Q3 2023 Rithm Capital Corp Earnings Call

Good morning, ladies and gentlemen, and welcome to with them Capital Corp Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.

After todays presentation, there will be an opportunity to ask questions.

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Please note. This event is being recorded I would like now to turn the conference over to M. A bullet Associate General Counsel. Please go ahead.

Thank you and good morning, everyone I would like to thank you for joining us today for rhythm capitals third quarter, 2020 three earnings call. Joining me today are Michael Nierenberg, Chairman CEO and President of rhythm capital and next Santoro, Chief Financial Officer for some capital throughout the call we are going to.

For reference the earnings supplement that was posted this morning to the rhythm capital website Www dot rhythm cap Dot com. If you have not already done so I'd encourage you to download the presentation now.

I would like to point out that certain statements made today will be forward looking statements. These statements by their nature are uncertain and may differ materially from actual results I encourage you to review the disclaimers in our press release and earnings supplement regarding forward looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC.

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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 supplement.

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

Thanks, and good morning, everyone. Thanks for joining us.

Really exciting times for our company.

From an earnings perspective, and just overall operations in the quarter, a very very solid quarter.

Core business lines continued to perform extremely well the positioning we put in place over the course of the past couple of years is continues to pay dividends as it creates solid earnings book value growth and high levels of liquidity.

We expect this to continue into the future with the fed signaling higher rates for a longer period of time, the global macro backdrop for investing puts our company in a great place to take advantage of where we believe the markets are headed as you know we have been very vocal about repositioning the company into more of an alternative asset.

Before I go there I want to be clear the core business lines, which have gotten us to this point are crucial to the future of our company.

We believe rhythm 1.1, which is our existing core business plus rhythm private capital will be a huge lift for our investors shareholders and our employees.

With this sculptor announcement, we had great investment talent to our already a terrific team. This expands our capabilities globally into all areas of credit real estate consumer and other strategies.

That I'm sure will launch at some point here in the near future.

We're also working on another transaction that upon consummation grows our asset management business. The 50 billion of AUN. These transactions are transformational for us and continue our narrative towards being a leading global asset management business we.

We are extremely excited by the prospects of growing our business and the private sector and most importantly, adding partners, who want to win with us and grow with us as growing with our partners will increase revenue earnings benefited our shareholders.

And our Lp's, who invest with us.

At year end, we estimate the following that our business will look like this now these are all projections.

Assuming that everything closes and the deals happen, we'll have 50 billion of AUM in the asset management business $7 2 billion of equity capital of 35 ish billion dollar balance sheet and plenty of liquidity with a bunch of new partners in the private capital business.

Back to the core business during the quarter, we announced the acquisition of SLS SLS is a mortgage company with $135 billion of servicing of which 85 billion or so is true third party servicing.

Consistent with our rate view this deal will bolster our servicing business add capacity and clients in our third party business grow our special servicing business and increase earnings.

Our total servicing portfolio of investments from a notional perspective gross to $840 billion.

Upon the settlement of the SLS deal. This includes mortgages that we service investment in what we'll call excess MSR and.

And legacy MSR, which are serviced by others.

To be clear this is not a race for us about size, we care about servicing our customers and making money for our shareholders and L piece.

Regarding the mortgage company, we continue to be vigilant on expense reduction initiatives, particularly in the origination segment, we expect the origination business to remain under extreme pressure with mortgage rates at 8%.

So how do we think about this is great for our servicing business as I pointed out we have $840 billion on a notional basis mortgage servicing assets.

Lower prepayments equals one thing for our servicing business, that's more earnings and more cash flow.

On the commercial real estate side that space remains a very big focus of ours going forward.

With no legacy assets and very attractive valuations you could expect us to allocate more capital to this sector going forward.

If you recall, we acquired Green barn, which was formerly known as Senlac Slash Normandy partners at the end of last year.

Since then we've made some opportunistic investments and we'll continue to do so right now we see the debt side extremely attractive.

There's so much more I can talk about and we're really excited for our company and the prospects ahead. So what I'll now do is I'll flip to page three.

Our supplement and I'll take you through the deck and then we'll take them, we'll open it up for Q&A.

Rhythm.

From an overall focus standpoint $35 billion of assets.

After our dividend payment Tomorrow, 4.4 point 9 billion of dividends paid in 10 years, seven 2 billion of book equity and a 23% total year to date shareholder return.

When we look at our expertise I would think of us as an asset management business in all areas of mortgage real estate and as we add our expertise around the housing credit. There's there's no business line that we will that we shouldnt be in number one number two if there is no business line that we will be in <unk>.

We have the expertise in house.

The right side of the slide powered by partnership we wanted to play opportunistic capital. We wanted to create more partners. Now. This is a very different thing from where we grew the company in the public markets. As we go forward again, we're going to grow more in the private markets because our equity trades at a substantial discount to book and we think it's a better.

There are opportunity for us to deploy capital in the private market pay.

Page four just talking about our financial highlights in the quarter GAAP net income of $193 $9 million or <unk> 40 per diluted share.

Earnings available for distribution of $288 million or 58 cents per diluted share. This includes a realized gain of 15 cents related to the sale of excess msr's during the quarter dividend twenty-five.

Cash and liquidity at the end of the quarter at $1.9 billion and again total equity of $7 $2 billion.

I do want to point out to the right side of the page here the book value growth from the end of Q4, 'twenty 'twenty, which at that time. It was 10 87 to where we are now which is 12 32.

In spite of the 10 year note rising from 91 basis points to the end of the quarter, where it was 460 to where today, it's almost 5%.

The evolution of rhythm page five you can see the company was started while we're while at fortress in 2013, it began with $1 billion of equity today, we have $7 2 billion of equity and as you look at the timeline and you look at our acquisition pipeline, we have grown substantially over the years everything has been.

Targeted around what I would call mortgage and real estate. The addition of the sculptor transaction and some of the other things we're working on will grow not only our real estate presence, but also our credit presence and we look forward to our continued growth.

As we go forward page six just talks about our private capital business. This is a slide you've seen before the thing I want to point out on the right side of the page private capital is going to help us generate recurring earnings and performance fees for rhythm shareholders and also for the folks that we manage capital for on the at the LP level, we wanted to.

Great partnerships with investors through specific Sma's co investment as well as the funds that we continue to work on and we'll continue to roll out. The other thing to point out is is the business continues to benefit from all the work that's been done over the years as we've created our own in house origination and servicing plan.

Forums.

And those will continue to grow as we go forward.

Page seven.

The Sculpsure transaction update obviously, a lot of press around that we're super excited to bring this this deal to a close and bring it in house.

You know what I would say on this deal there is very little to no overlap between sculptor and our business and we're super excited to get this thing wrapped up the expertise that we bring in house is is in my mind is going to be second to none.

If you think about it our existing investment team coupled with the sculptor investment team is going to create an asset management business that is going to be extremely formidable in the in this space.

Page eight just talks about the SLS deal really what it is is a servicing deal there's very little on the origination side.

The idea here is again, it's not about so called scale. This increases our third party special servicing business to almost 200 million.

<unk> $200 billion. So it's a real fee for service business. The other thing what it does for US is it increases our capacity and the special servicing space. So as we go forward and you think about the the macro.

The global macro picture if the economy in the U S does slow down and there was a need for more special servicing there's gonna be nobody better than.

Then just call it new resin in our business to take to work with with the homeowners and consumers around that commercial real estate page nine this really just talks about our expertise in house currently we have 25 to 30 investment professionals.

As many of you know we don't have any we have not traditionally been a large player on the commercial real estate space as the company was built more around the residential space and consumer side with it with the opportunity set that we see right now in the marketplace extremely what I would call.

Robust.

And having no legacy assets, we're extremely excited to grow that business and put up what I would call great returns for our shareholders and Lps.

On the loan side, the residential whole loan side keep in mind as I pointed out before our manufacturing capability in our mortgage company as well as in our Genesis business, which provides loans to builders gives us I think a very very good competitive advantage over just a traditional asset manager.

As we're able to manufacture our own assets.

When we look at them as we think about deploying opportunistic capital the rate environment and the macro environment for what we do is probably it hasn't been this good in probably 25 or 30 years I'm going to take you through a slide into into pages, which talks to where yield levels are and when you add and you think about at all.

Unlevered returns of something between eight and 12% on senior cash flow, we think its a great time to deploy capital and will continue to be a great time to deploy capital and are in the very assets that we manage money for.

Page 12, just talks about a number of different strategies I'm not going to spend any time on this but as we think about mortgage loan servicing rights commercial real estate debt etcetera, everything not everything, but most things look very attractive to US page 13. If you just have a look to the right side of the page over the course of.

The past couple of years look at the yield profiles on the different asset classes that we invest capital in everything that you know not everything again, but most things look extremely attractive to us.

And as we raise more and more capital around our funds business and we're hopeful that we're going to be able to generate what I would call real outsize returns and the asset classes that we have expertise and.

And then finally without I'm not going to take you through the segment performance.

You could have a look at that but you know I think that net of of where we are as an organization is we're a very different company than where we were a couple of years ago. We will remain true to our core business. The routes that got US here, but overall performance has been very very good and with that I'm going to turn it back to the operator and we'll open it up.

Up for Q&A.

Thank you well now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if you're using a speakerphone. Please pick up your handset before pressing cookies if at any time.

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At this time, well pause momentarily to collect questions.

Okay, we're ready.

There are any questions.

Okay. The first question comes with Kim Jeong with P. T. I G. Please go ahead.

This is Eric Hagen from <unk>.

Hey, how are you doing guys alright, so I don't I don't mean to be so short term focus, but how how the MSR valuations maybe trended in October.

Are there any bulk packages you know maybe even some opportunities that you feel like could emerge between now and like year end or kind of early next year.

However, just looking at the MSR market right now thank you.

Yeah, Here's what I would say on MSR as we were I think were a modest and in how we thought about our gains in the quarter as many of you know we are a bias short M.

MSR has had negative duration at some point, where you're going to see is multiples being capped on what I would say some of the legacy msr's.

So the short answer is modest.

Modest movement in March I think our weighted average MSR multiples of five one at this point Theres still room to go we are still bias shorten we're going to remain that way until we think the <unk>.

We see things change you know the fed has signaled that higher for longer the economic data. That's been reasonably you know what I would say okay too.

Probably not as soft as the fed would like to like it to be so we're getting we're going to stay the course regarding other packages. There is always going to be things that come up you know as we all know the banks from a capital perspective Theres a lot of you know regulation and rules running around right now the banks are nobody's really happy about it.

From a banking perspective, I think this will create more opportunity as banks have to hold more capital against certain assets that could create opportunities for us, but again, Eric I you know I.

Just wanted to point out as we think about capital deployment, we do things strategically where we think we're gonna in 15% to 20% returns on our capital. If we see a package of MSR is that we think we can achieve those returns will have a hard look at it if not we're likely not going to play in that sector, because like I pointed out we have 840 billion <unk>.

She'll amount of of MSR is and we can manufacture our own.

Yeah, that's great color.

So from a financing standpoint like how much headroom do you did you have to borrow more on on the secured MSR funding and what what's the what's your tolerance level going forward as you look to Sculpsure and you look at.

At closing Computershare.

How much headroom do you have and all the things you know cash on cash and liquidity at the end of the quarter was give or take about $2 billion. I think that's increased a little bit as we go into Q4.

Candidly I think the you know the capital markets folks know my partner, Charles and Sanjiv do a great job around.

Our balance sheet and in working with our lenders around certain things so.

There's plenty of room to go we're not looking over lever our balance sheet, though right here I think you'll see other sources of capital come in including private capital from third parties.

Really.

Really helpful. Thank you guys I appreciate your thoughts there.

Thank you. The next question comes with George with K B W. Please go ahead.

Morning.

Wanted to follow up on the performance quarter to date, just can you get in terms of book value can you just give us an idea of where that is now.

At.

Book value at the end of Q3 at $12 32, which was up from 12 16, it's probably modestly higher with rates up a little bit Canada, you know like I said, we're biased shorten our on our overall business.

So depending upon what happens with rates here you know part of this calculus says as a REIT. We have no agency mortgages. So you have a little bit of a basically saying from a whole pool perspective, depending upon what happens with the basis you know the basis today is as wide as it's been since the since the SBB crisis.

And you know, we expect that to remain under a little bit of pressure here with you know with the deficit where it is and the government continuing that you have to.

So a lot of that I think the refunding announcement will will be a little bit of a catalyst where the mortgage market goes as we know you know obviously mortgages or.

Unknown Executive: Good morning ladies and gentlemen and welcome to Rithm Capital Corp conference call. All participants will be in a listen only mode. Should they need assistance, please signal a conference specialist by pressing star than zero on your telephone keypad.

There's a lot less supply that comes into play. The challenge is the banks are not really able to buy anything just based on where they are from a capital perspective, but overall, we're you know I would say were trending higher and it just depends on where we go with some of our markets around the MSR business.

Unknown Executive: After today's presentation, there will be an opportunity to ask questions. To ask a question, you will press star than one on your telephone keypad. To withdraw your question, please press star than two.

Okay, great. Thanks, and then actually on the debt the sheet that we show the yields so the on the conventional MSR just show 9% to 10%.

What what's the leverage that you use on that and it's like what are the funding costs, what's kind of the levered Roe on that investment.

Unknown Executive: Please note, this event is being recorded.

Emma Bolla: I would like now to turn a conference over to Emma Bolla, 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's third quarter 2023 earnings call. Joining me today are Michael Nierenberg, Chairman, CEO and President of Rhythm Capital and Nic Santoro, Chief Financial Officer of Rhythm Capital. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Rhythm Capital website, www.rhythmcap.com.

It's typically something around 60 to 65 kind of advance rates, what I would say and right now funding cost in and around certain things depending on you know we have term funding and they're likely around sofa, plus 250 ish so for $2 52.

300 <unk>. The other thing is we have a bunch of term financing that's already existing on our MSR business. That's been outstanding for a few years based on capital markets issuance that we've done which is lower obviously.

Emma Bolla: 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 made today will be forward looking statements. These statements by their nature are uncertain and may differ materially from actual results. I encourage you to review the disclaimers in our press release and earning supplement regarding forward looking statements and to review the risk factors contained in our annual and quarterly reporting. We will be discussing some non-gap financial measures during today's call, reconciliation of these measures to the most directly comparable gap measures can be found in our earnings supplement.

Okay, great. Thank you.

It's both.

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

Thanks for taking my questions I, just wanted to follow up on.

The plans for sculptor and the mortgage spin off obviously theres a lot of moving parts there and you.

There's different things that need to come into place, but ideally how do you see this playing out as far as the timing perspective.

And then how much capital you think will remain in our mortgage company I know you addressed it previously, but just love to refresh their I'm sure as all the all that plays out thanks.

Michael Nierenberg: And with that, I will turn the call over to Michael. Thanks, Emma. Good morning, everyone. Thanks for joining us. Really exciting times for our company. From an earnings perspective and this overall operations in the quarter, very, very solid quarter, poor business lines continue to perform extremely well. The positioning we put in place over the course of the past couple of years has continued to pay dividends as they create solid earnings, book value growth and high levels of liquidity.

We have the S. One on file.

We continue to evaluate alternative because as we all know you know taking a mortgage company or quite frankly any company public right. Now is is a little bit of a challenging task. The idea around the mortgage company is the way. It is the thought is to try to figure out a way to recycle capital.

Michael Nierenberg: We expect us to continue into the future with the Fed signaling higher rates for a longer period of time. The global macro backdrop for investing puts our company in a great place to take advantage of where we believe the markets are headed. As you know, we have been very vocal about repositioning the company into more of an alternative asset manager.

I think one of the things we're going to do you know when you think about MSR is for example, we're working on different funds not necessarily just specific to <unk>, but really more specific to what I would call. The mortgage company has a capital vehicle and and what I mean by that is you know you have the origination business and the MSR.

Syed you know as rates if rates do rally at some point in our careers going forward. You know you want to folks that are deploying capital in these funds to be able to realize the you know what I would call either recapture or not give up that MSR. So I would say the mortgage company in the recycling of the capital there.

Michael Nierenberg: Before I go there, I want to be clear, the core business lines which have gotten us to this point are crucial to the future of our company. We believe rhythm 1.0, which is our existing core business, plus rhythm private capital will be a huge lip for our investors, shareholders and our employees. With the sculptor announcement, we had great investment talent for already terrific teams. This expands our capabilities globally into all areas of credit, real estate, consumer and other strategies that I'm sure will launch at some point here in the near future.

It's fluid.

As it relates to the bigger picture you know I've been pretty vocal.

We are going to and I alluded to this in my opening comments you know I truly believe by the end of Q4 that there is a possibility. We will have 50 billion of AUM as an asset manager you think of like the biggest and best alternative asset managers out there. They have their C corp. They have a read.

Michael Nierenberg: We're also working on another transaction that upon consummation grows our asset management business the 50 billion of AUM. These transactions are transformational for us and continue our narrative towards being a leading global asset management business. Business. We are extremely excited by the prospects of growing our business in the private sector and most importantly, adding partners who want to win with us and grow with us as growing with our partners will increase revenue, earnings, benefit our shareholders and our LPs who invest with us.

And then they have their private capital business, that's ultimately where I think will be and then hopefully at some point down the road, we'll have an insurance leads so we're working on all of these things the capital formation around our business is going to be as we know our stock is nine Bucks book values 12 30.

The capital formation side will likely be more in the private capital business than it will be in the public markets. At this point just based on you know how poorly I think REIT stocks trade up.

Michael Nierenberg: At year end, we estimate the following that our business will look like this. Now, these are all projections, assuming that everything closes and the deals happen. We'll have 50 billion of AUM in the asset management business, 7.2 billion of equity capital, a 35-billion dollar balance sheet and plenty of liquidity with a bunch of new partners in the private capital business.

But you know it's safe to say based on our ambitions and where we're headed and I think the progress that we've made that we will be a real global alternative asset manager by the end of the year.

Okay.

Are there any specific.

Michael Nierenberg: Back to the core business, during the quarter, we announced the acquisition of SLS. SLS is a mortgage company with 135 billion dollars of servicing of which 85 billion or so is true third party servicing. Consistent with our review, this deal will bolster our servicing business, add capacity and clients in our third party business, grow our special servicing business and increase earnings. Our total servicing portfolio of investments from a notional perspective grows to 840 billion dollars upon the settlement of the SLS deal.

Points that we should look for to see that this is you know really has legs and you really we start to see it really playing out is it the S. One on in the mortgage company or the closing of sculptor or is there a certain particular points that youre looking for really say this is going to play out as expected.

Sure. So I think sculptor obviously is is an important piece as we go into the S. M. You know grow our asset management business. I'd also say that you know we are an asset manager we just operate under the under the wrapper of a read sculptor is very important in the asset management side, we're working on another what I would call sizable a transformational transaction that we can.

Michael Nierenberg: This includes mortgages that we service, investment in what we'll call excess emissoras. And legacy emissoras which are serviced by others. To be clear, this is not a race for us about size. We care about servicing our customers and making money for our shareholders and LPs. Regarding the mortgage company, we continue to be vigilant on expense reduction initiatives, particularly in the origination segments. We expect the origination business to remain under extreme pressure with mortgage rates at 8%, so how do we think about this?

Spec to get done by the end of the year as well and that that gets you on the asset management business to where we want on the mortgage company sided you know the cash flow that we get from that is as a corporation or at the rhythm level is you know awesome. So if you think about it and you look at our earnings for the quarter were.

42 cents or whatever it is plus 43, plus 15 for the excess when I look at the mortgage company overall when I look at our our OE you know when I look at where we were at minus you know the the one timers I think actual return on equity for the quarter is something around net net 15%.

Michael Nierenberg: It's great for our servicing business. As I pointed out, we have 840 billion dollars on a notional basis of mortgage servicing assets. Lower prepayments equals one thing for our servicing business that's more earnings and more cash flow.

Is that right.

You know on an annual basis, I think we're trending towards our annual ROE you're about 30%. So we're not looking to give up any of these assets because on a go forward basis. In this rate environment, you know the mortgage the mortgage company will help as well as all the other things that we have going probably contribute to something between a 35 and 40 and 45.

Michael Nierenberg: On the commercial real estate side, that space remains a very big focus of ours going forward. With no legacy assets and very attractive valuations, you could expect us to allocate more capital to the sector going forward. If you recall, we acquired Green Barn, which was formerly known as Stenlach SLS Normandy Partners at the end of last year. Since then, we've made some opportunistic investments and will continue to do so. Right now, we see the debt side extremely attractive.

You know run rate on our core business, we don't want to give that up we just wanted to figure out a way to manufacture more capital at the cheapest basis, and then figure out how we can deploy that capital and what I would call today's great investing environment, but overall you know, we're not giving up on the mortgage company things that we're looking at our expenses, we're looking at retail clearly.

Michael Nierenberg: There's so much more I could talk about, and we're really excited for our company and the prospects ahead.

You know because that business really doesn't make any money right now when you think about true volumes and cost to run that business, but overall, you know where we're really happy with the asset that we have we just have to figure out a way to generate more capital because we think the investing environments that good. That's why we're that's why we're running around the globe quite frankly on our ROI on our private.

Michael Nierenberg: So what I'll now do is I'll flip to page three in our supplement and I'll take you through the deck and then we'll open it up for Q&A. Rhythm from an overall focused standpoint, 35 billion dollars of assets after our dividend payment tomorrow, 4.9 billion of dividends paid in 10 years, 7.2 billion of book equity, and a 23% total year-to-date shareholder return. When we look at our expertise, I would think of us as an asset management business in all areas of mortgage, real estate, and as we add expertise around the house in credit.

Business.

Great. Thanks for all the color Michael.

Thanks, Kevin.

Thank you all very much and with that we conclude and this concludes our question and answer session I would like to turn the conference back over to Michael Nierenberg for any closing remarks. Please go ahead, great. So thanks for dialing and everybody stay well and we look forward to.

Michael Nierenberg: There's no business line that we shouldn't be in. Number one, number two, there's no business line that we will be in unless we have the expertise in house. The right side of the slide, powered by partnership. We want to deploy opportunistic capital. We want to create more partners.

Dating you on more developments in as things change.

Change in our in our company have a great day.

Thank you.

Okay.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect have a good day.

Michael Nierenberg: Now this is a very different thing from where we grew the company in the public markets as we go forward. Again, we're going to grow more in the private markets because our equity trades at a substantial discounted book. And we think it's a better opportunity for us to deploy capital in the private markets.

Yeah.

[noise].

Michael Nierenberg: Page four, just talking about our financial highlights in the quarter, gap net income, $193.9 million or $0.40 per diluted share, earnings available for distribution, $280.8 million or $0.58 per diluted share. This includes a realized gain of 15 cents related to the sale of excess MSRs during the quarter, dividend 25 cents, cash and liquidity at the end of the quarter, $1.9 billion. And again, total equity is $7.2 billion.

Michael Nierenberg: I do want to point out to the right side of the page here. The book value growth from the end of Q4 2020, which at that time it was 1087 to where we are now, which is 1232. In spite of the tenure, no rising from 91 basis points to the end of the quarter, where it was 460 to where today it's almost 5%.

Michael Nierenberg: The evolution of rhythm page five, you can see the company was started while we were all at Fortress in 2013. It began with a billion dollars of equity. Today, we have $7.2 billion of equity.

Michael Nierenberg: And as you look at the timeline and you look at our acquisition pipeline, we've grown substantially over the years. Everything's been targeted around what I would call mortgage and real estate, the addition of the sculptor transaction and some of the other things we're working on will grow not only our real estate presence, but also our credit presence. And we look forward to continued growth as we go forward.

Michael Nierenberg: Page six just talked about a private capital business. This is a slide you've seen before. The thing I want to point out on the right side of the page, private capital is going to help us generate recurring earnings and performance fees for rhythm shareholders.

Michael Nierenberg: And also for the folks that we manage capital for on the at the LP level, we want to create partnerships with investors through specific SMAs, co investment as well as the funds that we continue to work on and we'll continue to roll out. The other thing to point out is the business continues to benefit from all the work that's been done over the years as we've created our own in house origination and servicing platforms. And those will continue to grow as we go forward.

Michael Nierenberg: Page seven, the sculptor transaction update, obviously a lot of press around that, we're super excited to to bring this deal to a close and bring it in house. You know what I would say on this deal, there is very little to know overlap between sculptor and our business and we're super excited to get this thing wrapped up. The expertise that we bring in house is in my mind, it's going to be second to none. If you think about it or existing investment team coupled with the sculptor investment team is going to create an asset management business that is going to be extremely formidable in the space.

Michael Nierenberg: Page 8, just talked about the SLS deal. Really what it is is a servicing deal. There's very little on the origination side.

Michael Nierenberg: The idea here is, again, it's not about so-called scale. This increases our third-party special servicing business to almost $200 million, $200 billion, so it's a real fee for service business. The other thing what it does for us is it increases our capacity in the special servicing space. So as we go forward and you think about the macro, the global macro picture, if the economy in the US does slow down, and the need for more special servicing, there's going to be nobody better than, you know, then call it new res in our business to take to work with homeowners and consumers around that.

Michael Nierenberg: Commercial Real Estate Page 9, this really just talked about our expertise in health. Currently we have 25 to 30 investment professionals.

Michael Nierenberg: As many of you know, we don't have any, we have not traditionally been a large player on the commercial real estate space as the company was built more around the residential space and consumer side with the opportunity set that we see right now in the marketplace. It's an extremely, what I would call robust and having no legacy assets, we're extremely excited to grow that business and put up what I would call great returns for shareholders and LPs.

Michael Nierenberg: On the loan side, the residential whole loan side, keep in mind as I pointed out before, our manufacturing capability in our mortgage company, as well as in our Genesis business, which provides loans to builders. It gives us, I think, a very, very good competitive advantage over just a traditional asset manager as we're able to manufacture our own assets.

Michael Nierenberg: When we look at, as we think about deploying opportunistic capital, the rate environment and the macro environment for what we do is probably, it hasn't been this good in probably 25 or 30 years.

Michael Nierenberg: I'm going to take you through a slide in two pages, which talks to where yield levels are. And when you look at it and you think about unlevered returns of something between 8 and 12% on senior cash flow, we think it's a great time to deploy capital. And we'll continue to be a great time to deploy capital in the very assets that we manage money for.

Michael Nierenberg: Page 12 just talks about a number of different strategies. I'm not going to spend any time on this, but as we think about mortgage loans, servicing rights, commercial real estate, debt, et cetera, everything, not everything, but most things look very attractive to us.

Michael Nierenberg: Page 13, if you just have a look to the right side of the page, over the course of the past couple of years, look at the yield profiles on the different asset classes that we invest capital in. Not everything again, but most things look extremely attractive to us. And as we raise more and more capital around our funds business, we're hopeful that we're going to be able to generate what I would call real outsize returns in the asset classes that we have expertise in.

Michael Nierenberg: And then finally, without, I'm not going to take you through the segment performance, you could have a look at that.

Michael Nierenberg: But I think the net of where we are as an organization is, we're a very different company than where we were a couple of years ago. We will remain true to our core business, the roots that got us here, but overall performance has been very, very good.

Michael Nierenberg: And with that, I'm going to turn it back to the operator and we'll open it up for Q&A. Thank you.

Unknown Executive: We'll now begin the question and answer session to ask a question you may press start then one on your telephone keypad. If you're using your speaker phone, 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 start and tune.

Unknown Executive: At this time, we'll pause momentarily to collect questions. Okay, we're ready. Is there any questions?

Unknown Executive: Okay, the first question comes with Tim Chung with BTIG. Please go ahead.

Eric Hagen: This is Eric Hagen from BTIG. Good morning. How are we doing, guys?

Eric Hagen: I don't mean to be so short-term focused, but how have MSR valuations maybe trended in October? Are there any bulk packages, maybe even some opportunities that you feel like could emerge between now and year end or early next year? How we're just looking at the MSR market right now.

Michael Nierenberg: Thank you. Here's what I would say on MSR. I think we're a modest in how we thought about our gains in the quarter. As many of you know, we are biased short. MSRs have negative duration. At some point where you can see is multiples being capped on what I would say is some of the legacy MSRs. So the short answer is modest, modest movement in marks. I think our weighted average MSR multiples of five-one.

Michael Nierenberg: At this point, there's still room to go. We are still biased short and we're going to remain that way until we think the, you know, we see things change. You know, the Fed has signaled that higher for longer. The economic data has been reasonably, you know, but I would say okay to probably not as soft as the Fed would like it to be. So we're going to stay the course.

Michael Nierenberg: Regarding other packages, there's always going to be things that come up. You know, as we all know, the banks from a capital perspective, there's a lot of regulation and rules running around right now. The banks are, nobody's really happy about it, you know, from a banking perspective. I think this will create more opportunity as banks have to hold more capital against certain assets. That could create opportunities for us. But again, Eric, I just want to point out, as we think about capital deployment, we do things strategically where we think we're going to earn 15 to 20% returns on our capital.

Michael Nierenberg: If we see a package of MSORs that we think we can achieve those returns, we'll have a hard look at it. If not, we're likely not going to play in that sector, because like I pointed out, we have 840 billion, notional amount of MSORs, and we can manufacture a room.

Michael Nierenberg: Yep, that's great color. Hey, so from a financing standpoint, like how much headroom did you have to borrow more on the secured MSR funding? And what's like your tolerance level going forward? Did you look to scopes or did you look at closing computer share? How much headroom do you guys have and all that? You know, cash and liquidity at the end of the quarter was give or take about two billion dollars.

Michael Nierenberg: I think that's increased a little bit as we go into Q4. Candidly, I think the, you know, the capital markets folks know my partner Charles and Sanjeev do a great job around our balance sheet and working with our lenders around certain things. So there's plenty of room to go. We're not looking over liver or balance sheet though right here. I think you'll see other sources of capital come in, including private capital from third parties.

Unknown Executive: Yeah, really helpful. Thank you guys.

Unknown Executive: Appreciate it.

Paul George: Thank you. The next question comes with Paul George with KBW. Please go ahead.

Michael Nierenberg: Good morning. Just wanted to follow up on the performance course date. Just can you get in terms of book value? Can you just give us an idea where that is now? We booked value at the end of Q3 at 1232, which was up from 1216. It's probably modestly higher with rates up a little bit. Candidly, you know, like I said, we're biased short and are on our overall business. So depending upon what happens with rates here, you know, part of this calculus is as a re we have to agency mortgages.

Michael Nierenberg: So you have a little bit of a basic thing from a whole pool perspective, depending upon what happens with the basis, you know, the basis today is as wide as it's been since the, since the SBB crisis. And you know, we expect that to remain under a little bit of pressure here with, you know, with the deficit where it is and the government continuing to have to sell a lot of debt.

Michael Nierenberg: I think the refunding announcement will will be a little bit of a catalyst where the mortgage market goes. As we know, you know, obviously mortgages or there's a lot less supply that comes into play. The challenge is the banks are not really able to buy anything just based on where they are from a capital perspective. But over over, you know, I would say we're trending higher and it just depends on where we go with some of our marks around the MSR business.

Michael Nierenberg: Okay, great. Thanks. And then actually on the that this sheet that we show the yields. So the on the conventional MSR shows 90 to 10%. What's the leverage that you use on that? And like what are the funding costs? What's kind of the levered ROE's on that investment? It's typically something around 60 to 65 kind of advance rates, what I would say. And right now funding costs in and around, you know, certain things, depending on, you know, we have term funding.

Michael Nierenberg: And they're likely around so for plus 250 ish. So for 250 to 300. The other thing is we have a bunch of term financing that's already existing on our MSR business. That's been outstanding for a few years based on capital market issuance that we've done, which is lower obviously. Okay, great.

Unknown Executive: Thank you.

Kevin Barker: The next question comes with Kevin Barker with Piper's Handler. Please go ahead. Great. Thanks for taking my questions. I just wanted to follow up on, you know, the plans for sculptor and the more spin-off. You know, obviously there's a lot of moving parts there and there's different things that need to come into place, but ideally, how do you see this playing out as far as a tiny perspective? And then how much capital do you think will remain in a mortgage company?

Kevin Barker: I know you addressed it previously, but I just love to refresh there as all that all that plays out. We have the S1 on file. We continue to evaluate alternatives, as we all know, taking a mortgage company or quite frankly, any company public right now is a little bit of a challenging task. The idea around the mortgage company is the thought is to try to figure out a way to recycle capital.

Kevin Barker: I think one of the things we're going to do when you think about MSRs, for example, we're working on different funds, not necessarily just specific to MSRs, but really more specific to what I would call the mortgage company as a capital vehicle. And what I mean by that is, you know, you have the origination business and the MSR side, you know, as rates to rally at some point in our careers going forward, you know, you want the folks that are deploying capital in these funds to be able to realize the, you know, what I would call either recapture or not give up that MSR.

Kevin Barker: So I would say the mortgage company and the recycling of the capital, there is fluid. As it relates to the bigger picture, you know, I've been pretty vocal. We are going to, and I alluded to this in my opening comments, you know, I truly believe by the end of Q4 that there is a possibility we'll have 50 billion of AUM as an asset manager. You think of like the biggest and best alternative asset managers out there.

Kevin Barker: They have their C-Corp, they have a REIT, and then they have their private capital business. That's ultimately where I think we'll be. And then hopefully at some point down the road, we'll have an insurance leave. So we're working on all of these things. The capital formation around our business is going to be, as we know, our stock is nine bucks, books, values, 12, 30. The capital formation side will likely be more in the private capital business than it will be in the public markets at this point, just based on, you know, how poorly I think REIT stocks trade.

Kevin Barker: But, you know, it's safe to say based on our ambitions and where we're headed. And I think the progress that we made that we will be a real global alternative asset manager by the end of the year. Okay, and so are there any specific points that we should look for to see that this is, you know, really has likes and you really, we start to see like it really playing out. Is it the S1 on the mortgage company or are they closing a sculptor or are there certain particular points that you're looking for really say this is going to play out as expected?

Kevin Barker: Sure, so I think sculptor obviously is an important piece as we go into the SM, you know, grow or asset management business. I'd also say that, you know, we are an asset manager. We just operate under the, under the wrapper of a REIT sculptor is very important in the asset management side we're working on another what I would call sizable transformational transaction that we expect to get done by the end of the year as well.

Kevin Barker: And that's that gets you on the asset management business to where we want on the mortgage company side is, you know, the cash flow that we get from that as as a corporation or at the rhythm level is, you know, awesome. So if you think about it, you look at earnings for the quarter where, you know, 42 cents or whatever it is plus 43 cents plus 15 for the excess. When I look at the mortgage company overall and I look at our ROE, you know, when I look at where we were minus, you know, the one timers, I think actually return an equity for the quarter is something around net net 15% is that right?

Kevin Barker: You know, on an annual basis, I think we're trending towards annual ROE about 30%. And so we're not looking to give up any of these assets because on a go forward basis in this rate environment, you know, the mortgage, the mortgage company will help as well as all the other things that we have going probably contribute to something between a 35 and 40 cents, 45 cents, you know, run rate on our core business.

Kevin Barker: We don't want to give that up. We just want to figure out a way to manufacture more capital at the cheapest basis and then figure out how we get deployed that capital and what I would call today's great investing environment. But overall, you know, we're not giving up on the mortgage company things that we're looking at or expenses, we're looking at retail clearly, you know, because that business really doesn't make any money right now when you think about two volumes and cost to run that business.

Kevin Barker: But overall, you know, we're really happy with the asset that we have. We just have to figure out a way to generate more capital because we think the investing environment is that good. That's why we're running around the globe quite frankly on our on our private capital. Great. Thanks for all the color, Michael. Thanks, Kevin.

Unknown Executive: Thank you all very much and with that we can and this concludes our question and answer session.

Michael Nierenberg: I would like to turn a conference back over to Michael Nierenberg for any closing remarks. Please go ahead. Great. So thanks for dialing in everybody. Stay well and we look forward to updating you on more developments and as things change. Nierenberg in our company.

Unknown Executive: Have a great day. Thank you.

Unknown Executive: This conference is now concluded. Thank you for attending today's presentation. You may not disconnect.

Unknown Executive: Have a good day.