New Residential sees potential in MSRs, caliber deal to gasoline progress

New Residential Investment Corp. reported growth in the underwriting and services segments in the second quarter and expects MSRs and residential investments along with the recent acquisition of Caliber to be profitable in the quarters ahead.

The New York-based REIT announced in its conference call on Thursday net income of $ 121.3 million for the second quarter, compared to a net loss of $ 8.9 million for the same COVID-hit quarter last year. For the first quarter of this year, the company's net income was $ 277.6 million.

With the portfolio of recently acquired Caliber Home Loans largely complementing NewRez's New Residential lending business, after the transaction closed in the third quarter, the company's executives were optimistic about the future outlook, particularly on lending.

“There is no overlap in the retail business and the JV business. From our point of view, this is 100% value-adding. In business (directly to consumers) it's the same. They manage their service portfolio and we manage our service portfolio, ”said Baron Silverstein, President of NewRez. "And then look at the third-party channels – there is very limited overlap based on our analysis and that was actually a big pleasant surprise when we looked at both third-party channels about the profitable nature of the business."

New Residential's underwriting business posted net income of $ 53.1 million compared to $ 151.3 million in the first quarter. Origination-funded production at NewRez was $ 23.5 billion in unpaid balances, down 14% from the previous quarter and 184% year over year. The profit-on-sale margin for the second quarter decreased to 1.31% from 1.43% in the first quarter.

The company also reported net income of $ 24.2 million in services, up slightly from the previous quarter's $ 23.7 million. The company's unpaid credit service portfolio grew to $ 305.9 billion, unchanged for the quarter, but 10% more than in the second quarter of last year.

The quarterly fortunes of other New Residential divisions were mixed. The residential securities and call rights business posted net income of $ 124.7 million and recovered from a net loss of $ 234.9 million in the first quarter.

However, the MSR and Servicer Advances segment posted a net loss of $ 206.3 million, compared to a profit of $ 292.1 million at the end of the first quarter. New Residential's MSR portfolio as of June 30 totaled $ 489 billion. The average rate of newly created MSRs was 2.96% compared to 2.79% in the previous quarter.

Despite the loss of the segment, New Residential saw solid future potential for its MSR business to increase earnings.

"When we look at the operational side, we continue to look for opportunities and see ourselves as opportunistic investment investors in the MSR portfolio," said Michael Kidneyberg, President and CEO of New Residential.

"We believe that if and when rates go up – and we believe they will go up – we have significant upside opportunities that will help drive higher book value, more cash flow and higher net core earnings in the future," said he.

In the home loan segment, the company posted net income of $ 165.2 million, compared to $ 89.9 million in the previous quarter.

New Residential has big plans in the single family home market including a new brand due to be unveiled in the coming days. New Residential is targeting $ 5 billion acquisitions in the SFR sector over the next five years, Kidneyberg said.

“We have acquired apartments and currently have 1,400 apartments. Looking ahead, we intend to really grow this business and have hired a great leadership and management team that we will be announcing in the coming week, ”he said.

New Residential's drive to diversify its offerings positions it well, noted Eric Hagen, director and analyst, mortgage and specialty finance at BTIG, as it could help "smooth out the volatility of mortgage lending."

In a research note, he said, “The company mentioned that the master plan is to eventually have a menu of potential products and connection sources (beyond maintenance and reclamation) to serve the 2.4 million households after the caliber deal is closed to offer in its service portfolio is complete. It is probably too early to place any significant value on this broader opportunity, but something remarkable. "

In line with the plan, NewRez recently launched marketing efforts to promote its variable rate products.

On the conference call for the second quarter, New Residential also reported earnings of $ 0.31 per diluted share, which is in line with analysts' estimates. Earnings per share were $ 0.34 for both the most recent quarter and the same period last year.

The company's share value rose immediately after the Thursday morning call, opening at $ 9.65, up 1.9% from the previous day's closing price, and ending the session at $ 9.87.

With New Residential's recent moves, Kidneyberg saw the company poised for further growth, regardless of how the markets might develop in the coming months.

“Announcing the Caliber acquisition, which we aim to complete earlier this quarter, will allow us to increase our recovery rates and, in any event, generate higher returns. If rates go up significantly, our MSR portfolio will grow pretty dramatically, ”he said.

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