing fee expense and as once we convert to a full MSR, there will be an additional adjustment that will come through to mark.

And just to make sure I understand, the $150 million through interest income and the $56 million that's separate, are they being driven by the same thing and just coming through two different places?

Yes, they are driven by the same thing.

Okay. Okay, great. Thanks.

Thanks, Bose.

Your next question comes from the line of Kevin Barker with Piper Jaffray. Your line is open.

In regards to the Ocwen deal, could you speak to some of the – whether you still have rights to the downstream services regarding any of the servicing counterparties that Ocwen has?

Yeah. So just to be clear on that, Ocwen has an agreement with Altisource for downstream services. When we entered the transaction, when we did this transaction with Ocwen, it was always our intention to try to do the cleanest transaction and the best economic deal for NRZ possible. We continue to be clear. We're hopeful that we will have an agreement with Altisource in the near future, there is no guarantee. But I would tell you that we feel and I believe Altisource would tell you the same thing that they feel that we are very close on agreement. These things take time. There is a lot of negotiations that go back and forth but that would be our expectation, again, no guarantees, but that would be our expectation on a go-forward basis that that agreement stays in place.

Okay. And then, on another topic, in regards to future investments, you've obviously built up your MSR portfolio and your Non-Agency Securities portfolio and executing on the call rights. There's been a massive investment over the last year. As you go forward, it seems like the amount of opportunities in Non-Agency MSRs is limited. Where do you see 6 months to 12 months from now where your incremental investment dollar will be put and where the best opportunities will be to be able to generate 15% or more ROEs?

Yeah, I think our call business is something that will continue to – that will continue to do extremely well. While saying that, if we take a step back and think about the landscape, Non-Agency mortgage bonds are trading at the tightest yields that we've seen in years. So, we'll be strategic around investing capital there if we believe that the economics make sense. On the MSR front, I pointed out earlier that we have not bought every MSR shown to us, and I don't expect that we will. I think the cleaner MSRs you're starting to see a bit from the banks for cleaner MSRs. For us, we need to be mindful of, again, how we deploy the capital? I think we have a large strategic investment in MSRs today and we'll continue to be active around the MSR investment, but we want to get performance out of our existing portfolio. The consumer space I think has been pretty interesting to us. We made a couple of strategic investments in the Prosper deal, or/and like – we think are still are pretty interesting. There's a lot of noise around the consumer space in the subprime borrower, et cetera. So, we'll continue to pay attention there. But I think the biggest thing to point out, Kevin, is that, the housing market is $24 trillion. There's always something to do and we want to be patient around our capital. I mean, we haven't gone out again and one of the things that we hear, we just want to buy assets but we have to take a step back and think about investment dollars. And I pointed out earlier, the portfolio will generate about $90 million a quarter of free cash flow once we board the Ocwen deal. So, we'll be patient. I think things change. All fixed income assets are trading extremely well. So, to step in here and say, we're going to buy something now is probably not the right idea.

Okay. Thank you.

I would now like to turn the call back over to CEO, Michael Nierenberg, for closing remarks.

Well, thanks for all the questions and the support. Clearly, a very good quarter, obviously, noisy in trying to explain certain things but we feel very good about our business. Again, just to echo what I just said, we're going to be very patient around capital and how we deploy our capital. We're really seeking to get performance out of our existing investments which will hopefully bear fruit for shareholders going forward. So, I look forward to speaking soon. Have a great day and enjoy the rest of the summer. Thank you.

This concludes today's conference call. All participants may now disconnect.