Good day, welcome to the New Residential second quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Kaitlyn Mauritz, Investor Relations. Please go ahead.
Great. Thank you, Betsy, and good morning, everyone. I'd like to thank you for joining us today for the New Residential second quarter 2021 earnings call. Joining me here today are Michael Nierenberg, Chairman, CEO, and President of New Residential. Nick Santoro, our Chief Financial Officer. Bruce Williams, CEO of Newrez, and Baron Silverstein, President of Newrez. Throughout the call this morning, we are going to reference the earnings supplement that was posted to the New Residential website this morning. If you have not already done so, I'd encourage you to download the presentation now.
Before I turn the call over to Michael, I'd like to point out that certain statements today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. I'd encourage you to review the disclaimers in our press release and earnings 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'll be discussing some non-GAAP financial measures during today's call.
A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings supplement. With that, I'll turn the call over to Michael.
Thanks, Kait. Good morning, everyone, and thanks for joining us. The second quarter for our company was a very good one. While the markets are challenging, we maintained book value and created stable earnings. When you think about our actual book value, it grew quarter-over-quarter before our capital raise related to the Caliber purchase. Our core earnings were in line with Q1, taking into account $0.03 in dilution. If you take away the dilution, our core earnings were actually $0.34. I feel very strongly that our company's positioned extremely well for all interest rate environments.
The Caliber acquisition, which we announced early in the quarter, is a game changer for our company and quite frankly, the industry. We are now in a position to compete against anybody. We will be able to offer many different products to homeowners across all of our channels, further helping with the dream of homeownership. The excellent leadership of both companies, the personnel of both companies, the technology on the Caliber side, the sheer scale of our business will enable us to drive results for shareholders for years to come.
While we believe that interest rates will rise, to the extent they rise slowly or stay around these levels, our production machine, coupled with the excellent recapture rates in the combined company, will enable us to grow our portfolio of MSRs. We are super excited about our operating business. On the investment portfolio side, the team continued to do a great job. Our financing business has never been better. We have essentially moved most, if not all of our financing away from daily mark-to-market other than agency MBS.
Our call business is back to pre-COVID levels. Our EBO business continues to grow. Essentially going forward with this level of rates, we will focus on our own, what I would call proprietary portfolios, call rights, EBOs, and MSRs. We will remain patient on capital deployment with this level of rates and where credit spreads are in the markets today, seeking to deploy capital opportunistically. On the single-family rental business, we have been acquiring homes and currently have 1,400 homes.
Looking forward, we intend to really grow this business and have hired a great leader and management team that we will announce in the upcoming weeks. Regarding our macro view, the strong economy will force the Fed's hand at some point. We should see higher rates ahead. As mentioned before, we are ready for anything. Should we stay here, our operating business will create higher earnings. The signals from Chairman Powell and the committee yesterday are that while the economy has improved and they will maintain asset purchases, the clock on tapering has begun.
Regarding our earnings and our stock price, we feel very confident on our ability to maintain and drive higher earnings in the future through a combination of our operating companies and investment business lines. While our stock price has taken a hit in recent weeks, our book value currently at $11.27 after our capital raise with our earnings potential will hopefully help our equity right itself. I'll now refer to the supplement which has been published online. I'm going to start with page three.
When you think about our company today, going back in time, we've paid $3.7 billion in dividends since inception. Current book equity, $6.1 billion. Shareholder return, 92% since inception, and a market cap of approximately $5 billion. On the investment portfolio side, we have $25 billion in assets, and we are the largest non-bank owner of mortgage servicing rights. On our mortgage company, and these numbers are specific to Newrez only, during Q2, we did $23.5 billion in origination, pre-tax income of $75.4 million, and we maintain our status as a top 10 non-bank mortgage originator.
Our servicing portfolio, $305 billion. Pre-tax income, $32.3 million. Again, the same, we maintain our status as a top 10 non-bank mortgage servicer. Page four in New Residential. How do we set ourself apart? I'd like everybody to think of us as an investment manager with complementary operating businesses. What does that mean? When we think about our portfolios, we have call rights. We have our MSR portfolios. We have EBOs, which are linked to our mortgage company and our MSR portfolios.
When we look at the operating side, we continue to hunt for opportunities and think about ourselves as opportunistic investors. On the MSR portfolio, we believe that when and if rates rise, and we do believe they will rise, we have significant upside opportunity, which will help drive higher book value, more cash flow, and net higher core earnings as we go forward. Our balance sheet has never been stronger. We have plenty of cash, plenty of liquidity, and when we think about the Caliber purchase, we expect to end after that purchase with about $1.1 billion of cash and liquidity and growing.
When we think about our ability to create new investments, think about the operating machine. We'll likely be a top three or four mortgage originator in the country with the combination of Newrez and Caliber. When you think about non-QM or other products, we just recently announced we're rolling out ARM products to homeowners. We believe that we can create whatever products that will help homeowners and help drive higher earnings for our balance sheet. Our diversified portfolio of income-generating business and assets, again, will further add to our ability to create earnings as we go forward.
When we look at our track record, our track record of delivering returns to shareholders is, I pointed out before, 92% since inception. Page 5, our financial highlights for the quarter. GAAP net income, $121 million or $0.26 per diluted share. Again, this reflects a dilution of $0.03 from the equity offering that we did to fund the Caliber purchase. Essentially, you could think of that as roughly $0.29. Core earnings, $146.6 million or $0.31 per diluted share. Same. Think about it as $0.34 per diluted share, pre the equity offering.
Common stock dividend, $0.20, consistent with where we were, 7.6% dividend yield as of the end of June. Cash on hand at the end of June, $956 million. Again, net equity of a little bit over $6 billion. When you look at book value. Our book value today, $11.27. That reflects dilution from the equity issuance of $0.16. That would put you at $11.43 versus prior quarter at $11.35. Our total economic return for the quarter, 1.1%. When we look at our equity offering to fund the Caliber purchase, we raised $522 million in April. Page six is just a simple walk on book value.
Again, $11.43 pre-capital raise, $11.27 post-capital raise. Page seven. How do we think about our results? I think the company today is positioned to perform in any rate environment. The announcement of the Caliber acquisition, which we hope to close early this quarter, will enable us to originate, expand our recapture percentage, and drive higher earnings in any rate environment. If rates rise significantly, our MSR portfolio is poised to gain pretty dramatically. When we look at that in the quarter, we deployed $1.1 billion in our call strategies and EBO strategies in our loan business.
Our balance sheet, daily mark-to-market exposure stands at just 1% of our total portfolio. On the Newrez side, we increased our refinance recapture rates to 40%. That's up from roughly 28% the previous quarter. Our direct-to-consumer channel, while the gain is modest, we actually had a gain in the quarter despite the fact that rates backed up in Q2. Our call rate strategy, which we saw the highest amount of call rights collapses in the quarter since Q4 of 2019. We called $666 million in collateral.
In our MSR portfolio, we continue to shift from bank financing and mark-to-market to non-mark-to-market and in the capital markets. Our current MSR financing profile is at 71%. Again, all of these numbers are specific to NRZ and Newrez. Page nine, the Caliber acquisition. How are we paying for it? As I pointed out earlier, we expect to have $1.1 billion of cash and liquidity after funding the acquisition. We're paying $1.675 billion to purchase Caliber. The funds are as follows: cash and liquidity, including the proceeds from our April equity raise.
Equity from the sale of agency securities, which has already occurred. Then from Caliber has cash and liquidity. There'll be a dividend out from Caliber to Lone Star, the parent, and that will result in a reduction of both the purchase price and the cash and liquidity at closing that's on Caliber's balance sheet. Again, we expect to end post that acquisition with $1.1 billion of cash and liquidity. Page 10. How do we think about the combined company? 2021 projections, $173 billion of origination. That is the combined company. Our total servicing portfolio, a little bit under $500 billion.
Here's where we think we're going to see some real game-changing results for our company. When you look at the upper right side of this slide and you look at the retail JV and direct-to-consumer, that it will be roughly 50% of our overall production. When you think about gain on sale margins and compare retail and direct-to-consumer to the correspondent and wholesale channel. We should see significant lift in P&L as we go forward and continue to grow those channels. We think about our recapture opportunity, again, more customers. Caliber's recapture numbers have been terrific.
The recapture numbers on the Newrez side, as I pointed out earlier, went from 28% to 40%. All in all, great results. As we drive more recapture through the system, we're going to see higher earnings, more cash flow from our MSR portfolio, and more customer retention. Page 11. The combined platform, 3.2 million customers in a full MSR portfolio. 700 direct-to-consumer loan officers. 1,700+ retail loan consultants. 540 retail branches. 5,000 wholesale broker partners. 900 correspondent lenders and 60 third-party servicing clients. We have it all. We just have to execute once we close this deal.
Page 12. Synergies from the combination of the two companies. I'm not going to go through every bullet here, but the way to really think about this is, 1, on a revenue side, we're going to have increased volumes. We should have economies of scale. I keep harping on the improved recapture, which is going to lead to more cash flow and more earnings. From a cost perspective, as we drive more, what I would call digitization, and we drive more technology through our entire system. The team at Caliber from Sanjiv and others around the technology side have done a really good job.
We're really excited about the prospects around the Caliber technology platform. We will implement that across our entire company. As we go forward, we think we're going to see significant gains from a technology standpoint. Clearly, we all have a lot of work to do around that front. Capital. We will improve the cost of funds on a lot of the financing stuff that's done on both sides. From a capital market standpoint, I think we're second to none in our ability to execute, and we also have diversified sources of capital. Strategy.
Again, we're going to expand our product offerings. We're going to cross-sell across our customer base. We think we have untapped opportunities in data and analytics in how we think about our customer base. Page 13. Market share opportunity. The one thing I want to point out here, while we all talk about volumes in the market, I think the thing to really highlight here is the bottom right side of the page. As we go through a higher rate environment, and I pointed out earlier, we think the combined company in 2021 will do roughly $170 billion. Think about it this way.
If we did an extra 1% in market share, and it's a large market, that would add $36 billion in production. If you think about $36 billion in production, and if we have a product mix of roughly 50% between retail and JV, and you think about the margins there, the net-net of that is just going to add more earnings to our company. Again, super excited to gain market share. Again, we have everything we need at this point. Page 14 just talks about our friends and peers on the Street in the business.
If you look at the middle column, when you talk about product mix and you talk about products that we're currently doing, and you think about servicing and special servicing and ancillary services and being a REIT, we have it all. Now it's going to be up to us to execute, drive higher earnings for shareholders, and get that stock price up. Page 15. I'm not going to spend a ton of time on this. Similar in nature to what I pointed out before. Our platform, end-to-end mortgage platform, we have a lot of work to do.
The Caliber side as we think about the digital platform, again, a great job there that will be implemented and we'll continue to expand on that. We think about our Customer for Life strategy, very important. How do we retain our customers? We're going to have to drive higher recapture rates and have customer service that's second to none. Technology. Continued investments in technology will help grow our business from a growth standpoint and a profitability standpoint. Page 17. Our portfolio, our investment portfolio.
A couple of things as we rip through this. One, leading mortgage originator, not going to spend a lot more time there. Call rights. We still have $80 billion of call rights. Think about this. We have proprietary call rights on $80 billion of the legacy non-agency market. Nobody has that. Our Ginnie Mae EBO opportunity. We have a $50 billion portfolio of Ginnie Mae collateral. There'll be more ability to drive earnings through our EBO business, and we also are looking from the investment side to source more EBOs in the market.
I mentioned before our single-family rental strategy. Currently have 1,400 homes. Going to have a great announcement in a couple of weeks on a new management team that's going to run that. We're going to target $5 billion in acquisitions over the next five years. From a financing perspective, again, I think we're second to none as we think about our capital markets and our ability to finance our balance sheets. From an investment standpoint, page 18. In the quarter and beyond the quarter. Called $666 million, as I mentioned before, in legacy non-agency deals.
During the quarter, we purchased $650 million of agency securities and $241 million of EBOs. We securitized $271 million of residential loans. We grew our SFR portfolio by 600 units with an average cap rate of 5.2%. Post Q2, we sold $5.4 billion of agency securities, and we sold $880 million of residential loans. Our MSR portfolio on page 19 totaled, as I pointed out earlier, $490 billion at the end of June. 100% of our MSR financings are non-daily mark-to-market. On our new origination. New origination during the quarter was 2.96% compared to 2.79% during Q1.
When you think about this, what we are trying to articulate here is as our portfolio changes over time, yes, this WAC is a little bit higher than the 279 during Q1. As we believe rates will rise, the desire of homeowners to refinance these lower interest rates will be lower and lower, again, leading to more cash flow, slowing slower speeds and higher earnings over time. On the servicing portfolio, currently 55% of the NRZ servicing portfolio is being serviced at Newrez or SMS. Keep in mind, we have third-party relationships with our friends at Cooper, LoanCare, and a couple others.
We also believe, again, that recapture rates slowing speeds will lead to further gains and cash flow in our MSR portfolio. Page 20 is really just a summary of our MSR portfolio and how we think about our financing.
It's currently at 71% in the capital markets. We priced seven securitizations since the dark days of COVID in March of 2020. 21. As you think about our MSR portfolio and our origination platform, improving recapture rates. Have a look at the bottom right side of the page. A change, a 10% change. Actually, let's start with a 5% change. A 5% change in recapture rates on our portfolio will lead to a change in market value of 4% or $0.02 in earnings per common share.
Clearly, a huge focus on recapture, huge focus on data and analytics, huge focus on what we're doing on the digital side to drive higher recapture and again, more earnings for shareholders. Page 22, our call rights business . Again, I'm not going to beat a dead horse here. Largest amount of calls since Q4 of 2019. We expect this to continue as delinquencies trend lower and advanced balances remain muted. You look at page 23 and think about our investment opportunities, our loan business will, again, target our own, what I'm going to refer to as proprietary collateral.
Call rights, EBOs. You think about the broader world and where credit spreads are, going out for us to buy loans is just not that interesting. Our call right business is very interesting. The EBO business is very interesting. We think about the agency mortgage market. During the early part of 2021, we saw a shrinking GSE footprint. To the extent that things change with the GSEs, that'll provide what we think is a pretty robust pipeline of opportunities for us to deploy capital in what we'll call agency eligible securities.
What you saw also in the first two quarters is the agencies pull back on non-owner occupied. That could create another opportunity for us in conforming balanced non-owner occupied loans. Non-QM will continue to be a growing part of our business as we go forward, particularly as we think about higher rate environments and again, a potential for a shrinking GSE footprint. Page 24, our SFR business. 1,400 units currently. Average base is $209,000. Geographic exposure, if you look to the bottom left part of the page, mostly Southeast, a little bit in the Southwest and the Midwest.
Targeted net lifetime yield, 12%-15%. Average underwritten cap rate, 5.2%. If you think about housing supply, and I know a lot of what I would call peers and different types of firms have announced entering this space. Some folks have done a great job already in this space. I think the opportunity is large, and we're excited about what this business will, can, and will become. Again, we'll look for an announcement at some point during the month of August on our leadership team. Servicer advance balances, not to spend a lot of time here. They've decreased from $3.4 billion - $3.2 billion.
Average amount of capital continues to shrink there. The team here has done a great job financing that. Keep in mind, going back to 2015 when we acquired HLSS, we had $11 billion of advances outstanding, or $11 billion of financing with $8.3 billion of advances outstanding. Page 27. I have Baron here. Baron, why don't you take us through these next couple slides, and then we'll turn it back to the operator and open it for some questions.
Okay. Thanks, Mike. Good morning, everyone. Turning to slide 27. For the origination division at Newrez, we ended the second quarter with $75.4 million of pre-tax income and funded volume of $23.5 billion. Some of the themes in the broader market, such as increased competition, ongoing margin pressures, impacted our performance during the quarter, though we continued to deliver across all of our channels on a number of aspects, such as growing recapture and our product set.
Besides these market headwinds, as I just mentioned, we continue to build and grow our business and are well-positioned to take advantage of future market opportunities. For example, we've grown our direct-to-consumer business with record funded volume of $6.4 billion, which is a 12% increase quarter-over-quarter in our sixth consecutive quarter of increased production. We announced last quarter the relaunch of our non-QM business, which continues to gain momentum, and we locked over $100 million in June alone. Our non-agency jumbo business is back to pre-COVID levels, with over $250 million in quarterly lock volume.
We also added our 19th JV partnership, and we have additional JV announcements coming into the third quarter as well. The other important point is gain on sale margins. While gain on sale margins have decreased 12 basis points quarter-over-quarter, we're beginning to see a flattening of the decline of margins. For our direct-to-consumer business, margins dropped up 10 basis points from March, and have remained range bound in the low 300s for the past 3 months, including July.
For our JV channel, margins dropped 25 basis points in June, but flattened in July, and this is the first reduction we have seen since 2020, and is primarily driven by the change in purchase volume from refinance volume. Margins in wholesale channel dropped from March to April, but have remained range bound for the entire quarter, including July. Similar theme in our correspondent channel as margins pressured by approximately 12 basis points in the second half of the quarter, and a flattening in mid-June and July. Given the size of our correspondent channel, which is 60% of overall volume, it's a significant driver in quarter-over-quarter margin decline.
As mentioned, given interest rate change in July and the removal of the FHFA adverse market fee, we've already seen ability to take back some margin and are looking forward to that in the months to come. The last comment on this slide is we're really excited about the opportunity to combine the Newrez and Caliber platforms. Michael talked a lot about that. We believe the two companies will have significant benefits that accelerate our objectives, goals for both origination and servicing efforts and continue to gain market share.
Turning to slide 28. I've continued to say this for the past few quarters, but our DTC or direct-to-consumer channel remains a huge focus for Newrez and NRZ and continues to present a long-term opportunity for our company. Our process changes have taken hold, and that can be seen in our increased fundings, but also our refinance recapture statistics with a 44% increase quarter-over-quarter. While we have improved our turn times, enhanced our scale and capacity, the importance of our brand awareness and recognition to further build customer loyalty are also critical to our success.
That's seen by a 25% increase of Newrez originated refinance recapture and a 13% increase in Newrez originated refinance recapture. In April, we launched our new brand. I invite all of you to visit Newrez.com to see our improvements in our digital marketing consumer experience. The message being, as we get better connecting to our consumers, our DTC platform will only continue to grow. Turning to slide 29, just some quick highlights on the other channels. Our joint venture business continues to perform well in any market environment. It originated $1 billion for the quarter and was flat quarter-over-quarter, even with higher interest rates.
In addition, we saw a return to normalization with purchase transactions, which comprised approximately 80% of funded volume versus 54% in the first quarter. As I mentioned before, we announced our newest JV, joint venture mortgage company, CoastOne Mortgage , LLC, in partnership with the Schmidt Family of Companies, which is our 19th JV partnership, and we welcome them to the Newrez family. In our wholesale channel, we continue to grow our platform by not only adding new customers.
New broker relationships, and building out our branches, but also focusing on non-agency products, including non-QM, which comprised 20% of our overall lock volume in the second quarter. In our correspondent channel, we continue to add new customers, approximately 40, with a focus on best efforts where we can add additional margin, also creating operational efficiencies to improve customer relationships and add new products such as non-QM through our non-delegated clients.
When I think about our performance in the second quarter, both in terms of funded units and other metrics we use to evaluate our performance, we continue to see great progress. Turning to slide 30. For the servicing division, we ended the second quarter with $32 million of pre-tax income, a 2% increase quarter-over-quarter. We also added a table showing historical servicing pre-tax income, which has proven to be a ballast to the volatility in origination, PTI, and our servicing business is a core strategy for Newrez overall.
We ended the second quarter with the aggregate servicing portfolio of $306 billion and approximately 1.7 million customers, representing modest growth quarter-over-quarter. On a cost per loan, continued to increase slightly, which was impacted based upon the COVID impacted homeowners as we continue to achieve loss mitigation solutions and retain their home. On the last slide 31. Since the CARES Act was first enacted, we've helped over 250,000 homeowners navigate the COVID pandemic.
Over 160,000 loans have resolved their forbearance and remain active in our portfolio, and our active forbearance is now 2.3% versus 3.5% in the first quarter. Our focus remains to work on every possible method to engage these homeowners in all available loss mitigation programs, including a series of newly introduced Fannie, Freddie, and Ginnie modification programs. Our numbers are in line with the industry and continue good work, but more to do to help homeowners. On that, back to Kait.
We'll open the lines for questions.
We will now begin the question- and- answer session. The first question comes from Kenneth Lee from RBC Capital Markets. Please go ahead.
Hi, good morning. Thanks for taking my question. Just one on the gain on sale margins. You saw some improvement within the JV and the DTC channels. Just wondering if you could just elaborate and just talk about what's driving that improvement? Thanks.
We've seen a flattening, is the message I delivered. We did see a decline, as I mentioned, in each one of the channels. In our JV channel margins dropped 25 basis points in June, but they've flattened. We hadn't seen any reduction in our JV business at all since 2020. In our DTC business, we've also seen a reduction, as I mentioned, of 10 basis points from March, but they've remained range bound for the last three months, including July.
Gotcha. That's very helpful. Just one follow-up, if I may. In terms of the estimated 2021 origination volumes for the combined Caliber and Newrez, I wonder if you could just talk about some of the key assumptions you have there driving that estimate. Thanks.
Right. You really need to look at each of the underlying channels that make up our estimate, which you can see on slide, I think it's on slide 11. No, on slide 10. On the retail business and the JV business, there's no overlap. In our view, that's 100% accretive. On the DTC business, it's the same. They're managing their servicing portfolio, and we are managing our servicing portfolio. You look at the third-party channels based upon our analysis, there is very limited overlap, and actually, that was a significant pleasant surprise as we looked at both of those third-party channels about the accretive nature of the business.
For example, Caliber is in direct to broker and Newrez is not. The overlap between both of the channels has been very limited. Also on top of that, their focus and our focus, meaning Newrez is focused on the type of customers in our view is accretive. Our view is from our current projection is really based upon our view of interest rate markets for the remaining five months of the year and our view of our pro forma of the overlap between the two companies, as I just described.
Very helpful. Thank you very much.
Thank you.
The next question comes from Bose George with KBW. Please go ahead.
Good morning. Actually, first, just wanted to ask about the EBO opportunity. In that slide where you give the portfolio size at, I think it's $700 million, is that the portion of EBOs that you've already purchased and it's on your balance sheet already? Just going forward, can you help us size it? You've got $50 billion of Ginnie Mae MSR. It seems like a sizable opportunity. We just saw Cooper book $180 million of gains just this quarter. Just curious, what we could see from that opportunity.
Morning, Bose. The $700 million we have is on our balance sheet. When we think about the broader opportunity between origination that we believe will go forward. You're obviously in a great credit cycle. However, should things change, there will be some potential opportunities to buy out loans and redeliver in the EBO business. I think, in some of the numbers we quoted in having a $50 billion Ginnie Mae MSR portfolio, it's hard to tell exactly what that number is. If you think about that $50 billion, you match it up to where Cooper is or where Penny is.
I think the way to probably think about that is, we're not the biggest Ginnie Mae originator. However, I do think that over time will likely grow our Ginnie Mae exposure. Therefore that $700 million could increase pretty dramatically over time. Again, I think a lot of it depends on where we are in the cycle and what's going to happen with the overall credit of the homeowner.
Okay. For now, the $700 million, you've repurchased the 90-day delinquent stuff out of the pool. To the extent there's more, it's basically if more flows into the delinquent bucket. Is that right?
Correct. That $700 million that's on our balance sheet, there's steady flow that we're actually buying out. The numbers aren't massive on an overall weekly basis. There is steady flow that continues to come onto the balance sheet.
Okay, great. Thanks. Actually, just a follow-up to the question on gain on sale. In that footnote, you say that the gain in the DTC and JV excludes the recapture MSR. Is that just saying that the gain essentially would've been 100 basis points or whatever higher, but instead that piece was just flowing through the servicing to replace the lost MSR?
Yeah, that is correct. A number of us book things differently as a REIT prior to being in the operating business. The recapture is in our MSRs. On the mortgage company side, if you look at what Cooper does, their MSRs are in their overall origination business.
Okay, great. Thanks. Then actually one last quick one. Can you give an update on your book value quarter to date?
It's pretty constant, right? As of today, it's pretty similar to where we were prior to the end of Q2.
Okay, great. Thanks.
Thank you.
The next question is from Eric Hagen with BTIG. Please go ahead.
Hey, thanks. Good morning. The servicing book looks like a mix of higher coupon seasoned loans, and of course, there's a fair amount of new loans that you guys have originated over the last year or so with lower coupons. I'm wondering how the recapture rates and the strategy around targeting certain borrowers differs depending on the seasoning and note rates and such, especially in environments like right now where rates are low.
Baron, you want to take that one?
Yeah. Certainly we are targeting based upon a number of different factors, including just what we call trigger leads or leads based upon consumers that may have interest in either refinancing or even looking to buy a home. Our biggest strategy from a marketing perspective continues to be in the context of borrowers that are in the money, and that is our focus. If you look at current coupons as of today, based on the overall size of the NRZ MSR portfolio, we're talking about approximately 1 million customers that we continue to target.
Eric, the one thing I would point out, when you look at where we were a year ago to where we are today, not only with the team on the Newrez side, but also with the team that Sanjiv's assembled on his side. I think in one of the slides I point out data and analytics, and technology gains. I think those couple areas, as we continue to get better on data and analytics and really identifying a homeowner who's ready to refinance, and that's what you're seeing in the Newrez numbers going from 28%- 40%, it's going to add huge lift.
As I look at our core earnings going forward, and I hate giving guidance, but I really do believe our higher recapture rates anticipated slowdown in speeds if we end up in a higher rate environment are going to add significantly to our core earnings and overall value of the company.
Got it. That's helpful. Thanks. One on just the capital structure. Considering Caliber has no unsecured debt, I'm wondering how you guys think about that capital structure and the appetite for additional leverage as you guys combine the platforms.
I think when we look at our capital structure from a parent level or down to what I would call the operating subs, we have not put on a lot of what I would call corporate debt. Saying that, as the operating businesses continue to grow, we'll continue to evaluate the best way to fund the business. Currently, as a result of the equity raise we did in April, and where we sit with coming out of this deal with $1.1 billion of cash and liquidity, and we expect by the end of Q3, depending upon what we do from an investment standpoint, we expect that $1.1 to be anywhere from $1.3-$1.5.
We really don't have a need for more cash or liquidity right now. We'll always evaluate based on where we think the markets are and what they're going to give us. Having more capital, I know people, shareholders hate it, particularly because it's a drag on earnings, is never a bad thing because it'll give us the opportunity to actually be opportunistic from an acquisition standpoint, as well as protect our balance sheet in the dark days like we saw in March of last year.
Got it. That's helpful. Thank you very much.
Thanks, Eric.
The next question is from Trevor Cranston with JMP Securities. Please go ahead.
Great. Thanks. Actually, a follow-up on the question about the improved recapture rate this quarter. Obviously, there was a nice spike, and that's something you guys have been really focused on. I was wondering if you could maybe comment more specifically on what you think sort of came together that allowed that to grow so much this quarter and how we should think about the potential for continued improvement in that rate sort of over the near term.
I don't want to ever have an excuse, but I think we're just getting better and better. We have very good focus. The person that's leading and quite frankly, we brought in some really great marketing people on the Newrez side. As our marketing folks and we get better, it's only made us a better company and improved our recapture rates. I'd like to go back to 2018 for a second. If you think about acquiring Shellpoint 2018, I think the production number was about $7 billion in 2018. When you look at the Caliber acquisition, the combined company is going to do $170 billion.
We clearly have growing pains in between 2018 and now, quite frankly. We're just getting better and better. When I look at the prospects of where I think we can go, and that's why I said, I think we're ready to compete against everybody. We're just going to get better. We have to get better because we have a large MSR portfolio. If you go back to one of the comments I made and point out X percent higher in recapture is going to lead to $0.02 more in core earnings and slowing down speeds.
We want to get back to where we're printing $0.40, $0.50, $0.60 in core earnings, and the book value continues to grow, and the stock's back to $15-$20, which is kind of where it should be now. That's what we're focused on.
Got it. Okay. On the SFR business, you talked about expanding that operating platform and bringing in some new management to run that. I guess, as you think about growth of that strategy in particular, where do you anticipate capital coming from to fund continued growth of that over the next couple of years? Is it coming from another area of the portfolio which you're anticipating maybe being in more of a runoff mode, or how should we think about that?
It could come from other areas of the portfolio. The financing of that asset in the capital markets is pretty efficient at this point. Again, I think Eric asked a good question. Currently, we have 1,400 homes. We have a little bit under $100 million in equity. When you think about our balance sheet, expecting to end the quarter in Q3 at 1.3 - 1.5 of cash and liquidity, depending upon what our investments look like during the quarter. We think we got plenty of capital to continue to grow without the need of any additional capital.
Again, if we think about unsecured debt or the capital markets, to the extent that we need capital into a very large portfolio, we would consider either a debt deal or a preferred deal or something like that.
Okay. Got it. One last one, just to clarify on the early buyout opportunity. When you mentioned the size of the servicing portfolio and everything, does that include Caliber, or does bringing in the Caliber portfolio change the sizing of the EBO opportunity in any way?
Yeah, it does. It does not include Caliber. With Caliber, obviously, the opportunity grows exponentially.
Okay, great. Appreciate the comment. Thank you.
Thanks, Trevor.
The next question comes from Kevin Barker with Piper Sandler. Please go ahead.
Good morning. Could you give us an update on maybe what you think earnings would look like for Caliber versus your previous expectations when the deal was announced? I believe you estimated somewhere around $295 million in operating income in 2022. Do you feel like Caliber's still on that run rate, or do you think there's anything that may have changed, just given the competitive dynamic in the origination market?
Hey, Kevin. Here's a couple things. The one thing that we haven't discussed on this call are synergies. When I look at the financing of Caliber, and Sanjiv and his team and our team have had discussions about this. I think realistically from a synergy standpoint, forget about gain on sale and compressed margins or where we're going. I think synergy-wise from the financing alone, we think we're going to be able to pick up something around $50 million a year from a financing perspective. That's why we highlight a little bit in our investor deck about the financing side.
We think overall synergies are going to be something between $150 million and $200 million on a per annum basis. When we think about that, we think about where gain on sale margins are. When we underwrote the deal, we sized it to 2018, 2019 kind of gain on sale margins. We're in line with how we're thinking about that. I don't see any change of where we're going in 2021 or 2022. I actually think with Sanjiv and Baron and the complementary teams on both sides and bringing this thing together, we're only going to see more lift and hopefully higher earnings as we go forward because we're only going to get better.
Could you unpack that a little bit more? You said $50 million in synergies due to financing. Is that on top of the $36 million that you laid out originally? Can you help us understand, did you say $150 million-$250 million or $150 million-$200 million?
I think the synergies, what we're going to be able to do between the financing side and overall integration and where we're going with technology is going to be something between $150 million and $200 million on a per annum basis. If you relate that and think about that with 450-ish million shares outstanding, it's a pretty sizable increase to core earnings and earnings overall for the company. Part of that is going to be around synergies. Part of that is around financing. Part of that's going to be truly around other things that we'll identify within both organizations. It could be space.
There's a lot of different things that we continue to work on.
If we have a market similar to 2018, 2019, like you described, and then add on the synergies of $150 million-$200 million above the originally stated $36 million, probably going to have potential operating income from Caliber north of $400 million. Is that your expectation on a normalized origination market or something more?
I think your initial assumption around Caliber's operating income is pretty consistent with where we go, what we believe. Again, the deal was underwritten to 2018, 2019 numbers. On top of that, your $150 million-$200 million in total synergies, not 36 + another $150 million-$200 million. Just think about $150 million-$200 million in total synergies. That's kind of the math on how we get to much higher core earnings.
Okay. All right. That's helpful. Thank you.
The next question comes from Stephen Laws with Raymond James. Please go ahead.
Hi, good morning.
Morning.
Morning. Follow up on the SFR side. Targeting mainly Southeast, that's a pretty competitive sector and environment. Can you talk a little bit about your sourcing? Can you quantify at all maybe capital allocation or unit growth or any metrics we can kind of look to as far as 6 or 18-month targets or anything like that?
I think we'll have more to come, Stephen, in a two weeks as we make a broader announcement including a new brand that we have ready to roll out with. Currently, we're doing, I would say, 50-70 units a week. We have a broad sourcing team working on this now. We also have technology partners that we're working with on the operating side. We have a pretty vast network. If you think about NRZ as a parent, I guess a two years ago, we bought a company called Guardian, which is a property preservation business.
Obviously, that's been a very good acquisition because that works alongside our SFR business, along with third parties who are running some of the operating side. We put out in our deck that we expect over the next number of years to get to $5 billion of acquisitions. I think you just saw Pulte Homes announce a deal with Invitation Homes. We would gladly partner with one of the large home builders out there, which I think would help us jumpstart certain initiatives that we're thinking about. I think there'll be more to come.
Again, I don't want the cart to lead the horse, but we have the new management team who will work very closely with us. They have a plan. They'll come in with a proper head count which will enable us to truly grow the business over time.
Appreciate the color. As a follow-up question, if we could switch to the calls and potential gains there. I know 666 in the quarter. Can you talk about how much accretion or the ROE on that are expected as you fully refinance those loans that were called? How do we think about it? I know that's going to be lumpy. Maybe on an annual basis in 2022 and 2023, how do we think about the call volumes and potential upside on the returns there over the next couple of years?
I'll let Nick comment in a sec. It is a little bit more episodic. I do believe, though, these loans that have been stuck in these pipelines for many, many years are starting to come out. When we look at deals that we've issued that go back over the course of the past few years, for example, in non-QM, RPLs, NPLs, some of the call activity was related to that. Some of it's related to the legacy side. I think just for simple math, this last result we had was quite frankly, fantastic around our call business.
I'll let Nick talk to that. I think the way to think about the business, if we get back to a steady state where we were early on in probably 2018, 2019, where we're calling about $300 million a quarter. I would expect us to do at least that as we go forward. I'm hopeful anyway. The math has generally been around a couple of points. This last one was a much better one, but I'd factor in, on average, about two points. Nick, I don't know if you want to talk about the last one.
Just one other thing about that. We didn't securitize. We announced a large sale of loans, which is, I think, $800 million or $900 million out of that $1.1 billion or so that we did in the quarter. It wasn't securitized. It was actually sold in loan format. The return on equity was huge. Nick, you can give whatever color you'd like.
Sure. For this quarter, we generated approximately $0.03 from the call strategy. The mix of income on calls is a little bit different from what occurred in the past, where we saw more income coming from the accretion side. Given where our portfolio is today, more income is going to come from the securitization side. As Michael mentioned, we did do a loan sale in the month of July. That will result in core earnings in the third quarter, so it's not reflected in the second quarter.
You can see that when you look at our P&L from the loan mark that we actually recorded in the second quarter.
Great. Nick, Michael, thank you very much.
Thanks, Stephen. Stay well.
The next question comes from Henry Coffey with Wedbush. Please go ahead.
Good morning, thanks for taking my call. Some small questions first, then one large question. The JVs, what's the incentive of the companies for joining up? Are some of them home builders? Are most of them independent operators? Maybe you could give us some thoughts around that.
Most of our JV partners are realtors, right? Across the entire U.S., it really comes down to those owner-operators looking to basically monetize on mortgage origination income through their retail sales force. That's really what it comes down to. You do the joint ventures to basically work through the RESPA rules from any kind of lead references that we pass through to our loan officers.
All right. Are these companies that are just generating, doing lead gen for you?
No. These are just real estate brokers. They're effectively working with consumers looking to buy their home. They basically make referrals to our loan officers or their partnership loan officers within our joint ventures and we help those consumers buy their homes. It's a partnership directly with their real estate offices.
On the wholesale front, any comment on where gain on sale margins are going sort of in July and August, given that we have seen some stability there as of late?
Yeah. I mentioned that. We've seen stability for basically the quarter. We saw a drop from March to April, and we've seen basically stable margins in our wholesale channel for the rest of the quarter, including July.
Mike, for you, a big question. All of this is going to take time. If you had one primary ingredient that you could accelerate, it would be, quote, time, because it takes time to put the businesses together. It's going to take time for interest rates to go up, et c. You are earning your dividend by a healthy margin. What is the logical trigger for seeing an increase there?
Henry, it's a great question. I think that when we take a step back and I look at our company today, and I try to think about, I'm looking at our equity price. As we're going through this call, I'm writing down some notes here. Our equity, we announced the Caliber deal. We raised capital around $10.10. Stock gets back to $11 and change. We announced book value now, give or take, at $11.30 after everything. We took a big hit on our equity, which goes back to, I think, in June, when you look at when Two Harbors came out, announced lower book value and did a capital raise.
As I think about where we're going with the company, we have a great operating business that'll be second to none. I'm very confident of that. When you talk about time, I don't want to rush time in life nor does anybody. We want to rush through the integration so we get through, and we have an operating business that's second to none. Both teams, Sanjiv's and his excellent management team, and Baron Silverstein and Bruce and our excellent management team, have done a great job so far getting us to the place when we have the final close that we want to hit the ground running. Back to my thought here.
When you look at us, we have this operating business that we get no credit for. We have a lot of proprietary channels, I think, in our business, whether it be call rights. We talk about EBOs and the gains that Jay and his team have done. Again, we're not getting properly valued, I think, as it relates to the operating business or on the investment business where I think the investment business can go. When I think about the increase in recapture, and I look at forward earnings that $0.40, $0.50, $0.60 as we go forward, and I'm not going to short that now because we all have a lot of work to do. I look at current trends in amortization.
The big question for us is how do we think about our dividend policy, quite frankly. We have an operating business. Certain operating businesses pay dividends, others don't. We have a REIT that's paying $0.20 right now. It's a very good question. Would I like to see our dividend increased? Absolutely. Do I think we'll get there? Absolutely. We want to get through the Caliber closing, then we'll reassess everything, and then we'll hopefully come out with some news that makes everybody happy.
I think it's a really interesting time for us as a company and how we think about our investment company and the operating businesses and the portfolios that we have, and quite frankly, get valued properly for who we are and the hard work that the teams put in to drive shareholder results. We'll get there. It's a question of when. I don't think this is that far out in the future. The question is really what does our dividend policy look like.
Is this something we can harass you about in the fall, or is something that we should wait till next year when you've really digested everything and Caliber's up and running, and you have a bigger sense of what the 2022's going to look like?
I think you can harass me anytime.
Okay. I might ask.
Our goal and quite frankly, and I bring up our stock price because I'm very frustrated with where we're trading with an $11.40 book or $11.30 book and the results that we put up. If I want our stock, if we get properly valued, there's no reason that our stock shouldn't be, when you think about the sum of the parts, and we took that slide out, that we shouldn't be between $13 and $15 right now. We're not, and we got to do our job on our side to get the stock there. We'll do all we can.
Great. Thank you.
Thank you.
This concludes our question- and- answer session. I would like to turn the conference back over to Michael Nierenberg for any closing remarks.
Thanks to everybody always for your support, your questions. I would like everybody to think about the results, the book value that we continue to drive, and where I think we're headed. Stay well. Have a great rest of the summer. It goes quick. Henry, don't rush time, and look forward to catching up with everybody soon. Take care.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.