Onity Group Inc (ONIT) 2024 Q3 法說會逐字稿

Good day, everyone and welcome to the Onity Group's third quarter earnings and business update conference call at this time. All participants are in a listen-only mode later. You'll have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one on your telephone keypad. Please note today's call will be recorded and we will be standing by if you should need any assistance. It is now my pleasure to turn today's conference over to Dico Akseraylian Senior Vice President, Corporate Communications. Please go ahead.

Good morning and welcome to Onity Group's third quarter earnings call. Please note that our earnings release and presentation are available on our website at Onitygroup.com. Speaking on the call will be chair President and Chief Executive Officer Glen A. Messina and Chief Financial Officer Sean O’Neil. As a reminder, our comments today may contain forward-looking statements made pursuant to the safe harbor provisions of the federal security laws. These statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are uncertain, forward-looking statements speak only of the date. They are made and involve assumptions, risks and uncertainties including those described in our sec filings. In the past, actual results have differed materially from those suggested by forward-looking statements and this may happen again.

In addition, the presentation or comments contain references to Non-GAAP financial measures such as adjusted pretax income. We believe these Non-GAAP measures provide a useful supplement to discussions and analysis of our financial condition because they are measures that management uses to assess the performance of our operations and allocate resources.

Non-GAAP measures should be viewed in addition to and not as an alternative for the company's reported. GAAP results a reconciliation of these Non-GAAP measures to their most directly comparable GAAP measures and management and reasons for including them may be found in the press release and the appendix in the investor presentation. Now I will turn the call over to Glen Messina.

Thanks Dico, good morning and thanks for joining our call. We're looking forward to sharing a few highlights for the third quarter and reviewing our strategy and financial objectives to deliver long term value for our shareholders. Let's get started on slide. Three.

I'm going to begin with three key themes today. First, we reported our highest adjusted pre tax income and return on equity in the last three years. Our MSR hedge performed very well, effectively offsetting the impact of declining interest rates contributing to our reported net income of $21 million.

Second, our originations team again delivered solid performance with $18 billion in total servicing additions. A 26% increase in total origination volume and a 52% increase in consumer directory capture volume both versus the second quarter.

Finally, we're executing a series of transactions to enable further deleveraging and a holistic corporate debt refinancing our debt to equity ratio closed the quarter at 2.9 to 1. We have almost $300 million in liquidity and we reduced corporate and MSR debt by over $180 million. This year, we've again demonstrated that we're delivering on our commitments and that our strategy and financial objectives are sound and our ability to execute and deliver results is consistent and strong.

We believe the continued execution of our strategy and financial objectives positions on to create and capture substantial value for our shareholders.

Let's move to slide 4 to see our strategy has materialized in our financial performance.

Our actions today and over the past several years are guided by our five point strategy.

It starts with balance and diversification to deliver strong financial performance through interest rate cycles, capital like growth to reduce capital demands and street risk exposure industry leading cost structure to enhance our competitiveness value proposition and profitability, top tier operating performance and capabilities to enable positive outcomes for borrowers, clients and investors and improve the customer experience and lastly dynamic asset management to enhance earnings and cash flow.

The execution of these strategies has enabled a remarkable improvement in our financial performance adjusted pretax income is up $162 million for the last 12 months ended September 30th versus the full year 2022.

And we've delivered a 19% adjusted ROE over the last 12 months. Up from a negative 17% in 2022.

We've delivered meaningful book value accretion and significantly reduced our ratio of MSR and corporate debt equity, improving the quality of our business for lenders and shareholders alike.

Let's turn to slide 5 to see how our servicing and origination platforms drive performance through rate cycles.

Our servicing and origination platforms complement each other very well as you could see, even with the sharp increase in interest rates from 2021 and a material decline in origination income, our total business is delivering improved performance as in rates have risen profitability in our servicing platform has improved materially, we did see a significant and short lived drop in interest rates during the third quarter. Even with that drop, servicing was still the earnings engine with origination earnings continuing to improve. Versus the prior year, we expect the earnings trends we've seen during the last during the first three quarters of 2024 to continue for the fourth quarter.

With servicing being the predominant earnings contributor and origination earnings continuing to improve.

We believe having scale operations in originations and servicing provides the balance necessary to deliver strong financial performance through interest rate cycles.

Please turn to slide 6 and we can talk more about our growth strategy.

As I mentioned earlier, our growth strategy is focused on capital light subservicing coupled with a disciplined investment management strategy for our MSR portfolio year-to-date. We've added $38 billion in third party subservicing editions significantly more than our total subservicing additions for the full year 2023.

Since the end of 2020 we've delivered over 80% growth in our subservicing portfolio while growing our own servicing and ess portfolios by about 57%.

We continue to dynamically manage our own MSR portfolio to maintain a range of $115billion to $135 billion in UPB including excess servicing spread transactions.

Consistent with this objective. This year, we've originated a purchase $23 billion in owned MS rub and sold 16 billion above our book value capitalizing on favorable bulk market pricing.

In addition to enhance MSR returns, we focus on origination channels and products that offer higher margins which comprise 39% of our MSR originations. Almost double the level we achieved in 2022.

Please turn to slide 7. So we can discuss how we manage risk on our own. Servicing our portfolio exposure to changing interest rates is generally aligned with industry with a slightly lower exposure to rates above 5% and slightly higher to rates below 5% to manage interest rate risk. We utilize both operating and financial approaches.

Our operating approach is all about recapture and rep punishment.

Our recapture platform is delivering 1.9 times the industry average capture performance as reported by the Ice mortgage Monitor for the last 12 months end, June 30th and we're continuing to invest to deliver best practice level performance.

Our originations platform which we started largely from scratch back in mid 2019 is now a TOP10 correspondent lender.

Our correspondent and co issue platform has demonstrated the ability to replenish both run off and opportunistic portfolio sales.

Our financial approach is the MSR hedge. We target a 90% to 110% hedge coverage ratio for our own MSRS which we expect will continue to provide immediate protection to changing MSR values due to changes in interest rates.

Let's move to slide 8 and I can share with you our recapture platform performance and plans.

As you can see on the left, our performance has improved significantly since 2020 when we started our recapture platform.

As previously mentioned, we are now performing above ice industry average for the last 12 months ending June 30th with mortgage interest rates falling about 100 basis points in 75 days. During the third quarter, our recapture platform delivered strong performance versus the second quarter block volume was up 76% funded volume up 52% and adjusted pretax income up over five times with the rapid increase in lock volume activity levels did reach capacity limits causing a slight reduction in recapture rate for GSE volume consistent with several of our public peers. However, Jenny may recapture performance continued to improve due to streamlined refinance options.

We regularly benchmark our refinance recapture performance to available industry information from ice and performance data from large public independent mortgage banking peers.

Based on third quarter, year-to-date reported results for refinance recapture excluding home equity products. We believe our platform is performing better than ice reported averages and on par with several of our large peers.

However, we believe there is upside opportunity if we can increase our performance to industry best practice levels and we're continuing to invest in our platform to capture that opportunity.

Our investments are focused in five key areas starting with talent.

We've strengthened the recapture team by adding talent with deep industry expertise with leading recapture performance companies.

In addition to talent, we're focused on process technology data utilization and product enhancements. This includes refining the integration of our recapture platform, servicing continued optimization of tasks, workflow and technologies, data enrichment and machine learning and continued evolution of our HELOC HELOAN and purchased product offerings.

We expect these investments will improve opportunity, identification lead conversion, the customer experience platform efficiency and reduce cycle time, all of which we believe will translate to an increased recapture rate regardless of the outlook for interest rates, we remain focused on achieving performance levels comparable to industry best practice participants.

Now let's move to slide 9 for a deeper look at our MSR hedge performance.

Our MSR hedge performed very well this quarter with the increase in value of our hedge portfolio more than offsetting the reduction in our MSR value due to changes in rates and assumptions. The result was a net favorable $10 million benefit.

And for the last 12 months, our hedge portfolio offset all but $12 million of the change in MSR value due to rates and assumptions.

We're pleased with how the hedges performed considering the continued industry volatility we've seen in the past 12 months, the higher hedge coverage ratio we implemented in the fourth quarter of 2023 has helped stabilize earnings and protect book value this year.

In addition, the cash generated by hedging instruments when interest rates fall helps offset margin. Calls on our secured MSR financing.

We intend to maintain our 90% to 110% target hedge coverage ratio for the foreseeable future and optimize our hedge portfolio composition as interest rates change.

Please turn to slide 10 to discuss our value creation potential.

We've meaningfully improved business performance capabilities, capital structure and potential for growth. However, we do not think our share price reflects these results nor the potential for our business. We believe this provides an enormous opportunity for both existing and new investors while several of our peers are trading at over book value. We are trading at a discount to both book and our analyst price targets. We're intensely focused on closing the valuation GAAP by continuing to execute our strategy, delivering strong financial performance, ongoing deleveraging and increasing investor awareness.

Now I'll turn it over to Sean to cover our third quarter performance in more detail.

Thanks Glen. Let's turn to slide 12 to talk about our third quarter financial performance.

We had a strong quarter measured on both a net income and adjusted pretax income or pt basis. Net income of $21 million was up both quarter over quarter and year over year. This resulted in an after-tax ROE of 19% diluted earnings per share of $2.65 and an increase in book value per share to $59.50.

We extended the positive year to day trend with both our servicing and origination businesses increasing their profitability resulting in adjusted pretext income of $35 million with a 31% adjusted ROE.

We continue to add scale to our servicing platform growing our book through MSR originations of $8.5 billion plus purchases and subservicing boardings for a total of $18 billion in the quarter or $60 billion of gross editions. Year-to-date.

Let's move to slide 13 to see how we've been trending over the last two years.

As you can see the third quarter was another sequential quarter improvement in both adjusted PTI and adjusted ROE.

We are successfully executing our strategy and meeting and exceeding our financial objectives.

Our financial objectives start with sustained adjusted pre-tax income performance. This quarter reflected solid reverse and for servicing contributions and was bolstered by our consumer direct channel. Exhibiting strong recapture results.

Please turn to slide 14 for a discussion on our Ford and reverse servicing performance.

Servicing segment improved its contribution to adjusted pretax income. Yet again, this quarter's performance was supported by strong profitability in the reverse business benefiting from a successful asset management transaction with improvement both quarter over quarter and year over year, the forward servicing business saw continued growth in revenue and lower OpEx partially offset by higher MSR runoff quarter over quarter due to seasonally low second quarter runoff measuring on a seasonally adjusted year over year basis. Forward servicing adjusted pre-tax income was $13 million or 35% higher than Q3 of last year driven by higher revenues and lower cost to serve our average of servicing volumes grew year over year on a net basis by $9 billion of unpaid principal balance or UPB.

More detail on our servicing portfolio and how it diversifies risk between the owned and subservice book. Plus details on investor types such as Ginnie or GSE are in our appendix.

Please turn to slide 15 to talk about results of the origination segment.

Originations had another strong quarter. Consumer direct channel drove the bulk of the improvements driven by strong recapture volume, which added almost $4 million of adjusted PTI versus the second quarter.

Our B2B channel which is correspondent lending and QOQ decreased quarter over quarter as a result of unanticipated price changes by the two GS, all of our channels had higher volumes quarter over quarter for an increase in total funded origination volume by 23% to 8.5 billion. More volume details by channel are available in the appendix overall. We operate an origin, an originations business that is profitable and we believe is able to adapt to any interest rate environment.

And as Glen mentioned, we are laser focused on enhancing our recapture abilities to move from better than peers to best in class.

Now let's turn to slide 16 and I'll walk you through the actions that we successfully took to restructure our corporate debt.

As slide 16 shows we've orchestrated multiple transactions that were timed to lower our debt profile, increase our earnings per share and facilitate the issuance of a new high yield corporate debt that we priced in October. Starting on the left, we aligned the first three business as usual transactions to close in September. These included the acquisition and securitization of reverse assets on our securitization shelf, the retirement of $23 million of PMC 2026 notes at a discount to par and the servicing release sale of $8.5 billion UPB of Fannie and Freddie MSRS, which we transacted at a premium to book value.

These transactions all provided strong liquidity to retire debt as well as a creative net income impact in the quarter. These are broken out in more detail in our appendix. Moving to the right, the waterfall reverse asset transaction closed last week, it increases our equity through preferred equity. Issuance provides additional liquidity and includes about $55 million of reverse assets which are accretive to our earnings per share. More detail on our reverse products and why we like them in our appendix.

Next is the pending mav sale which monetizes our 15% equity stake in MAV or the MSR acquisition vehicle. This is a JV. We set up with Oaktree in 2021.

This sale monetizes an asset solidifies Otri and MAV as a strategic capital partner as we extend our MAV subservicing contract for an additional five years and provides liquidity to reduce our corporate debt.

We expect the mav sale will close in the fourth quarter after receiving regulatory approval, the closing will trigger the escrow release of the high yield proceeds as an important reminder, this transaction permitted us to reduce the dilution, uncertainty related to the execution of the warrants.

Now, we have the ability to ensure a less dilutive or roughly $1.55 a share dilutive impact on a net settlement as opposed to a larger or in excess of $4 a share dilution for a gross settlement.

In all cases, we still retain the ability to decide if we settle the warrants in cash shares or a combination of the two.

The warrant options are shown in our balance sheet appendix.

The final step was the successful issuance of $500 million of high yield notes which we will use to redeem in full the PMC 2026 notes and the Onity 27 notes. When the mab transaction closes, this deal is already priced and allocated and we expect it to close into escrow tomorrow on November 6th.

In light of that transaction, we are releasing our Q after the high yield close likely Thursday morning premarket.

The combined result of these transactions will be roughly a $100 million decline in corporate debt or 182 million decline in corporate and MSR debt from the beginning of the year, an increase to both our common and preferred equity and a reduction of our debt to equity leverage down to from almost four times at the beginning of the year to 2.8 times on a 930 pro forma basis.

It also extends out our corporate debt maturity to November of 2029.

Moving to slide 17, we show detail on the improved earnings per share result of our new debt profile.

When we break escrow on our debt refinancing transactions, the total corporate debt interest expense inclusive of the preferred dividend will decrease by about $14 million on an annualized basis. This is driven by lower debt amounts as well as much lower accretion on oid or discount of debt and debt issuance cost.

The transactions will result in a onetime impact in the fourth quarter of 2024 of approximately $41 million due to refinancing costs. The bulk of this is about $37 million of accelerated unamortized original issue discount and debt issuance costs from the older 27 notes and the PMC 26 notes. This acceleration is only bringing forward a cost we would have incurred through the maturity of the debt.

We have already been accreting this monthly since the 2021 issuance of these debt structures which is why eliminating this noncash expense will improve our ability to generate earnings going forward.

In summary, these transactions that restructured our corporate debt provide three clear catalysts for closing our GAAP to book value. one, they remove the dilution impact of ongoing OID that would have gone into 2027 Two, improves the earnings generation of the company by $14 million annually. Three, removes uncertainty on the dilution impact of our outstanding warrants.

Please turn to slide 18.

We continue to focus on these financial objectives, sustained adjusted PTI performance. The last eight quarters have been evidence of that and we will continue that focus two reduced earnings volatility. This was evidence in our strong hedging performance in the third quarter and throughout the year and we expect we will continue to deliver good results here. Three improved ROE, that's a result of the first two objectives in our capital ratios will benefit from both that and our continued focus on reducing our leverage until we reach pure normative levels.

Finally, we continue to capitalize on market cycle opportunities demonstrated by our selective MSR sales above book value this year, all three of which were replenished in the same period by strong originations volume as well as the opportunistic reverse asset transactions. We have engaged in since early 2023 two of which were the reverse transaction in September and the waterfall transaction, both of which helped our successful debt restructuring and provided accretion to net income back to you, Glen.

Thanks Sean. Please turn to slide 19.

I'm proud of the enormous progress our team has made. I believe we are well positioned to navigate the market environment ahead and deliver long term value for our shareholders.

We delivered a robust increase in profitability and returns in the first three quarters of 2024 and made meaningful progress against our strategic and financial objectives.

Our performance is driven by our demonstrated operational excellence, focus on prudent capital like growth and commitment to deleveraging the balance sheet while maintaining solid liquidity levels.

All this comes together to suggest a share price that we believe has excellent upside and we intend to continue to take the actions and extend the outreach to close that GAAP for the benefit of all shareholders overall, we could not be more optimistic about the potential for our business.

With that. David. Let's open up the call for questions.

Absolutely. At this time, if you'd like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind you may remove yourself from the question queue at any time by pressing star and two again, it is star and one task a question today. Take our first question from Bose George with KBW. Please go ahead. Your line is open.

Hey, good morning. On slide 5, you know, you show the it looks like sort of the expectations for pre-tax earnings in fourth quarter is, looks like it works out to about 40 million. So, is that right? And is the improvement over Q3 reflect some of the strategic actions or you can you just walk through that a little bit?

Sure, both.

Yeah, this is our current estimate or our run rate you know using our existing forecast. We're probably not going to see a lot of the impact from the corporate restructuring as that will not get broken from escrow or triggered by the math sale until closer to the end of November. So we'll probably only have one month of impact of the 14 million of annual savings I referred to. So the bulk of that's you know coming just through continued success in our originations and servicing business originations probably typically dips a little bit in the 4th and 1st quarter, seasonally speaking. But we continue to see pretty strong results there. And so that's just kind of our current run rate.

And Sean just to clarify the numbers on that Excuse me both the numbers on that page are just for servicing and originations. It doesn't include corporate and or any of the charges from the corporate debt restructuring. Correct?

That's correct. Yeah, this is PTI and then the charges I referred to the 41 million that'll show up in a GAAP net income.

Okay, great. And then actually just a related question on the transactions impact on the warrants. Is there going to be any impact on the diluted share count or is it just the benefit in terms of limiting the dilution of the warrants?

So both in our investor presentation page 35 we've actually modeled out for you and others. The what the difference is in fully call it fully diluted book value per share. After consideration of all options, awards and the exercise of the warrants showing the three different settlement methods, the gross settlement method, the net settlement and shares and net settlement in cash, which we have the option to control. So it is a pretty meaningful reduction in dilution based on the current share price.

Okay, great. And then just one other one the 6 million in legal and regulatory costs you know actually what was that? And does that flow through the servicing segment on the Expense line?

It actually depends on each cost. Those so some of the costs could be linked to legacy corporate actions and they wouldn't flow through servicing others might flow through servicing. But over time could be you know build back to investors and then some could be borne by us in the servicing. So you could have any of those three options. This was just probably closing out either some legacy matters or reserves for matters that we have more certainty on going forward. That's typically when we make the adjustments.

Okay, great. Thanks.

We'll take our next question from Derek Sommers with Jeffries. Please go ahead. Your line is open.

Hey, good morning, everyone. Just on your forward guidance for 15% adjusted ROE into 2025. Could you share any kind of underlying assumptions and market environment on that guidance or anything you're thinking about as catalysts that would drive that result?

Sure there We're current, this is kind of what I would call an early estimate based on the fact that we're still formulating our budget and our forecast for next year, but we're currently anticipating a slightly improved originations market. However, you know we're also cognizant of where interest rates are currently and what the trends have been over the last few months. You know, the offset here would be if interest rates decline originations should accelerate faster. However, servicing could see some declination in its pt due to a slightly lower float which while it is partially offset by lower cost to borrow, still could create some negativity. Also factored into that number. We're not considering any opportunistic transactions like or reverse asset transactions of which we've had a couple in 2024 and then another in 23 those we typically don't budget or forecast for, but they could further accelerate or improve our ROE and then we are assuming slightly lower float, as I mentioned earlier from a higher elevated sorry, not elevated interest rates, lower interest rates.

And Sean is it fair to say you know, the you know general industry volume forecast really don't materialize is largely going to be as a result of higher rates, which is you know which may you know depress industry origination volumes. It it's going to result in lower MSR amortization expense and servicing and I'll have more servicing earnings. So again, you know, given the balanced nature of our business with two scale platforms, one in originations and one servicing, you know, we're designing the business to perform in any market environment not necessarily being dependent upon one industry condition or another.

Got it and then just given, you know the commentary and rates and where we are into the quarter. Is there any kind of update you could provide on how things in the DTC channel have been trending quarter to date so far. Thank you.

Yeah, just generally, I mean if you could look if you look at our you know, our portfolio stratification by interest rates that I talked about earlier on the call. You know, with the 30 year fixed rate mortgage rate now in the high six, low seven depending upon where you look. You know, you can imagine that you know, block volume is trending lower than it was when rates were 100 basis points lower in the third quarter. I think that's you know, born out in the NBA refinance application Index. We've seen we've seen that trend down. Notwithstanding, look I still think we've got you know, upside opportunity to move our platform to industry best practice recapture levels. We're continue to invest to drive our performance and increase our recapture rate. And you know, looking forward to continuing to chip away at that over the months and quarters ahead.

We'll take our next question from Eric Hagen with BTIG. Please go ahead. Your line is open.

Hey, thanks, good morning. I think two questions here on the, on the co issue MSR channel, I mean when you reference unanticipated pricing changes at the GSES which affected the channel last quarter. Can you elaborate on what may have driven that?

And then when we think about, you know, the overhead costs and the expenses that are associated with sourcing co issue MSRs, how does that differ from the cost structure in a traditional correspondent relationship?

Eric this is Glen on the pricing changes, you know look the Fannie MAV and Freddie MAC you know, at their discretion contain price whenever they so choose at any given time during the quarter. You know, historically that has meant any the loans you may have in your pipeline that are not sold forward even though you may be hedging them. They're being hedged for changes in interest rates but not a hedge for a change in a random change in price that GSES could put forth. You know, at the most recent you know, NBA conference, this drew a fair amount of discussion amongst industry participants and I believe FHFA has, you know, put forth some saying that they'll be more thoughtful about price changes going forward and we'll do better to pre announce changes so people can adjust their pipeline position and you know not get caught with you know loans that haven't been sold forward.

Sean on the other one, I'll leave that to you the second part of Eric's question.

Sure, what was your other half, Eric?

It was around the cost structure of co issue versus, you know, traditional correspondent channel.

Oh, sure. I mean their co issue is probably the most optimized and easily scaled cost structure followed then by correspondence. So correspondent you need a small group of what we would consider to be B2B type sales people. You need pricing capabilities. The co issue is more participating in the Fannie and Freddie and Ginny marketplaces like SMP and PTI. And that can be done quite effectively with a small team and scale up or down. But you know all of those both correspondent and co issue are dependent on the broader market. So if the market is growing, that's more volume into that space. And then of course the those spaces both tend to be fiercely competitive like everything else in originations.

And Eric, even within correspondent, there's different cost structures depending upon loan delivery method. So, you know in co issue, you're really just buying an MSR. So it's the channel is unaffected by GSE price changes. And you know that when you move into the correspondence space, you have mandatory best efforts and non delegated delivery levels and the cost of processing those transactions mandatory lowest non delegated as highest because you're putting the most amount of work you're actually doing the underwriting in a non delegated transaction.

Yeah. Yeah, good color here. Thank you guys. All right. So when we look at your earnings going forward, I mean, what do you feel like is the target ratio between owned MSR and subservicing here? And which do you feel like is a bigger growth opportunity potentially if rates are either higher or lower from here?

You know, we're going to continue to go forward with the strategy that's you know help the business perform to the level it's at today and that is focused on capital like growth. So you we'll be continuing to manage our own MS R portfolio in that $115billion to $135 billion of outstanding UPB range. You know, we may that may be a little bit higher, a little bit lower in any given quarter depending upon how we time our MSR sales. And we're going to continue to focus on capital like growth through subservicing both with our capital partners and through third party. You know I call it third party subservicing agreements with independent mortgage banks, banks and credit unions.

Got you. All right, one more I mean if interest rate volatility does come down, do you think that would support a lower hedge ratio and would you know, bondholders potentially look to that as a source of incremental liquidity on the balance sheet.

You know what we do manage our hedge position dynamically. If volatility comes down we would give consideration to not only the adjustment of our hedge portfolio composition, which can also affect cost and we also reevaluate what is the appropriate target hedge coverage ratio. But I think as you know, Eric you know, markets can move at unanticipated times in ways you don't expect. So, you know, I don't suspect we'll necessarily at least here in the near term, just given the volatility we've seen, I wouldn't expect any major change in our strategy in the near term. But as things settle down in the long term we'd always evaluate what makes most sense and it's in the best interest of all of our constituents.

Thank you guys. I appreciate you and congrats on the headway with the capital structure here.

Thank you, Eric.

As a reminder. If you'd like to ask a question today, please press the star and one keys on your telephone keypad. We'll take our next question from Matthew Hallett with B Riley. Please go ahead. Your line is open.

So, hey Glen and Sean. Thanks for taking my question. Congratulations on the refinancing. The first question I think is the obvious question with the discount to book a 56% of that fully diluted number. I know you're going to take $4 off but then you'll, you'll obviously earn at least two in the fourth quarter. It looks like why wouldn't you reinstitute the buyback? I think Sean, you said you want to hit leverage targets? I love to hear what they are as you as you continue to grow earnings. But why wouldn't you put the buy back here? That's the quickest way to close that GAAP and create value for shareholders.

Yeah. So we're focused on a couple of things here. So, you know we said we want you know over the over the long term, continue to drive towards a pure normative leverage. We think that's important for the business that accretes earnings and you know, it further de risk the balance sheet closing the GAAP between our cost of corporate debt versus industry cost of corporate debt, which is still GAAP. I mean, we've lowered it, but we've got more room to do that. We also want to invest to continue to improve the intrinsic earnings power of the business. But look to the extent that we have excess liquidity, we certainly would give consideration to call it just generally a quasi rateable, you know, retirement of debt and maybe some limited share repurchase, but it's got to be done in a way that actually helps reduce our leverage. We don't, you know, we work really hard to get our leverage down. We don't want to buy back shares and drive our leverage back up. That's not I just don't think that would be healthy for the business.

I was going to say you, you had indicated what is our long term target? When we say pure normative? I think we may have mentioned earlier that we think most of our public and private peers, at least those who participate in the 144 a high yield market have a debt to equity ratio somewhere in the range of 2.0 or lower. And so that's kind of our long term target to attain those levels. Obviously peers can fluctuate over time. So if they go up or down, we'll look to fall in line with that over time.

Right? I hear you can call that high yield debt in two years.

Yeah, it's a five year non call to structure.

Okay. Well.

Look, I mean Glen, I appreciate that you know, the importance of getting leverage down even further, but I mean, clearly a little bit of excess capital towards buybacks at this 50% discount to book and as a follow on question, I mean I always ask about the different tax I said but, where does that stand? You think you've had five quarters of consecutive profitability, you're not going to be paying corporate taxes for a long time. You know that's an asset that you can put on your balance sheet. What when and that's going to just inflate book value even more. Just talk about that and again, just a little bit of cash towards the buyback, I think would make sense. Given the discount to intrinsic value is tremendous.

Sure, man. You are correct. We have a fairly significant deferred tax asset on our balance sheet. That's back in our last year's K. We update that annually. Currently it's north of 170 million. It's fully offset by something we call a valuation allowance. The valuation allowance really gets lifted. When a couple of items fall into line, I'm not going to pretend I'm a tax and AASB expert, but the high level view is you have to have a cumulative taxable income, you know, and GAAP is GAAP net income is probably the easiest proxy for that. And by cumulative, that's positive that's several years worth. And so if good years fall off your accumulated number, you have to continue to produce good years to offset that. So, you know, 2022 they were relatively good years for originations in PTI. And we'll have to continue to hit and exceed those numbers in 25 as we replace those rolling off. And then the other thing is demonstrated long term GAAP net income positivity. And so, you know, as we get closer to being able to lift that valuation allowance, you'll definitely hear me talk more about that on earnings calls, I would I want to make sure the rest of the markets is tuned into our DTA as you are.

I mean, look, needless to say you're not going to be a corporate taxpayer for a long time.

The bulk of corporate taxes, you're correct. We do have some taxes that we pay on behalf of our Asia Pacific legal entities that don't get any tax efficiencies from our deferred tax assets. But you're right in the US. When we look at those tax paying entities, we have quite a decent buffer to minimize our tax rate at least.

Well, look like I said, it's just another asset of the company that I think, you know goes well above that, you know, what you state is reported, book value and, and I appreciate the color on that. We'll look forward to that final question on sub servicing editions. You would have 38 billion a year-to-date. I mean, Glen, and what can we when you have the originations of corresponding and you can buy bulk? But what can we assume? Like sometimes you give like a line of subservicing who you're talking with. You talked about your, you know, MVA and other vehicles, but what can we assume next year in sub servicing additions and maybe just quickly address the, the rhythm, you know, extension.

Yeah, so we yeah, we've not yet put forth a guidance on subservicing editions and our targets for the, you know, for 2025 for subservicing editions probably do that on our next earnings call. Yeah, we are seeing continued strong interest. We just came out of the, you know, the Mortgage Bankers Association annual conference in Colorado. Lots of good leads and opportunities came from that. As you know, we've got a pipeline of transactions that we're working. Subservicing ads can be lumpy as consumers are or I'm sorry, clients are you know deciding on, you know, what is the right timing for them to change providers? So, you know, we'd like another quarter or so to give us to give some more color on that you know through our planning process or your own planning process. But yeah, the industry remains strong and we're still optimistic about our ability to drive some servicing ads in terms of the rhythm contract. You know, we've had that contract typically comes up for renewal every fall. We've issued several eight Ks which has pushed the date further out into the future. And we've extended the contract until February the February time frame as we're still undergoing negotiations. Now, There's two portions of that contract, if you may recall in reading our 10-Q.

There's a body of assets that are called R MSR 2.0 which is about $9 billion in UPB generates 22% or so of the revenues from the rhythm of servicing portfolio, that portion of the contract has been, was not terminated by rhythm and it just continues to run until December of 2025 where the next, you know, renewal period comes up and it's the remaining 78% or so that we're still you know, in negotiations with rhythm on the terms and conditions of, of a renewal. But discussions are ongoing and you know, look they've been a been a great client and, you know, we look forward to continuing to, to serve them on a go forward basis, but discussions are ongoing and yeah, we'll keep the market posted.

Great. We'll stay tuned for progress. Thanks Sean. Thanks Glenn.

Thank you.

And there are no further questions on the line at this time. I'll turn the program back to Glen Messina for any additional or closing remarks.

Thanks David. And I'd like to thank our shareholders and key business partners for supporting our business. I'd also like to thank and recognize our board of directors and global business team for the hard work and commitment to our success. And we look forward to updating everyone on the call about our progress at our next earnings call. Thank you.

This does conclude today's Onity Group's third quarter update call. Thank you for your participation and you may now disconnect.