Q2 2022 Rithm Capital Corp Earnings Call
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Good morning, and welcome to the rhythm capital second quarter 2022 earnings call.
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I'd now like to turn the conference over to Phil Seven. Please go ahead.
Thank you and good morning, everyone I would like to thank you for joining us today for rhythm Capital's second quarter 2022 earnings call. Joining me today are Michael Nierenberg, Chairman, CEO and President rhythm capital, Nick Santoro, Chief Financial Officer of working capital and barren Silverstein President of new raise.
Paul we are going to reference the earnings supplement that was posted to the rhythm capital website. This morning, if you've not already done so I'd encourage you to download the presentation now.
I would 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.
Or would you view that.
<unk> in our press release and earnings supplement regarding forward looking statements and 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 reckon.
Reconciliations of these measures to the most directly comparable GAAP measures can be found in our earnings supplement.
And with that I will turn the call over to Mike. Thanks, Phil Good morning, everyone and thanks for joining us.
The second quarter was a period of extreme volatility I'm very proud of our team as we navigated some of the most difficult markets. We've seen in many years, we saw interest rates rise dramatically credit spreads widened and liquidity in the markets become challenged we positioned our company for higher rates and our portfolios rose in value as a result book value.
Kris to 12 98 from $12 56, before the internalization payment to fortress.
Our company, formerly known as new residential rebranded to rhythm capital and internalize. Its management contract. The result of that transaction will add approximately 12 to 15 cents in core earnings as we create synergies not only within the investment manager, but also in our operating business lines. In addition to our synergies we've been.
Very focused on our expense reduction and happy to announce that our expenses and our mortgage company have been reduced by half our approach to investing is is that we don't need to be the biggest we just want to be the best deploying capital at times, where we see real returns if a division of our sector will not yield great returns for shareholders.
There's we will pivot and deploy capital elsewhere I think a good example of this is how we reduce the capital in our origination business from approximately $2 billion at the time, we closed the caliber transit transaction to $650 million today.
As we look at the financial services sector. We believe the next six to 12 months will provide us with the opportunity to deploy capital with teens type research returns driving earnings higher and creating more value for shareholders.
We will be adding some great talent and business lines, where we have not been as active in the past as we think about capital we've been very patient as I pointed out earlier, we ended the quarter with $1 8 billion of cash and liquidity and that number stands at roughly 165 billion today and that's after $200 million payment made to fortress during the.
Quarter as we go forward, you'll continue to see the same discipline around investing a terrific investment team more diversification in our income stream and hopefully higher earnings I'll now refer to the supplement which has been posted online.
I'm going to start on on on page three I mean to get through it it's pretty pretty quick and then what we'll do is we'll open up for Q&A, because I think the important part of our presentation. This morning is not what it was but we're but where we're going on a forward basis. So when we look at our company, obviously, we rebranded to rhythm capital and I.
That reflects our where we are today as a company and also the desire to diversify away from more on the single family residential side, our portfolio of operating companies and assets put us in a very unique position that I think differentiates us from.
Some of our peers in the marketplace. When we think about capital we've maintained higher levels of cash and liquidity on our balance sheet. That's done purposely as we thought as we look at the volatility in the markets, we think about funding and and with the fed obviously in play and the uncertainty and the uncertainty we think will have the opportunity.
Deploy capital at higher Roes.
When we look at the single family rental business, that's something that we've spoken about on prior earnings calls. We're currently up to 3700 properties and when we look at the housing market with mortgage rates higher and housing is starting to really slow down and we think we're gonna be able to deploy capital at much higher cap rates when we look at the landscape.
We do think we're going to start seeing more pockets of opportunity not only get in some of the traditional business lines that we've been in but in other areas such as commercial real estate.
Our track record very very strong since inception in 2013, our total economic return is 162% or 18% on an annual basis page four our business overview, a little bit of highlight real since inception, and a $4 1 billion of dividends at the time of 630 <unk>.
Dividend yield was 10, 7% 7 billion in net equity 35 billion dollar balance sheet 600 plus billion of Msr's.
A top non top five non bank originator and servicer with Genesis, we are an industry, leading business purpose lender our growth in the single family rental business, we have complementary operating businesses, which are all listed on the bottom side of the right page and again, our desire to anti other parts of the financial services business, which we'll talk about.
Shortly.
Five our highlights.
From a financial perspective during the quarter, our GAAP net loss of $3 $3 million that reflects a one time fee.
To the external matter to fortress of $325 million earnings $145 8 million and core earnings of <unk> 31, 31 per diluted share dividend in 'twenty five.
Cash and liquidity as I pointed out early $1 8 billion net equity 7 billion. Our book value 12, 28, but that reflects a 77 hit from the termination fee paid to fortress page six business highlights.
June 17th Rhythm announced the internalization of its management function, we all part of what we'll call Newco a rhythm capital. We do think as I pointed out earlier should add about 12 to 15.
Per diluted share and earnings for our shareholders will see more synergies as we leverage the infrastructure across our entire ecosystem. The rebranding today, we I believe it is today, we trade as a R. T M on the New York Stock exchange will actually be ringing the bell on on August 10th we're very excited about that and.
And again the rebrand to rhythm we think this distinguishes our company from just from one of our mortgage company and new Red but also.
It will reflect the diversified nature of our company as we go forward our focus on profitability is always there I pointed out earlier, our run rate expenses are down by about 50% in the mortgage company will continue to focus there when you look at the mortgage company for the most part all the integration has already happened and we continue to focus on ways to.
To drive additional cost savings as well as increased revenue as we go forward.
On a financial side again, $1 8 billion, 99% of our portfolio to non daily Mark to market and then when we look at our business, we're totally focused on ROE and IRR and risk adjusted returns, we reduced our equity in our mortgage and the origination side because quite frankly gain on sale is just not there.
Theres no reason to produce a unit that we don't think is going to make money for shareholders.
Page seven is really our strategic evolution as you can see from 13, we started as an excess MSR owner to where we are today. We think we've made great progress great job by the team as we've as we've gone from just being what I would call an asset owner into more operating business line.
Page eight.
Really just defines our ability or our talks about our ability to manufacture asset.
As I pointed out a minute ago, we're not just going to manufacture assets to do that because we are in the operating business, we're going to manufacture assets because we think the return on equity for shareholders is something.
Is the reason why we want to manufacture assets.
Again, pointing out that the capital in the origination business has shrunk we could take excess capital there and deploy it to other areas, where we think the return on.
Equity is going to be greater than that as it relates to just originating a mortgage loan the macro environment. There is no there's nothing surprising here.
Inflation continues to be a multi year highs.
We're starting to see a little bit of softening in some of the economic numbers that are coming out.
The fed 75 basis point back to back we're expecting 50 in September and probably at least another 50 going forward. Obviously, the economic data is something that we continue to monitor so how do we think about that.
I pointed out earlier that we've been positioned for higher rates.
To the extent that we believe the market will rally.
We will start adding hedges to some of our.
Portfolios as it relates to our MSR portfolio just to give you a sense our gross whack at three 6%. So youre, probably about 175 basis points added the money at this point and I'll talk to talk a little bit about that.
A bit as we look at the housing market.
Mortgage rates anywhere from five and a quarter to give or take five and three quarters right now we.
We do think we're going to continue to see the slowdown in the housing market I think I am and you know I'll talk personally I am a little bit more bearish than I think some of the analysts out there I think when you look at housing everybody's banking on supply the lack of supply to keep housing at well you know kind of what I would call. These elevated levels were pricing at these ela.
<unk> levels.
It could be wrong, but I do think higher interest rates.
Will lead to lower home prices.
From a financing standpoint, great shape on our financing side, what I would say there from a macro standpoint, all financing costs.
In the marketplace have increased.
And when you look at the securitization markets.
Overall cost of funds have increased when you look at some of our bank Counterparties some of that some of the cost of funds has increased there as well and again, we will talk to that in a little bit second half preview patient approach to investment strategy.
We started to deploy some capital.
What I would call wider spreads here, we'll continue to do so if you take a step back and think about our capital 165 billion of cash today, let's assume that we deployed $1 billion, even at a 12% kind of return that is a $120 million of net income on the year. So while we've been very patient on capital, we're going to start to look to.
<unk> to deploy capital at.
What we think are some wider spreads here our continued focus on profitability MSR valuations.
Talk to that for a second we have slowed down our origination and our mortgage company pretty dramatically again, because I think we don't see the the merit of of what I would call real gain on sale there unless we increase our MSR multiples. So when you think about it we have 600 plus billion of MSR is on our balance sheet.
With a growth with a weighted average gross WAC of three 6% or $3 75 year season speeds about 11 CPR.
When we take a step back we say, okay should we produced 6% coupon mortgage rates at kind of a five at a five multiple or should we just stay the course.
And I think the general view is keep some extra capital we can deploy capital at wider levels slowdown origination until we get to a place where we think that the risk returns are warranted and we see gain on sale come back. So we've been very very cautious there on the on the origination side and I think as we go forward and we can expand into other product areas.
Youre going to see the diversification of earnings from.
From our company really has hit its stride.
Age 12 summary of our business segments origination servicing MSR related investments, we do have some real estate related investments. The single family business will grow again, we're we're very patient there we've increased cap rates quite frankly, as a result of our increase in cap rates, our ability to source at higher cap rates has really slowed down.
So we'll continue to monitor that because the market has been adjusted.
Our loans remember, we still have $76 billion of call rights on the legacy mortgage market currently out of them out of the money any market rally should kind of bring that back in and then other when we look at consumer loans and corporate page 13 of our MSR portfolio I'm not going to spend a ton of time on the next number of pages, but.
I hit the highlights roughly 60 months season 3637 gross WAC.
As you look at page 14, 11, CPR recapture rates are fine.
Keep in mind, and a lower refi market.
See less recapture because theres, just less refinancing activity going on and we still believe we're going to be in a purchase market, which lends credence to the the.
Caliber purchase.
Franchise that we have there on the retail side.
Page 15 single family rental business I pointed out 3700 units.
We're very thoughtful when we think about geographies, where we're going with this.
And obviously, we'd like to see this grow but we're going to we're going to be patient and we're going to deploy capital at higher cap rates unless the markets tell us otherwise paid 16 Genesis $1 3 billion of our production in the first half.
<unk> is performing extremely well Robert Wiseman and his team have done a great job there will continue to.
And a lot of time on that business thinking about other areas, where we could where we can invest capital to grow the business.
The way the company is performing and on track for <unk> for the way we've underwritten. The initial investment servicer advance is not allowed to talk about there.
<unk> capabilities are extremely high and advanced balances are down and continue to remain lower as the consumer continues to perform.
<unk>.
Our mortgage company pre tax income $552 million.
G&A expenses I told you that we continue to bring those down dramatically a couple of things to point out here on the origination side.
I think the way that we're trying to forecast. This going forward is a flat pre tax income number as we go forward you look in the quarter.
Have a pretax loss of $26 million $23 million of that is due to the legacy cleanup around some scratch and dent stuff on the caliber side and then we're exiting some leases and there is a little bit of severance there, but in general if you take out these kind of one time charges in there and we hope they're onetime charges the origination business is going to be running.
Breakeven as we go forward.
As we look at the overall company itself just to give you some metrics when we did the caliber acquisition. The combined company had roughly 13500 people.
Currently I think we said give or take around <unk>.
7800 people today, so dramatic reduction in costs trying to right size for the for the existing environment origination business will run flat and the servicing portfolio will continue to generate what we think are very good earnings.
Yeah.
And then finally on the.
On page 19, and 20 of the origination and servicing business I think you know bear and we'll talk to this but when we look at gain on sale, we're starting to see a little bit of what I would call.
Openings for higher higher gain on sale margins, we continue to work on there.
<unk> very disciplined that we're not going to originate a mortgage loan that doesn't make money.
Just kind of substantially revenue so with that I'll turn it back over to the operator open up for Q&A and again I think the big thing for US is where we are today, we have a great business, we're sitting on a lot of cash.
Earnings have been very very good.
But I think where we go is rhythm capital is something that the team is extremely thrilled about and and we're thrilled about as we as we strive to drive higher earnings for shareholders.
And continue to diversify around just the residential side of the mortgage market, so with that I'll turn it back to the operator.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Bose George with <unk>. Please go ahead.
Hey, everyone. Good morning.
Can I get an update on book value quarter to date.
I assume you haven't put on any hedges on the MSR yet.
Yeah, So I'll take the second part.
Nick will give you a little bit of color, it's still early in the quarter.
As far as MSR hedges against that $3 six gross WAC.
We haven't really I mean yesterday, we bought a little bit under $1 billion of mortgages, but.
In general we haven't gone out to hedge the MSR because our MSR as we feel are different.
There is that delta between where we where we're going to start to see prepays pick up.
But we think that we're pretty far away from that as far as book value and Nick you want to take that.
Book value given the change in rates is approximately call. It 11, 70 thoughts as well.
Sure.
Okay, great. Thanks.
And then actually what are your thoughts on the bulk MSR market in terms of.
The opportunities there.
So.
We can manufacture our own msr's and I pointed that out when we think about our origination business I think we have capped the multiple that we put on msr's no matter what rates do because.
Again, we don't want to get into a period of time, you would see massive moves in rates. So I think the high we saw in 10 year rate was about $3 45. This morning. Its $2 55. So if you put on a six and change coupon mortgage youre going to see the likelihood of that going away and you got to be able to recapture that so we've kept our.
There are what I would call our multiples.
We will see I think where you're going to see in the mortgage company business I don't you're going to see people rollover youre going to see companies go out of business, we've seen a little bit of that already.
That will or could present, an opportunity for us to acquire MSR is I don't think we're there yet we do have an appetite if the multiples are right, but the one thing both to keep in mind as your cost of capital on MSR financing and everything else.
Put you at roughly a.
Kind of 10 ish percent Levered return. So I think we're gonna be really patient unless the MSR market Cheapens up here I think there's other places to deploy capital and we have $650 billion of them or something like that.
Okay, great. Thank you one quick one on servicing technology any update there in terms of what you guys are going to do.
Yes, I think that.
We continue to evaluate that I think we're getting closer to making a decision.
So.
Stay tuned.
Okay, great. Thanks. Thank.
Thank you.
Our next question will come from Eric Hagen with BTG. Please go ahead.
Good morning, guys congrats on the transition here.
A couple of here so with respect to the capital and the originations segment should we think of that being sort of the baseline amount the company would need to keep their at its current size of the current amount that youre originating and what might change that.
And then how should we think about the growth in Genesis and the SSR business against the backdrop of what you discussed is lower home prices and just a bumpier environment in general.
First of all our capital in the mortgage company will go up if gain on sale goes up I mean, it's I think it's pretty binary.
Or unless we can figure out a better way to generate more kind of net income not just gross revenue for.
For the business as you think about Genesis.
Those guys approach they've been around a long time.
Charles Sorrentino, and I are out on the West Coast last week, we spent a couple of days together.
The ability to do different things in the real estate industry.
It's something that I think gets us extremely.
Excited to work with the.
The Genesis folks so I think I think we'll see things expand we want to be cautious about where we are in the cycle as it relates on the building side, because you are going to start to see that slowdown, but I think you know.
With our capital with the relationships that those folks have I think you could see some good growth there. It may it may be and not in a non traditional weight and they're currently doing that.
And then finally on the <unk> space.
We've raised our cap rates, we're not acquiring a lot of properties here, just because we think home prices will slide a little bit.
When the market with the securitization announced that we monitor what the ROE is on that.
In conjunction with where we've acquired the properties. So I think you'll see a more patient approach from us and potentially others may be the way that others look at their capital.
But we'd like to see cap rates go up a little bit here based on where rates are.
And if not we may pivot to lower at lower cap rates, but I think for now we're going to be a little bit patient here, because we think theres other areas, we could make more money by deploying that capital.
Yes, that's helpful. When we think about a market yield applied to the existing MSR portfolio, where would you say that shakes out right now.
Probably 10 ish would be my guess based on where speeds are.
And our gross wax.
On a levered basis.
On a levered basis, how about on Unlevered basis before you apply the level eight ish.
It is some of the season stuff it could be a little bit higher, but it's you're probably in and around 10.
Would you say theres a meaningful difference in ROE between the MSR is that.
Service yourself versus sub service.
From others.
You mean, our sub servicing.
The loans that you service in house mortgage somehow versus.
Yeah, So I mean listen we made some early purchases appears back from.
From United Wholesale and Quicken.
Obviously, those guys are very good and refinancing anything and everything they possibly can so.
But there are they already burned out so I would say that our own servicing stuff is probably a little bit better here, we have sub servicing with ocwen those portfolios continue to perform extremely well.
Got you that's really helpful. Thank you guys. Thanks, Eric.
Our next question will come from Doug Harter with Credit Suisse. Please go ahead.
Thanks, Michael.
Look to deploy your capital do you think the opportunities are going to come in.
Kind of asset purchases or.
Central and acquisitions of other companies.
It depends I think on the asset side, we're waiting for the shoe to drop if the shoe does drop so I think to one of the earlier questions around MSR values.
<unk> went down obviously, we would sit here and pounce on them and buy more MSR is I think for US. It's a total return play.
At some point you wanted to deploy a little bit more capital I think even if you listen to some of the comments from Jamie Diamond around the stress test and you think about bank capital.
That will have an impact on the entire system as people think about financing their business you see the banks, taking write downs in some of their leveraged loan positions that will have an impact on how people finance, so maintaining higher levels of capital, but we do think there could be some opportunities that kind of debt, but even even down the road that may come out of the banks.
To see a more on the asset side quite frankly.
Then we would see on the operating side, but to the extent that there is some great opportunities there.
<unk>.
We will look at either one I think it will be a little bit agnostic, but buying distressed assets typically is the way that.
Folks have made a lot of money in the past.
And then as you.
Look at the the commercial real estate opportunities.
Where is.
His rhythm today as far as kind of having the right.
People in place to be able to take advantage of that opportunity is that something you need to hire or now.
I guess, where are you on that opportunity.
So the one thing that I would tell you doing this for a long period of time.
You need.
Great people to be part of our organization I think we're at a point or we're pretty close we'll be making an announcement hopefully within the next.
Couple of weeks to 30 days about a team or a P.
Partnership in the commercial real estate space, while saying that between Charles Sorrentino myself, who had been in the business for a long long time.
<unk> and commercial real estate debt I think is something that we have extreme expertise in doing.
But we're currently we're pretty close on being ready to announce something to the marketplace is not buying a company. This is bringing on a team we're developing in partnership with a team of who we think are a plus quality folks who are going to help us drive more earnings for shareholders.
Great. Thank you.
Thank you.
Our next question will come from Giuliano Bologna with Compass point. Please go ahead.
Good morning.
Can we go back a little bit.
For discussion I'm curious if it would make sense.
On the hedging side, where it makes sense to hedge out more of your new production or are there subsets of the portfolio and it makes sense to hedge.
The new production coming on.
<unk> is obviously coming on at a much higher whack when would it make sense to go out and have some of them some of them into production.
Portfolio.
Yeah, Great question, but here's what I would say we've slowed down our production in the mortgage company. So we have less to hedge overall at a higher WAC level than our existing portfolio and I point that out because we.
We have 600 odd billion of these things.
While saying that it's a very valid point and we are looking to.
I don't know if this is just a bear market rally to $2 55 and 10.
These market moves are extremely dramatic the one thing I would say about the MSR business is that these MSR is a much more.
There are they are they have a lot less negative duration today than they did going back a year or two ago. So what I think you'll see from US is we'll put on more hedges against some of the higher coupon stuff, which is I think really where your question is I think that being mindful.
I mean, we do think event is going to get to.
Been spending some time with some of our economic consultants I'll call them.
We think that we think the fed is going to get to a <unk>, 4% on funds rates does that mean tens youre going to see the $2 $55. I don't think we want to make sure that we're not trapped here, but I do think the MSR asset will not go up as much in value. So we have to be mindful of market moves in rates.
While saying that again, though some of the higher coupon stuff with mortgage spreads where they are where they have some mortgages against those who started that.
Yesterday.
That makes sense.
Little bit of a different question around the MSR as you guys have roughly $2 billion of custodial deposits.
I'm curious roughly roughly what kind of yield you're generating on those.
Because I was involved with them.
Just in general it sounds like you know what.
The best thing that SKU counts.
It is now.
We are closest to tracking roughly around where you are.
Video you are able to generate almost custodial deposits.
Yeah.
So we have I think the number is something it depends on the on the time of the month, but I would assume something in the vicinity of $12 billion on average during during the month and those are generating something fairly close to the funds rate.
Fed funds very.
Very much on top of <unk>.
Looking with our bank Counterparties to make sure that we're getting appropriate.
Rates on our on our deposits.
The big part of it.
Yes.
No I'm sorry elements of injection.
Yes, no I said, it's a big part of our.
It's one of the thing the inputs into our business right now the big deal.
That's very helpful.
It can be a big driver.
Most of our earnings power over I'll jump back in the queue. Thank you.
Yeah.
Our next question will come from Trevor Cranston with JMP Securities. Please go ahead.
Okay. Thanks.
Question on the gain on sale margin.
Bumped up pretty nicely in the second quarter.
I guess as you guys have moved through July so far would you say that.
Margins are kind of holding steady at the level you had for the second quarter.
Should we think about how that's trending heading into <unk>.
Yes at least in July we have seen margins maintain or increase.
And that includes slide so we've continued to do that and the strategy that Michael talks about.
Okay got it.
And then on the MSR portfolio looks like.
Petersburg 11 within.
In the quarter.
Just kind.
Kind of give an outlook on kind of where you think this beatles settling with you know in.
In terms of turnover speeds, assuming the portfolio stays pretty substantially over the money.
Your guess is as good I think.
It's like $10 67.
I think I think it depends on.
On your view of housing I don't.
I still believe.
Our view on housing is probably a little bit more negative like I said earlier than the market is.
Your speeds are all going to be related to turnover, we have five to six year season kind.
<unk>.
So.
I don't know I think we should say something around here keep in mind, our DTC business is fairly large around recapture.
The extent that we can actually pick up some of these folks that may even sell their house and go for Ferrari to purchase a new home we have the caliber side, we have both the DTC side and the retail side on the caliber side, so that should help us so hopefully we stay in and around these levels.
I think the other thing is it depends on where the absolute level of rates settle in.
Think about it we were talking before about a three <unk> to 4% terminal funds right.
And you've got a 285% to $2 90.
Front end two year note. We do think rates will continue will push higher and again like I mentioned I don't know if this is a bear market rally the market's a little bit ahead of its skis or non people just really play in the slowdown.
Okay. That's helpful. Thank you.
Q.
This concludes our question and answer session.
I'd like to turn the conference back over to Michael Nierenberg for any closing remarks.
So thanks, thanks, everybody for joining again Super excited about the next chapter in our lives.
<unk> Alright E M.
That goes live today and again I think the most important thing to get I think we had a great quarter, we're sitting on a lot of cash.
The most important thing to get out of this call is as we pivot to <unk>.
To rhythm.
I think youll see more of an investment manager.
Style than just being all in on the resi side and we look for great opportunities doesn't mean, we won't get bigger in resi, but we look for great opportunities to deploy capital I. Appreciate your support have a great rest of the summer any questions you know how to reach us. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Yeah.