Earnings Call Transcript - RITM Q2 2024

Operator, Operator

Good morning and welcome to the Rithm Capital Second Quarter 2024 Earnings Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Emma Bolla, Associate General Counsel. Please go ahead.

Emma Bolla, Associate General Counsel

Thank you and good morning everyone. I would like to thank you for joining us today for Rithm Capital's second quarter 2024 earnings call. Joining me today are Michael Nierenberg, Chairman, CEO and President of Rithm Capital; Nick Santoro, Chief Financial Officer of Rithm Capital; and Baron Silverstein, President of Newrez. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Rithm Capital website. 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 earnings supplement regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC. In addition, we will be discussing some non-GAAP financial measures during today's call. Reconciliations of these measures to the most directly comparable GAAP measures can be found in our earnings supplement. And with that I will turn the call over to Michael.

Michael Nierenberg, CEO

Thanks, Emma. Good morning, everyone, and thanks for joining the call. Rithm had an excellent quarter with strong contributions from all of our business lines. While we continue to focus on the direct lending business lines which have gotten us to this point, the growth of our alternative asset business is very important to the revaluation of our company. During the quarter, Newrez, our mortgage company; Genesis, our RTL lender, and our portfolio of assets generated very strong returns. The scope to business, which we have owned since November of last year, is seeing excellent performance in credit, real estate, and in the multi-strat fund. AUM is stable, and the teams are having great conversations with LPs. During the quarter, we did several transactions. We closed the previously announced acquisition of SLS, which is a mortgage company. This deal added to the Newrez platform $56 billion in owned servicing, and another $100 billion in third-party servicing. We closed on our previously announced investment in our Sculptor CLO business, a captive CLO equity fund. This helps support the franchise, generates great returns for the house, and should increase enterprise value for both Sculptor and Rithm at the top of the house. We completed the previously announced acquisition of the Management Contract of Great Ajax, a residential mortgage REIT, which we are now going to transition into an opportunistic commercial mortgage REIT, which will help generate fee-related earnings for shareholders as we reposition the company and grow it. We also added $40 billion of excess MSRs, where we partnered with Sculptor on this acquisition. This shows the power of our franchise. Looking at the macro picture, we are extremely well-positioned for the future and the expectations of the Fed lowering rates beginning in September bodes very well for our company. This will help lower our borrowing costs and hopefully lead to higher earnings. We believe a steeper curve will lead to higher prices and tighter spreads as the cost of finance from mortgage-related assets comes down with SOFR going lower on a nominal rate basis. This will generate solid returns and earnings for the business and good returns for our LPs and shareholders. One thing you'll see that's a little bit different in our presentation this time is a couple of slides illustrating some of the parts of our business. I'm hopeful that this will help show the value of our company and the value proposition for our shareholders and LPs. I'll now refer to the supplement, which has been posted online. I'm going to start with Page 3. Baron, who's with me, will focus on the mortgage company. So now to Page 3. This slide demonstrates the kind of power of the overall franchise. If you look back in history, the company was started in 2013 with $1 billion of equity capital. Today we have $7.3 billion of permanent capital. We paid out over $5.4 billion of dividends. Total economic return is 189%. When you look at the Sculptor franchise and the breadth of that investment team, whether it be in real estate, the multi-strat fund, credit, you look at the power of the Rithm franchise on the investment side. There is not a sector that we don't have expertise in, whether it be credit, real estate, mortgage, or on the consumer side. And when you look at the power of our direct lending businesses and our continued desire to grow those, I'm really excited for the future of what our company will be. As you look at Q2 financial highlights, book value is $12.39 per diluted share, GAAP net income of $213 million or $0.43 per diluted share, earnings available for distribution $231 million or $0.47 per diluted share; dividend still $0.25. That's a 9.2% dividend yield as of the end of June, economic return for Q2 3.7%; earnings after distribution return on equity 15%, and cash and liquidity at the end of Q2 was $1.5 billion. Page 5 and 6, I'm going to talk a little bit about our intrinsic value and the sum of the parts. Again, looking back to the end of June, current valuation at the end of Q2 was $5.4 billion in market cap, share price at the end of June was $11.22, book value $6.1 billion. When you look at the sum of the parts there, we can compare ourselves to others in the business. For Newrez, the mortgage company, there are public peers out there where we might put a range of 1.1 to 1.5 times. I would encourage you to look at some of the public companies that trade out there. For our Genesis business, which continues to generate very good returns, we put a 1.2 to 1.5 times multiple on that business. And then for Sculptor, just put in at our acquisition cost of one time. What that does, I don't know what the exact number should be, but it gets us to a range of value between roughly $13 and $16 per share. The valuation lift can vary, and we think it's a great value proposition for our shareholders and LPs. Page 6 discusses where we think current value is today and where we think it could go. This is why people buy equities, and from a performance standpoint, as a team here we strive to ensure we generate great results for our shareholders and LPs. Page 7 highlights Rithm 2.0, why we are different today. We have our direct lending businesses, whether that be Newrez or Genesis Capital. I'll get to a minute just discussing Rithm Commercial. It's really more of direct lending off the Rithm balance sheet. It doesn't compete with any of our other strategies. We bought a large pool of excess MSRs, that was $40 billion, in partnership with the Sculptor franchise. The power of the franchise and our outlook for both the investment side and direct lending business excites us for the future. After discussing our markets a little, we acquired Genesis Capital in December 2022. EBITDA growth in that business since our acquisition has been about 50%. During the quarter, we did our first rated securitization at the Genesis level. The financing market is extremely healthy these days. When you look at Sculptor, we closed two CLOs during the quarter for $780 million. We completed the acquisition of Great Ajax. Performance is essential, not just AUM growth. Looking at Page 9, we believe the Fed is going to lower rates by 25 basis points in September, leading to lower financing costs for mortgage-related assets. The yield curve should continue to steepen. Market volatility will persist, and private credit will continue to expand. There will be plenty of opportunities for us to seize on. Lastly, we have a significant demand for capital in the credit space within commercial real estate. With that, I'll turn it over to Baron, who will pick up on Slide 10.

Baron Silverstein, President of Newrez

Alright, thank you, Michael. Good morning, everyone. We wrapped up another great quarter here at Newrez and we're firmly in growth mode, gaining market share and focused on disciplined management and expansion of our third-party client base. We're now the second largest nonbank servicer and the fifth largest lender in the industry. Our growth is driven through our originations business which allows us to meet customers where they want to be met, particularly with our recapture engine that's well-positioned for a rate rally. Our servicing platform has scale and a long history of third-party servicing, and we continue to gain market share by bringing in new clients and also increasing wallet share from our existing customer base. Overall, we believe we can continue to grow our business both organically and inorganically while focusing on operational excellence and maximizing performance for our shareholders. Moving to Slide 11, we delivered a strong quarter, building upon the foundation we've constructed over the past few years. Our second quarter pretax income was $248 million, delivering a 23% ROE, excluding mark-to-market on the owned portfolio. Excluding MSR mark-to-market, our pretax income increased 7% quarter-over-quarter, reinforcing the strength of our balanced business model. Key drivers include the acquisition of SLS, which closed on May 1st, which added $56 billion in owned MSRs and $98 billion in third-party MSR servicing, growing our MSR portfolio by 28% quarter-over-quarter and third-party servicing by 92% quarter-over-quarter. We completed the transition of all 800-plus thousand SLS loans onto our servicing platform, which we believe is the first in the industry to move so many loans in such a short period while minimizing homeowner disruptions and maximizing cost and expense management. Our originations business performed well despite overall margin pressures, with production volume up 35% quarter-over-quarter, led by our correspondent and wholesale channels. Overall, I believe our business is best positioned it's ever been, and I'm looking forward to continuing to share the Newrez story to the market. Back to you, Michael.

Michael Nierenberg, CEO

Thanks, Baron. A few more slides for me, and then we'll open up for Q&A. Genesis Capital, again, that's our transitional lending business, very focused on high-quality loans to strong sponsors. In the quarter, we did close to $300 million of production. When we first acquired the company, production was between $1.5 billion and $2 billion. This year, we expect to hit over $3 billion in production. Our EBITDA on that business is set to grow over 50% since the acquisition. On Page 13, you'll see we had a strong ROE for the quarter at 18%. We originated 65% of our loans as floating rate, maintaining a 64% loan-to-value ratio. Our overall delinquencies are only 2%, indicating strong credit culture within that business. As for Sculptor, I previously mentioned them. We've been working collaboratively over the last six months, and I am very excited for the prospects of that business. We closed two CLOs for $780 million and also brought in $100 million into the real estate credit fund, which supports long-term AUM growth and capital for investments in this strong real estate market. Our overall performance during Q2 has been very strong, and the power of the Rithm franchise remains evident. I encourage you to look at some of Baron's comments on public company peers that have done a great job. Our focus is on performance first and growth second, driving returns for shareholders and LPs. With that, I will turn it back to the operator and open it up for Q&A.

Operator, Operator

The first question comes from Eric Hagen with BTIG. Please go ahead.

Eric Hagen, Analyst

Hey thanks, good morning. On the MSR portfolio, given its growth, do we have an estimate for how much amortization you might incur going forward including on the excess MSRs? And how are you feeling about the leverage in the MSR portfolio, would you consider shifting your capital allocation if rates drop sharply?

Michael Nierenberg, CEO

You gave me too many questions. But on the excess MSRs, these are legacy MSRs where we own the very same MSRs. This is a seasoned portfolio, likely seeing a stable amortization around 6 CPR, but again, that’s the nature of the mortgage market. Our recapture focus, brand building, and operational strategy remains critical. Given that our MSRs are 96% out-of-the-money, we are cautious about refinancing activities for now. The origination market capacity is high this year without much refinancing activity, and as far as our business funding, we expect to be a more frequent issuer in the high-yield market moving forward.

Eric Hagen, Analyst

Super thoughtful, thank you so much. What's the growth outlook for Genesis? Could lower interest rates catalyze new production? How much could you expect to produce over time?

Michael Nierenberg, CEO

Genesis has a solid credit-first strategy. If credit performs well, we will grow significantly. We see the capacity to reach maybe $3 billion plus production this year, especially as regional banks pull back in lending. I feel optimistic about our growth in this sector.

Bose George, Analyst

Hey and good morning. Actually, I wanted to talk about Newrez. The peers are valued quite a bit higher in the market. Do you think a listing is necessary to bridge that gap?

Michael Nierenberg, CEO

Bose, I knew you were going to ask that question. We're continuously striving to maximize our capital structure to achieve proper valuation. Our slides illustrate the value of the franchise. We're actively exploring options to increase our equity's value.

Bose George, Analyst

So just to summarize, is it fair to say that listing remains an option?

Michael Nierenberg, CEO

Yes, we're exploring everything to increase shareholder value.

Stephen Laws, Analyst

Hi, good morning. Baron, can you touch on volumes and market share? How do you see growth into 2025, especially with rates coming down?

Baron Silverstein, President of Newrez

We don’t necessarily set specific market share targets; instead, we strategize where we can achieve the best returns. Our correspondent business has been the best for profitability, and while we've seen margin pressures, our focus on extending our brand and improving customer experience continues to drive market share growth.

Michael Nierenberg, CEO

Regarding Sculptor, the sequential increase in AUM revenue was attributed to some off-cycle realizations. We expect more realizations in the fourth quarter. For Q2, we recorded $50 million in realizations, and that's the norm for our business.

Crispin Love, Analyst

Just looking at Sculptor, you noted solid profitability with comp expenses down. What drove comp lower in the quarter for asset management, and can you size the crystallization?

Michael Nierenberg, CEO

Comp expenses typically peak in the fourth quarter. The second quarter saw $50 million in realizations, and those will likely increase in the fourth quarter. This quarter was indeed off-cycle.

Trevor Cranston, Analyst

Thanks. Follow-up on the servicing portfolio and refi potential. Do you have stats on how much MSR is in higher-rate mortgages?

Baron Silverstein, President of Newrez

Yes, we have about $100 billion notional with a coupon of 6% and above.

Michael Nierenberg, CEO

On the commercial real estate opportunity, we've been focusing on buying AAA CMBS, which generates better cash flow. Our strategy is more on direct lending rather than competing with other funds for the time being, but we have ample experience and relationships across this sector. Thank you for the questions. Have a great rest of the summer. Please refer to our deck for more information.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.