Good day and welcome to the New Residential Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Kait Mauritz, Investor Relations. Please go ahead.

Great. Thank you, Betsy and good morning, everyone. I'd like to thank you for joining us today for New Residential's third quarter 2021 earnings call. Joining me today are Michael Nierenberg, Chairman, CEO and President of New Residential; and Nick Santoro, Chief Financial Officer of New Residential. Also with me today are Sanjiv Das and Baron Silverstein, Chief Executive Officer and Chief Operating Officer and President, respectively, of New Residential -- and Caliber. Throughout the call this morning, 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'd encourage you to download the presentation now. Before I turn the call over to Michael, I'd like to point out that certain statements today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. I'd encourage you to review the disclaimers in our press release and earnings supplement regarding forward-looking statements and 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 our earnings supplement. And with that, I'll turn the call over to Michael.

Thanks, Kait. Good morning, everyone. Thanks for joining us today. When we look at our company today and look back over the recent history, I'm super excited for where our company is and what this is going to mean for our shareholders as we go forward. The combination of our investment portfolio and operating business lines should continue to drive higher earnings as we go forward. The ability to manufacture our own assets through our different operating business lines, thus creating earnings for our company is a true differentiating factor for us. This past quarter, we grew our core earnings from $0.31 to $0.44 and we increased book value from $11.27 to $11.35 despite the fact that the 10-year note ended the quarter essentially unchanged versus the Q end -- the end of Q2. With the macro outlook looking like higher rates ahead, the Fed is likely to announce the beginning of tapering tomorrow and inflation seems like it's here to stay for a while, our portfolios are in great shape to take advantage of this environment. Our MSR portfolio should do extremely well and see much slower speeds in this scenario. During the quarter, we closed our Caliber transaction which makes our mortgage company one of those top five players in the space. The addition of great talent, complementary origination business lines and a terrific technology platform really transforms our business. During the quarter, we announced the acquisition of Genesis Capital which is a market leader in the industry of providing loans to developers and real estate investors for the development and fixing up single-family homes. We believe the integration of this business into the family of our operating companies will be a very good acquisition which will not only create high coupon short-duration assets for our balance sheet…

Thank you, Michael. So I'm excited to join you all in the first earnings call since the close of the acquisition of Caliber. I'm on Page 18. Let me begin by giving you a quick update on the integration between Caliber and NewRez. As Michael mentioned, we had started that work pretty much right after announcement. But across the business, with leaders on both sides, we have now combined it into one unified team. I can tell you that even in the first 60 days since we closed, we've made tremendous progress in that, both our correspondent and wholesale teams have come together in terms of both sales and operations. And we have also made a tremendous amount of progress integrating or thinking through what our integrated technology platforms will look like. As you all know, some of these things take a little bit of time but we know that we will drive improved efficiencies through a consolidated tech platform. Over the next two months, we will continue to integrate the rest of our origination channel. So it's basically DTC across the two companies because retail is largely unchanged. It will stay on the Caliber platform and so that part of the business stays pretty much unchanged. We're also working through our servicing platform to see how we consolidate a pretty large servicing platform. Overall, very pleased with the progress and we are very confident about our ability to achieve full integration and full synergies through 2022, with a strong focus on expenses, as Michael mentioned. As part of our integration efforts, we have already identified synergies which are shown on the right of the chart. I think we had shown some of these numbers before. But even in the two months since we've closed, we've made significant progress towards…

Thanks, Sanjiv. Why don't we turn it back to the operator and open it up for Q&A.

And the first question comes from Kevin Barker with Piper Sandler.

Good morning, thanks for taking my question. I just wanted to get an idea from when you think about Caliber and NewRez integrated, could you help us think about what the pretax operating margins would be on the combined entity when you measure it against origination volume year-to-date? And then would you expect that to run rate next year and then maybe into 2023?

So in other words, you're looking for forward guidance?

Sure. Actually -- no, we're just looking for like what do you think you can operate these businesses at for -- on an operating basis per UPB originated when you -- on the combined entity. Obviously, it will move around depending on cycles. But...

Why don't I take the first crack and go back to when Sanjiv speaks about expenses or I speak about expenses, our top line revenue in the origination business, when you look at gain on sale for the quarter was about $900-plus million on the origination side. So really, our goal when we take a step back is to reduce our -- I mean, to do the best we can, obviously. But when Sanjiv speaks to whatever expense reduction that we could do, I think that the ability for us to reduce our expenses there and drive higher net earnings for the company is significant. And that's where the integration work which has begun and quite frankly, has a lot of work to continue as we get more and more efficient and use the technology of H2 on the Caliber side is really going to bear some fruit for us. As we look at going forward into '22 and '23, the origination volumes, when you look at the MBA stuff, this -- if you look at 2020 production, 2020 production was roughly $4 trillion, 2021 was projected to be about $3.5 trillion. And then when you look at 2022, it's about $2.5-ish trillion. And that's what the steady run rate looks like. So, we think we're going to be able to pick up market share. We think we're going to be able to take out expenses on a go-forward basis as we pick up market share, reduce expenses, that $900 million number will obviously come down because you're going to be doing less volume but so will the amount of expenses that come out of that. So I don't know if that's helpful but that's how -- that's my initial take on it. But I think on the expense side, when you think about the large amount of expenses that in the combined organization, we're going to be able to make, I think, be able to take out significant amount of expenses. And that's a real lever for us to pull on the operating side there.

Okay. So, the gain on sale margin is obviously higher at Caliber. They have -- but they also have higher operating expenses just given the distributed platform and operating in several different channels, right? So would there be -- do you think Caliber could be significantly accretive to the pretax margins that are generated in the origination channel today versus what Caliber was producing prior?

Yes, Kevin. So you're right in stating the fact that gain on sale margins from caliber are higher. They're also quite stable. You saw on one of the slides I talked about a gain on sale margin of 1.84% on a pro forma basis. Our expectation is because of our mix that gain on sale for the combined business is actually doesn't drop that much. We think that will probably drop more in DTC compared to historical margins. Michael and I were talking about this earlier today. DTC has about 40 basis points, we think, across the industry to drop. Retail probably about 30 basis points but correspondent and wholesale pretty much at historical levels. So we think gain on sale margins don't drop that much for us because the . Our opportunity is in expenses, again, as Michael pointed out. And we think that with the addition of our non-QM businesses, roughly $3.5 billion to $4 billion, as Michael indicated earlier, a pretty substantial gain on sale margins. But that, combined with the fact that we will take out our expenses aggressively will be accretive to the overall franchise.

Thank you, Sanjiv. Thank you, Michael.

Thank you, Kevin.

The next question comes from Doug Harter with Credit Suisse.

Thanks, Michael. Can you talk about your expectations for the dividend, kind of, given your level of earnings right now and kind of how you're balancing raising -- potentially raising the dividend versus looking to retain capital and use that to reinvest back into the business?

Good question, Kevin -- I mean, Doug. Sorry about that. Yes. So here, as you think about a $0.44 in core, $0.30 in GAAP, as we look forward into '22, we think -- we're hopeful that we're going to be able to maintain something with a four handle as you think about our core earnings. There's always the balance about -- on the dividend of how much capital you actually give back. Historically, we've been paying north of 90% of our taxable earnings to our shareholders. I think the way that we are thinking about it is, it is November 2, today. From a dividend perspective, any dividend announcement would get paid at the end of January. So we have some time. But I think as we have a $0.40 core run rate, it's likely that we would consider increasing our dividend, assuming that the Board has the desire to go there. So, we don't want to give back all the capital. But as long as we continue to see this path and continue to operate the way that we are and as I pointed out in my opening remarks, when we think about the ability to manufacture our own assets, the great investment portfolio, the slowdown we're going to see, I think, in speeds, I do think that there'll likely be another increase at some point in the future. No promises but that's just my take.

Great. I appreciate that. Yes, Michael?

Anything else, Doug?

No. I guess. Just -- I guess, how quickly on the expense side can you actually really start ramping it up? Is that something that we start to see kind of in the fourth quarter? Or do we start -- or is that more of a '22 event for those cost saves start to really start coming through?

What I would say is on the expense side, initially day one, when we all got together, I think we picked up roughly $50 million in synergies around some of the financing stuff. So that was an immediate pick up. Keep in mind, that's on an annual basis, right? So you're not going to see that all day one in Q3 or Q4. I think the real expense saves you're going to begin to see are going to be in '22 as we go forward. One of the things when we're all sitting around this table, you're doing this call this morning, the technology side of where we go with our business is something that's significant. I personally believe we have only scratched the surface. Clearly, the Caliber technology organization is something that we didn't have on the NewRez side. So that is a huge mess of pickup when we think about the acquisition of Caliber. As we go forward and -- we're in the market now. Quite frankly, we're going to hire a Chief Digital Officer. We have a search; the team has been interviewing a number of folks. So we hope to get that done by year-end which then would launch what we'll call as a lab within the company that will focus on how we become, quite frankly, competitors to Rocket and everybody else. So -- or anybody else that's a real leading technology provider in the industry. So that's kind of really where I think we're headed. That will help us on expenses. But as I think the long-winded answer to your question is it's going to be more likely you'll see these results in '22 and forward.

Great, thank you.

The next question comes from Trevor Cranston with JMP Securities.

Okay, thanks. A question on the MSR portfolio and some of the numbers you were talking about around slowdown in speeds and amortization. I guess most of that seems like it was in the context of the possibility of higher rates. So I was curious if you could maybe just comment on how you see prepay speeds evolving in 4Q and going forward, if we just assume like a flat rate environment from where we are today? And how much of the slowdown could we get in previous meetings? Just from there.

I think it's -- I think there's a couple of factors, Trevor, that go into that. One is, we keep talking about recapture rates. And on the NewRez side, we're in the 20s, now we're in the 40s. And Caliber's in the 60s. So that delta between 40 and 60, I think, is something that we'll continue to add to the slowdown we're going to see in overall speed. I think when you think about HPA being up roughly 20% on the year, what does that really mean? Housing becomes a little less affordable as rates move a little bit higher here. So we are expecting that slowdown. I think street consensus is roughly down -- speeds down 6%, I think, in November as we look forward. So I think it's a number of different factors that are going to go into that real slowdown. But clearly, Q3 2020 over -- versus Q3 2021, a dramatic reduction in the overall speeds. Our organization is 1,000% better today than where we were in 2020, quite frankly. We got hit in the teeth during that March period. and we recovered quite nicely and that is not just due to the market but quite frankly, it's due to the hard work of our organization and our team. When you think about our MSR portfolio, $600-and-something billion, I was doing the math this morning prior to the call. If we have one turn, one multiple higher in valuation, where we are today, that's going to add roughly $1.5-ish to book value as we go forward. So, really what we're playing for is I don't think higher rates hurt us. I think lower rates don't hurt us either because our manufacturing machine is that good. And that's a difference where we are today versus where we were going back in time. So the balanced nature of what we're doing around the MSR portfolio, higher rates, we are biased to the short side. As I pointed out, I think, earlier in our opening remarks. But the combination of higher recapture, higher rates, higher purchase market, lower refi's and I think, drives higher book value and higher earnings as we go forward.

Got it. Okay, that's very helpful. And then, just one quick one on gain on sale margins. And thank you for all the detail you guys gave on the margins for the different channels. But I heard the guidance you guys gave for 4Q on the origination side, I may have missed it but did you guys comment on the expectation for where you see margins, on an overall basis, heading into 4Q?

Yes, sure. This is Sanjiv. Yes. So in the fourth quarter, we are seeing margins potentially decline more in DTC than in any other channel. Obviously, as the Refi population is shrinking, we are all getting aggressive with rates. So we expect DTC to drop to roughly 40-ish basis points. Correspondent is kind of at historical levels but we are bracing ourselves for 5 to 10 basis point drop in margins and correspondent. Wholesale has actually picked up quarter-on-quarter from 95 basis points to about 105 basis points combined. We expect it to stay around the 100 basis points range. So no major change, Trevor, on the wholesale side. And then retail, of course, high and strong, continues to be at the 3.65%, 3.80%-ish range and we expect it to stay stable through Q4.

Okay, perfect. Appreciate it.

The next question comes from Bose George with KBW.

Hey everyone, good morning. Just wanted to first ask us about Genesis. Are you able to disclose the purchase price? Or is there a way to -- for us to think about the accretion? Also, is there any goodwill created as a result of that?

Yes. So there's roughly $100 million of goodwill created depending upon where the loans are marked, as I pointed out earlier, the roughly 7% to 8% kind of coupon, very short-duration loans. So as depending upon how we book those, that's going to dictate, I think, the goodwill amount. From an accretion standpoint, it's likely, I think, early on, probably about $0.01 a quarter, is the way to think about that, again, depending upon where those loans are marked. And the overall amount of capital from a business perspective or equity, I should say, is about $350 million -- probably $325 million to $350 million, I think something is where we'll settle out on that one.

Okay, great. That's helpful. And then, in terms of future acquisitions, are there things that you guys are looking at, either on the mortgage -- the services side? Are there things that could complement what you have at the moment?

Bose, that's like leading the horse to the water. The answer is yes. Yes, we're always -- we -- our M&A and acquisition team are always on the hunt for things that we think will be accretive for our business. I look at some of our peers out there and some of the large private equity firms. Our ability to go out and acquire an operating business that's going to generate good REIT assets for our business which will feed into our earnings is really where we've gravitated to and I think where we're going to continue to gravitate to. We don't want to overpay for anything, even echoing what Sanjiv said, when you think about mortgage production, we're not in a race to be the biggest. We're just in a race to make the most amount of money for shareholders. That's kind of how we think about it. We are looking at things, quite frankly, in the commercial space. which could be accretive. These are not, what I would say, going out to acquire a whole business but there's some things that we're currently working on that we're excited about the prospects of potentially getting that done. Not a lot of capital required. And then, what that would do is effectively put us in the business of creating assets for our balance sheet. Same theory, same thesis with Genesis. Same thesis on the NewRez Caliber side; so the short answer is yes.

Okay. Great. That's helpful. And then just actually one follow-up on your earlier comments about the servicing technology. Is there a time line, do you think by when you're going to decide which platform you choose? It sounds from what you said that the likelihood that you end up consolidating on the Caliber platform. Is that fair?

Yes. I mean that part is already decided. That was decided, I think, at the day that we announced the acquisition. So the H2O platform that Caliber has and Sanjiv the team and Rene Gilats have built, is something that I think is far superior to what something that we had on the NewRez side and we're going to continue to expand on that. Again, I go back to prior earnings calls over the past couple of years where everybody always asks how do we think about ourselves versus Rocket. And I always said, we'll never compete against Rocket. And there's no disrespect to those guys because they've done a great job in their business. There's nothing that's going to stop us now.

Okay, great. Thank you.

The next question comes from Eric Hagen with BTIG.

Hey, thanks, good morning. Another follow-up on the margin. Can you discuss any differences between margins for purchase loans versus Refi? And then when the purchase loans end up back in the MSR portfolio, do they get valued any differently in this environment compared to the Refi loans?

Yes. I mean, obviously, we see that in our DTC and our joint venture businesses, the purchase margins are much higher than they are on the Refi side, roughly 50 to 75 basis points in certain cases and much more stable in terms of given where these rates are at today. I'm talking about the primary rate. Also, when we book these loans today, one of the things that we see is that these loans are -- because they are being originated at relatively low consumer rates, our expectation is that they will have a much longer duration. In fact, going back to even Refi and the point that Michael was making earlier, on the slowing down of the runoff in our businesses which is related to the question you asked. What we are seeing is that for the same cohort of customers that are in the money, far fewer of them are refinancing out of share because of share refinance fatigue. So that is something that we also have taken into account in our refinance models. So hopefully, that answers your question on the duration.

I think it does -- go ahead.

Eric, regarding the mark, there's no difference in how we book the loan on the MSR side.

Got it. Yes, that's what my follow-up was going to be. Great. And then, can you discuss the outlook for the call rights business at this point? And what the pace of activity could look like there? And how much capital you think you might need to capitalize on that opportunity as it hopefully grows?

Yes. I think the -- one is the financing market is extremely efficient. So -- and our desire to turn around our loan portfolio, as we call these deals is pretty high. the overall opportunity, I think we're running a little bit south of $2 billion year-to-date that will likely continue as we go forward. Keep in mind, a lot of these loans or most of these loans are from mid-2000s, like 2005 to 2007. You have to think you're going to continue to get cleaned up. And if the industry was smart, we'd figure out a way to call all these deals, quite frankly. You'd liquidate all the REO that's sitting in these pipelines and not that, that's a driver or a restraining factor, I think, on the side of the call business but you'd clean up those legacy deals and then you figure out a way to collapse the rest of them. Clearly, there's a lot of different interests in folks that own different parts of the capital structure but I would expect it to continue to only pick up as we go forward.

Got it. Thank you very much.

The next question comes from Henry Coffey with Wedbush.

Yes, good morning and thank you for taking my questions. Frankly, awesome quarter. just a little sort of picky question. A gain on settlement of investments of $98 million loss this quarter, $78 million the prior quarter. What is that tied to? And under what environment would that gain -- even though it's not part of core, it does affect book value? How would that shrink or change?

The gain on sale of investments, that relates to the carrier derivatives. There's an offset that comes through in the mark-to-market. So overall, that number was relatively flat in the quarter.

Okay. So the $98 million is offset by what?

Offset by swaps.

So Henry, it's a long and short, I think, on our agency mortgage business versus our swap business. So the way to think about our overall portfolio and Nick is here and obviously Nick is much more knowledgeable about the way this stuff gets reported. But if you take a step back and think about our portfolio, we have roughly $9 billion of agency mortgages that we have to keep on our balance sheet for recompliance. As I pointed out, we're not just net long. We're actually -- in fact, we're net biased to higher rates. So effectively, against that, we have swaps against that. As rates move higher, the value of your agency mortgages likely go down in value but you're going to pick up your income on the swap side. So we're hedged against that portfolio. And Nick, correct me if I'm wrong but I believe it's just an up and down between those 2?

That's correct.

Yes. And the offset is in comprehensive income or...

No. It comes through mark-to-market, Henry.

Okay. Yes -- no, that's helpful. That's extremely helpful. And then getting back to the operating business, on the wholesale side of the equation, Caliber was number three, now they're number four. You've got Rocket with that new initiative they announced with Salesforce which sounds still confusing but sounds like it's kind of a restart of that old business, PHH Core Pad with banks and credit unions. PennyMac has talked about wanting to be number three in that business. Obviously, Homepoint doesn't want to go away. What are your thoughts there? It's not an unimportant part of what you do. Are you willing to sort of just step back and focus on other areas? Or -- Are there acquisition opportunities in the wholesale business that we should be thinking about? Or what are your thoughts in terms of the future growth of the wholesale channel?

I think we've been pretty clear that everything we do is about how we make money for shareholders. So this is not a counting of a chest where we're going to get into a price war with anybody on any channel, right? When we think about the capital, we're fiduciaries to our shareholders. At the end of the day, if we could grow a channel and it's profitable or if we have a view to -- even if you -- I mean, I guess, throw wholesale to the side. If you think about the correspondent business, correspondent business is truly a manufacturing arm in a normal steady state environment. You're not making a lot of money in correspondent but you create MSRs. So if we think valuations on MSRs are going to go higher, that is a great channel for us to kind of put our foot to the pedal a little bit. On the wholesale channel, I think Sanjiv has been pretty clear about this and I think he mentioned even on our last earnings call, we're not going to compete against Rocket and UWM when there's a price war. We're just not. If pricing normalizes which it has in the marketplace now, we'll continue to originate product. But we don't want to get into a price war with anybody unless we have a specific view on the market and where this is going to take our company.

Yes. I'll just -- Michael and I have talked a lot about this channel. And I agree, while we are number four in terms of originations, I am certain that we are number three in terms of profitability. That's number one. Number two, folks may aspire to be number three but we are number three. So that's the other thing. And the way we plan to evolve from a distributed wholesale business, is to grow in the direction that essentially UWM has led the math and I have no problem saying that we will be a best follower to UWM. And so we are investing pretty heavily in our direct-to-broker business as opposed to just our distributed business. Our distributed business shows that we have much higher wallet share with larger clients. Our direct-to-broker business shows it's a much lower cost of operating at roughly 53 basis points of cost per loan. And the most important thing I'll say that Michael touched on this, is that our wholesale and corresponding channels actually are a fantastic distribution channel for us to distribute non-QM light products and we will gain outline share because of our sheer presence in different geographies. That's kind of how we think about it. On the other hand, we also realize that recapture opportunities in wholesale are much lower. And so we treat it as a strategic channel as a hedge to retail in case retail loan officers move to wholesale. But I think we have a pretty comprehensive view of how we want to run a $30 billion to $40 billion to maybe $50 billion channel profitably.

Great. Thank you very much.

Thanks, Henry.

The next question comes from Mark DeVries with Barclays.

Thanks. I had a follow-up question on the 4Q gain on sale margins. I appreciate the color on the direction of margins by channel. But 4Q, you're obviously going to benefit from a full quarter of the higher-margin Caliber businesses. Can you -- anything you can give us on how kind of your 4Q margin could compare to what you reported, the 161 basis points in 3Q?

Yes. So on a pro forma basis, we said 184 basis points of what we would have done in Q3. In Q4, I'd say we're probably around 176 basis points, so roughly 8 basis points, my math is right. Even though we are seeing a 40 basis point drop -- factoring in a 40 basis point drop in DTC, it's the mix in our other channels, particularly in retail, that allows us to mitigate a lot of that drop. So net-net, down 8 basis points.

Okay, great. That's helpful. And then, Michael, how should we think about the cyclicality of the Genesis business you're acquiring, particularly around originations? Is that a business where it's a lot easier for them to originate these loans in kind of a frothier housing market? Or is it -- do you expect kind of a more steady production from that business?

I think it's a good question. I think it's going to be more steady production. I think production is going to increase quite frankly. We're looking at a lot of different initiatives that the team has that, quite frankly, couldn't do under certain circumstances based on where they were with Goldman. So I think the opportunity for us to grow in certain channels there is going to be pretty significant. The other thing there is -- and just a quick sidecar on this, there's another question in the queue from an investor. And I just wanted to address over the past more or two earnings calls, I spoke about a management team that we're potentially going to bring on to lead this -- the SFR business. Doing the Genesis acquisition, I think, puts us in a far better place than if we're going to go down this other path with a different management team. Not that there was anything wrong with the other management team, great group of folks but we think this is a much better solution for our company. And with Charles leading our investment business, we think that the overall -- an acquisition of Genesis is going to add not only on the origination side of the loan stuff but also, again, as I said in the earlier remarks, it's going to really bolster our SFR business through the acquisition channels. So we're pretty pumped about that.

Okay. Are there any synergies with that business with the new kind of local distribution you have in real estate markets from the Caliber acquisition?

I mean, absolutely. I mean if you think about it, Caliber has, give or take, 400 branches, I think we have 5,000 LOs in the entire system. So all of a sudden, we have more products to roll out to what I would call, family and friends of the retail brokers. It should be highly accretive there as well. So the overall strategic thing when we do an acquisition and we think about it logically is to actually look at it across all of our operating platforms. And if you look as we continue to grow our operating platforms, we've only scratched the service from a synergy standpoint. You think about servicing, you think about the services businesses that we have and how each one of these underlying businesses could provide more and more support and actually generate more income for our overall company. It's -- I think, again, I think what we do is unparalleled to anybody else in the industry.

This concludes our question-and-answer session. I would like to turn the conference back over to Michael Nierenberg for any closing remarks.

So, thanks to everybody for joining us. And this is not necessarily related to our company but I was walking to work this morning and I'm thinking of November 2. So as we all take a step back and look at life goes really quick. I think back to the March days of 2020, I look to where we are now. Hopefully, we continue to do what we're doing and drive higher earnings and higher dividends and higher share -- stock price for our shareholders. So I thank you. We thank you for all your support and we'll talk to you again, I'm sure in the new year, if not before. So have a great holiday season. Thanks, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.