During the quarter, it took significant steps to lessen this reliance on short-term funding.
On July 22, NRZ reported a 2Q GAAP net loss of $8.8 million or $0.02 per share.
On June 22, NRZ declared a 2Q20 dividend of $0.10 per share.
On May 22, New Residential announced a $600 million capitalraise to bolster its cash position (which now stands at $1 billion) and provide additional flexibility. The loan was priced with an 11% coupon.
On March 13, the company held a business update conference call in which it reiterated its focus on liquidity, book value, and earnings. The company reported a leverage ratio of 4.3-times including agency MBS hedges and 2.5-times excluding agency MBShedges. The primary concern was the company’s MSR book, which accounts for about 50% of assets. With interest rates near zero, management noted that increased mortgage refinancing could impair the value of the MSRs. (If a mortgage is refinanced, the value of the MSR goes to zero as there is nothing left to service.) In March, 30-year mortgage rates ranged from 3.13% to 4.5%, which led to substantial volatility in the MBS market. Recent QE buying activity has stabilized the agency MBS market, and new repurchasing programs include investment grade non-agency securities. During the first quarter, NRZ sold $28 billion in assets in order to increase liquidity and preserve book value, reducing the investment portfolio to $12.7 billion. On the 1Q earnings call, management indicated that leverage had been reduced to 1.5-times as of April 30, 2020. At the end of 2Q, the leverage ratio stood at 2.4-times.
In March, we also saw the forced liquidation of two leveraged ETNs issued by UBS (MORL & MRRL) and a drop in a REML ETN note issued by Credit Suisse. These notes were designed to provide double the return of the mortgage REIT REM. The value of the UBS notes fell below a trigger level, forcing liquidation. These actions caused mortgage REITS to fall in value as the ETN issuers liquidated the underlying REIT securities. NRZ represents 8%-9% of the REM ETF.
We also saw the implementation of temporary 3- to 6-month mortgage forgiveness programs. These programs affect the value of MSRs as servicers are required to pay the servicing fee to the holder of the mortgage even if the borrower doesn’t make his or her monthly payments. The recent economic stimulus package includes provisions for servicers, and GNMA, FNMA and FHLMC have implemented different programs to alleviate the issues that servicers face.
The company noted that the Ditech platform has been fully integrated.
EARNINGS & GROWTH ANALYSIS
Values on these securities are still lower than they were before the pandemic.
Reflecting management’s efforts to transform the NRZ business model, we are raising our core EPS estimates to $1.49.
FINANCIAL STRENGTH & DIVIDEND
On June, 2020 NRZ had over $1 billion in cash. It increased its advance servicing capacity by $1.8 billion in April.