Q2 2023 Rithm Capital Corp Earnings Call

Good day and welcome to the Brigham Capital second quarter 2023 earnings Conference call.

All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays 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 Australia. Your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Ana Paula Associate General Counsel. Please go ahead.

Thank you and good morning, everyone I would like to thank you for joining us today for rhythm capital second quarter 2023 earnings call.

And today are Michael Nierenberg, Chairman CEO and president.

But that capital.

Brown Chief financial officer throughout the call, we're going to replace the earnings supplement.

This morning capital website Www Dot dot.

Uh huh.

<unk> already done so I'd encourage you to download the presentation.

I would like to point out that certain statements made today.

These statements by their nature are uncertain and may differ materially.

I encourage you to review the disclaimers in our press release and earnings supplement regarding forward looking statements I encourage you to the risk factors contained in our annual and quarterly reports filed with the SEC.

In addition, we will be discussing some non-GAAP financial measures during today's call reconciliations of these measures to the most directly comparable GAAP measures can be found in our earnings.

And with that I will turn the call over to Michael.

Thanks, Sam and good morning, everyone and thanks for joining us as some of you heard last week, we pre released earnings in conjunction with the announcement we were acquiring sculptor these.

These are really exciting times for us our shareholders and our Lps are strategic measured growth in business lines, where where we try to create an edge is something we are very proud of.

Since inception in 2013, when the company was formed by fortress to take advantage of price dislocations created by a hair higher capital requirements at the banks, we have executed on that plan and along the way we grew and acquired a number of operating companies in the financial services space. Our mission is to continue to do this very same thing we've done.

For the past 10 years drive value for shareholders and L. PS with teens type returns.

If you think about where we are in the cycle interest rates are at some of the highest levels. We've seen in 20 plus years capital requirements in the banking system are headed higher we are in a period of time, where unlevered returns on most of the assets. We invest in are between eight and 12% on an unlevered basis. This period of time for an investment perspective as some of the best <unk>.

<unk>, we have seen in years. The time is now well we are a mortgage REIT I like to think of us as an asset manager operating as a REIT, yes, we do invest in all types of assets, both good REIT assets and non good REIT assets, such as consumer loans and operating companies.

Onto the sculptor acquisition, there should be a great one for everyone rhythm shareholders sculptor L. PS and all of our employees at both respective firms. It is truly transformational for all of US the acquisition adds excellent investment expertise and broadens our overall mandate as we continue to produce results drove higher AUR.

Create more value for shareholders and L piece. The combined platform is powerful we have a very strong capital base of seven plus $1 billion in equity we have a global investment business. We have a 30 plus billion dollar balance sheet I'll now referred to the deck, which has been posted online.

Yeah.

The theme of this call from from my perspective, and our perspective, its a talk a little bit about rhythm who rhythm is so I'm going to open with page three we changed our slides a little bit just to talk again about rhythm in and how the company has grown over the past 10 years rhythm has become a real leader in the real estate and financial services.

This sector the company, which was launched in 2013 under the fortress investment group was again.

Setup to capitalize investment opportunities in real estate and financial services space.

What was once solely a manager of mortgage servicing rights. When the company was formed in 2013 rhythm has grown into a platform with a diverse and opportunistic portfolio that includes operating companies and a large investment portfolio.

The company, which was started in 2013 with $1 billion of equity has grown to over 7 billion of equity along the way, we've distributed $4 $7 billion of dividends to shareholders and we currently manage a $34 billion balance sheet.

Our recent activity during the quarter and subsequent to quarter end has really accelerated our mission to become a leading global asset manager.

And as we look back in time in June while at fortress. The management contract was internalized and that goes back to June of 'twenty. Two in Q4 of 'twenty two rhythm launched its private capital business in June of 'twenty, three we acquired 1 billion for our consumer loans from Goldman Sachs during the quarter.

In June as well, we acquired 371 units in our single family rental space business called the door from Lenore in July we announced the acquisition of sculptor asset management, which is a $34 billion asset manager. We also agreed to acquire 200 units of newly built homes Townhomes from.

A company called Dream find dream finders with equity capital from rhythm.

And that provided by Genesis capital, we continued to execute on our strategic plan and we're well positioned for new stages of growth.

The rhythm team here has worked together through many economic cycles that includes the great financial crisis that includes the period of Covid and we go back to the late eighties and early 90 some of US the sculptor 34 billion dollar asset manager complements rhythm 7 billion of permanent capital as well as our 30 plus billion dollar balance sheet.

As we look forward deal flow is significant investment opportunities. We're seeing are very very attractive and we think that's going to continue to help us grow earnings and add value for again shareholders in lp's now onto the quarter GAAP net income $357 million or <unk> 74 per day.

<unk> share earnings available for distribution $297 million or 62 cents per diluted share in that number there's a 20 cent gain related to the exit from the sale of excess msr's during the quarter, our dividend 25 cents, which reflects a 10, 7% dividend yield as of June .

Our cash and liquidity at quarter end $1.8 billion total equity $7.1 billion.

Page five the evolution of rhythm I'm not going to take you through all of these but again the company was started at fortress to acquire assets that we thought were very attractive as a result of higher capital rules and Basel III capital rules, which were implemented on the banks.

As you look from 2013, all the way out to 2023 the growth has been strategic the companies and assets. We've acquired along the way have been all core to our mission, which is in the financial services space and the addition of sculptor now is something that really vault says into hopefully becoming.

Our leader more of a leader in the Oh space and growing not only be a U M. But again staying very focused on the on the same things, which got us here, which are results for our Lps and shareholders rhythm.

Rhythms experienced across all asset classes, if you ever look at page six.

We just talk on this page the asset classes that we currently have on balance sheet. The things that we do and the things that we're going to continue to do as we go forward. So those included residential mortgage loans.

Our single family rental business, which is which is called the door, which now has over 4000 units our business purpose loan business, which you said, which is Genesis capital.

As our mortgage servicing right portfolio, which continues to perform extremely well.

We're currently in and around 600 billion there and that's obviously helped us grow book value quarter after quarter as interest rates continue to rise on the commercial real estate space, We have an investment co investment with Green born.

Obviously, we're doing some stuff with Genesis capital and one thing I want to point out we have no legacy office, Oh I'm in any one of our either operating companies or investment portfolios with others on the consumer loan side I announced we bought a $1 4 billion of loans from Marcus <unk> from Goldman Sachs, which is under the Marcus brand.

If you go back our experience in that business. While at fortress was in 2013, we acquired $3 $8 billion of loans for spring castle or or from I'm, sorry, HSBC and that was really the growth, which helped propelled spring castle.

To grow into what is now known as Onemain financial under the fortress umbrella.

In 2017 or 18, I think it was we acquired prosper.

We acquired 35 per cent of prosper for Penny warrants as well and we did that in consortium with Zoro third point and Jefferies and then around the or securitize lending and structured products business. Obviously, we have a balance sheet and we do a ton of work in the securitization markets.

Page seven I think is a very important one there's a lot of talk obviously in the industry about a bank regulations higher capital needs.

The one thing I would say about this is typically what this does and again I'm going to refer back to 2013, So I'm trying to put some history in here this creates opportunities for asset managers to acquire assets.

At very very attractive levels, we think we're in that period of time, you know with but so for fed funds in the mid fives now if you think about anything sopra, plus something youre going to get again to that 8% to 12% Unlevered.

Return spectrum.

On the sculptor deal on page eight.

Again, just repeating a little bit of of from last week, our alternative asset manager 34 billion of AUM as of July the transaction was valued at $639 million of $11.15 per share are all cash consideration for sculptor class a holders the class eight.

<unk> unit holders.

Are gonna received consideration in accordance with their operating partnerships again based on the 11 15 share price a class a unit holders are expected to be offered the opportunity to elect to receive cash or new units in a rhythm.

Subsidiary from a financing perspective, the transaction will be funded with cash and liquidity on our balance sheet our.

Sculptor will operate as a separate business unit within rhythm very similar to all of our operating companies they'll continue to be led by Jimmy Levin and will report to a to me and our management team are here at the rhythm level.

From an earnings perspective neutral ish for 'twenty, four and accretive in 'twenty five for rhythm and we expect to close in.

Early hopefully early fourth quarter page nine you know the rationale for doing this is kind of more of the same and we've been pretty vocal about our desire to broaden our reach and our scope not just says a you know away from just being and a mortgage REIT, which we don't feel like we want a different.

She herself in many respects in the REIT space. So this acquisition are really vaults us and helps us grow in the Alt space. We've spent a lot of time over the course of the past year running around the globe meeting with different Oh piece, we're very very excited about our prospects to continue to grow again.

I am not to say U M, but more to drive higher returns for our Lps and shareholders.

Page 10 is this rhythm a 2.0 I think many of you have seen this obviously the the difference when you have a look at this slide.

The box of operating companies in the lower left side of the page our investment portfolio and as we thinking I think about managing private capital. We're really really excited about the growth prospects of our organization I'll take you through quickly on our and some of the results from the from the second quarter and then we'll open.

And up for some Q&A on the mortgage company side, our total pretax pre tax income for the quarter of $327 million.

This includes a 19% pre tax ROE in that it excludes our MSR mark to market and in the quarter from an origination standpoint, obviously higher rates tough origination markets are bearing and his team have done a great job getting this back to breakeven to slight profitability in that space. The one thing I want to be really clear with it.

Everybody and I I've echoed this many many times that we don't need to originate a unit to originate a unit to do volume, we want originate units that a quarter of our business, where we where we're doing something that are going to make money for our Lps and shareholders. So what do we do an extra $1 billion in origination in a channel or a $1 billion less in the channel.

We care about one thing, obviously servicing our customers and then driving profitability for our shareholders and L. PS.

When you look at the mortgage company activity and highlights for the quarter servicing portfolio again, and then around $600 billion. This includes both excess and and full msr's we.

We continue to move our mortgage servicing rights from some of our sub Servicers back in house that goes under the new Red Slash show point brand. There's a couple of portfolios that would still continue to move in that that that continues to go on on gain on sale, a little bit lower but in general obviously with volumes.

Coming off a little bit you you you should expect that and again core thesis for US we're not originates something that unless its profitable as we look at our MSR portfolio doing terrific helps us grow book value a lot of earnings coming into the quarter.

There's not a I would say there's not a ton to report there you know one of the things I would encourage everybody to have a look at when you look our recapture rates or you look at apples you know all the different mortgage companies that report, whether it's us and or others look at apples to apples. If you have any questions on that I would tell you to refer to to Nick or bad Nexsan tours are.

F O R or bearing on some of those questions MSR portfolio are right now the WAC is three 8% that includes all of the new stuff, we originate our average mark in and around a five multiple just to give you for context on the Genesis business, we expect to do in and around $2 billion. I think this year our performance has been.

Great. We love the asset you know most of these things are so firm plus anywhere from five to 700 with points, we've tightened up our credit box. When we think about from an underwriting perspective, and Clint Aerosmith and that team are doing a great job consumer portfolio I mentioned before I mentioned, the spring castle stuff that was.

Under the fortress umbrella and 13 prosper in 17 and now the Marcus loans really it's an asset play termed funded you know up until Theres, a 15% clean up call at the end, we expect returns here to be 15% to 20%.

On the single family rental space continue to grow if you recall in prior calls we had stopped acquiring units until.

Until cap rates increase we're now starting to acquire units whether it be in the build to rent space and or other areas are with higher cap rates.

We will continue to grow that business over time, obviously, you need to have scale in that business and we continue to work towards doing that are stabilized aki, but occupancy in that area is 95%. We're still we still see some you know new rent growth ever.

And we're excited about the prospects with where rates are to continue to grow that business servicer advance, there's really nothing to speak about that but the underlying performance of the consumer continues to be extremely strong and we'll continue to monitor that obviously, we have quite a bit of data there both on the consumer side and on the on.

On the mortgage side.

With that I will turn it back to the operator for some questions.

We will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

The first question today comes from Eric Hagen with B T. I G. Please go ahead.

Hi, Thanks, good morning.

Got a couple of questions here I mean.

How do you think the valuations for other mortgage originators and Servicers.

Right now is sort of driving your thinking around the value you could pick up in a in a spinoff of the originator and servicer and then just from a timing standpoint that at what point do you maybe run into issues with the REIT tests from having sculptor folded in here. Thanks.

So on the timing of the mortgage company, we we announced that we filed in a confidential S. One on that we continue to work hard.

You know with where mortgage companies are trading I don't know that anybody trades at a significant premium at this point and quite frankly, they don't we just think that timing is is right now with the scale and what you know the team has done there around the new res brand and obviously the caliber acquisition and all the other stuff we've done there.

To bring this company out I don't I don't necessarily think that we're going to turn around and just sell down the entire thing I think it's more to give us flexibility habit heavy true operating company. That's that's listed similar in ways to what a what a fortress.

With you know back then Nationstar and Mr. Cooper, So a similar kind of mindset around that.

As it relates to your second question, which you know from a good REIT test you know Nick's sitting next to me you know.

We have a ton of experience around how to navigate things whether it be in taxable REIT subsidiaries in other ways.

Obviously, we have a you know a fairly large agency mortgage book, which helps with the whole pud whole pool test. So we don't anticipate any issues I do think over time, you'll see an evolution of the company and in our capital structure I alluded to that last week. We're not Gonna then we you know the one one thing I would tell from an.

Analysts perspective, we're still gonna have a mortgage REIT you know if you look at some of the some of the best running larger alternative asset managers. They have reads. They have a C corp. They have private funds I think you should think of us in the same light.

Yeah. That's helpful. Thank you very much.

Into the portfolio a little bit I mean, what do you feel like would take servicing valuations higher from here like how sensitive do you do you feel like valuations for MSR is or to an inverted yield curves do you feel like there's any upside for servicing the field curve were to steepen from here. Thank you guys very much.

I think on the AR on the MSR values, they're fine where they are you know you have unlevered yields I would say anywhere from 8% to 10%. If you do have a view that at some point down the road and we don't have this view that and you know this year that the fed's going to cut rates when short rates start coming down and you'll see better financing terms I think the levered <unk>.

Asset yield will be in the teens, while saying that I don't you know doing this for a long long time, I don't see a ton of upside in yield in our pricing in the MSR asset right now, but it is a very very stable cash flow you know I was watching a and interview this morning about somebody talking about you know where we are in.

Fixed income assets going down in value as rates rise, which is absolutely. The truth. This is the one asset that does go up in value and rates rise I do think we're getting towards the upper end of of a value standpoint, and keep in mind, you know new new issue MSR is or whatever a four handle I think from it from a value standpoint, so there's room.

For those to go some of the legacy stuff that you know with the 3% gross WAC that were originated journey are you.

The days of Covid when rates essentially went to zero will only prepay. If you see housing turnover. So I think Theres limited upside for US you know, we're monitoring where rates are and you know youre going to start to see us put more rate hedges on against that asset as we go forward.

Thanks, Michael appreciate it.

Sure.

The next question comes from Bose, George with VW. Please go ahead.

Hey, guys. Good morning, I had a couple on sculptor first is there any tangible equity coming with the transaction or is there a goodwill sort of equivalent to the purchase price.

We expect a tangible equity to be about $300 million to $350 million approximately two to $2 50 and goodwill.

Okay, great. Thank you and then to the extent the market's deal was done after sculptor close is that the kind of asset that could end up there going forward.

Yeah, you know I think at this time, both organizations is gonna be run as separate organizations. Obviously the sculptor deal is not closed so Jimmy and that team will continue to lead their their business no different than what we do you know what the genesis level or the mortgage company level again, it's a wholly owned operating <unk>.

<unk> is the way that I view that yeah I mean.

I mean, the possibilities around less I mean, the one thing I would say as you look at our balance sheet. You look at most alternative asset managers don't have larger balance sheets, I think KKR does but you know theres a lot of work.

To be done here, if you look at our balance sheet. Today, you know we're in a loan side, we look at our loan book and I think the where that's carried is probably 15 15 plus percent return why should we not take that work with our you know that our new partners at sculptor and drop that into a fund it would reduce our balance sheet, we'd create more.

Sure.

We create some capital and we create a.

More AUM and then we drive more earnings through or are you know asset management business, which theoretically those earnings are going to get valued signet significantly higher than the way our earnings get valued at the REIT level.

Okay that makes sense. Thanks, and then just rates are up a bit since you guys pre announced just wondering if we could get an update on book value.

I would just I would assume it's you know in and around but at the same at this point you know 12 15 to 12 in a quarter or something in that range.

I don't think theres any material move for us right now.

Great. Thanks.

Thank you.

The next question comes from Doug Harter with Credit Suisse. Please go ahead.

Oh thanks.

What is the timeframe that you expect to see additional assets are kind of come available from from the banks from regulatory changes and do you think you'll be kind of up and running with third party capital to take advantage of that.

I think there'd be answer is it's we're seeing it now RBC the Marcus loans Goldman made a decision to get out of that line of business and.

Clearly with a number of our relationships. We took advantage of that I would tell you our pipeline of investments whether it be company investments and our asset investments.

That we're working on it is pretty significant right now so it's here. It's now you know you look at I'm just looking at some news feeds is whereas we're chatting here you know the ADP number for from an employment standpoint is well above expectations. This morning, you've got enough you've got unemployment report tomorrow, so that will likely move rates high.

And we're seeing that.

With a 15% to 20% return in roughly a 10 per cent coupon with higher FICO borrowers.

Okay I appreciate it.

Thanks, Doug.

The next question comes from Julianna Valonia with Compass point. Please go ahead.

Good morning, and congratulations on a great quarter.

Similar lines to some of the other questions I I'd be curious overtime.

Now, you're you're potentially have shelter and a number of months here under the rhythm umbrella.

Is there a focus on shifting more of the two externally managed obviously, you're talking about yeah, potentially I'm doing and I feel a part of the mortgage company and pushing more assets essentially into different fun vehicles.

Is there a general sense of what kind of what your capital allocation should look like going forward or or if you want the rhythm side of the quite a bit to be smaller familiar one perspective, and then continue to extend the asset management side and a much higher ratings.

Yeah, I tend to asset management businesses get value you know one of the strategic things for US is we want to raise third party AUN and we've been very very clear about that the sculptor acquisition helps us do that.

Under that under that umbrella <unk> last weekend in our announcement you know we're pretty clear we're not gonna go out an issue equity here, but we don't intend to anyway to you know when we're trading at book value is 12, and a quarter or whatever that number is in our stock trades in and around 10 Bucks.

Can issue equity here, so based on that and the opportunities for investment that we see today and going forward. It's our desire to work with third party L. PS and grow our business away from our existing balance sheet, you know from a capital perspective, and then the third party markets and that's you know.

That I mean, that's that's where we're headed if we if we're successful in doing that which I believe we will and you know you look at some of the larger asset managers and how they you know raise capital we're going to be very successful and our valuation on our on our equity she'd go significantly higher and that's really what the goal is it saying.

To improve our equity valuation for shareholders and continue to drive you know real results for L PS and shareholders.

That sounds right and then thinking about the <unk>.

It also you mentioned there's no.

Frankly, I find out there are opportunities.

What are you looking at opportunities at this point are you focus more on your assets or are there any other operating platforms does yeah, you could add that would be uhm decretive are related to the other ask what's even log in at the moment.

I would say both you know if you.

You know, we we want to do things, where we think we have a reasonable edge, where we where we can create value. If we could do things that are 15 to 20 per cent returns and.

In today's interest rate environment, you know I think we're gonna try to pounce on that and sees that and right now that's kind of where where we are so if it's an operating company.

And we're working on some of those now or it's a cheap pull of assets will <unk>.

That's great. Thanks for answering my questions and then we'll jump back to me too.

Thank you.

The next question comes from Kevin Cranston with J M. P. C. Q U. Please go ahead.

Hey, Thanks, good morning.

One more one more on the on the sculptor deal What'd you guys talk about it being neutral to earnings in 24, an accretive in 25.

Sorta take us through.

What it is that makes it accretive in 25, and if there's any sort of assumptions baked into that in terms of growth.

Growth or anything like that.

Yeah, I think we're we're not assuming a lot of a U M growth I think it comes down to some of the results that are already existing in there and the portfolio of investments today and when they realized.

So you know the expectation is that 24 and 25 should be good years for realizing a number of the results as a result of prior investments made.

The sculpture team has a you know they have some great great business lines and as we start to see results come through from earlier investments you're going to start to see I think a good pop and I think when you when you take a step back and look at the valuation of the company and kind of how we value didn't think about the relationship there and I know.

Jimmy for probably 10 to 12 years now are actually more you know that that platform and the ability to drive results for L. PS is is pretty significant and that's what gets us really excited about this acquisition.

We can't look at everything like a day one thing we have we do have to have any vision a vision as we build business lines and that's one of the things that I think we've been very successful and add an on doing you know you take a step back and you look at you know and and one of the reasons I wanted to give a little bit of revisionist history on the fortress side, you know you'd go back to 13 win.

<unk> and raining or don't came up with you know we could make excess MSR is a good read asset that propelled that started the growth of new residential which was spun out of new castle, So financial engineering and being able to create value for shareholders. You may not see it all day, one, but it's something that as we look forward we have a vision.

That goes out not this quarter to quarter, but something that's a little bit longer than that.

Sure. Okay I appreciate that thank you.

As a reminder, if you would like to ask a question. Please press star within one to be joined into the question queue.

The next question comes from Kevin Packer with Piper Sandler. Please go ahead.

Thank you just in relation to the S. One that you filed.

Within the mortgage company are you, including all the origination servicing segments.

Including.

The servicing segment any MSR related investments or would that be broken up as well, whether it's in the mortgage rate or an hour and the mortgage company.

It's it's it's likely going to be most but not all assets or not all msr's that that will go in there cause some are held at the but I'll call. The rhythm level in the sub there is N R M, but mostly it's it's all the origination it's most of the servicing stuff some emissaries may stay back.

But I guess, it's it's one of these T V D things as we continue to work through it.

And then you can.

<unk>, having a mortgage REIT as well.

Possibly the asset manager Alright, and obviously with a sculptor deal what would the mortgage read basically have all the real estate securities and the property and residential mortgage segments that you have existing now or would it be.

Other segments embedded within the mortgage rates.

You know I I think it's T. B D. You know you look at <unk>, you know Blackstone I use this analogy last week. They are B X M T, which is a commercial read I think the way that we're thinking about it is likely in a similar vein, but there's a lot of I mean, clearly, we just announced a deal last week. So we have a we have a lot of work to do on it from a capital structure standpoint.

But you know the one thing I wanted to emphasize on this call is we are still gonna have a mortgage rate and a and a large mortgage reading that the asset management business will will grow will likely have a C Corp.

And you know from a structure standpoint, we just wanted to figure out a way that we're going to increase.

One is our shareholder price.

And then to be able to grow AUN, which will feed into that and hopefully hopefully drive that significantly higher.

And then this quarter you're pretty.

You know you were selling them S. R. As you obviously deemphasize those.

I believe there was we didn't tell any msr's. We we just we just did in excess trained.

As in excess Street, Okay, do you anticipate doing several more of those.

In order to like.

<unk>, yeah, the there'll be there'll be more there'll there'll be more coming out whether it's this quarter or next court I I, just don't know, but there'll be more access more excess MSR deals done.

Thank you.

Thank you.

This concludes that question and answer session I would like to turn the conference back over to Michael in Hamburg C O capital for any closing remarks.

Thanks for joining us this morning have a great rest of the summer I appreciate the support Super excited where we are as an organization and let's go [noise].

The conference is not included thank you for attending today's presentation you may now disconnect.

[noise] [music].