Rithm Capital Corp (RITM) 2016 Q4 法說會逐字稿

Good morning. My name is Matthew and I'll be your conference operator today. At this time, I'd like to welcome everyone to the New Residential fourth quarter and full-year 2016 earnings call.

(Operator Instructions)

Thank you. Mandy Cheuk, you may begin.

Thank you, Matthew and good morning everyone. I would like to welcome you today to New Residential's fourth-quarter and full-year 2016 earnings call. Joining me here today are Michael Nierenberg, our CEO, and Nick Santoro, our CFO.

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

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

In addition, we will be discussing some non-GAAP financial measures during today's call. And the reconciliation of these measures to the most directly comparable GAAP measures can be found in the earnings supplement. Now I would like to turn the call over to Michael.

Thanks Mandy. Good morning, everyone, and thanks for joining us today. Some of this is old news obviously in light of our acquisition of the Citi MSRs and our equity rates, where we went through some of the numbers. However, we are extremely excited about the way that our Company is positioned now and the results that we had last year for the Company and for all of our shareholders.

Last year was a good year for us. It was obviously a good year for shareholders. We continue to execute on our core business plan, which is to focus on MSRs, Non-Agency securities with call rights, and servicer advances. Going forward, our strategy will be the same. I'll talk a little bit about servicer advances in a bit, as we've taken measures to protect the Company against rising interest rates as it relates to the servicer advance business that we have.

The way that we're set up, we have positioned our Company and our portfolios for the current market environment which should continue where we believe our portfolios should continue to perform extremely well. Last year, we had a very active year. We grew our Non-Agency portfolio by 200%.

We went from approximately $350 million at the end of 12/31/15 so a little bit north of, give or take, $1 billion of net investment value at the end of 2016. When you look at our portfolio today, based on mark-to-market, and we haven't realized this, we have an unrealized gain in our portfolio of approximately $130 million.

Our MSR portfolio for the year grew by $260 billion and s this includes the Citi announcement, again trying to stay very focused on our core businesses, thinking about the current rate environment, and how we view the future.

In our servicer advance segment of our business, we took all measures we could to lock in longer-term fixed-rate financing so we converted a lot of our LIBOR financing to fixed rate financing and we extended terms on those financings. Last year, we issued, for example, five-year term financings, which has been the first time in quite some time when anybody has been able to issue that around the servicer advance population.

So all in all, a very good year for the Company, for our shareholders, and now I'm going to refer to the supplement which has been posted online. If you look at page 2, clearly, a lot of numbers across the page but just to take you through some of the metrics, 2016, we had a 44 % total return.

Our stock price was up 29%. Our year-over-year growth in GAAP earnings was up 61%; our year-over-year growth in core earnings was up 11%; our ROE for 2016 was 17%. We deployed $1.5 billion of capital throughout the course of the year. Our book value increased by 7% and our lifetime dividends that we paid out for the Company are currently at $1.3 billion.

On the bottom left, if you take a look, we currently own either excess MSRs or MSRs on approximately $600 billion of MSRs. Based on our forecast for rates and the Street forecast for rates and believing that the Fed will likely go two or three times this year, this asset actually continues to perform extremely well.

We continue to execute around our call business; we currently have call rates on approximately $160 billion of the legacy Non-Agency market. We believe that to be about a third and we continue to expand our relationship with a diverse group of non-bank servicers, which now include Nationstar, PHH, Ditech, and Ocwen.

Page 3, our financial performance for the fourth quarter. We had GAAP net income of $225 million, or $0.90 per diluted share. Our core earnings were $155 million, or $0.62 per diluted share. We paid a fourth quarter dividend of $0.46 per common share. For the full year, our GAAP net income was $504 million, or $2.12 per diluted share. Our core earnings were $511 million, or $2.14 per diluted share; and our full-year dividend totaled $1.84 per common share.

Then on the bottom right, you can see we try to give you a comparison from 2015 to 2016. As you can see, we have thrown a couple numbers. GAAP net income for 2015 was $269 million; 2016, $504 million. Core earnings, $389 million for 2015 versus $511 million for 2016. And our dividends, we paid $355 million in 2015 versus $443 million in 2016.

Page 4, what we try to do here is show you our trajectory around our dividends and how we think about the business. Again, we've paid out $1.3 billion in total lifetime dividends since Q3 of 2013. We've taken on dividends from $0.35 to -- in the first quarter of 2017, we announced a dividend increase of $0.02. Currently, we are paying dividend of $0.48.

Page 5, taking you through 2016 and some subsequent highlights. During and after Q4, I mentioned we acquired $267 billion UPB of mortgage servicing rights. The approximate purchase price is $2.2 billion. Some of those numbers will amortize a little bit lower depending upon when we actually settle these transactions.

We purchased $72 billion of mortgage servicing rights from PHH, and we also purchased $97 billion of mortgage servicing rights from Citi. Again, both of those will settle in 2016, we believe the Citi MSR purchase, we are hopeful that, that will settle in the first quarter. We believe that the PHH MSR transaction will hopefully settle early in the second quarter.

On the servicer advance business, as I mentioned earlier, we continue to term out and extend maturities, converting our LIBOR financing to fixed rate financing. For example, in -- during the quarter, we refinanced $1.4 billion of floating rate debt with $500 million of three-year debt; $400 million of five-year debt; and then we also did another $500 million of three-year debt.

So we converted all this floating rate debt which was shorter-term maturities in nature to three, four, and five-year maturities. In Non-Agency securities with call rates in the fourth quarter, we executed clean-up calls on 14 different deals totaling $417 million. We did a Non-Agency securitization around our calls business for $274 million and a net equity, as I pointed out earlier, an increase from $374 million at the end of Q4 2015 to $960 million at the end of Q4 2016.

On the consumer side, our SpringCastle transaction, we completed a $1.7 billion refinancing of that in October 2016. We took our cost of funds from 4.5% to 3.6%; we released some liquidity. We lowered our effective expense rate by about $15 million on an annual basis. So again, that transaction continues to perform extremely well. And then, in Q1 of 2017, we announced our Citi deal. We raise $834 million to help fund that purchase and other things that we working on in our business.

Page 6, what we wanted to do is just take you through a walk on our balance sheet, including the current transactions that we announced. So if you take a look, the excess MSR bucket at the end of 12/31/16, these are all market values pre-debt. At the end of 12/31/16, we had $1.5 billion, or $1.6 billion of excess MSRs; $659 million of MSRs; our gross servicer advance business was $5.8 billion. I'll talk about that in a little bit, how advance balances have come down since we did the HLSS transaction two years ago.

Our residential securities for call rights are a little bit under $5 billion of residential loans, which we continue to acquire through our call transaction is a little bit under $1 billion. Our consumer loans, which are now grossed up on our balance sheet, are now at $1.8 billion; if you recall in 2016, we acquired more equity which caused us to gross up the entire transaction on our balance sheet and then we ended the quarter with $291 million of cash.

To the right side, the walk on the MSR portfolio, $1.6 billion of excess, and then if you look at our overall acquisition of MSRs, including debt, we are going to add approximately another $2.3 billion of MSRs which totals, give or take, about $3.8 million to $3.9 billion, as I pointed out earlier. That number will be lower as, by the time we settle the Citi and PHH transactions, we will have some amortization on that portfolio and then we did our equity raise in Q1 of 2017 which gives us a cash position of approximately $631 million gross and there are some reserves there so I'll explain that in a bit.

Page 7, again, this is just a walk on our cash. I think more relevant if you take the look to the right side of the page, cash on hand, 12/31/16, net of reserves, is $110 million. Proceeds from the equity raise which will -- which, again, these are net numbers of $239 million. The gross number was $834 million, but the net number, when you add that up after taking out reserves and future funding was $239 million.

Proceeds from our financing gives us investable liquidity of a little, give or take, around $400 million and then you add back the reserves and that's how you get to the $631 million number.

On page 8, this is our balance sheet today and again, these are net numbers now, inclusive of our projected financing in and around these asset classes. So as of 12/31 pro forma adjusted excess MSRs $931 million. That includes existing debt and some -- the anticipated debt financing. Our MSR bucket is a little bit under $1.2 billion; again, that's assuming roughly 50% LTV financing on MSR so you gross that number up.

So that number becomes roughly $2.2 billion plus the gross number on our excess MSRs; again, that brings it to, give or take, about $3.8 billion. Our servicer advances, the team has done a fantastic job financing that business. We currently have equity of only $69 million in that business. Our residential securities and call rights is $1.1 billion; on our residential and consumer loan portfolio is $324 million, and again, our cash number gross is $631 million.

Now, flip the page to 10, just to talk a little bit about our MSR portfolio and some of our recent purchases. If you take a look at the upper left side on the page, in Q4, we acquired roughly $65 billion of MSRs, again those are after amortization from both Walter and WCO. WCO is a -- was a REIT that was managed by Walter. We also acquired $13 billion of MSRs from FirstKey; we acquired some more flow and other things from Walter and another $5 billion.

And then the two big ones we announced, one at the end of December which is the PHH deal, it was about $70 billion and then we announced the Citi deal. We think that these MSR transactions, they are a little bit different from our legacy MSR transactions where we owned credit-impaired, very, very seasoned MSRs. These MSRs on the Citi and the PHH are seasoned. They're not credit impaired; they're very good MSRs. They will continue to perform extremely well in a rising rate environment and they also offer a great offset to our call strategy, which we will talk about a little bit.

Page 11 is our standard page. It just shows our portfolio, why it's different, looking at our net CPR so I'm going to -- I'll scan through that page.

Page 12, our servicer advance business. Just to give everybody a sense on that, current portfolio, roughly $5.9 billion. When we acquired the HLSS transaction in 2015, the amount of advances we had on our balance sheet at that time were a little bit south of $9 billion. Today, we have $5.9 billion. The offering portion of our servicer advance portfolio is $4.4 billion, so if you think about it, it's approximately 25% lower in two years.

The [nation's star] part of our advance business is $1.5 billion, which is down almost 50% from when we acquired that a couple of years ago. So overall, as we go forward, I do believe servicer advances balances will continue to come down. What this really means for our business is that this will make our callable transactions more callable as advances come down and delinquencies tend to trend lower. And we'll talk to our call business in a bit.

On page 12, if you just look to the right side of the page, I mentioned this a couple of times. We refinanced a bunch of our debt from floating rate financing to fixed rate financing, termed out debt from anywhere from three years to five years. And then on the left, you can see the metrics on our advance business.

Page 12, again, it just reiterates what we've done. Today, we have 98% of our advance debt that has maturities greater than one year and of that, roughly 96% of fixed rate. We think that's prudent in light of the rising rate environment that we are currently in and with the Fed in play likely in March and throughout the course of the year.

Page 14 is our standard slide. It shows the economics around our Non-Agency securities and how we -- when we call deals and how we think about that.

Page 15 talks about our Non-Agency securities and our call rights. We do believe over time that essentially each and every deal will get called. We think at the call -- as the call date, that number will be approximately between something between $90 billion and $120 billion, so using a round number of $100 billion averaging something. 2 points is shown on that is roughly $2 billion is the way that we think about it.

Again, delinquencies continue to come down and advances continue to come down. The key drivers on the right side of the page for us to call more deals. Our delinquencies coming down and servicer advances coming down.

16 is our consumer portfolio. Again, I don't think you're going to see a lot of activity in and around that now that we've termed it out. But quick metrics on that, initial investment was roughly $297 million; that includes our equity purchase of this year. We've received $583 million of distribution plus the current valuation of $208 million.

So $297 million, we have a profit of approximately $500 million, which is roughly a 92% return, so or IRR. A terrific transaction; obviously, we would like to do more of those. We'll keep our eyes out for that.

On 17, is just -- we did some surveys of the markets as we think about interest rates. Just to give you a couple of quick snippets. The 10-year treasury at the end of 2015 was 2.27%; at the end of 2016 was roughly 2.45%. If you think about it, we had periods during 2016, where the 10-year treasury touched, I believe, something around 1.50%.

So there is a lot of volatility throughout the course of the year. The real net of it is, the 10-year treasury was only up a little bit less than 20 basis points. Mortgage rates at the end of 2015 were 4.01%; at the end of 2016, were 4.32%. Non-Agency mortgage spreads continue to do well. I mentioned earlier we have unrealized gains in that portfolio of approximately $130 million. And then I think the real mover in 2016 versus 2015 was the S&P. S&P closed 2015 at 2,044; 2016 was 2,239.

Page 18 just talks a little bit -- we get asked this question quite a bit. How do we think about our portfolio in various interest rates? I'll just take you through the slide real quick. Excess MSRs and MSRs clearly in a higher interest rate will do extremely well. Our new purchases in MSRs again, they are seasoned, very clean MSRs that will rise in value should rates go up.

If they don't go up, it is a great offset to our call business because we issued fixed rate debt so if rates rallies, for example, our call population becomes worth more money. Lower interest rates, our excess will be fine. The newer production stuff will obviously suffer a little bit. Keep in mind that all these MSRs we have, we captured agreements with our servicers and we're able to bring in recapture -- third-party recapture agents in the event that recapture numbers are not to our liking.

Currently, on the Fannie/Freddie populations, our recapture percentages are about 30%. We underwrite this stuff somewhere between 25% and 30% so those numbers are very good. Non-Agency securities and call rights, higher interest rates, again, just to talk about that.

Almost all of our portfolios is floating rate in nature so you're going to get higher interest income on the bond portfolio. When we issue fixed rate securities, you will have lower income. So lower interest rates will be better for the issuance of fixed rate debt around that population.

Higher interest rates will be better for the bond portfolio, impacting negatively on the call rights stuff. Servicer advance, we locked in almost all of our financing. It's now fixed rate so we think that's neutral and the consumer portfolio, that's been outstanding quite some time and we think that's neutral. So overall, the portfolio we think is set up in a great, great way for the future, the way that the forward curve is looking. And we just need to execute around the message that we made.

Finally, the past -- the next couple of pages, 2016, very good year. Diversification of our servicing partners. We now have four plus some smaller ones. We continue to grow MSR portfolio. We've accelerated our call strategies.

During the year, we set out to be licensed in all 50 states. We're currently licensed in all 50 states which gives us the ability to acquire MSRs and work with different servicing partners and then I mentioned earlier, different metrics around returning equity, et cetera.

2017, looking forward, quite frankly, it's going to be more of the same, away from our servicer advance business and executing on our MSRs; executing on our call strategies. Those two things should keep us pretty busy throughout the course of the year and hopefully, pay off extremely well for shareholders. So, I will now turn the call back over to the operator. We will open it up for questions.

(Operator Instructions)

Your first question comes from the line of Bose George at KBW.

Got a couple of questions. First, in terms of earnings, it's a little hard to map. You guys did obviously a very strong $0.62 this quarter. Can you just talk about what you think the run rate earnings is and the $0.62, and what was the main driver of the beat over that run rate?

So the numbers, $0.04 is roughly a mark on our MSR portfolio or excess MSR portfolio. If you recall, going back, I think it was in 2015, when rates rallied a bunch. Our incentive income around our servicer advance business based on the forward curve came down. This quarter, we got the benefit because the forward curve rose. So as a result, we picked up roughly $0.07 or $0.08 on our servicer advance population. So the current run rate is, give or take, in and around $0.50-ish per quarter is the way to think about.

Okay great. Thanks.

Then in terms of rate sensitivity, that slide on page 18 is helpful. But I was wondering if you could quantify that a bit more. Like if rates fell 25 basis points or 50 basis points, what do you think that does to pro forma bulk, including the PHH and Citi MSRs?

I have the numbers; I don't have them in front of me. We could do this after the call. We haven't mapped out. But the way that your Citi MSRs will come down; your PHH MSRs will come down.

Keep in mind, Bose, a big part of the way that we think about this is our recapture provisions as well. So if we underwrite this between 25% and 30% overall from a recapture perspective, we're estimating that one of every three loans we'll recapture. A drop of 25 basis points, we believe is worth about 1% CPR on our overall new -- we'll call it the new production portfolio. But the offset between our new MSRs and our call population we think matches up extremely well. But I could take you more through more finer numbers after this call. I just don't have that one in front of me.

Okay, great. That's helpful.

Then second one, on the clean-up call, just with the rate move this quarter, presumably the value of the clean-up call option goes down. When we look at the slide that shows that opportunity, is the decline in value really that it gets pushed out so the IRR goes down but the set that you can call remains unchanged?

Yes, here's how we're thinking about it. Just for example, in the month of February, we called $900 million in loans. So we're going to be in the market shortly with a new term securitization around the call population. If you think about the non-Agency business and you look at spreads on non-Agency securities, just to give you a sense, from 12/31 of 2015, non-Agency spreads were approximately 295 basis points.

If you look at where we are today, for example, non-Agency spreads are 195 basis points. So overall, when you think about our population, the bond portfolio is up a fair amount. When we issue term securitizations, despite higher rates, you are going to be able to issue them at tighter spreads. So overall, the net impact of that is less than you would expect in a rising rate environment.

So spreads are tighter, right? So overall, your cost of funds will remain fairly constant than where we would've issued, let's say, a year ago because spreads are 100 basis points tighter. So if you think about short rates, the two-year treasury, for example, right now is 1.19%. A year ago, in 2015 at the end of the year, it was 1.05%. The difference is LIBOR was up a fair amount. But the net of that is tighter spreads on the non-Agency securities, higher cost of funds. The net impact is very minor, if anything at all.

Okay, great. Thank you.

You have a question from Michael Kaye with Citigroup.

Can you just talk about banks exiting mortgage servicing? We saw one happen, which you took advantage of. Do you see more banks exiting, or is that more of a one-off opportunity?

Quite frankly, I think the transfer of MSRs from the large banks to folks like us or other non-bank servicers, I think has kind of plated -- run its course, I think. I think what you're going to see, Michael, going forward in a rising rate environment, you should see some consolidation around the mortgage banking industry, and gain on sale with the government programs now running off will likely be less.

So I think there could be some opportunities from some of the smaller mortgage bankers for us to work with them. You saw that in a couple of our transactions in Q4, as well as in Q1 of this year. So I think that will be our source of product as we go forward.

Great. Just one other quick question. During the quarter, you grew transactions. You announced growing your MSR portfolio pretty massively. I think it was over $250 billion worth of recent announcements. We've seen other players get tripped up growing too big, too fast.

Could you just talk about what you're doing inside New Resi in terms of compliance, getting ready to monitor all of these servicing partners, and also your discussions with the regulators? Thank you.

Yes, that's a great question. For us, we have a very robust compliance group here at Fortress. We've also added a number of employees in and around the NRZ platform on the compliance front. We are in constant dialogue with all of our friends in DC, from FHFA to Fannie and Freddie, around servicing transfers.

I think a couple of very important things to point out. The PHH transaction, there's no transfer of MSRs off the PHH platform. So effectively for us, it's just a pure economic ownership transfer from PHH to us.

On the Citi transaction, the initial settlement of that transaction will be purely economic. Then Nationstar will likely be the subservicer. That will occur over the course of the next year.

So our big thing is making sure that we work closely with our subservicers. We've pointed out over the course of the past couple of years, we felt it was very important to establish relationships with a number of servicers. We've done that.

We've also hired third-party contractors, for example. There's a company called Navigant, who was basically a full-time service provider to us around the compliance functions. So we've built it out in a very robust fashion. We will continue to do that. There's constant dialogue with all of our friends, again, whether it be from a regulatory standpoint, as well as the folks at Fannie and Freddie, on our business.

All right. (multiple speakers) Thanks very much. Thank you.

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

I see that you extended out your financing for a lot of the portfolio. Is there an eye towards extending it out even further, mainly in the three- to four-year kind of range?

I think, based on the forward curve, if we could extend our maturities and term out -- whether it be our advance business or anything else-- we will continue to do that. It is our expectation that the Fed is going to go at least 2 times, maybe as many as 3. Again, that's purely based on where we see the economy and listening to some of our market-oriented friends as well. So protecting ourselves against higher interest rates is something that we've taken very seriously.

The other part of that is we do have some strategic hedges around our debt, which should protect us in a higher rate environment. So when you look at some of our GAAP numbers, even throughout the course of Q4, we had a little bit of lift around that. So, yes, locking in fixed-rate financing is very, very important to us. Term financing is better because it gives us the ability to focus on other parts of our business.

Okay thank you. Then, in terms of your resi loan portfolio, especially those that you get when you collapse the call rights, how do we think about kind of how you're thinking about that portfolio in terms of holding those loans? Do you look to monetize them? What do you do with those?

Well, there are a couple of parts. One is when we acquire these transactions, there's usually a percentage of real estate owned that are not non-performing, such as houses effectively. We try to get those out the door as quick as possible. Now that we've accelerated our call strategy, I pointed out we're calling $900 million this quarter. So think about that versus our typical run rate of $300 million.

We're going to end up growing that, so we've hired another team. We've added another three resources to that business to get homes out the door, working with property managers, going to see houses ourselves. It's a pretty labor-intensive business.

On the non-performing loan side, we work with our servicing partners to try to get, whether we do loan mods for people or whether we do principal forgiveness. We do anything and everything we can to help the consumer stay in their home and do loan modifications. That's a really important thing. Once we get those performing, then we can either secure [tight] those or sell off the loans to the marketplace. So that's really our strategy there.

We have done a couple one-off transactions, where we've acquired loans. Quite frankly, right now, where loans are trading, we don't believe it's as fruitful for our shareholders as other areas that we can deploy capital. So it will grow, and so will the team around it. So again, loan modifications, doing everything we can to help consumers stay in their homes. Then REO, getting that out the door as quick as possible.

Okay. Thanks so much.

You have a question from Jason Weaver with WDB Securities.

Given the rates and also the answer to a prior question there, I see that the advance rates on the Citi portfolio are somewhat higher. Can you talk about what you see as appropriate leverage in here and where you see that moving?

Yes, I think we have set out -- we've done a couple of term MSR notes, particularly on the PLS, where I believe our advance rates are something around 60% or 65%. We did that in, I believe it was 2014 or 2015. On the Citi portfolio and other kind of new-production portfolios, we would like to cap, at least for now, our MSR financing at 50%. We don't want to run a hugely levered business. Just to give you a sense on leverage ratios, after putting on MSR financing of about 50%, should be something between 1.7 and 1.8 overall.

So when we think about leveraging our portfolio, we want to run the lowest levered business and obviously provide the best returns as possible for our shareholders. So I don't believe -- we don't see it going above 50% right now.

Fair enough. Okay, and just one more. I wonder if you could talk about what, if any, changes you see for NRZ and the manager as a result of the FIG/SoftBank deal?

There is no change. I think the NRZ is an important part of obviously Fortress. But as a result of this acquisition by SoftBank, there's a lot of funds there that could be interesting things to do. But for NRZ, it is just business as usual. There is no change at all.

Fair enough. Thanks again.

Your next question comes from the line of Brock Vandervliet with Nomura Securities.

I just wanted to go back to the question that Bose asked in terms of trying to better dimension some of your operating or your core performance. The servicing revenue that we see is broken out, listed on page 27 of the deck, $118 million. Does that include those marks that you talked about, or is that just the operating servicing fee?

I'm sorry, the $118 million --

Where you see that, Brock?

Yes, the $118 million servicing revenue on slide 27.

Brock, that includes ARP from the (inaudible) on our portfolio.

That does, okay. What would you consider to be the core operating revs there ex marks?

The mark that flowed through for the quarter was approximately $104 million.

Okay, got it. All right. That makes sense much more so with what we've modeled.

Mike, you called out, I think really for the first time, obviously the $900 million called is a huge number. But you called that linkage with lower servicing advances and a greater ability to execute these calls. Could you just kind of review that relationship?

Sure, so as servicer advances and delinquencies come down, the call population becomes more economical. I pointed out earlier that when we first acquired the HLSS advances, or the Ocwen advances, couple that with the Nationstar advances, I believe that the amount of that portfolio was something between $8 billion and $9 billion. It's currently $5.9 billion.

So when you think about the overall cost around servicer advances, when we call a transaction, we pay off all these advances at par. If you don't have to pay them off at par, the deals become more economical. So the more servicer advances that are outstanding, the less economical those deals are.

Got it. Okay. All right. Thanks for taking my questions.

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

A follow-up on the question about financing for the newer MSR portfolios. Can you talk a little bit about what financing options are out there for new MSRs, in terms of issuing notes versus a warehouse line or a secured debt from a bank counterparty? Also, how much depth do you see in that financing market? Thanks.

I'll take the last part first. The amount of depth is pretty encouraging, and a lot of that comes from our bank friends. We closed on a facility last week that was a very large one. I think that there are a number of banks that want to work with us and provide MSR financing.

Our goal, quite frankly, is to get lower cost of financing obviously and do something around the MSR asset that's more term in nature. For example, tomorrow, there's a group of us that are going down to Washington to meet with FHFA to discuss different ways that we can potentially improve the financing market around the MSR asset class. A lot of that has to do with how do banks and others get comfortable around being first in the waterfall around secured liens and not be subordinate to others.

So we're working hard at that. The depth is very large. Typical cost of funds has been something around LIBOR+400 area. We've been able to go out a little bit more term in nature. But ultimately, what we would like to do is solve for a longer-term non-mark-to-market lower cost of funds facility, which would help obviously drive more earnings around the asset class.

Got it. Okay, and then a question on the securities portfolio. You mentioned that spreads had come in at a decent amount over the last year and even a decent amount into the first quarter here. Are you guys going to still be looking to add to that portfolio meaningfully? Does it continue to make sense with tighter spreads, specifically on deals if you guys control the call rates on those?

If, in fact, it enables us to call the transactions, we will continue to deploy capital there, even though yields are lower. This is no secret because we've been focused on this, and I've been mentioned this on pretty much every earnings call. We're doing all we can to accelerate call rights.

Being able to grow from $300 million last quarter or whatever, give or take, to $900 million this quarter. As we look at the future, we are going to be more aggressive. Advances are coming down, so economics with tighter spreads continue to improve. So to the extent that there are lower dollar price bonds that enable us to call these transactions, we will continue to deploy capital there.

It's less interesting, quite frankly, today than it's been; and the competition is pretty vast out there. A lot of the large money managers continue to deploy a lot of capital there. But we'll continue to search for opportunities there.

Great, thank you.

Your next question comes in line of Fred Small with Compass Research.

I don't know if it came up on any of the questions before on the core earnings, but can you say or break out how much of core earnings were related to the call rights in the fourth quarter?

That was $0.04 came through from accretion from collapses for core.

Okay, and when you've disclosed it before, that's sort of where it's been. Mike talked about the run rate before. Is that fairly linear as the UPB goes up? I know there are sort of some puts and takes on how it gets recognized versus the amount of UPB.

Yes, it varies. Certain deals, we're able to make more money. It depends on how many bonds we have at discounts on other deals. But the one thing I want to point out. The non-performing loan sector continues to perform extremely well, right? There's a lot of capital that's being deployed there, as well as into the REIT performing loan sector.

Part of this is, if you think about these large bank settlements that have been agreed to with different regulatory entities, there's a bunch of principal forgiveness or loan modifications that need to happen as a result of that. What's that done effectively is it creates, for us, when you think about it -- if we recalled every loan we took today, it's between $30 billion and $40 billion because that's the amount that's in the appropriate factor date.

So think about this way. We control roughly $40 billion of loans, with spreads doing better on the non-performing loans space and spreads doing better on the non-Agency space. Effectively, it will enable us to call more transactions. I think that's part of the driver in our ability to do more here.

The bigger strategy continues to be if we work with industry participants and figure out more of a global thing. I think that would be a much better thing. The team here has had conversations with the rating agencies and with bond trustees in and around trying to figure out different ways that we can accelerate these call timelines.

But some of the deals, as it comes back to the economics, will vary. Whether you make 1 point, 2 points, 5 points, it all depends on how much is delinquent and how much is not delinquent and how many bonds you have, et cetera.

Got it. Thanks and then just one follow-up on that -- well, two follow-ups maybe.

One, is there an average level of advances or delinquencies, however you want to think about it, where the economics start to make more sense on a specific deal or on a specific group of deals?

Again, a big part of it is the bond portfolio because we have bonds that we own on a weighted average price of, give or take, $0.70-odd. That is a big driver, as you think about accretion in the quarter, in any particular quarter. As you think about the deals, it's hard to pinpoint exactly.

I think we had that slide that shows if delinquencies go down by 2% and advance balances go down by X%, we will be able to call a certain amount more. I do think we're going to be active. We're currently trying to figure out if we can work with some of the banks that have agreed on some of these settlements because, again, we control a population of today, $30 billion to $40 billion of loans. I don't think anybody controls that kind of population where we can work with third parties on. So it's going to vary.

Okay and just a follow-up on that. Just on average, what percentage of underlying bonds in the deals that you've called to date or in the fourth quarter does NRZ own?

On every deal, we typically own bonds that we call because, again, that helps us call economics because there's delinquencies. I'd have to get back to you. Maybe we can do a follow-up on that and what we did, for example, in the fourth quarter in the deals. We can show you how many bonds we own. We can go back to that. That will be a follow-up.

Okay, great. Thanks a lot.

Your next question comes from the line of Ken Bruce with Bank of America.

My question relates to, I guess, you touched on a couple different times the issue on advances and trying to -- you expect that to come down over time. Can you remind us or maybe kind of address what you believe you can do with servicers to try to help to expedite getting those advanced dollars down? You touched on the delinquencies as being a key part of that, but can you kind of remind us what they can do?

Then maybe separately, does the situation with Ocwen, does it look any better today now that it sounds like they are working through some of the regulatory issues that they have?

Okay, first question. On the servicer advances, we don't control that part of the business. The servicer itself, whether it be Ocwen or Nationstar, so they control their own advances. In the specific pooling and servicing agreements, they have certain things that they could do to either call back advances or not.

Keep in mind as delinquencies -- over time, these deals were issued between 2003 and 2007, call it. So let's say a weighted average data issuance, just for kicks, is 2005. These deals are outstanding for 12 years now. So you'd think over time, the delinquencies that come down. As delinquencies come down or loans get liquidated, advance balances come down. I think that will be a bigger driver going forward versus just the servicer having the ability to call back advances.

Clearly, they will do so because it costs them money to have advances outstanding, meaning Ocwen and NationStar. But I think for both companies, the language that's in the pooling and servicing agreement is how they service their loans.

For us, we don't really have influence on that. Obviously, we always want to make sure that advance balances are as low as possible. But they have to service according to the guide.

As it relates to Ocwen and their financial health, quite frankly, we are thrilled for them. We have a very good working relationship with Ocwen. Having Ocwen healthy, I think, is a very important thing for the industry; I really do.

More is better; there's not that many folks that are out there. We have relationships with kind of the big four. But we're very happy for them. I would hope over time, we can continue to do more business with them.

Right, maybe just on the first point. I think back -- this is a little bit of a dated question and just in terms of timing. You kind of identified or highlighted that there needed to be some industry issues resolved to help expedite getting the advance balances down. Is there any update on that, or is there anything that you can do to kind of, again, try to work on that as a large piece of your balance sheet?

Yes, a number of our team have gone down and met with the rating agencies, met with the bond trustees, had extensive conversations with counsel. So we continue to work on that. There have been a couple of deals over the course of the past year where which the call dates have been modified.

So we're going to continue down that path. I don't think it's a dead end by any means. But it's something that there continues to be a lot of work and will be a big focus in 2017 for us.

Okay, thanks, and appreciate all the information you provided in the supplement and good quarter. Thanks again.

There are no further questions at this time. I'll turn the call back over to the presenters.

Well, thanks again, everyone, for all of your support. We appreciate it. 2017, hopefully, will be a very good year for all of you and all of our shareholders. So we'll continue to do all we can to execute around our business. Thanks again. Bye-bye.

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