Rithm Capital Corp (RITM) 2015 Q1 法說會逐字稿

Good morning. My name is Steve and I will be your conference operator today. At this time I would like to welcome everyone to the New Residential first-quarter 2015 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session, (Operator Instructions). Thank you.

From Investor Relations, Mandy Cheuk, you may begin your conference.

Thank you, Steve, and good morning everyone. I would like to welcome you today to New Residential's first-quarter 2015 earnings call. Joining me here today are Michael Nierenberg, our CEO, and Jonathan Brown, our interim CFO and CAO.

Throughout the call we are going to reference the earning supplement that was posted to the New Residential website this morning. If you have not already done so, I would suggest that you download it now.

Before I turn the call over to Michael, I would like to point out that certain statements made today will be forward-looking statements. These statements by their nature are uncertain and may differ materially from actual results. I encourage you to review the disclaimers in our press release and investor relations regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC.

Now I would like to turn the call over to Michael.

Thanks, Mandy. Good morning, everyone, and thanks for joining our Q1 earnings call. For the quarter, I think we had a terrific quarter. We have been executing on all of our core strategies, trying to simplify our Company and from a core strategy standpoint, with the acquisition of HLSS, their assets, we now have critical mass in what I would call our three core strategies which are MSRs, servicing advances, and non-agency securities with call rights.

From an earnings perspective, we had record core earnings in our business and all of our segments continued to perform extremely well. We closed on the HLSS acquisition in early April and this has really transformed our Company giving us again critical mass in our core business lines. We are now one of the largest capital providers to the mortgage servicing industry.

Our message is consistent, execute on our core business which will hopefully drive our dividend yield lower and create terrific value for our shareholders.

I'm going to refer to the supplement that has been posted online and I will begin on page 2 and take you through and then we will open it up for Q&A.

Currently NRZ is a $3.2 billion mortgage REIT from a market capitalization standpoint. Our total return year to date is up 38%. Our year-over-year growth in Q1 core earnings this up 38% as well. As a result of the acquisition of HLSS as well as our current business at NRZ, we currently have a very unique asset mix. And as I think about that, we have call rights on $235 billion on non-agency mortgage securities. We have an excess MSR portfolio of $407 billion and life-to-date we have paid $397 million in dividends.

On page 3, our core earnings for the quarter were $0.44 per diluted share. We earned $63 million and again our year-over-year core earnings from a gross perspective in the first quarter is up 38%. We declared a dividend of $0.38 per share or $54 million.

As you flip to page 4, one of the things that we have been trying to do as well as obviously trying to get our share price higher and drive our dividend yield lower, we have been working with a number of street analysts and we currently have coverage from nine different firms and we expect that to continue to grow and as you look at page 4, you can see the ratings from the different analysts whether it be buy, outperform and there is one neutral.

As you look at page 5, this talks about our activity in the quarter and then subsequent to the end of Q1. We had a robust quarter of activity as we worked with our balance sheet to put us in the position to acquire the assets of HLSS. Our MSR portfolio continues to grow and our life-to-date IRR has been 26%.

In the MSR world, our investment thesis has been to focus on credit impaired MSRs which are less sensitive to prepayments in a lower interest rate environment. Post Q1, we acquired $165 billion of MSRs from HLSS, they are all private label credit impaired MSRs which should provide very stable cash flows for a long time. And from a prepayment standpoint, will be very stable as well.

Subsequent to Q1 away from the HLSS acquisition, we have committed to acquire $64 billion of legacy or credit impaired MSRs. Some of these are still subject to regulatory approval but we expect to get approved and those should fund over the course of the next one to two quarters. We are expecting a lot of these to fund this quarter and some will fund in early Q3.

As you go to the servicer advance segment of our business, our returns have been terrific. Life-to-date IRRs on servicer advance investments have been 34%. Our legacy servicer advance business -- and that is pre-HLSS -- have been all funded with our bank partners and throughout the quarter what we have done is we increased our facilities as needed and we have also extended the terms and the duration of these assets.

On HLSS, the acquisition of HLSS, we currently have added $6 billion of advances and those are funded both on bank balance sheet as well as in the public markets and I will talk a little bit later on that.

On our non-agency business, we were very active in the quarter. Early in the quarter we purchased securities and then with the accelerated timeline in the HLSS acquisition, we sold securities and used the proceeds to pay for the HLSS acquisition.

Our life-to-date returns on our securities portfolio have been terrific. They have been and 52% and a big part of the large returns have been due to our call strategy.

On call rights, we acquired called rights on over 1375 different mortgage deals which correlates to $140 billion of non-agency mortgage securities. This should be terrific for our Company. Couple that with our existing call rights which is approximately $95 billion, that gives us again call rights on $235 billion of the non-agency mortgage market. And I will talk further on that in a little bit.

On the acquisition front, we announced the HLSS acquisition and subsequent and in conjunction with that acquisition, we raised $877 million of new capital in the equity markets.

On page 6, what we tried to do here is break down our business into our three core segments and then on the right side of the page, you can see what our projected balance sheet looked like as of 3-31 rolled forward from using HLSS's balance sheet as of 12-31 as those numbers are not public at this point in time.

On our excess MSR portfolio, we currently have a net investment of $1.566 billion in excess MSRs. We expect a targeted lifetime net yield to be between 15% and 20%.

On our servicer advance segment, we have $550 million of equity and again all these numbers are as of 3-31. We expect our targeted lifetime net yield to be between 20% and 25%.

On residential securities and call rights as of the end of 3-31, we had $205 million of net investment and again expect lifetime net yield to be 15% to 20%. Our opportunistic investments are really some legacy loans that we have as well as our consumer portfolio which is currently carried at a zero basis and on the $200 million as of 3-31, we have a targeted lifetime net yield of 20%. And then as of the end of the quarter we had cash on our balance sheet of $336 million.

So again, our efforts here are to try to simplify our business, show you our core segments and try to help you figure out a way to model the Company.

On page 7, we will talk a little bit about excess MSRs, why we are different. Clearly with the rally that we saw in rates in the first quarter and the large amount of mortgage production that we saw, there was concern around prepayment rates. Our investment thesis from day one has been to focus on legacy, credit impaired excess MSRs again that are going to provide very stable cash flow and a very stable prepayment profile. Over 88% of our portfolio is credit impaired and of the portfolio, 97% of that portfolio is well seasoned. On some of the newer production stuff that we have which is a very tiny amount, we have already seen some very good recapture rates on that portfolio.

Today our portfolio is positioned for all interest rate environments. We do believe that rates are going to increase and it is very rare that you could find a great fixed income asset that will increase in value as rates rise.

On the bottom of the page what we tried to do is give you a little bit more of a description of our MSR portfolio. As you can see by that chart, our non-agency portfolio is $268 billion and as you think about that again, most of these are very, very seasoned legacy credit impaired borrowers with a delinquency portfolio that is something around 20%. The rest of that, you have Freddie Mac, Fannie Mae and Ginny Mae MSRs and I could talk further -- we will talk further on that in a little bit.

On page 8, this is a slide we put in pretty much every quarter. The way to think about this is in 2010 when we first began acquiring excess MSRs, the bank serviced about 90% of all MSRs. Today they service approximately 75% of all MSRs and we expect that to head toward 50%, which would then bring another $2.5 trillion of MSRs to the market.

On page 9, this is a snapshot of our servicer advance portfolio. This also includes HLSS. Our total servicer advance portfolio is $8.7 billion. The way that we get compensated we receive a portion of the MSR off of the $251 billion UPB of non-agency loans. This compensates us for our advances.

Our advances are currently funded with $7.9 billion of debt with an approximate advance rate of 90% and an interest rate of cost of funds of 2.2%. On our debt, 50% have fixed-rate coupons which will also help mitigate interest rate risk. And as I pointed out earlier, our life-to-date IRR on our advanced portfolio has been 34%.

On the bottom of the page what we tried to do is show you our different servicers. There is Nationstar, Ocwen and SLS and then show you our advance rates, our maturities and our cost of funds.

Page 10 talks a little bit about our non-agency securities and our call rights and really what we think is a fantastic opportunity for our Company as a result of the acquisition of all these call rights.

We have call rights in over 2100 different non-agency mortgage deals. That totals a UPB of $235 billion which represents approximately 35% of the outstanding non-agency mortgage market which is something around $690 billion today. As a result of this, we expect sustainable earnings as a result of our long-term deal pipeline. The way to think about this as delinquencies decline, more of these deals become in the money so as delinquencies come down what we think over the course of the next couple of years, the projected callable balance at the time of call will be approximately $100 billion to $125 billion.

Our recent experience when we've called deals the way to think about this has been we have been making approximately 2 to 3 points per deal. Now some of this will be dependent upon rates but as you think about it on a $100 billion portfolio of call rights at the time of call, 2 points would correlate to about $2 billion. Thinking about it with 198 million shares outstanding it should bring in approximately $2 per share.

On page 11, we tried to simplify how the call rights work and try to get you grounded on how we make the money and the way it works is we purchase underlying bonds at a discount which is our non-agency bond portfolio. We then exercise our clean-up call and the way the clean-up calls work typically when a loan pays down, the way to think about it when a deal pays down to 10% of the original balance, we are able to purchase that pool of loans at par plus expenses. We then sell or re-securitize the performing loans and those are typically at a premium. And then on loans that are delinquent, we retain those and liquidate those over time and the accretion on those loans flows into core earnings.

On the bottom of the page is a walk-through on how the economics work. And I'm happy to answer any questions when we go to Q&A on that.

On page 12 is really 2015 and looking forward. For us we think the beginning of the year has been a fantastic start. The acquisition of HLSS again has been terrific for our Company. We also think that us acquiring HLSS at the time that we did really helped stabilize the mortgage market as there was a little bit of distress around the servicing market and around the Company.

As a result of the acquisition of HLSS, we now took on a terrific partner in Ocwen. We have partnerships with both Nationstar and Ocwen which are two of the largest non-bank servicers in the US. For a year-to-date perspective as I pointed out earlier, we have generated a 38% total return for our shareholders and as we look forward, we will continue to identify and execute on attractive investments across our core segments.

As you think about the MSR pipeline and this is something we get asked pretty much in every quarterly call, we do think it is more robust today than we have seen over the course of the past couple of years. We are seeing plenty of supply from both banks and non-banks. The non-bank sellers will have to over time particularly on some of the smaller mortgage companies retain more capital on their MSR portfolios so we do think we are going to see more MSRs come to market from that segment and we think the banks will continue to sell non-core excess MSRs or MSRs that are from their non-core customers.

As we think about servicer advances, we see a pipeline to the extent that we acquire more non-agency securities or MSRs of about $5 billion and again on our call rights, we expect to be very active in that sector and intend to execute on the $235 billion that we currently own call rights on.

Now I would like to just take you quickly through our portfolio and give you a performance update and then after that we will open up for Q&A.

On our excess MSRs -- and again this is on -- this is all NRZ pre-HLSS -- as of the end of 3-31, we had a portfolio of $248 billion. Our lifetime performance has been 26% IRR. On our initial investments of $800 million, we have already received cash flow of $400 million or 50% of our initial investment. Our carrying value as of the end of Q1 was $752 million and we expect future cash flow of $1.2 billion.

You can see by the graph in the middle of the page how stable the prepayments have been, the right side of the page how consistent our cash flows have been and again staying with our story about purchasing MSRs that are backed by credit impaired borrowers.

Page 15, we talk about our servicer advances and our performance update. Initially we invested $313 million for a 45% interest in a pool of $5.2 billion of servicer advances. We have received $188 million of cash flow and the current carrying value is $198 million, a resulting life-to-date IRR to date has been 34%.

As you take a look when we first began when we first purchased the advances, it was on a pool of $5.2 billion. The outstanding advanced ratio to UPB was 4.8%. It now currently stands at 3.2% or from a number standpoint, it has gone from $5.2 billion to $2.9 billion.

Page 16 talks a little bit about our non-agency securities again very active initially purchasing securities earlier on in the quarter and we sold some securities as I pointed out to create some capital and liquidity to enable us to acquire HLSS. The portfolio today is $836 million of face or $600 million from a fair market value perspective. Average dollar price of $0.72, and again, all of our securities that we have will be correlated to our call rights.

On the residential loan side on page 17, in the quarter we exited most of our loan holdings, we sold $1.1 billion UPB of loans, we generated an IRR of 35%. The remaining portfolio as of today is currently $349 million which represents an equity investment of $72 million. You can see the breakdown. We have some seasoned performing and nonperforming and as a result of the sale of the $1.1 billion -- $1.1 billion of loans, we generated gains of approximately $25 million.

On our consumer loan portfolio as I pointed out earlier, we carried it at zero. Initially when we purchase this it was a $241 million investment in a pool of $3.9 billion of consumer loans. We received on the $241 million, $484 million and we expect to generate excess cash flow on that of between $100 million and $150 million over the next four years. The IRR will be 96% and the performance has been terrific.

So with that, we will turn it back over to the operator and open it up for questions.

(Operator Instructions). Paul Miller, FBR.

This is Jessica in for Paul. Just two quick questions. What would you say the average duration on the excess MSR portfolio is today?

Being that they are mostly credit impaired it is probably something in the area of four to five years.

Okay, great. And then what is the visibility for acquiring more call rights? Are there sellers, is it something that you kind of have to look for?

The answer is we always look for it. The amount that we currently have is roughly 35% of the outstanding market. Obviously we are always in conversation with potential sellers of call rights. Typically when we acquire pools of private label servicing, a lot of those come with call rights and we are currently in discussion on acquiring some pools of private label servicing. So we hope to acquire more, there is no guarantees but we think we will be successful in acquiring more call rights.

Okay, great. Thanks so much.

Bose George, KBW.

Everyone, good morning. A couple of questions. First, just from a capital standpoint pro forma for the HLSS deal, do you have any excess capital after that?

We do have some excess capital as a result of the capital raise. Part of our strategy and as we continue down the path, we do have some commitments on MSRs, we have purchased some non-agency securities. While saying that, we still do have some capital.

Is that quantifiable or does it kind of depend on other things?

To give you a sense as of today, we have $375 million of cash on our balance sheet. However some of that is allocated toward future investments but again, we do have some capital on our balance sheet.

Okay, great. Then just on the funding side, are you going to put on any permanent funding or is it really going to be asset based for the HLSS deal?

I think the way to think about the Company is we do some short-term financing around some of our MSRs to raise some capital in order to pay for the acquisition. On our non-agency business, we continue to work with our bank counterparts and other counterparts and use the repo markets and typically those facilities are [360 floor based] facilities with advance rates of approximately 75%.

Our loan business will continue to be something similar but again that is going to be more deemphasized and our loan growth will likely come as a result of our call rights when we acquire some delinquent loans when we call those deals. Overall we continue to evaluate our capital structure, we are looking at longer-term debt financing and we have done some of that with certain parts of our portfolio.

Okay, great. That is helpful. There is actually one more. Just in the GAAP to core reconciliation, that $13.4 million of interest income, can you just walk through that line item?

Sure, so for GAAP purposes when you put a loan into a held for sale category, you have to discontinue accretion on those loans. However, economically they continue to earn economic return and so for core earnings purposes we have continued to accrete them. That was a change we made last quarter in our core definition as a result of putting our loans into held for sale.

Okay. So it is really just coming through a different line item because of the re-class?

Exactly.

Okay, great. Thanks.

Doug Harter, Credit Suisse.

Thanks, Mike. I was wondering when you have conversations with others about buying call rights,. sort of what is the pricing look on that and if you were to apply that to the value of your call rights, how would that look?

You know, Doug, in just acquiring call rights that is not an easy thing as I pointed out earlier. Typically the call rights when we acquire pools of private label servicing, we try to acquire the call rights associated with those pools of servicing. The all-in price the way that we think about it is one price that goes with that MSR.

While saying that, at some point now that we have critical mass, it is likely that we will be valuing our call rights on our balance sheet on a go-forward basis but it is hard to tell because as you think about the non-agency universe and one of the things that is tricky as we think about calling these deals, if the average -- deals that have less delinquencies will get called right away and obviously the value of that option is significantly higher than an option that is kind of three to four years out of the money.

What we tried to do in the presentation is give you a sense as far as when the population is callable as we amortize the called rights down based on a constant prepayment speed. But overall the shorter the call right, obviously the more valuable. The longer is they will be a little bit out of the money and they will be worth less in the way that we are thinking about it. But I think you will get more clarity as we go forward over the course of the next quarter in the valuation of call rights.

So just to be clear, there is no value on the balance sheet today for those call rights?

There is essentially no value on the balance sheet. When we acquired them, we put a small number on but it doesn't move with mark to market.

Currently they are valued at something close to zero.

Got it. And that slide where you guys showed kind of where you view the callable universe as of each year, so would that $33 billion as of today, would that be economically feasible today or do delinquencies have to improve for that to make sense to call that $33 billion?

The answer is both. We are going to be doing a securitization this quarter and that will be something between $400 million and $500 million and then we have another one queued up for the following quarter. And we continue to evaluate the population and we expect it -- I guess we expect the pace to pick up throughout the latter part of this year and then over the course of the next probably two to three years as delinquency pipelines clean up.

If you think about it, as a lot of these kind of delinquent loans have been sitting in these delinquent buckets for a long time and as those get liquidated by the servicers, the deals theoretically should be more callable.

Great. Thank you very much.

Jason Weaver, Sterne, Agee.

Good morning. Thanks for taking my question. First I wonder if you could just talk about if you think there is any relationship or how you think the pricing and availability of the MSR pipeline might evolve in response to changing monetary policy expectations?

I think the big thing when you think about MSRs, there is not a ton of servicers overall that have the ability to acquire critical mass from a lot of the large bank sellers. So as you think about that, a lot of what we do or a lot of what Nationstar does for example is dependent on the regulators in Washington.

So if a pool of $20 billion for example comes from Bank A, the folks that are going to be in the best position to buy that are going to be the large non-bank servicers that are well capitalized. And as you think about Nationstar, they are well capitalized and they are in a great position to continue to acquire MSRs.

Part of it is pricing and a lot of it has to do with who is really going to get approved by the regulators to acquire those agency MSRs. On the PLS side, it is a little bit different and where we have an edge is being that we are the largest capital provider to the servicing industry whether it be with Nationstar and/or Ocwen, we feel like we are in a great position to acquire whatever remaining PLS is out in the marketplace today.

So part of it is pricing but the other part I think that is probably more relevant is really the counterparty who is going to acquire any servicing and that is why having relationships with Nationstar is fantastic, having Ocwen come into our stable is great so we are pretty excited about what we think is future opportunities to acquire MSRs.

Okay. You when you mentioned long-term debt a few moments ago, was that in relation to -- are you looking at possibly doing a senior secured deal or is that something else?

We are evaluating our capital structure across everything and we continue to do that every day obviously. It is our desire to extend our maturities on all of our debt financing as long as possible. So we will continue to look at that whether it is a term loan, whatever that may be, we will continue to evaluate our capital structure. No guarantee how we are going to do things but we will evaluate what we think is best for our shareholders.

Fair enough. And just one more, you might have said something earlier about the opportunistic portfolio but is there anything you can share about anything on the horizon you are looking at doing there possibly replacing some of the run-off from the consumer loans?

We think based on the HLSS acquisition, the Company is now in a great place to execute on again the three core strategies. I don't think there is anything that is that interesting for us right now on the opportunistic side so we will continue to grow in the areas that we have grown in which are going to be MSRs, servicer advances, and we acquire more PLS and then non-agency securities as we own all the call rights.

Thank you for that color and thank you for taking my questions. Great quarter.

Jason Stewart, Compass Point.

Good morning, Mike. I wanted to just get your color on when you look at the collapses, the call rights, how you think about generically where the P&L will come from over time from the security side versus the back-end loan sale execution side?

It is both. We tried to give you guys an example on page 11 just how to think about things. I pointed out earlier that the securities we own, if you own securities that are between $0.70 and $0.80 and as the pipelines continue to clean up, the accretion of those securities from using a round number just to illustrate a purpose is from 75 to par depending upon how many securities you actually have.

And then as the clean loan portfolios, thinking about it this way, clean loan portfolios when we do securitizations based on the illustration on page 11 will show you a profit of approximately 5 points. So if you say okay, you are taking a pool of loans you called at par, your securitization will be something between 4 and 5 points depending upon how delinquent the population of loans within those securities that you are calling. That is really going to be the driver but in the meantime, we expect based on the $235 billion of call rights that our non-agency portfolios will likely grow over time.

So let me just ask it a little bit of a different way because I understand -- and you guys do a great job with the disclosure, the security side I think you have disclosed historically you have made $12 million on something like $1.4 billion of call rights through 2014. If we apply that to a prospective UPB of call rights you have, the number is just much higher than 2 -- I think what you said it was something like $2 a share. It is just much higher just on the call rights alone. I understand there is some differences but it seems to me like when you acquired the HLSS assets, part of the reason was you acquired them because you had this much larger portfolio of bonds to buy and on the front end that really increased the opportunity. I am just trying to understand perhaps where I'm not thinking about that the right way?

I think you are thinking about it the right way. The call rights, think about it this way, the call rights currently are $235 billion. There is going to be amortization to get to a 10% clean-up call or 10% factor on the underlying deals. So in our best case or our best guess-timate at this point, that $235 billion at the time of call will be between $100 billion and $125 billion.

If you think, if you use our assumption that we are going to make call it 2 points or 3 points on that $100 billion, that $100 billion then becomes $2 billion. So we are going to call the deal, that $100 billion times 2 points gives you $2 billion of earnings. Based on 198 million shares outstanding, the approximate addition to our earnings will be $2 per share. Does that help?

It is helpful. I think it is a great discussion and you never want to -- your sister company, NCT telegraphed their called rights on collapsing CDOs and I don't know how far you want to go on that but I will leave it there.

My other question was, Wes yesterday said on the (inaudible) call that the permanent capital vehicles will be between $12 billion and $15 billion of equity at the end of this year. That is his target. My question is how much do you think NRZ will be of that $12 billion to 15 billion?

I think the way that we are going to manage our Company, we are not just going to -- the $12 billion to $15 billion that Wes quoted is across the entire permanent capital universe and we clearly have a lot of different businesses around permanent capital as you know. The way that we are going to manage our Company is we are going to try to create sustainable earnings on the lowest levered Company that we can. I think initially when we fielded a ton of questions after we did the HLSS acquisition, our targeted -- and again this is our targeted pro forma based on the balance sheet the way that we see it today. And again there can be no guarantees is something between $2 per share on an annualized run rate.

That is the way that we are going to try to manage. We want to be able to be -- create sustainable earnings that you could count on quarter after quarter and that is the way that we are thinking about it. Where we go with the Company I think is going to be dependent upon our ability to acquire excess MSRs or one of our core business lines that we currently have on our balance sheet.

So there is no plan just to say okay, let's go raise equity I think is the short answer to your question.

I appreciate the color. That is helpful. Thank you.

Jason Deleeuw, Piper Jaffray.

Thanks and good morning and also just want to say congrats on closing the HLSS asset acquisition.

First question, just on the $64 billion of you UPB MSRs that you are going to close on or are committed to close on, are those mostly credit impaired assets?

Yes, I think almost all of those are some type of credit impaired whether it be high FICO, some loans that have already been modified. I mean low FICO, loans that have been modified or higher LTV securities and again some of those are still subject to approval because some of those are agency but we expect all those to close between this month and early third quarter.

Got it. And then just thinking about MSR acquisitions in the future, you have done it in conjunction with Nationstar and now you've got Ocwen as another servicer. But banks are as you point out moving MSRs off their balance sheet onto other balance sheet and I am just wondering if there are opportunities for NRZ to acquire MSRs directly maybe from banks or do some sort of financing arrangement where you wouldn't necessarily need another servicer to come along with you guys on that transaction? Is there any opportunity for that?

I think on the bank side the banks, once they agree to sell an MSR, they don't want to service it. As you think about the market, we would need to be a licensed seller servicer and we have no intention of being a servicer.

So the non-bank servicers would need to own that MSR on their balance sheet. One of the ways that we could do it is we could get licensed and then work with different servicers. I think for now the way that we are thinking about it, we are comfortable where we are, we are comfortable with our relationships with both Nationstar, Ocwen, you also saw in our presentation we have a relationship with SLS. So we have expanded our servicing partners. But while saying that, we don't intend on being a servicer. So the likelihood of a bank retaining servicing and then us being the capital provider is probably not likely.

Got it. And then on the excess MSRs and the mark that we had this quarter, they are very small relative to what we have seen from other companies this quarter. And I am just wondering if you can talk to -- I know because it is probably partly because it is the credit impaired assets but if you could just talk to the characteristics of your MSRs and why there hasn't been a lot of volatility in the mark to market of those that would just be helpful.

Sure. To give you a sense on our Fannie portfolio, our 12-month projections on our Fannie portfolio were approximately 11% CPR. They came in that 11 CPR.

On our PLS, our projections, our 12-month projection was 13.6 CPR and they came in at 12.5 CPR. So actually our projections from a speed perspective where we projected over the course of the past 12 months have been lower. The actual speeds have been lower than our projections. On a three-month basis for the quarter to give you a sense on our Fannie portfolio, our actual speeds were 10.8 CPR versus a projection of 11 and change.

On our Freddie portfolio, our speeds are 10 CPR versus a projection of approximately 10 CPR. Our PLS was actually 11.9 CPR versus a projection of 12.6. So overall what I'm trying to illustrate to you is that our CPR projections were one thing, our actual speeds were lower than our projections and that continues to bear fruit as our investment thesis in a lower rate environment has been to focus on legacy credit impaired MSRs. That is why we did not have any write-down really in the quarter.

Got it. When I think about because I think your MSRs given where the path of interest rates and the future over time, they are probably worth more than where you've got them marked, but what assumed pre-pays do you have in there when you mark them now? Like I'm trying to get a sense for let's say we do get rising rates over time, is there significant upside value that you can mark up those MSRs at?

The way that we think about it in a 50 basis point rising rate environment, we feel that our portfolio will increase something between $40 million and $50 million. On the HLSS side -- and that was the existing NRZ portfolio -- on the HLSS side being that these are credit sensitive, they won't go up as much but they are not going to really go down in a lower rate environment.

On the HLSS side, a 50 basis point selloff or actually rise in rates will contribute about another $35 million to the value of our MSRs. So if you think about it, any 50 basis point selloff the value of our portfolio we expect to go up something between $80 million and $100 million.

Got it. That is very helpful. And then the last question on the consumer loans, so there were no GAAP earnings. We just had the earnings run through the core number, is that how it is going to work from an accounting standpoint going forward?

So on a GAAP side what runs through is the cash that we received from the consumer loan so there was some cash that went through and was recorded as a gain now that we have no bases. And for the core, you are right, we continue to accrete the loans since the refinancing didn't generate a gain for corporate and the difference between those two is the net add back to core.

Good, all right. Thank you very much and congratulations.

Michael Kaye, Citigroup.

Good morning. Can you just give me some thoughts on the dividend going forward? Already the payout ratio seems kind of low $0.38 dividend versus $0.44 core. And should we expect to see a false step out to the full dividend run rate in Q2 or is it going to take some time to hit that post HLSS? Thanks.

Good morning. On the dividend, we will continue to pay out something close to 100% so as we go through the Company, the assets just boarded in early April. We will continue to evaluate our dividend policy but I think the way to think about it is we are going to pay out something between 95% and 100% to our shareholders.

Just looking ahead, is there any opportunity and interest in your part for purchasing more MSR assets from Ocwen? I believe they still have about a $46 billion UPB of additional PLS?

I think if the pricing works and we all come to an agreement, that works for us as a Company of course.

Okay, thank you.

(Operator Instructions). Ken Bruce, Bank of America.

Good morning. You have addressed a lot of potential questions and thank you for the enhanced disclosure. I guess there is a few things that still I'm trying to square up. I guess as you look at the excess MSR potential in the distressed loan arena, what market share do you see yourselves having and how might you go about extracting more of those servicing assets whether it be with an Ocwen or a Nationstar to essentially have the opportunity to acquire those?

The way that we continue to think about it and I'm not sure what page that slide is on, on the MSR side, as you think about the banks, the banks are basically service 75% of all MSRs, we expect that to continue toward 50%. The banks -- they will sell some may be some clean Ginnie Mae stuff but in general they are going to continue to shed non-core assets. We think the runway there is roughly $2.5 trillion of credit of credit impaired servicing. In today's market, that $2.5 trillion should give us a very good runway to continue to grow around the legacy side.

So I think there is plenty to do. As it relates to the overall market share we are not striving to be number one, we're trying to drive share obviously we are trying to drive value and results for our shareholders so it is hard to say we want to have 50% market share. So I think it is really dependent upon how we drive shareholder value.

Right. And I guess as you pointed out in your prepared remarks, a lot of what you are attempting to do here is to provide better transparency into your business so that we analysts and investors can gain some visibility around the business which goes to driving the lower yield on the stock. I presume that is what you meant, I don't expect you to be dropping your distribution so I assume you want the stock price to go up.

And for that to happen I think there needs to be better visibility. One of the things that the market has a challenge with is just understanding how the market from banks to non-banks happens. We have been talking about a $2 trillion to $3 trillion non-bank market for a while and obviously the industry has had some challenges here of late. So I think that is kind of part of the issue is just having some understanding how those assets migrate over so that you've got the opportunity to acquire them.

When I look at slide eight in terms of that market opportunity, it would seem to me that maybe some of these assets do end up being stuck at banks and to maybe to Jason's earlier point, any way to figure out how to finance the excess MSRs if they do end up residing on the bank balance sheet I think what would be an interesting opportunity for you all to pursue.

I guess maybe my other question and you spent a lot of time on call rights and I appreciate that, is there any way when you look at slide 10 or just think about how that opportunity manifests itself. Is there any way to think about the cadence of essentially the earnings recognition or however you want to articulate it, any way to think about how that happens over time. Because I think one of the challenges that Newcastle had is they had a huge opportunity to extract the hidden value in those similar type transactions on the CDO side but understanding the timing of that was always one of the challenges of the market and I'm hoping you might be able to provide some sense as to how the cadence would ultimately play out over the course of the next couple of years?

I think again, it is so hard because there is a lot of these loans as you know that are stuck in these securitizations as a result of what I would call the existing regulatory pressures that existed in the market whether that be loan city and judicial states where you couldn't liquidate the pipelines because of the hang up in the courts, etc.

I do think we are going to have some good success this year in that business. I think the bulk of the earnings power are really going to be in 2016, 2017 and 2018 and I am hopeful over time that we do figure out better ways to kind of -- obviously this is a servicer thing it is not NRZ thing because we are really just a capital provider and own assets. But I am hopeful that the servicers will figure out ways to liquidate these pipelines which will then make it feasible for us to call these securities.

So I think it's more going to be a 2016, 2017, 2018 kind of runway although we are going to have some good success this year is the way that we are thinking about it. And we are working on some different things that hopefully will bear fruit sooner rather than later but I think a lot of it depends on the pipelines cleaning up.

When you look at that, is it is more of a -- is the friction just because of all of the things that are going on at the state level or wherever the friction may lie or do you think there is sufficient incentive for these servicers to try to pursue those improvements in and of themselves?

I think the servicers will continue to service in accordance with what the PSAs tell them to do as well as in accordance with I think some of the settlements as you know. So it is not something where if you call the service and said I'm going to give you more money that they can liquidate a pipeline. I don't think it is related to that. They have to service according to certain guidelines and I think they continue to do that as well as in accordance with the different settlements that they have had with the various regulators.

So I think it is more on the servicing side, it is really not on our side. I don't think it is an economic thing. Obviously no servicer wants to continue to service delinquent loans because it costs them more money. So the quicker I think that the pipelines get liquidated I think the better it is for the entire industry.

Okay, great. Thank you very much and congrats on a successful quarter and a good transaction.

Thank you. There are no further questions at this time. Michael Nierenberg, I turn the call back over to you for closing remarks.

Terrific. Thanks everyone for your support and calling in and we look forward to catching you up over the next quarter. Have a great weekend. Thanks.

This concludes today's conference call. You may now disconnect.