Q1 2025 Rithm Property Trust Inc Earnings Call
Thank you for standing by and welcome to the Rhythm property Trust first quarter 2025 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd 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.
Speaker Change: Your question again press Star one. Thank you I'd now like to turn the call over to <unk> Associate General Counsel of rhythm capital you may begin.
Speaker Change: Thank you and good morning, everyone I would like to thank you for joining us today for rhythm property Trust's first quarter 2025 earnings call. Joining me today are Michael Nierenberg, Chairman, CEO and president of rhythm capital and CEO of rhythm property Trust and next Santoro CFO of rhythm capital and rhythm property Scott.
Speaker Change: The call we are going to reference the earnings supplement that was posted this morning to the rhythm property Trust's website Www Dot rhythm property Trust Dot com.
Speaker Change: 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 uncertain and may differ materially from actual results I encourage you to review the disclaimers in our press release on earnings supplement regarding forward looking statements and to review the risk factors contained in our annual and quarterly.
Speaker Change: <unk> 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 supplement and with that I will turn the call over to Michael.
Michael Nierenberg: Thanks, Andrew Good morning, and thanks for dialing in.
Speaker Change: Yes.
I'm not going to give you the long.
Speaker Change: Great.
Speaker Change: Update but speaking about this this company that that we manage here at rhythm.
Speaker Change: The company is in great shape, if you think about when we took it over in June of 'twenty for.
Speaker Change: The company had a lot of what I would call re performing loans very low coupon assets on the balance sheet and the team has done a great job by repositioning the company selling down those assets and redeploying into.
Speaker Change: Current cash flow higher yielding assets in the in the commercial space.
Speaker Change: One note is this company has no legacy commercial real estate exposure to the downside. So when you think about where we are today. The company has give or take about $300 million of equity.
Speaker Change: It's sitting on almost a $100 million of cash we did a capital raise in the quarter.
Speaker Change: So things are in very very good shape.
Growth story here is going to be one that is similar to what we did with.
Speaker Change: Rhythm, which was formally known as new residential where we are.
Speaker Change: The company was seeded with roughly $1 billion of capital and we grew it from $1 billion of permanent capital to roughly $8 billion today.
Speaker Change: And grew.
Speaker Change: Balance sheet earnings that company makes a $1 billion a year or so.
Speaker Change: This will take a little bit more time, obviously because of where the equity trades and I'll talk to that in a minute as I flip through the deck, but.
Speaker Change: In General I would say the company is in really good shape. We're excited about the ability to grow this company and put up real earnings.
Speaker Change: For shareholders and see the equity price right itself to a more normalized valuation so with that I'm going to I'm going to start on page three and I'll just flip through this quickly and then we'll have a little bit of Q&A.
Speaker Change: So when you think about the company. It is managed by rhythm capital and our teams here at rhythm capital there is.
Speaker Change: There's roughly 75 folks internally that focus on all of our what I would call our both rhythm rhythm capital in a rhythm property trusts that doesn't include obviously some of our affiliates such as sculptor and some of the different op goes.
Speaker Change: The team here has a ton of experience whether it would be.
Speaker Change: In the resi space or the commercial space.
Speaker Change: My partner here, Charles Sorrentino has been with me since 2008 run running.
Speaker Change: We're running different.
Speaker Change: Trading desk on the sell side and.
Speaker Change: And has a ton of experience in the commercial real estate as do our other team members that are focused on this company if you flip to page four.
For the quarter, GAAP, GAAP income $1 $1 million or <unk> <unk> per diluted share earnings available for distribution 7.3 quarters of a million dollars or <unk> <unk> per diluted share.
Speaker Change: The first first quarter dividend, we paid <unk> that hopefully should continue and then over time, hopefully that grows cash and cash equivalents as I pointed out now.
Speaker Change: $97 million total equity $295 million and the GAAP book value today is $5 40.
Speaker Change: If you think about that on a relative basis the stock trades in the current market at about $2 85.
Speaker Change: So we think the equity is extremely undervalued, we saw a pop after last quarter's earnings calls and then when the with them with the volatility we saw in the markets.
Speaker Change: Obviously, the equity price got hit pretty hard, but we feel very confident in.
Speaker Change: One is where.
Speaker Change: Where we stand in the business, but number two is the ability to create real shareholder value for folks that are along the equity page five if you look for first quarter, we deployed $65 million in various CRE debt that.
Speaker Change: That includes $47 million of AAA, <unk> MBS bonds with a roughly 11%.
Speaker Change: Type yield we also did we split alone between our rhythm capital and rhythm property trusts $35 million alone at Sopra, plus 800 on our Midtown.
Speaker Change: Office building with a good sponsor so thats a.
Speaker Change: When you think about that that's a 12 or 13% on unlevered return not including fees during the quarter. We did one of the first perhaps that got done in a long long time, we raised $52 million of capital.
Speaker Change: Well I would say, we're eager to grow earnings we want to be mindful of the volatility we're seeing in the markets.
Speaker Change: We're looking for great opportunities to deploy capital at what I'd call a teens type returns.
Speaker Change: And we were seeing plenty more things to do right now, but we're going to be patient.
Speaker Change: During the quarter, we sold $21 million of legacy <unk> assets and we continue to grow earnings in the company paid six is just a slide showing the potential earnings growth I think you should assume for what we're trying to do here.
Speaker Change: <unk> is looking for a strategic.
Speaker Change: Either a transaction or assets to acquire which youre going to give us the ability to read to grow earnings and raise capital around.
Speaker Change: We continue to be on the hunt for that but like I said with the volatility in the market. We do think things are going to come our way, but we're going to be extremely patient here.
Speaker Change: Page seven looking ahead at the opportunity with RPT. One is this year just look at the stock price $2 85 versus $5 $40 book value that should say enough when.
Speaker Change: When you look at.
Speaker Change: This page why CRE debt, you've seen obviously, the repricing of assets and dislocations. There was an article in the journal yesterday.
Speaker Change: I'm talking about the Chicago market that there is a $1 7 million square foot office building.
Speaker Change: On the river there Blackstone gave the keys back and they are just talking about the state of the so-called office market in.
Speaker Change: In Chicago I'd encourage you to have a have a look at that that article.
Speaker Change: When you look at our exposure in this business or at rhythm property Trust again, Theres no legacy commercial real estate exposure, we feel really good about that and we have a very good team.
Speaker Change: What to expect as we go forward, we continue to see a pretty robust pipeline will continue to focus on what I would say opportunistic investing.
Speaker Change: And looking for the right time to deploy capital and drive higher earnings and higher growth and then finally on page eight just a.
Speaker Change: An illustration of what the future state of the portfolio could look like Youll have some see MBS youll have senior loans, a little bit of Mezz and some opportunistic investments we're not looking to go all in on any one strategy.
Speaker Change: As it relates to the company, we're looking for some diversification.
Speaker Change: Across all these different asset classes, so with that I'll turn it back to the operator, and we'll take some questions.
Speaker Change: Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue. If you would like to withdraw your question simply press Star one again.
Speaker Change: First question comes from the line of Jason Stewart from Janney Montgomery. Your line is open.
Jason Stewart: Hi, Thanks, good morning.
Speaker Change: Good morning.
Jason Stewart: All the volatility that we've seen has that changed.
Speaker Change: Motivations would change the activity level in the market are you seeing.
Jason Stewart: Any movement there.
Jason Stewart: Yeah, Yeah, yeah, absolutely wider spreads across the board.
Jason Stewart: Whether you look at high yield or you look at IAG or you look at.
Jason Stewart: The residential side of the market, while saying that we've seen some good stability over the course of the past couple of weeks as best and I think it's taken more of a prominent role in the narrative around tariffs.
Jason Stewart: Again, while saying that I do think that you're going to see more and more we're going to see more and more opportunities across all of our platform. The beauty aware. This company sits along with it what I would call it parent at a rhythm as we see a ton of deal flow from all of our Counterparties, whether that'd be it banks or if you look at.
Jason Stewart: Our sourcing teams across the country that are out there looking for assets <unk>.
Jason Stewart: <unk> deals to put capital to work. So there's plenty to do we got to be careful though I mean, you know I use the the Chicago Office building is as as an example.
Jason Stewart: In that article they are talking about how a lot of these deals are funded and you know with Triple AC MBS. If you look at the conduit markets those markets have been very very quiet as of late so you're seeing more single property deals and.
Jason Stewart: You know that are coming to market and what I would call a wider spreads, but you've got we've got to be careful there.
Speaker Change: Yeah. Thank you and then when you say looking for diversification does that mean.
Jason Stewart: You've shifted your.
Speaker Change: Your thoughts on a platform or a transformative type acquisition.
No. It's it's more adjacent as more of the same way.
Speaker Change: Still looking at platforms, we're looking at origination businesses I think the key for us.
Speaker Change: Not only this company, but for all of US that are so called in the alts business or managing capital is how do you take your origination engines and.
Speaker Change: And use that to either seed balance sheet, our seed funds, we've done a good job on that on the at the parent level and that's something we'd like to see follow through at the rhythm property Trust.
Speaker Change: Got it okay I'll jump off thank you.
Speaker Change: Thanks, Jason.
Speaker Change: Your next question comes from the line of Tom Catherwood from <unk>. Your line is open.
Tom Catherwood: Thanks, and good morning, everybody.
Speaker Change: Maybe starting with the the $75 million subordinate mortgage. This was your first investment not subordinated mezzanine loan category on page eight that you highlighted Michael how is your $1 billion pipeline divided between that category and see MBS senior loan.
Owns an opportunistic investments at this point.
Speaker Change: This wasn't I would actually look at this as an opportunistic investment.
Speaker Change: We partnered with a couple of large money center banks.
Speaker Change: On this we split it between like I pointed out earlier between rhythm property Trust and rhythm capital.
Speaker Change: As we look at this.
Speaker Change: Again, it's not like we want to be all loans, where we wanna be all bonds.
Speaker Change: So it's going to be a diversified portfolio, we think that is a good way to.
Speaker Change: Create risk limits around the portfolios that we're going to deploy capital.
Speaker Change: I don't know that it's any one formula, but we look at asset to asset we underwrite every single asset that goes on the balance sheet.
Speaker Change: This was an example of something working close with our banking partners. We're in the middle of another one that we're currently looking at with.
Speaker Change: Some of the large money center banks here in New York to partner with them on on putting capital out.
Speaker Change: Got it I appreciate that and then.
Speaker Change: Obviously, you mentioned the preferred issuance in <unk>.
Speaker Change: Youre sitting on nearly $100 million and the balance sheet cash on the balance sheet.
Speaker Change: When are you thinking of starting to pay down that higher coupon corporate debt and kind of beyond that what are the next steps in the companys balance sheet evolution.
Speaker Change: So the corporate debt I believe is 970 <unk> right now.
Speaker Change: So that probably stays outstanding for a little bit here as long as we think we're able to deploy capital above that if you think about it corporate debt versus preferred the preferred we get equity treatment. Obviously the debt. We don't so I think that stays outstanding as we get an upgrade for the company you'll see D. A.
Speaker Change: 970, <unk> I think that our rate drops by 100 basis points.
Speaker Change: So I think until we get the company at scale it probably stays outstanding for now unless again there was some transformative deal that we do where we're going to raise a bunch of capital around and I do think it's very conceivable that the growth in this company.
Speaker Change: Could could be not only from Canada.
Speaker Change: Kind of the rhythm family of companies, but also from third party and bringing a real partners to grow this vehicle and I think that's more likely than not as we go forward based on your stock trading roughly half of book value at 50% of book.
Speaker Change: Got it and then kind of partially answered my last question, but I wanted to go through the thought process anyway.
Speaker Change: In terms of dividend coverage right like if we look at current pace.
Speaker Change: Proving earnings from <unk>.
Speaker Change: A penny a share and we look at the <unk> dividend per quarter at this current rate it would be another four quarters to fully cover the dividend understand the transformative.
Speaker Change: Acquisitions or investments can accelerate that process, but outside of a transformative event are there any other items that can help accelerate the process of reaching breakeven on dividend.
Speaker Change: I think you know, it's growing earnings and getting rid of lower coupon quite frankly, lower coupon assets on the balance sheet. The challenge with some of the lower coupon assets on balance sheet. The retained interest and we can sell those.
Speaker Change: So that's part of the challenge the flipside of that is the cost of liabilities on some of those lower coupon assets is obviously very low because they're issued in securitization trust.
Speaker Change: It's gonna be more quite frankly, it's probably more of the same deploy capital at accretive levels.
Speaker Change: Two to grow out of the so called earnings hole you know if you think about it and I have a very strong view that the Reits in general are extremely attractive relative to different types of companies you look at rhythm for example, with train five and a half we trade at call. It five to six times earnings you look at somebody.
Speaker Change: Larger alt asset managers that trade at 30.
Speaker Change: You look at companies like this that are trading at 50% of book value. There's a lot of value here. The other thing what I would say as it relates to dividends.
Speaker Change: We didn't pay dividends and we're going to keep with our dividend policy. In this company. If you didn't pay dividends and you redeploy the capital at teens type returns. Your overall equity prices should increase because you're retaining or anything you're growing at double digit returns. So in general what I would say is policy stays the same we're going to grow out.
Speaker Change: Of it.
Speaker Change: But the sector fundamentally is extremely extremely cheap right now and again you know that.
Speaker Change: Going back to my earlier comment I do think the growth in this vehicle will likely be with some third party partners over time.
Speaker Change: Got it I appreciate the answers thanks Michael.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Randy Binner from B Riley Your line is open.
Randy Binner: Hey, good morning, just a couple.
Kind of balance sheet related questions I guess the first one is taking on the last call you had mentioned there would be less.
Randy Binner: Sale activity.
Randy Binner: <unk>.
Randy Binner: Selling the legacy portfolio and so I think it was $21 million.
Randy Binner: This quarter and it sits at about $100 million and so is that I think.
Randy Binner: And kind of putting all the comments together, but the ability to continue to move up in the legacy portfolio is relatively limited going forward or is it pretty good like how should we think about that remaining amount that's going to kind of stay yes.
Randy Binner: Yeah.
Randy Binner: It's relatively limited I mean, where we can make headway we will as long as we think we're not giving up value.
Erez: Erez to to have the obviously the cleanest balance sheet in the balance sheet is very clean.
Erez: But when you look at the true amount of equity that's associated with a lot of the so-called legatee legatee legacy the legacy assets, we have on balance sheet.
Erez: Its extremely low after quarter end.
Erez: I think we're down to about $25 million of NPV that potentially could be sold that's not where we have to hold for Dodd Frank reasons from old securitization trusts or what have you.
Erez: Okay. That's helpful and then just on the <unk>.
Erez: The unrealized gain that came through the income statement I think I think that's related to the AAA CBS, but just looking to confirm that.
Erez: I think that would be lower this quarter at least so far is that is that where that.
Erez: Unrealized gain activity is coming from.
Erez: No I think it's a sale of legacy assets versus marks.
Erez: Does it do we did not sell any any of our AAA floating rate <unk> in the quarter.
No I mean, I think this is an unrealized gain.
Erez: Okay.
Erez:
Erez: Where do you see that.
Erez: The way I read it the 4.4.
Erez: Million.
Erez: The $4 4 million of unrealized loss that you see in the quarter. There is an offset in OCI.
Erez: It's.
Rob: It's Rob.
Erez: On book value quarter over quarter.
Erez: So, it's an up and understood.
Erez: Yeah got it got it those geography, okay perfect I appreciate that clarification. Thank you.
Erez: Thank you.
Speaker Change: Our next question comes from the line of Jade Rahmani from <unk>. Your line is open.
Erez: Thank you very much.
Speaker Change: A bit of a follow up to Randy's question, but just in terms of the balance sheet for those of us new to the story.
Speaker Change: What percentage is a core longer term hold.
Speaker Change: Whether it be from the legacy assets or new investment and what percentage of that is commercial real estate the new.
Speaker Change: That investment strategy.
Speaker Change: On the what.
Speaker Change: Whats the legacy hold again Theres, probably I think we discusses are about $25 million of kind of resi assets that can be sold I think at this point.
Speaker Change: And again, there's not that much cash that's associated with those.
Speaker Change: From our overall core balance sheet the goal is to deploy.
Speaker Change: Deploy capital in commercial real estate assets that is what this vehicle is set up to do but also explore if there's opportunistic investments we could do in and around kind of what I would call. Our core expertise, that's where we're going with the company. So the core hold will likely be more commercial real estate assets that will grow.
Speaker Change: We take for example, the little under $100 million of capital that we have today.
Speaker Change: Well, we'll keep I think $50 million of that needs to be hold for either covenants around some of our high yield debt and and kind of mark to market on some of the legacy <unk>.
Speaker Change: Assets that are on balance sheet, so that $50 million, let's just say gets deployed that'll get deployed into commercial real estate assets.
Speaker Change: Okay.
Speaker Change: Secondly, can you give some color on the team that you've put together to focus on CRE I know you have these.
Speaker Change: Affiliate companies Green bonds sculptor.
Speaker Change: Maybe you could talk about the experience that that's within commercial real estate I've seen a lot of new entrants in the space and.
Speaker Change: When the experience that doesn't match along duration there could be issues. So it would be helpful to get some color on the team.
Speaker Change: Well I'll start with my partner Charles soon the two of us have been.
Speaker Change: Working together since 2008.
Speaker Change: You know running I mean, one of my prior lives is Iran.
Speaker Change: Part of Bank of America, including all the commercial real estate there Charles ran some of the trading businesses.
Speaker Change: When you look internally, we've added but I would say a half a dozen folks around are around the hoop.
Speaker Change: Here on the commercial real estate side.
Speaker Change: Couple that with all the other folks that are working on our different investment businesses. So it's a pretty robust team on the green bond side, we own 50% of the Opco. There I would look at them more as a sourcing engine for us at this point.
Speaker Change: Sculptor as a separate entity, but the overall amount of real estate experience here is.
Speaker Change: Our extremely high is what I would say.
Speaker Change: It comes from you know various firms as well.
Speaker Change: Thanks, very much and lastly, what are you seeing from the banks one of your peers in commercial real estate debt.
Speaker Change: Saw a handful of special situations crop up in the quarter.
Speaker Change: We continue to see banks pull back from CRE indirect lending, but be active in the credit facility side and then maybe look to sell Npls. What are you. What are you seeing from you mentioned large money center banks, but the banks overall.
Speaker Change: Our relationships are still putting our money on the senior side, what I would say and they're looking for partners like us and others.
Speaker Change: So we continue to see that you know if you think about a bank once that once a loan goes bad if they don't think they're going to be able to work it out they're going to sell it. So youll see more nonperforming loans, if credit deteriorates and the banks are going to are going to sell them, but in general and I think the banks are going to be specific if you think about the way a bank is run by different <unk>.
Speaker Change: Officers banks are going to be specific based on you know obviously, we all know not every commercial real estate asset is the same so you're going to see some.
Speaker Change: I think what youre going to see a little bit of diversification from the banks, but we still see the banks lending we do a lot of business with the banks and I think that'll continue.
Speaker Change: Thanks, a lot.
Speaker Change: Your next question comes from the line of Doug Harter from UBS. Your line is open.
Doug Harter: Thanks, Michael can you talk about the the balance between kind of looking to grow to be able to scale the business and hopefully scale earnings power versus.
Doug Harter: You know kind of willingness to issue equity and dilute.
Doug Harter: Current book value.
Doug Harter: So I think it's you know again book value is $5 40 stock is $2 85.
Doug Harter: So if we start there.
Doug Harter: <unk> sitting on call. It a 100 of cash assume we're going to keep <unk> on balance sheet at all times right now until that until the balance sheet growth and then we'll we'll keep more cash.
Doug Harter: The growth will likely be from a third party I think is the way that we'd like to bring somebody in it could be in an M&A transaction, where we look at another company and that will help us create some scale here.
Doug Harter: But you know.
Doug Harter: The company doesn't trade I mean, we all know right, it's $300 million of equity.
Doug Harter: For this company to be relevant and I think it's gotta be significantly bigger than where it currently is we won't sacrifice.
Doug Harter: Price earnings I said that the same you know on the.
On the rhythm call on Friday.
Doug Harter: But we've got to figure out a way to grow this thing and grow earnings more importantly.
Speaker Change: So I don't I don't think Doug the short answer is no secret sauce right now I don't think it.
Doug Harter: Could be third party, if there was a great transaction, where we thought.
Doug Harter: It was going to be highly accretive and we were going to generate a lot more earnings I think we would issue equity but.
Doug Harter: Right.
Doug Harter: One of the reasons, we did the preferred route is to not dilute shareholders. So we're likely to go down that path again as well.
Speaker Change: Okay I appreciate the answer Michael Thank you.
Doug Harter: Thanks, Doug.
Doug Harter: And that concludes our question and answer session I will now turn the call back over to Michael Nierenberg for closing remarks.
Doug Harter: Thanks to everyone for asking the questions. Thanks for dialing in and have a great week.
Doug Harter: This concludes today's conference call. Thank you for your participation you may now disconnect.
Doug Harter: Okay.
Doug Harter: Yeah.
Doug Harter: Yeah.