Q4 2024 Rithm Property Trust Inc Earnings Call
Speaker Change: What allows you to say that you, we, think we recognize from somewhere. Self reparies. The aim that humans have been doing is to call a time when the human answer is that they do not know. One of the things that human beings always try to try do is to
Ian: Thank you for standing by. My name is Ian and I will be your conference operator today.
Ian: At this time, I would like to welcome everyone to the Rhythm Property Trust fourth quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise.
Ian: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you.
Ian: I would like to hand the call over to Emma Bolla, Associate General Counsel of Rhythm Capital. You may begin your conference.
Emma Bolla: Thank you and good morning, everyone. I would like to thank you for joining us today for Rhythm Property Trust's fourth quarter 2024 earnings call. Joining me today are Michael Nierenberg, CEO of Rhythm Capital and of Rhythm Property Trust, and Mary Doyle, CFO of Rhythm Property Trust.
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.
Emma Bolla: 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.
Emma Bolla: 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, Emma. Good morning, everyone.
Emma Bolla: and thanks for joining us. I have some short comments and then and then we'll just we'll go to the supplement and then we'll do a little bit of Q&A.
Emma Bolla: As we think about this vehicle, we took over the management contract of what was formerly known as Great Ajax in June of 2024.
Emma Bolla: for the first time in three years we're happy to report the company had a positive economic result in Q4. While six cents a share in you know is a start we look forward to our ability to continue growing earnings and our capital base.
Emma Bolla: as we, you know, when we took over the company, the thought was, you know, with the commercial real estate market.
You know extremely dislocated
Emma Bolla: We were going to turn this vehicle into getting out of the so-called legacy resi non-performing loan business not that we're out of it at as a firm but in this vehicle and turning it into an opportunistic vehicle focused on commercial real estate.
Emma Bolla: So, in doing that, we repositioned the balance sheet, we shored up all the financing around the assets.
Emma Bolla: We sold down legacy residential positions and we reinvested the proceeds into high quality commercial real estate.
Emma Bolla: In doing all that, you're going to see, you know, you could see the economic result, which
Emma Bolla: You know, for the quarter again, we made six cents per diluted share from a gap perspective. And we're still maintaining the dividend at six cents with the belief that we're going to continue to grow out of out of this so called hole that was, you know, part of this company for many, many years.
Emma Bolla: How are we going to get there? How are we thinking about this vehicle on a go-forward basis?
Emma Bolla: because right now it's got roughly 250 million call it of equity, it trades at give or take 50% a book.
Speaker Change: Unknown Speaker So how are we going to get there? One is we're going to need more capital. So when we think about the stock price, we think the equity is extremely undervalued. So we'll likely be in the market in Q1 with a preferred equity deal. This will do a couple things. One, it's going to help us shore up our capital base.
Speaker Change: To it's going to give us more capital to invest which therefore is going to hopefully create more earnings for our shareholders
Speaker Change: That's part one. Part two, however, on that is the liability structure. They were issued with very low rates. So we feel good about that. And again, there's not much we could do there.
Speaker Change: And then finally, what we're going to do is we're going to seek M&A opportunities to truly grow the company.
Speaker Change: as you know, at Rhythm Capital, we, you know, our pipeline of M&A across the firm is extremely broad. And we do, we do, we are optimistic and we do feel like we're going to be able to do something here.
Speaker Change: You know, the playbook is very similar to New Residential, when we started that vehicle at Fortress, it was externally managed and that was in 2013.
We started roughly a billion dollars a capital
Today it has 7.8 billion.
Speaker Change: Unknown Speaker And along the way we did a bunch of M&A and we bought a bunch of assets and, you know, quite frankly, I think we're going to be able to do that. I'm hopeful we'll be able to do the same thing here. So with that, I'm going to turn to the supplement. I'll begin on page. I'm going to begin on page three.
Again, Rhythm Property Trust was formerly known as Great Ajax.
Speaker Change: I gave you the comments that we set this thing up or reposition the company to take advantage of what we think is one of the better investing opportunities we've seen in many, many years in the commercial real estate sector, as well as we'll look for other opportunistic things.
Speaker Change: Unknown Speaker, The Huffington Post, Unknown Speaker, Unknown Speaker, Unknown Speaker,
Speaker Change: When we look at the amount of capital in, you know, in commercial real estate right now there's $50 million in commercial real estate that's going to continue to grow. When we look at new investments, you know, we're targeting something in the low double digits.
Speaker Change: When you look at the team and you think about the folks that work on this business, again, this vehicle is externally managed. There's not, you know, whether it's 200 million dollars, quite frankly, or 20 billion dollars.
Speaker Change: The amount of effort and the team is still the same and we take great pride in trying to create value for shareholders.
Speaker Change: Page four financial results 2.9 million in gap income for the quarter
Speaker Change: Six cents per diluted share, EAD earnings available for distribution, a penny.
Speaker Change: Again, first positive result in three years while pennies not much, you know, we're optimistic on where we're going to go with this. We kept our dividend the same at six cents per, you know, per common share.
Speaker Change: Cash and liquidity on balance sheet at the end of Q4 is $64 million and total shareholder equity is $247 million.
Looking at book value $5.44.
Speaker Change: Essentially unchanged from Q3, the one thing I want to point out there is rates, when you know, when you look at rates across the curve, they're up approximately 60 basis points.
Speaker Change: So if you think about the result, rates up 60 basis points.
Speaker Change: book value essentially unchanged and a lot of that is due quite frankly to the investing that we did in you know in the quarter and then you know prior quarters where we put on floating rate assets at low double-digit returns and that enabled us to get to this positive result.
Speaker Change: You know the if you look at page five, you know, just a couple points here
Speaker Change: We, you know, as I mentioned, we repositioned the balance sheet. What did that mean? We sold down a little under $340 million from a gross.
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Speaker Change: Growth standpoint of legacy residential mortgage assets. We deployed as I pointed out 50 million into commercial real estate
Speaker Change: Gap net income grew from a loss in Q2 of $13 million to a positive result of 2.9 and then earnings available for distribution grew from a loss of little under $10 million to a little bit, so call it kind of flat. And then we also improved all of the financing.
Speaker Change: you know we're we're targeting what I would say low double-digit returns there'll be some opportunities to deploy capital at higher returns but that for now that's how we're thinking about it there's no legacy issues that we see right now that are gonna
Speaker Change: and because any problems for the company think about the commercial real estate sector anybody that's been investing in office over the past number years is headed it's going to have many issues
Speaker Change: Right now where we stand, you know, we feel very, very comfortable at the opportunity ahead of us.
Page 7 just talks about opportunities and yields.
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One is
Speaker Change: The company is on the right path. Team is working hard. We are going to need more capital, the capital, what we're going to try to do is raise money in the prep market in Q1. And then from there, we'll continue to deploy capital, we'll hunt for some M&A opportunities.
Speaker Change: And again, the playbook is very similar to what we did when at Fortress, where we had started with a billion of capital and new residential and grew that to where it has a little bit under eight billion today.
Speaker Change: So with that, I'm going to turn it back to the operator and then we could have some Q&A.
Speaker Change: Thank you. As a reminder, to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, once again, please press star one.
Speaker Change: Our first question comes from the line of Tom Catherwood with BTIG. Your line is opened.
Tom Catherwood: How is your view on commercial real estate evolved and are the opportunities that you're pursuing the same as they initially were or have they shifted over time?
Speaker Change: You know, hundreds of millions of dollars into different commercial real estate opportunities.
Tom Catherwood: While saying that, we're not, you know, the, there are opportunities to do so. We've seen a lot of office over the course of the past, you know, year, year and a half.
Not everything works.
Unknown Speaker quite frankly.
We are starting to see more opportunities. We're seeing
Tom Catherwood: for example, working with some of the large money center banks where we could provide a
Tom Catherwood: You know, a B note or Mez note on some underlying loan that that they're making helps from a capital standpoint at the bank.
Tom Catherwood: and for us it creates that, you know, double-digit yield that we're targeting.
Tom Catherwood: Sculptor, which does their own thing, has raised a lot of money around the real estate funds and has, you know,
Great track record
Speaker Change: Rhythm at the at the rhythm level where we've deployed capital and now in this vehicle where we repositioned There's we see
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Speaker Change: I appreciate those thoughts and that's kind of where I wanted to go next was, you know, were you somewhat surprised in 24 that we saw a slower pace of loan sales out of banks and could that accelerate in 25?
Speaker Change: I do think it will accelerate in 25, you know, when you think about and I worked at a large bank for five years
When you think about the banks.
Um...
Speaker Change: Unless you're forced to take that mark, typically you're going to hold on to that asset. As you see banks taking more marks, obviously the banking sector has had a great, great run. You look at bank earnings, they're fantastic. I think you'll see them write down more of their kind of problem real estate. The other thing, what you're going to see is our belief is that rates are going to stay higher for longer.
Speaker Change: Everybody was betting on, for example, the 10-year note. I pointed out rates are up 60 basis points, right? So if you look, I think 10s went from, you know, the 10 years trading roughly 4.60 today. And, you know, I think at the end of the year you're up, you know, you're up 60. Now you're up even a little bit more. When you look at...
Speaker Change: The general belief was that rates are going to come back down because the Fed is cutting rates. You know, you had the Fed meeting yesterday and the Fed's basically saying we're on hold for now because the economy is strong. Rates are not going to come down that quick.
Speaker Change: and as a result, I think you're going to see more problems in commercial real estate as people, you know, as things reset higher and debt service becomes a problem. So I think you'll see more assets come out.
Speaker Change: It's going to be a combination of both. It's a good question. I mean, ideally, if there was a transaction that was highly accretive,
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Speaker Change: you know, we're going to continue to try to do those where the stocks trading, you know, I didn't
Speaker Change: This morning, roughly 285 or something like that. And book value of call it five and a half bucks.
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Speaker Change: We prefer not to issue stock down here if we don't have to. That's why tapping into the preferred market, even if it's IRA Coupon. I will point out that if you go back in time, you know, there's covenants around the unsecured and there is a need to buffer the capital base around some of that unsecured as you think about covenants.
Speaker Change: Now, we've deployed capital, we have, you know, cash, cash and liquidity on balance sheet, but the net of it is we want to do both one, take care of some of the high yield notes and to have more capital to deploy so we could grow earnings.
Understood. Appreciate the comments, Michael. Thank you.
Thank you.
Speaker Change: Our next question comes from the line of Jason Stewart with Jani, your line is opened.
Speaker Change: Unknown Speaker The answer is yes. You know, when we do something, if we're going to partner with, you know, call it one of our large money center banks,
Speaker Change: Unless the returns where we could justify an unlevered return without putting any leverage on that asset. There's plenty of financing available to us.
Speaker Change: at the Rhythm Property Trust level. Keep in mind, Jason, you know, as a firm, you know, at the Rhythm level, the balance sheet, you know, we finance the mortgage company and everything else, the balance sheet's $40 billion. So when you think about the power of Rhythm supporting, you know, being that this vehicle is externally managed and everybody here is a Rhythm employee, the power of our franchise, I think, is pretty broad.
Speaker Change: We have a lot of access to financing. So we're not going to do something unless it meets, obviously, the return hurdles. So, you know, the short answer is...
Speaker Change: Going back, yes, but there's plenty of financing available, whether that be in the term financing on an asset or some straight financing with an insurance company and or other ways to finance our business.
Speaker Change: Senior down at the sub to juice the top line gross ROEs to cover say the preferred and
Speaker Change: We're not we're not going to set up this vehicle to be a so-called first loss vehicle just to seek yield. I'll be really clear about that. You know there's a ton of lending demand.
where it could be transitional lending, it could be...
Speaker Change: There's just a ton of demand for for lending and you know when you look even in our Genesis business That's that's a wholly owned sub of Rhythm You know that business on you know residential transitional loans did almost four billion of production last year you look at the underlying
Peace provider on different deals just to do something
Speaker Change: to seek yield. We want to make sure one is we're first first and foremost
Speaker Change: Credit first, you know in underwriting and then and then we're gonna solve for return and we're confident we'll get there you know, we did a loan out of at a rhythm going back in 24 at you know, so for plus 700 on a on a development project with With Kushner and you know, that was
Speaker Change: You know, if you think about it, it's a 12 plus percent unlevered return. So there's going to be plenty of opportunity to deploy capital.
Speaker Change: Got it. Okay. That's that's really helpful. And then just going back real quick to the office market I mean, it does seem like on the margin the conversation has shifted a little bit more positively Do you think that unlocks more opportunity or do you think how do you think about that conversation evolving? I guess and the opportunities in office
You know, my old fortress stomping grounds, 1345.
Speaker Change: that traded to Blackstone. There's a ton of things that we see in office. We want things that, if we're going to be in office, for example, if you're going to be on the equity side, that equity investment in rhythm property trust has to be a multiple.
Speaker Change: But there's there's tons and tons of office that continue to come out a lot of it's bad quite frankly You know and when I say bad, it's like you know. I don't know a lot of this stuff has to be repurposed so
Speaker Change: Unknown Speaker You got to be really, really selective there. And this is again, there's a ton of need for capital, I do think people are going to go back into the office. There's a there's a ton of need for money for capex in a lot of these buildings, because everybody wants to be in a new building.
Speaker Change: But we said we see plenty but a lot of it doesn't work
Okay, thanks for the call. I appreciate it. Thanks, Jason.
Speaker Change: Our next question comes from the line of Stephen Laws with Raymond James. Your line is opened.
Stephen Laws: Hi, good morning, Michael. On the deck, about $48 million of equity capital is allocated to CRE assets, about 20%. Can you...
Stephen Laws: Can you talk about the ramp and on the current equity base how how high that can get or maybe ask another way? How much how much equity supports some of that investments and legacy assets that are going to stay on the balance sheet?
Stephen Laws: So let me address the second part. It's everything we do, not everything, but I think everything we do on a go forward basis is going to be around, you know, around commercial real estate. So for example, if we hit the market with,
You know, let's just use round numbers and
Stephen Laws: I'm hopeful we can do this if we hit the market with a couple hundred million of a preferred equity over the course of the year Whether we do it in one swoop or not. I don't know we prefer to do it now Let's just call it roughly 50% of that if we wanted to retire the outstanding debt We would do that then you'd have another hundred million of equity going into
Stephen Laws: You'd have another $100 million going into commercial real estate. When you look at the money that we've deployed in commercial real estate so far, we've added about $270 million from a gross.
Stephen Laws: standpoint. Again, most, if not all of it's floating rate. And when you think about the advance rates on this stuff, and where we are, you know, advance rates could be anywhere from, you know, call it 80 to 85%. You know, in that range, as we think about
the No Mark-to-Market or Facilities.
Stephen Laws: The rest of the stuff, quite frankly, you have a bunch of stuff that's consolidated on balance sheet, and I pointed that out earlier in my, in my opening remarks. You just can't sell them because their legacy, you know, the legacy residential RMBS.
Stephen Laws: so if you think about 250 of kind of equity capital and You know, I'm looking at our position sheet and the position, you know, the balance sheets are in really good shape There's not that much that's left to sell down. That's going to release a ton of equity
Stephen Laws: So the rest of it's really going to be in residential real estate right now.
Speaker Change: Great, appreciate the comments there. And touching base on the investments, you know, I guess, can you update us on any investment activity in the month of January, and then kind of bigger picture? You know, if you look at your current pipeline, can you talk about the relative attractiveness of additional CMBS investments versus the senior and MES loan opportunities you're seeing in your pipeline?
Speaker Change: You know, we're looking at both. You know, we look at every deal that comes out. We see every deal.
Speaker Change: It's going to be a combination is what I, you know, what I would say, you know, same, same comment going back to Jason's question. We're not going to be, you know, I've been doing this a long time credit matters first underwriting matters first, particularly in commercial real estate, you want to make sure that you're
the
Speaker Change: M&A, you know, we look at hundreds of deals a year.
Speaker Change: You know, if you look at our track record around the stuff that we've done, you know, it's
It's been pretty impressive, quite frankly.
Speaker Change: But that doesn't mean, you know, last year we did, we took over the management contract of this and we did another mortgage company deal. So it's not like, you know, we're going to do a ton, but there'll be some opportunities, I think, on the M&A side to one grow the capital base, and then to put out capital that's going to be more creative than just, for example, buying a triple A CMBS bond.
Speaker Change: Great. And then lastly, you know, over the course of the year,
Speaker Change: You know, I know most of the securities from the balance sheet is available for sale. I mean, are those investments you think eventually you rotate out of into CRE whole loans or do you think you, you know, these are longer term holds and just part of the longer term targeted asset mix as you put together this portfolio?
Speaker Change: You know, when I look at forward, you know, forward leverage yields on the remaining portfolio where we currently sit, our forward returns are on average, you know, what I would say anywhere from 12 to 18 percent.
Speaker Change: So, there's really no rush to sell them unless you have the ability to redeploy that capital into something that's more creative.
Speaker Change: And we spent a lot of time between, you know, on the on the resi side of our, you know, our residential teams or commercial teams, we spent a lot of time looking at all kinds of different assets.
is what I would say.
Speaker Change: Great. Oh, any investment activity in January you can share with us today or...
Speaker Change: Yeah, just a little bit more in the top part of the capital stack around some of the some new newer CNBS deals, not a ton of capital out, you know, I pointed that earlier, I think we're
Speaker Change: We're sitting on give or take $65 million of cash and liquidity. We want to raise a bunch here in the first quarter, you know, just to bolster the balance sheet, you know, have a hard look at some of the debt, and then get ready to deploy more capital.
Speaker Change: and then if there's something highly creative, we'll come back to the marketplace and figure out a way to take our track record is good in doing the stuff to take this company from where it has 250 million of quality value to something that's multiple billions so it becomes extremely relevant.
Speaker Change: Yeah, fantastic. Appreciate the comments this morning, Michael. Thank you. Thanks, Stephen.
Speaker Change: Our next question comes from the line of Doug Harder with UBS. Your line is opened.
Doug Harder: Thanks. Hey, Michael. Can you talk about the relative attractiveness of using structural leverage like a BNOTE versus kind of financing, you know, through warehouse lines and which kind of offer better return opportunities today?
Speaker Change: Unknown Speaker Again, I, you know, going back to my earlier comments, we're going to look at we look at everything, there's going to be a combination of both.
Speaker Change: Unknown Speaker You know, when you think about B notes and you think about issuing, you know, loans, obviously, you got to underwrite first.
Speaker Change: Structural leverage, you know, when you hit the securitization markets, that is attractive. While saying that, you know, the balance sheet that we have here is small, the equity capital base is small.
Speaker Change: You know, you may even see at some point where we partner with some of the other businesses that we have here a rhythm on some opportunities in commercial real estate. You know we have a lot of capability between. [inaudible] You know we have a lot of capability.
Speaker Change: Rhythm Property Trust are working on Rhythm, obviously Rhythm has plenty of capital, so you're going to see situations I think where we as a firm, no different than I think what Blackstone does on some of their stuff, where we as a firm are going to partner with some of our other subs and operating companies.
Great. Appreciate it. Thank you, Michael.
Thanks, Doug.
Speaker Change: There are no further questions at this time. I would like to hand things back over to Michael Nierenberg for some closing remarks.
Speaker Change: Thanks. Appreciate you guys joining the call and asking the questions. It's helpful to all of us here at Rhythm.
Michael Nierenberg: Property Trust and Rhythm Capital. What I would say again just to close in my closing remarks
Michael Nierenberg: This vehicle will be a lot more active, we hope, over the course as we go forward.
Michael Nierenberg: Our ability and track record to create value for shareholders, I think is, you know, you don't have to look further to some of the other things that we as a group have done. It's the same group that's
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Speaker Change: You know and stay tuned, you know the desire to grow earnings and make this thing, you know
Michael Nierenberg: Great, and grow the share price is something that's extremely important to us. So look forward to updating you soon.
Have a great day!
And thank you.
Michael Nierenberg: Thank you. This concludes today's conference call. You may now disconnect.