Onity Group Inc. (NYSE:ONIT) Q3 2024 Earnings Call Transcript

Onity Group Inc. (NYSE:ONIT) Q3 2024 Earnings Call Transcript November 5, 2024

Operator: Good day, everyone and welcome to this Onity Group’s Third Quarter Earnings and Business Update Conference Call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note, today’s call will be recorded, we will be standing by if you should need any assistance. It is now my pleasure to turn today’s conference over to Dico Akseraylian, Senior Vice President, Corporate Communications. Please go ahead.

Dico Akseraylian: Good morning and welcome to Onity Group’s third quarter earnings call. Please note that our earnings release and presentation are available on our website at onitygroup.com. Speaking on the call will be Chair, President, and Chief Executive Officer; Glen Messina, and Chief Financial Officer, Sean O’Neil. As a reminder, our comments today may contain forward-looking statements made pursuant to the Safe Harbor provisions of the federal securities laws. These statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are uncertain. Forward-looking statements speak only as of the date they are made and involve assumptions, risks, and uncertainties, including those described in our SEC filings.

In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again. In addition, the presentation and our comments contain references to non-GAAP financial measures, such as adjusted pre-tax income. We believe these non-GAAP measures provide a useful supplement to discussions and analysis of our financial condition because they are measures that management uses to assess the performance of our operations and allocate resources. Non-GAAP measures should be viewed in addition to and not as an alternative for the company’s reported GAAP results. A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures and management’s reasons for including them may be found in the press release in the Appendix to the Investor Presentation.

Now I will turn the call over to Glen Messina.

Glen Messina: Thanks, Dico. Good morning and thanks for joining our call. We’re looking forward to sharing a few highlights for the third quarter and reviewing our strategy and financial objectives to deliver long-term value for our shareholders. Let’s get started on Slide 3. I’m going to begin with three key themes today. First, we reported our highest adjusted pre-tax income and return on equity in the last three years. Our MSR hedge performed very well effectively offsetting the impact of declining interest rates contributing to our reported net income of $21 million. Second, our originations team again delivered solid performance with $18 billion in total servicing additions, a 26% increase in total origination volume and a 52% increase in consumer direct recapture volume both versus the second quarter.

Finally, we’re executing a series of transactions to enable further deleveraging and a holistic corporate debt refinancing. Our debt-to-equity ratio closed the quarter at 2.9:1. We have almost $300 million in liquidity and we reduced corporate and MSR debt by over $180 million this year. We’ve again demonstrated that we’re delivering on our commitments and that our strategy and financial objectives are sound and our ability to execute and deliver results is consistent and strong. We believe the continued execution of our strategy and financial objectives positions Onity to create and capture substantial value for our shareholders. Let’s move to Slide 4 to see how our strategy has materialized in our financial performance. Our actions today and over the past several years are guided by our 5-point strategy.

It starts with balance and diversification to deliver strong financial performance through interest rate cycles. Capital-light growth to reduce capital demands and interest rate risk exposure. Industry-leading cost structure to enhance our competitiveness, value proposition and profitability. Top-tier operating performance and capabilities to enable positive outcomes for borrowers, clients and investors and improve the customer experience. And lastly, dynamic asset management to enhance earnings and cash flow. The execution of these strategies has enabled a remarkable improvement in our financial performance. Adjusted pre-tax income is up $162 million for the last 12 months ended September 30 versus the full year 2022. And we’ve delivered a 19% adjusted ROE over the last 12 months, up from a negative 17% in 2022.

We’ve delivered meaningful book value accretion and significantly reduced our ratio of MSR and corporate debt to equity, improving the quality of our business for lenders and shareholders alike. Let’s turn to Slide 5 to see how our servicing and origination platforms drive performance through interest rate cycles. Our servicing and origination platforms complement each other very well. As you could see, even with the sharp increase in interest rates from 2021 and a material decline in origination income, our total business is delivering improved performance. As interest rates have risen, profitability in our servicing platform has improved materially. We did see a significant and short-lived drop in interest rates during the third quarter. Even with that drop, servicing was still the earnings engine with origination earnings continuing to improve versus the prior year.

We expect the earnings trends we’ve seen during the last — during the first three quarters of 2024 to continue for the fourth quarter, with servicing being the predominant earnings contributor and origination earnings continuing to improve. We believe, having scale operations in originations and servicing provides the balance necessary to deliver strong financial performance through interest rate cycles. Please turn to Slide 6 and we can talk more about our growth strategy. As I mentioned earlier, our growth strategy is focused on capital-light subservicing, coupled with a disciplined investment management strategy for our MSR portfolio. Year-to-date, we’ve added $38 billion in third-party subservicing additions, significantly more than our total subservicing additions for the full year 2023.

Since the end of 2020, we’ve delivered over 80% growth in our subservicing portfolio, while growing our own servicing and ESS portfolios by about 57%. We continue to dynamically manage our owned MSR portfolio to maintain a range of $115 billion to $135 billion in UPB, including excess servicing spread transactions. Consistent with this objective, this year, we’ve originated and purchased $23 billion in owned MSR UPB and sold $16 billion above our book value, capitalizing on favorable bulk market pricing. In addition, to enhance MSR returns, we focus on origination channels and products that offer higher margins, which comprise 39% of our MSR originations almost double the level we achieved in 2022. Please turn to Slide 7, so we can discuss how we manage interest rate risk on our owned servicing.

Our portfolio exposure to changing interest rates is generally aligned with industry with a slightly lower exposure to rates above 5% and slightly higher to rates below 5%. To manage interest rate risk, we utilize both operating and financial approaches. Our operating approach is all about recapture and replenishment. Our recapture platform is delivering 1.9 times the industry average recapture performance, as reported by the ICE Mortgage Monitor for the last 12 months ended June 30 and we’re continuing to invest to deliver best practice level performance. Our originations platform, which we started largely from scratch back in mid-2019, is now a top 10 correspondent lender. Our correspondent and co-issue platform has demonstrated the ability to replenish both runoff and opportunistic portfolio sales.

Our financial approach is the MSR hedge. We target a 90% to 110% hedge coverage ratio for our owned MSRs, which we expect will continue to provide immediate protection to changing MSR values due to changes in interest rates. Let’s move to Slide 8 and I can share with you our recapture platform performance and plans. As you can see on the left, our performance has improved significantly since 2020 when we started our recapture platform. As previously mentioned, we are now performing above ICE industry average for the last 12 months ending June 30. With mortgage interest rates falling about 100 basis points in 75 days during the third quarter, our recapture platform delivered strong performance. Versus the second quarter, lock volume was up 76%, funded volume up 52% and adjusted pretax income up over 5 times.

With the rapid increase in lock volume, activity levels did reach capacity limits causing a slight reduction in recapture rate for GSE volume consistent with several of our public peers. However, Ginnie Mae recapture performance continued to improve due to streamlined refinance options. We regularly benchmark our refinance recapture performance to available industry information from ICE and performance data from large public independent mortgage banking peers. Based on third quarter year-to-date reported results for refinance recapture excluding home equity products, we believe our platform is performing better than ICE reported averages and on par with several of our large peers. However, we believe there is upside opportunity if we can increase our performance to industry best practice levels and we’re continuing to invest in our platform to capture that opportunity.

Our investments are focused in five key areas starting with talent. We’ve strengthened the recapture team by adding talent with deep industry expertise with leading recapture performance companies. In addition to talent, we’re focused on process, technology, data utilization, and product enhancements. This includes refining the integration of our recapture platform with servicing, continued optimization of tasks, workflow and technologies, data enrichment and machine learning, and continued evolution of our HELOC, HELOAN, and purchased product offerings. We expect these investments will improve opportunity identification, lead conversion, the customer experience, platform efficiency, and reduced cycle-time, all of which we believe will translate to an increased recapture rate.

Regardless of the outlook for interest rates, we remain focused on achieving performance levels comparable to industry best practice participants. Now, let’s move to Slide 9 for a deeper look at our MSR hedge performance. Our MSR hedge performed very well this quarter with the increase in value of our hedge portfolio more than offsetting the reduction in our MSR value due to changes in rates and assumptions. The result was a net favorable $10 million benefit. And for the last 12 months our hedge portfolio offset all but $12 million of the change in MSR value due to rates and assumptions. We’re pleased with how the hedge has performed considering the continued interest rate volatility we’ve seen in the past 12 months. The higher hedge coverage ratio we implemented in the fourth quarter of 2023 has helped stabilize earnings and protect book value this year.

In addition the cash generated by hedging instruments when interest rates fall helps offset margin falls on our secured MSR financing. We intend to maintain our 90% to 110% target hedge coverage ratio for the foreseeable future and optimize our hedge portfolio composition as interest rates change. Please turn to Slide 10 to discuss our value creation potential. We’ve meaningfully improved business performance, capabilities, capital structure, and potential for growth. However, we do not think our share price reflects these results, nor the potential for our business. We believe this provides an enormous opportunity for both existing and new investors. While several of our peers are trading at over book value, we are trading at a discount to both book and our analyst price targets.

We’re intensely focused on closing the valuation gap by continuing to execute our strategy, delivering strong financial performance, ongoing deleveraging, and increasing investor awareness. Now, I’ll turn it over to Sean to cover our third quarter performance in more detail.

Sean O’Neil: Thanks Glen. Let’s turn to Slide 12 to talk about our third quarter financial performance. We had a strong quarter measured on both a net income and adjusted pre-tax income or PTI basis. Net income of $21 million was up both quarter-over-quarter and year-over-year. This resulted in an after-tax ROE of 19%, diluted earnings per share of $2.65, and an increase in book value per share to $59.50. We extended the positive year-to-date trend with both our servicing and origination businesses, increasing their profitability, resulting in adjusted pre-tax income of $35 million with a 31% adjusted ROE. We continue to add scale to our servicing platform, growing our book through MSR originations of $8.5 billion plus purchases and subservicing boardings for a total of $18 billion in the quarter or $60 billion of gross additions year-to-date.

Let’s move to Slide 13 to see how we’ve been trending over the last two years. As you can see, the third quarter was another sequential quarter improvement in both adjusted PTI and adjusted ROE. We are successfully executing our strategy and meeting and exceeding our financial objectives. Our financial objectives start with sustained adjusted pre-tax income performance. This quarter reflected solid reverse and forward servicing contributions and was bolstered by our consumer direct channel exhibiting strong recapture results. Please turn to Slide 14 for a discussion on our forward and reverse servicing performance. Servicing segment improved its contribution to adjusted pre-tax income yet again. This quarter’s performance was supported by strong profitability in the reverse business, benefiting from a successful asset management transaction with improvement both quarter-over-quarter and year-over-year.

The forward servicing business saw continued growth in revenue and lower OpEx partially offset by higher MSR runoff quarter-over-quarter due to seasonally low second quarter runoff. Measuring on a seasonally adjusted year-over-year basis, forward servicing’s adjusted pre-tax income was $13 million or 35% higher than Q3 of last year driven by higher revenues and lower cost to serve. Our average subservicing volumes grew year-over-year on a net basis by $9 billion of Unpaid Principal Balance or UPB. More detail on our servicing portfolio and how it diversifies risk between the owned and subservice book plus details on investor types such as Ginnie Mae or GSEs are in our appendix. Please turn to slide 15 to talk about results of the Originations segment.

Originations had another strong quarter. Consumer direct channel drove the bulk of the improvements driven by strong recapture volume which added almost $4 million of adjusted PTI versus the second quarter. Our B2B channel which is correspondent lending and co-issue decreased quarter-over-quarter as a result of unanticipated price changes by the two GSEs. All of our channels had higher volumes quarter-over-quarter for an increase in total funded origination volume by 23% to $8.5 billion. More volume details by channel are available in the appendix. Overall, we operate an originations business that is profitable and we believe is able to adapt to any interest rate environment. And as Glen mentioned we are laser-focused on enhancing our recapture abilities to move from better than peers to best-in-class.

Now let’s turn to slide 16 and I’ll walk you through the actions that we successfully took to restructure our corporate debt. As slide 16 shows we’ve orchestrated multiple transactions that were timed to lower our debt profile increase our earnings per share and facilitate the issuance of a new high-yield corporate debt that we priced in October. Starting on the left we aligned the first three business-as-usual transactions to close in September. These included the acquisition and securitization of reverse assets on our OLIT securitization shelf, the retirement of $23 million of PMC 2026 notes at a discount to par and the servicing release sale of $8.5 billion UPB of Fannie and Freddie MSRs, which we transacted at a premium to book value. These transactions all provided strong liquidity to retire debt as well as accretive net income impact in the quarter.

These are broken out in more detail in our appendix. Moving to the right the waterfall reverse asset transaction closed last week. It increases our equity through preferred equity issuance, provides additional liquidity and includes about $55 million of reverse assets which are accretive to our earnings per share. More detail on our reverse products and why we like them in our appendix. Next is the pending MAV sale which monetizes our 15% equity stake in MAV or the MSR acquisition vehicle. This is a JV we set up with Oaktree in 2021. This sale monetizes an asset, solidifies Oaktree and MAV as a strategic capital partner as we extend our MAV subservicing contract for an additional five years and provides liquidity to reduce our corporate debt.

We expect the MAV sale will close in the fourth quarter after receiving regulatory approval. The closing will trigger the escrow release of the high-yield proceeds. As an important reminder, this transaction permitted us to reduce the dilution uncertainty related to the execution of the warrants. Now we have the ability to ensure a less dilutive or roughly $1.55 a share dilutive impact on a net settlement as opposed to a larger or in excess of $4 a share dilution for a gross settlement. In all cases we still retain the ability to decide if we settle the warrants in cash shares or a combination of the two. The warrant options are shown in our balance sheet appendix. The final step was the successful issuance of $500 million of high-yield notes which we will use to redeem in full the PMC 2026 notes and the Onity 2027 notes when the MAV transaction closes.

This deal is already priced and allocated and we expect it to close into escrow tomorrow on November 6. In light of that transaction, we are releasing our Q after the high-yield close likely Thursday morning premarket. The combined result of these transactions will be roughly a $100 million decline in corporate debt or $182 million decline in corporate and MSR debt from the beginning of the year an increase to both our common and preferred equity and a reduction of our debt-to-equity leverage, down to from almost four times at the beginning of the year to 2.8 times on a 9/30 pro forma basis. It also extends out our corporate debt maturity to November of 2029. Moving to slide 17, we show detail on the improved earnings per share result of our new debt profile.

When we break escrow on our debt refinancing transactions, the total corporate debt interest expense inclusive of the preferred dividend will decrease by about $14 million on an annualized basis. This is driven by lower debt amounts as well as much lower accretion on OID or discount of debt and debt issuance cost. The transactions will result in a onetime impact in the fourth quarter of 2024 of approximately $41 million due to refinancing costs. The bulk of this is about $37 million of accelerated, unamortized original issue discount and debt issuance costs from the older 2027 notes and the PMC 2026 notes. This acceleration is only bringing forward the cost we would have incurred through the maturity of the debt. We have already been accreting this monthly since the 2021 issuance of these debt structures, which is why eliminating this non-cash expense will improve our ability to generate earnings going forward.

In summary, these transactions that restructured our corporate debt provide three clear catalysts for closing our gap to book value. One, they remove the dilution impact of ongoing OID that would have gone into 2027; two, improves the earnings generation of the company by $14 million annually; three, removes uncertainty on the dilution impact of our outstanding warrants. Please turn to slide 18. We continue to focus on these financial objectives, sustained adjusted PTI performance. The last eight quarters have been evidence of that and we will continue that focus. Two, reduced earnings volatility. This was evidenced in our strong hedging performance in the third quarter and throughout the year and we expect we will continue to deliver good results here.

Three, improved ROE, that’s a result of the first two objectives and our capital ratios will benefit from both that and our continued focus on reducing our leverage until we reach pure normative levels. Finally, we continue to capitalize on market cycle opportunities, demonstrated by our selective MSR sales above book value this year, all three of which were replenished in the same period by strong originations volume, as well as the opportunistic reverse asset transactions we have engaged in since early 2023, two of which were the reverse transaction in September and the waterfall transaction, both of which helped our successful debt restructuring and provided accretion to net income. Back to you Glen.

Glen Messina: Thanks Sean. Please turn to slide 19. I’m proud of the enormous progress our team has made. I believe we are well-positioned to navigate the market environment ahead and deliver long-term value for our shareholders. We delivered a robust increase in profitability and returns in the first three quarters of 2024 and made meaningful progress against our strategic and financial objectives. Our performance is driven by our demonstrated operational excellence, focus on prudent capital-light growth and commitment to deleveraging the balance sheet while maintaining solid liquidity levels. All this comes together to suggest a share price that we believe has excellent upside and we intend to continue to take the actions and extend the outreach to close that gap for the benefit of all shareholders. Overall, we could not be more optimistic about the potential for our business. With that David, let’s open up the call for questions.

Q&A Session

Operator: Absolutely. [Operator Instructions] We’ll take our first question from Bose George with KBW. Please go ahead. Your line is open.

Bose George: Hi, guys, good morning. On slide 5, you show the — it looks like the expectations for pre-tax earnings in fourth quarter looks like it works out to about $40 million. So is that right? And is the improvement over 3Q reflects some of the strategic actions, or yes can you just walk through that a little bit?

Sean O’Neil: Sure, Bose. Yeah, this is our current estimate or our run rate using our existing forecast. We’re probably not going to see a lot of the impact from the corporate restructuring, as that will not get broken from escrow or triggered by the MAV sale until closer to the end of November. So we’ll probably only have one month of impact of the $14 million of annual savings I referred to. So the bulk of that’s coming just through continued success in our originations and servicing business. Originations probably typically dips a little bit in the fourth and first quarter, seasonally speaking, but we continue to see pretty strong results there. And so that’s just kind of our current run rate.

Bose George: Okay. Great.

Glen Messina: And Sean, just to clarify, the numbers on that — excuse me Bose, the numbers on that page are just for servicing and originations. It doesn’t include corporate and/or any of the charges from the corporate debt restructuring, correct?

Sean O’Neil: That’s correct. Yeah, this is PTI. And then the charges I referred to the $41 million that will show up in GAAP net income.

Bose George: Okay. Great. And then actually just a related question on the transactions impact on the warrants. Is there going to be any impact on the diluted share count? Or is it just the benefit in terms of limiting the dilution of the warrants?

Sean O’Neil: So Bose, in our investor presentation Page 35, we’ve actually modeled out for you and others the — what the difference is in fully call it fully diluted book value per share after consideration of all options, awards and the exercise of the warrants showing the three different settlement methods, the gross settlement method, the net settlement in shares and net settlement in cash, which we have the option to control. So it is a pretty meaningful reduction in dilution based on the current share price.

Bose George: Okay. Great. And then just one other one. The $6 million in legal and regulatory costs, actually, what was that? And does that flow through the servicing segment on the expense line?

Sean O’Neil: It actually depends on each cost, Bose. So some of the costs could be linked to legacy corporate actions, and they wouldn’t flow through servicing. Others might flow through servicing, but over time, could be billed back to investors and then some could be borne by us in the servicing. So you could have any of those three options. This was just probably closing out either some legacy matters or reserves for matters that we have more certainty on going forward. That’s typically when we make the adjustments.

Bose George: Okay. Great. Thanks.

Operator: We’ll take our next question from Derek Sommers with Jefferies. Please go ahead. Your line is open.

Derek Sommers: Hey. Good morning, everyone. Just on your forward guidance for 15% adjusted ROE into 2025. Could you share any kind of underlying assumptions in market environment on that guidance or anything you’re thinking about as catalysts that would drive that result?

Sean O’Neil: Sure, Derek. We’re — this is kind of what I would call an early estimate based on the fact that we’re still formulating our budget and our forecast for next year. But we’re currently anticipating a slightly improved originations market. However, we’re also cognizant of where interest rates are currently and what the trends have been over the last few months. The offset here would be if interest rates decline, originations should accelerate faster. However, servicing could see some declination in its PTI due to slightly lower float, which while it is partially offset by lower cost to borrow, still could create some negativity. Also factored into that number, we’re not considering any opportunistic transactions like our reverse asset transactions of which we’ve had a couple in 2024 and then another in 2023.

Those we typically don’t budget or forecast for, but they could further accelerate or improve our ROE. And then we are assuming slightly lower float, as I mentioned earlier from higher elevated — sorry, not elevated interest rates lower interest rates.

Glen Messina: And Sean, is it fair to say the general industry volume forecast really don’t materialize, it’s largely going to be as a result of higher rates, which is — which may depress industry origination volumes. It’s going to result in lower MSR amortization expense in servicing and it will have more servicing earnings. So again, given the balanced nature of our business with two scale platforms one in originations and one in servicing, we’re designing the business to perform in any market environment not necessarily being dependent upon one interest rate condition or another.

Derek Sommers: Got it. And then just given the commentary in rates and where we are into the quarter is there any kind of update you could provide on how things in the DTC channel have been trending quarter-to-date so far? Thank you.

Glen Messina: Yeah. Just generally, I mean, if you could look — if you look at our portfolio stratification by interest rates that I talked about earlier on the call, with a 30-year fixed rate mortgage rate now in the high 6s, low 7s depending upon where you look. You can imagine that lock volume is trending lower than it was when rates were 100 basis points lower in the third quarter. I think that’s borne out in the MBA refinance application index we’ve seen that trend down. Notwithstanding, look, I still think we’ve got upside opportunity to move our platform to industry best practice recapture levels. We’re continuing to invest to drive our performance and increase our recapture rate and looking forward to continuing to chip away at that over the months and quarters ahead.

Operator: We’ll take our next question from Eric Hagen with BTIG. Please go ahead. Your line is open.

Eric Hagen: Hey, thanks. Good morning. I think two questions here on the co-issue MSR channel. I mean when you referenced unanticipated pricing changes at the GSEs, which affected the channel last quarter, can you elaborate on what may have driven that? And then when we think about the overhead costs and the expenses that are associated with sourcing co-issue MSRs how does that differ from the cost structure in a traditional correspondent relationship?

Glen Messina: Eric, it’s Glen. On the pricing changes look the Fannie Mae and Freddie Mac at their discretion can change price, whenever they so choose at any given time during the quarter. Historically, that has meant any of the loans you may have in your pipeline that are not sold forward, even though you may be hedging them they’re being hedged for changes in interest rates, but not necessarily hedge for a change in — random change in price that GSEs could put forth. At the most recent MBA conference, this drew a fair amount of discussion amongst industry participants and I believe FHFA has put forth some interestingly — saying that they’ll be more thoughtful about price changes going forward and we’ll do better to preannounce changes so people can adjust their pipeline position, and not get caught with loans that haven’t been sold forward. Sean, on the other one, I’ll leave that to you, the second part of Eric’s question.

Sean O’Neil: Sure. What was your other half Eric?

Eric Hagen: It was around the cost structure of co-issue versus traditional correspondent channel.

Sean O’Neil: Sure. I mean, the co-issue is probably the most optimized and easily scaled cost structure followed then by correspondent. So correspondent you need a small group of what we would consider to be B2B type salespeople. You need pricing capabilities. The co-issue is more participating in the Fannie and Freddie and Ginnie marketplaces, like S&P and PIIT and that can be done quite effectively with a small team and scale up or down. But all of those both correspondent and co-issue are dependent on the broader market. So if the market is growing that’s more volume into that space. And then of course, those spaces both tend to be fiercely competitive like everything else in originations.

Glen Messina: And Eric, even within correspondent there’s different cost structures depending upon loan delivery method. So in co-issue you’re really just buying an MSR. So it’s — the channel is unaffected by GSE price changes and when you move into the correspondent space you have mandatory best efforts and non-delegated delivery levels. And the cost of processing those transactions mandatory is lowest non-delegated is highest, because you’re putting the most amount of work you’re actually doing the underwriting in a non-delegated transaction.

Eric Hagen: Yeah. Good color here. Thank you, guys.

Glen Messina: Yeah.

Eric Hagen: All right. So when we look at your earnings going forward, I mean what do you feel like is the target ratio between owned MSR and sub-servicing here? And which do you feel like is a bigger growth opportunity potentially if rates are either higher or lower from here?

Glen Messina: We’re going to continue to go forward with a strategy that’s helped the business perform to the level it’s at today and that is focusing on capital-light growth. So we’ll be continuing to manage our owned MSR portfolio in that $115 billion to $135 billion of outstanding UPB range. We may — that may be a little bit higher a little bit lower in any given quarter depending upon how we time our MSR sales. And we’re going to continue to focus on capital-light growth through sub-servicing both with our capital partners and through third-party I’ll call it, third-party sub-servicing agreements with independent mortgage banks, banks and credit unions.

Eric Hagen: Got you. All right. One more, I mean if interest rate volatility does come down, do you think that would support a lower hedge ratio? And would bondholders potentially look to that as a source of incremental liquidity on the balance sheet?

Glen Messina: We do manage our hedge position dynamically. If volatility comes down we would give consideration to not only the adjustment of our hedge portfolio composition which can also affect cost. And we also reevaluate what is the appropriate target hedge coverage ratio. But I think as you know Eric, markets can move at unanticipated times in ways you don’t expect. So I don’t suspect we’ll necessarily at least here in the near-term just given the volatility we’ve seen, I wouldn’t expect any major change in our strategy in the near-term. But as things settle down in the long-term, we’d always evaluate what makes most sense. And it’s in the best interest of all of our constituents.

Eric Hagen: Thank you, guys. And I appreciate you. And congrats on the headway with the capital structure here. Thank you.

Glen Messina: Thank you. Eric.

Operator: [Operator Instructions] We’ll take our next question from Matthew Howlett with B. Riley. Please go ahead. Your line is open.

Matthew Howlett: Oh, Hey, Glen and Sean. Thanks for taking my question. Congratulations on the refinancing. The first question I think is the obvious question. With the discount to book 56% of that fully diluted number. I know you’re going to take $4 off, but then you’ll obviously earn at least $2 in the fourth quarter it looks like. Why wouldn’t you reinstitute the buyback? I think Sean you said you want to hit leverage targets. I’d love to hear what they are, as you continue to grow earnings. But why wouldn’t you put the buyback here? That’s the quickest way to close that gap and create value for your shareholders.

Glen Messina: Yes. So we’re focused on a couple of things here. So we said, we want to over the long-term continue to drive towards a pure normative leverage. We think that’s important for the business. It accretes earnings and it further derisks the balance sheet, closing the gap between our cost of corporate debt versus industry cost of corporate debt, which is still a gap. I mean we’ve lowered it but we’ve got more room to do that. We also want to invest to continue to improve the intrinsic earnings power of the business. But look to the extent that we have excess liquidity, we certainly would give consideration to call it just generally a quasi-ratable retirement of debt and maybe some limited share repurchase but it’s got to be done in a way that actually helps reduce our leverage.

We don’t – we work really hard to get our leverage down. We don’t want to buy back shares and drive our leverage back up. That’s not – I just don’t think that will be healthy for the business. Go ahead Sean. Go ahead.

Sean O’Neil: No I was going to say you had indicated what is our long-term target. When we say pure normative I think we may have mentioned earlier that we think most of our public and private peers, at least those who participate in the 144A high-yield market have a debt-to-equity ratio somewhere in the range of 2.0 or lower. And so that’s kind of our long-term target to attain those levels. Obviously, peers can fluctuate over time. So if they go up or down, we’ll look to fall in line with that over time.

Matthew Howlett: Right. I hear you. And you can call that high-yield debt in two years?

Glen Messina: Yes. It’s a five-year non-call to structure.

Matthew Howlett: Okay. Well, look, I mean Glen, I appreciate the importance of getting leverage down even further. But I mean clearly a little bit of excess capital towards buybacks at this 50% discount to book. And as a follow-on question I mean I always ask about the deferred tax asset but where does that stand? I think you’ve had five quarters of consecutive profitability. You’re not going to be paying corporate taxes for a long time. That’s an asset that you can put on your balance sheet. When – and that’s going to just inflate book value even more. Just talk about that. And again just a little bit of cash towards the buyback I think would make sense given the discount to intrinsic value is tremendous.

Sean O’Neil: Sure, Matt. You are correct. We have a fairly significant deferred tax asset on our balance sheet. That’s back in our last year’s K. We update that annually. Currently it’s north of $170 million. It’s fully offset by something we call a valuation allowance. The valuation allowance really gets lifted when a couple of items fall into line, I’m not going to pretend I’m a tax and FASB expert but the high-level view is you have to have a cumulative taxable income and GAAP net income is probably the easiest proxy for that. And by cumulative that’s positive, that’s several years’ worth. And so if good years fall off your accumulated number, you have to continue to produce good years to offset that. So 2022 they were relatively good years for originations in PTI and we’ll have to continue to hit and exceed those numbers in 2025 as we replace those rolling off.

And then the other thing is demonstrated long-term GAAP net income positivity. And so as we get closer to being able to lift that valuation allowance, you’ll definitely hear me talk more about that on earnings calls. I would want to make sure the rest of the market is as tuned into our DTA as you are.

Q – Matthew Howlett: I mean, look, needless to say, you’re not going to be a corporate taxpayer for a long time.

Sean O’Neil: The bulk of corporate taxes, you’re correct. We do have some taxes that we pay on behalf of our Asia Pacific legal entities, that don’t get any tax efficiencies from our deferred tax assets. But you’re right, in the US, when we look at those taxpaying entities, we have quite a decent buffer to minimize our tax rate at least.

Q – Matthew Howlett: Well, look, like I said, it’s just another asset of the company that I think goes well above that what you stated is reported book value, and I appreciate the color on that. We’ll look forward to that. Final question, on subservicing additions, you have $38 billion year-to-date. I mean Glen and Sean, what can we — I mean, you have the originations correspondent and you can buy bulk. But what can we assume — sometimes you give like a pipeline of subservicing, who you’re talking with. You talked about your MAV and other vehicles. But what can we assume next year, in subservicing additions? And maybe just quickly address the Rithm extension.

Glen Messina: Yes. So, we’ve not yet put forth guidance on subservicing additions and our targets for the — for 2025, for subservicing additions probably do that on our next earnings call. We are seeing continued strong interest. We just came out of the Mortgage Bankers Association Annual Conference in Colorado. Lots of good leads and opportunities came from that. As you know, we’ve got a pipeline of transactions that we’re working. Subservicing adds can be lumpy, as consumers are — or I’m sorry, clients are deciding on what is the right timing for them to change providers. So we’d like another quarter or so to give us — to give some more color on that through our planning process, our year-end planning process. But yes, the interest remains strong and we’re still optimistic about our ability to drive some servicing adds.

In terms of the Rithm contract, we’ve had — that contract typically comes up for renewal every fall. We’ve issued several 8-Ks, which has pushed the date further out into the future. And we’ve extended the contract until February, the February time frame. As we’re still undergoing negotiations now, there’s two portions to that contract. If you may recall in reading our 10-Q, there’s a body of assets that are called RMSR 2.0, which is about $9 billion in UPB generates 22% or so of the revenues from the Rithm subservicing portfolio. That portion of the contract has been — was not terminated by Rithm, and it just continues to run until December of 2025 where the next renewal period comes up. And it’s the remaining 78% or so that we’re still in negotiations with Rithm on the terms and conditions of renewal.

But discussions are ongoing. And look, they’ve been a great client and we look forward to continuing to serve them on a go-forward basis. But discussions are ongoing, and we’ll keep the markets posted.

Q – Matthew Howlett: Great. We’ll stay tuned for the progress. Thanks, Sean. Thanks, Glen.

Glen Messina: Thank you.

Operator: And there are no further questions on the line, at this time. I’ll turn the program back to Glen Messina for any additional or closing remarks.

Glen Messina: Thanks, David. And I’d like to thank our shareholders and key business partners for supporting our business. I’d also like to thank and recognize our Board of Directors, and global business team for their hard work and commitment to our success. And we look forward to updating everyone on the call, about our progress at our next earnings call. Thank you.

Operator: This does conclude today’s Onity Group’s third quarter update call. Thank you for your participation and you may now disconnect.