Good day, and welcome to the New Residential Fourth Quarter and Full Year 2021 Earnings 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 . Please go ahead.

Thank you, Jason, and good morning, everyone. I would like to thank you for joining us today for New Residential's Fourth 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 us today are Baron Silverstein, President and Jordan Licht, Chief Operating Officer of NewRez/Caliber. 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'd encourage you to download the presentation now. I would 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 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 will be discussing some non-GAAP financial measures during today's call. Reconciliations of these measures to the most directly comparable GAAP measures can be found in our earnings supplement. And with that, I will turn the call over to Michael.

Thanks, . Good morning, everyone, and thanks for dialing in. 2021 was a very good year for our shareholders and our company as we continued our strategy of building and acquiring world-class operating companies with the ability to manufacture assets for our own balance sheet as well as an investment portfolio that's very hard to replicate. The positioning of our company today as well as the investment experience of our team should enable us to drive strong returns for shareholders as we go forward. With interest rates rising, our MSR portfolios will see much slower amortization, keeping our customers through our retention efforts should drive book value higher and offset any decrease in origination earnings. We have one of the largest MSR portfolio today and MSRs do rise in value as interest rates increased. Today, only 16% of our borrowers have the incentive to refinance as compared to 2020 when that number was a little bit south of 50% and in the upper 40s. To put this into context, the 10-year treasury, which has risen approximately 45 basis points since year-end, coupled with rising mortgage rates, helped increase our book value where we stand today to between $11.75 and $12 per share. Our mortgage company NewRez had a very good year, and the addition of Caliber which closed in August has created one of the best nonbank mortgage companies anywhere. Our goal is to be the best, not the biggest. We will continue to focus on efforts working with our government partners on affordable housing initiatives as well as taking care of our 3.2 million customers offering better solutions for homeownership. The past two years in the mortgage origination business have been very good. They will not be repeated. Gain on margins will come under pressure as rates rise. Many…

Thank you, Michael. This is Jordan. As Michael mentioned, the integration of NewRez and Caliber is well underway as we continue to combine our origination platform, technology and service and leadership. If you look through the fourth quarter, we've realized approximately $90 million of our target synergies as a result of actions taken in '21. These synergies include personnel reductions, reduced cost of funds and vendor consolidation as well as increased efficiencies due to alignment and best practices. We expect to achieve an additional $45 million to $60 million of synergies in 2022 to complete our origination platform consolidation, removal of duplicate technology systems and finalization of our servicing strategy. Once completed, our full year 2022 target run rate synergy is expected to be between $175 million to $200 million. As Michael mentioned, there's other exciting news, we hired a new Chief Digital Officer, and she will help us drive digital innovation, user experience, our customer experience and increase engagement across our customer production and servicing channels. We've kicked off the year with both companies aligned with a single vision of helping our customers and homeowners. I'll now turn it to Barry.

Thanks, Jordan, and good morning. Turning to Slide 21. The origination division ended the second quarter with $101 million of pretax income, funded volume of $38.1 billion, which is a decline of 43% and 14%, respectively, quarter-over-quarter. The biggest impact of PTI was the pressure on gain on sale margins, which had an 18 basis point drop quarter-over-quarter. And as I look at each one of the businesses, for our direct-to-consumer business, our margins increased approximately 6 basis points even with the reduction of funded volume, which was 17% reduction over that -- those two quarters. We've also seen a 14% pickup in locked volume in January and a flattening of margins when comparing December to January of 2022. For our retail and JV channels, our margins decreased approximately 23 basis points with the reduction in funded volume of 14% quarter-over-quarter. While we expect further competitive pressure within our retail channels, our platforms allow us to take advantage of the expected growth in the purchase market to come. For our third-party wholesale and correspondent channels, margins decreased 17 basis points and 13 basis points, respectively. However, while the higher interest rate environment presents headwinds for our origination business, our balanced business strategy provides us a competitive advantage over other mono-line competitors. As Michael previously mentioned, we intend on managing our business to focus on profitability, disciplined approach to rightsizing the cost basis. Our plans include concentrating on our higher-margin channels, retail and direct-to-consumer, which was 42% of our funded volume in the fourth quarter. We're also looking to expand our partnership business through our joint venture platform. We're going to adjust our lower-margin channels towards higher-margin products, including non-agency and non-QM products. We're going to remain opportunistic on MSR origination and acquisition, and on the expense side, our over expenses…

Thanks, Baron. Thanks, Jordan. Just we'll wrap up our supplement and then we'll go to Q&A. Page 25 just talks about our operating companies. I'm not going to read these off to you. But we have a full scale, but I would say financial services company. When you look at the complementary businesses that go along with our mortgage company, and then on Page 26 is really just a slide how we think about ourselves. We think about ourselves first as an investment manager. And then two, when we look at our -- 1 is a very, very strong balance sheet with a lot of cash and liquidity to the MSR portfolio in this rate environment is, quite frankly, AGM. It was hard in 2020. We did a lot of origination, but it is truly AGM today, and we expect that to provide very good returns as we go forward. With that, I'm going to turn it back to the operator. We'll open it up for Q&A. Thanks.

We will now begin the question-and-answer session. Our first question comes from Bose George from KBW. Please go ahead.

Actually, first question just on gain on sale margins. You guys noted that in 1Q, you've seen a flattening, but you could see more pressure in retail going forward. Can you just give us some color on how much pressure you think you could see just how you think things will play out this year?

Yes. So Bose, just -- all I said is in one month, we saw a flattening in our direct-to-consumer channel. Month-over-month, we certainly continue to see pressure across the Board in the context of margins for each of our channels. And that's due to overcapacity and less production in the marketplace. Michael has been very clear and on his message, and we're pivoting our origination business to focus on core profitability, right? We continue to have attractive margins, I will tell you within our retail, JV and our direct-to-consumer channels. It's the third-party channels from our perspective that continue to see what we look at as additional pressure in those, and we'll just continue to focus on our view on profitability and then we'll be opportunistic about which assets that we're looking to basically participate in those channels to the extent that margins continue to compress.

Bose, just add further to that. When I talk about origination, whether we do 1 loan or 10 loans, it's -- if you take a step back and you look at what our business is I pointed out I keep on out our $630 billion MSR portfolio. To Barron's point earlier, the wholesale and correspondent side, you're going to see a lot more -- you'll always see more competition because United Wholesale and Rocket are huge in wholesale. The one thing I would say is if we could create MSRs, even if we don't have a huge gain on sale, we will originate that loan. So if we like where MSR multiples and values are, for example, in the Ginnie space right now, we like where multiples are. So if we could originate $100 billion, quite frankly, in the wholesale and correspondent channel, we may think about doing that. You can't because of the market share as a result of the overall production market is smaller, but that may lead us into a potential acquisition of Ginnie originator, for example, so we could focus on growing our Ginnie presence. So it's one of these things gain until margins are in because you're in the winter months, I mean, you're going to have less months, less production. You're also seeing the highest level of 10-year rates that we've seen since December of 2019 to give you a sense. So I think once the market settle me come in the spring, we're going to have a good purchase market. Our retail and DTC franchises will thrive, and our origination business will be good. We just want to be prudent about how we think about making money and not just originating widgets unless we really like the value of the MSR.

Okay. Great. That's very helpful. And then actually just one on the servicing -- consolidation of servicing on one platform. Is that -- what's the time line for that? And is that the plan still to move it on to Caliber's, The MSP platform?

Yes, we continue to evaluate it, Bose, and we have not made a final decision as to where we're headed. The change in the servicing leadership for us was the first step in the context of us evaluating, which servicing platform, we will end up operating on. And the other important fact for us is making sure that we're basically servicing the loans based on best practices to help our homeowners. That was the most really a critical fact for us in making sure that our leadership is aligned.

The next question comes from Kevin Barker from Piper Sandler. Please go ahead.

I just wanted to follow up, Michael, I just wanted to follow up on your comments around the tangible as the tangible book at $11.75 to $12? Or was that book value?

That's book value.

Okay. Okay. And then does that include the dividend? And could you outline what's driving that as far as quantifying how much was MSR mark up? And then how much of that was offset by maybe portfolio marks or fair value marks?

Sure, Kevin. So the range of $11.75 to $12 does include an estimate for the dividend, keeping it the same as prior to. And the pickup is primarily due to the increase in MSR marks. And it does follow the page that we have in the deck that references the basis point change and the subsequent increase in fair value.

So just with the sensitivity that you outlined?

That's correct. It's in line with that sense.

And Kevin, part two of your question, as we think about other potential marks, we're fully hedged across our business. We've had this bias. I think I've alluded to this maybe forever, but to higher rates in the market, and we're really starting to see that play out the way we're positioned, whether it be in our loan portfolios, having hedges or anything else I feel like we're extremely well protected and look at the increase in book value, I think that going forward, hopefully, we see more, more of that to the extent that we remain in this rate environment towards higher rates.

So if you're fully hedged, shouldn't the mark the minimal or just incremental relative to your total equity? Or do you feel like you're still quite biased to higher rates, given the composition of the portfolio today?

We are very biased to higher rates. And quite frankly, if the market has rallied significantly the other way, the origination business is you flip the switch and you start doing a ton. So -- as of now, we are extremely biased to higher rates. MSR portfolio is fully hedged across all of our investment portfolio. So, we feel like we're in good shape.

The next question comes from Eric Hagan from BTIG. Please go ahead.

Can you -- can you guys discuss how the capital allocation across the business might evolve with higher interest rates? Like do you see yourself potentially reallocating from the production side to other areas of the business as origination volume flows and how the capital needs to support the MSR might evolve along with that?

So answer to your first question is, yes, there will be less capital in the origination business unless listen, we're going to strive for higher ROEs in our business overall. So if that means that to Baron's point and all of our points, if wholesale is not going to produce anything on the agency side, but it's going to produce more on the non-QM and geo side, we're going to put more capital in the wholesale side on those production channels. I think overall, you'll likely see more capital allocated. I pointed out, if we could find a -- we do believe there's going to be opportunities to acquire some origination or smaller originators as a result of the current rate environment. So, we have our eyes out on some good retail Ginnie producers, for example. Jordan, I don't know if there's anything else you want to elaborate on that front. As we think about the potential acquisition in the mortgage company around some.

No. I think in this -- I think as you mentioned in this market environment, there'll be -- and we're seeing smaller players that are looking to kind of cash in or exit out.

Because gain on sale margins and folks are holding on to their MSRs, so the out is either to sell themselves or sell the MSRs. And Eric, to your point, would we allocate more money to the MSR business? The answer is absolutely yes. So you'll likely see a shift from some capital out of the origination business into the MSR business. And the other thing is when we look at our origination business, we haven't spoken about this, but between hiring on the digital side. We just promoted on the technology side who's doing a great job for us to help drive down the cost of origination, coupled that with Bob Johnson, who's running our fulfillment and upside. As we bring down our cost of production, we need to do that, it makes us more competitive in some of the more, what I would say, very competitive channels, which may enable us to actually get a little more aggressive there. So a lot of focus on bringing costs down, but a lot of focus on bringing costs down through the technology initiatives that we have and with the new leadership.

That's really helpful. I think you noted you expect the Fed to go 5x to 7x a year. Any thoughts on how that could translate into spreads at the longer end of the yield curve?

We think that they are going to -- they -- whether they have reinvestment strategies around mortgages and treasuries. We had a good update call with one of our economic advisers yesterday, and we went through this. The general feeling is that they think five rate hikes, not seven. And then the other thing that's out in the market is 50 basis points in March. They don't -- and I don't think they go 50 basis points at March because then at every meeting, folks are going to be like whether they go in 25 or 50, and that could rock the market. It could be wrong, but it's my own personal view as well as our advisers. I do think rates in the long end are going to go up. are my partner, who's sitting next to me here, we were talking about 2018 where we were hedging out some of our business, and we were paying on swaps at 327 on 10. Today 10 at 195, you have inflation at the highest levels you've seen. The Fed is going to stop buying mortgages and reduce their balance sheet. So I think rates go up a fair amount in the long end, I really do. I think the market is under pricing where the tenure note could actually go. It's still historically think about 195 tenure note so historically very, very low. We do think you'll get your bear market rallies, but I do think rates are historically low, particularly in the longer run.

And then one more on the portfolio construction since the end of the year, have you guys done anything with the Agency MBS portfolio as a hedge for the MSR where that sits today?

Yes. When -- on the agency MSR side, on the -- when we acquired Caliber, there was some hedge against the MSR there. We've taken that off. So there -- at this point, there's no hedge against the MSR.

The next question comes from Douglas Harter from Credit Suisse. Please go ahead.

Just hoping to clarify the comments around the expense synergies -- does that include -- the update energies, does that include any further actions you're taking? Or would those further actions be on top of those synergies?

Yes, the further actions are going to be on top of those synergies. We looked at synergies as specific to the eventual merger of both operating businesses. And we looked at further adjustments due to market conditions. It's just BAU expense cost reductions.

So I guess when all said and done and kind of those expense reductions are done and obviously, it does take time, I guess, how would you expect your cost per unit of production to compare to kind of where they were last year?

I mean, as Michael just talked about as well with our initiatives in the context of the technology side, we believe our costs are going to be materially lower than where they are today. And the other really great vantage point that we had with the acquisition of Caliber was we were able to look at two different operating businesses and the mousetraps that they each had to effectively close mortgage loans. And then you saw the differences between the costs. And we've been able to take advantage of best practices within our fulfillment strategy to effectively have a plan to reduce costs obviously, that also takes some technology initiatives for us to basically ensure that we meet those objectives and goals, but that is what we're basically working towards.

The next question comes from Trevor Cranston from JMP Securities. Please go ahead.

Question on the non-QM side, you mentioned that you're expecting the quarterly volume to reach up to about $1 billion this quarter. As that number grows to potentially $1 billion plus per quarter, is the anticipation that you guys will have the appetite and capital availability to bring that on to NRG's balance sheet? Or is there going to be some mix expected between selling loans to third parties and keeping some for NRZ?

The mortgage company is about making money. NRZ is obviously about making money as well. Currently, we don't expect to be selling non-QM loans into the marketplace. The NRZ team worked extremely close with the mortgage company. And I think that the beauty of our corporate structure and capital structure makes us very different than anybody else. So as we look where we are today, if we could grow this to a multibillion dollar a year origination business. One of the things that we have a lot of experience in here over at fortress NRZ and the mortgage company, whether it be Baron, Jordan, Charles or everybody else, is we've been in the securitization markets for I have been for 30 years, 30-plus years. So I expect no change other than growth and for the mortgage company to work very closely with our -- with the NRZ team.

Okay. Got it. That's helpful. And you mentioned briefly in the prepared comments that you guys were exploring the commercial space and could get involved there in 2022. Can you elaborate any on sort of what segment of the commercial market would be the most likely place for NRZ to potentially become involved?

We have some small investments now. I would say in the commercial space, we have some secured term loans and the like. We won't -- we're exploring -- there's a terrific group of what I would call conduit originators that we've been in discussions with for a while. We're looking at some redevelopment stuff with some proven operators. And this is not quite frankly, to hire somebody to come in and just look at CMBS to be something a little bit more strategic. So as you think about the growth in our business, where we went from being an MSR owner to where we are today with having operating companies that support our overall business. An example of that is the NewRez/Caliber side, which is focused on recapture. Recapture rates on the refi side on caliber in the 60s on NewRez, they're in the mid-40s. That's a big, big deal to support our overall MSR franchise. So as we look at the commercial space, it's going to be something that's more strategic and more growth oriented as we go forward. And we're hopeful that we'll get something done there in probably over the next quarter or during this quarter.

our next question comes from Giuliano Bologna from Compass Point. Please go ahead.

I just want to touch on some of the sensitivities that you guys put out there on Slide 15. We look at that table, one of the things I just want to kind of make sure I was thinking about correctly there was that as the amortization goes down, you're obviously increasing eligible pretax income. But on the origination side, you're reducing taxable income. Am I right to think about it from that perspective because there's roughly a 20-ish or 21% tax rate on the origination side, so the impact should actually be slightly greater than just the pretax income numbers that you have on the slide.

Yes, I think that's correct. I mean, obviously, there's a portion of the MSR, if you're not in the operating business, the MSR becomes assets. So the answer is yes to your question.

That sounds good. Then thinking about a follow-up on a question that came up earlier about capital allocation. You originated $17 billion more MSRs or more of how MSR you ran off in the quarter. And you're up, you obviously have some growth plans of some of the other assets. I'm just trying to think about how you think about capital allocation and capital needs to fund some of the growth in the balance sheet versus dialing up the dividend?

So first on the MSR side and the capital allocated, if you think about -- there's a lot of capital that sits in the mortgage company today. There's plenty of capital to shift from the origination business over to if we want to acquire MSRs there, whether it be in the mortgage company and/or on the NRZ side. With $1.3 billion of cash and liquidity, we feel like we're in a good position today. I've been pretty clear over the past number of earnings calls that we are going to run with a lot more capital and it's not to take every last dollar and invest it in some assets. So we drive an extra $0.01 a share. We're not going to live our life that way. As we look forward and think about the dividend, it's really a Board decision, quite frankly. I think the run rate of the Company is going to be from all of our perspective. I think it's going to be interesting to see what happens in the spring as we come out of the winter months and what happens to the origination business, meaning gain on sale or really what the demand is for mortgages. I think that will help drive a little bit of our dividend strategy as we go forward. The one thing to be clear is you look at some of our peers out there. Our book value, we continue to see increase in book value because of our positioning in the market and our macro view as we as we go forward over time until that kind of changes. So, I think the net of it is, we're hopeful that we continue to drive book value higher. The result of that should hopefully drive our stock price higher. And with rates still at 195 on 10s or 2% wherever they are after this call, it's my belief that our equity is extremely cheap. Whether you trade an 8% dividend yield, a 10% dividend yield, a 6% dividend yield, I feel like we're in a great place as it relates to our capital, our earnings projections and our book value projections as we go forward. The dividend discussion is a board thing, and we'll continue to evaluate as a group, but there's nothing I can say to that now.

That makes sense. And then just a quicker got kind of two-part question, I notice there's a segment shift you guys dropped off the consumer loan segment from a reporting perspective the segment side, and you've added mortgage loans receivable. I'm assuming the edition is moving consumer loans in other and the mortgage loan receivables seems to be Genesis. I just want to make sure that's correct. And then when you think about Genesis, is there a sense of how much you can originate on the Genesis platform? And what kind of assets and if the assets should resemble the portfolio that came over on the $1.5 billion?

So Nick, why don't you take the balance sheet, the income statement stuff, and then I'll take the Genesis side.

Correct, Giuliano. So the Genesis business is shown in the separate segment, and we did move the consumer segment given its size.

And then on the Genesis side, we're in the inning. We're getting up to the plate together as partners. I think the growth opportunities there are going to be pretty significant as we go forward. Keep in mind, they were owned by Goldman Sachs, a little bit different of a corporate structure than us. Cleary, we're going to be in the market with the securitization on the Genesis side probably in the next two weeks. We acquired $1.4 billion. We'll probably be out with, I think, $500 million-ish on our first securitization. So, we think there's a lot of growth there, and we look forward to bringing -- to creating more products for either the home building industry or the fix and flip industry. And as a result, that business should grow pretty significantly over time.

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Michael Nierenberg for any closing remarks.

Thanks for joining us this morning. Very excited for what -- from where we are today with our -- whether it be on the investment portfolio side, the leadership team on the mortgage company side and look forward to updating you during the quarter and next quarter. Stay well, and have a great day. Thank you.

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