Earnings Call Transcript - RITM Q1 2024

Operator, Operator

Hello, and welcome to the Rithm Capital First Quarter 2024 Earnings Conference Call. Please note this event is being recorded. I would now like to hand the call 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 First 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, Chairman, CEO and President

Thanks, Emma. Good morning, everyone, and thanks for joining us. As you look at our business, it is another very solid quarter for Rithm and, quite frankly, all of our operating companies. All of our business lines performed extremely well. With the recent backup in rates, the market should provide us with great opportunities to deploy capital and continue to generate outsized returns. Regarding risk, we are much closer to home from a duration perspective. With the Fed's peak early in the quarter and, quite frankly, late last year, targeting lower rates, we hedged most of our MSR risk or MSR positions. What this should do for the company is continue to create stability in earnings as well as book value on a go-forward basis. As everyone knows, we set out on a mission to grow our alternatives business. To be clear, this is not just in size, but more importantly, excellent risk-adjusted returns for our shareholders and LPs. Sculptor during the quarter continued to deliver strong results across the platform. What we are seeing in terms of risk reward in credit markets are some of the most attractive levels we have seen in years outside of financial crisis levels. The multi-strat fund continues to generate strong returns, while maintaining conservative risk posturing. The real estate group, which focuses on nontraditional niche asset classes continues to generate excellent returns. Their track record when you look at the numbers is unparalleled relative to others in the marketplace. In the first quarter, we announced the launch of Sculptor loan financing partners. The firm's first captive CLO equity investment platform. This was anchored by a commitment from Rithm. In the quarter, we produced two CLOs, one in Europe and one in the U.S. As you think about all these comments, we're super excited about where we are with the business and the prospects for the future. At Newrez, our mortgage company, Baron and the team did a great job during the quarter. We had excellent results both in the Servicing segment as well as in the Origination segment. We look forward to closing the SLS transaction, which we announced late in the fourth quarter, which will add significant third-party business to the platform. Our Genesis business, which is our transition business had its best origination quarter ever. Not only were volumes up as banks retreat, but the addition of new clients to the platform has never been higher. I think we originated loans to 66 different counterparties during the quarter. Also, we completed a $500 million rated securitization in the quarter, lowering our cost of funds by approximately 150 basis points as well as achieving higher advance rates. All of these are very exciting things for our business, and we look forward to updating you along the way. I'll now turn to the supplement, which has been posted online. On Page 3, when you look at where we are today, just one thing I want to highlight on this page, aside from the sheer scale of our business, the balance sheet at Rithm today is higher as a result of the hedges that we put on during the quarter against our MSR business. During the first quarter, we have $5.3 billion in dividends paid, $7.1 billion of equity, and our total economic return since inception is 184%. Sculptor on the right side of the page has $32 billion of AUM. During the quarter, GAAP net income was $262 million or $0.54 per diluted share, or earnings available for distribution of $233 million or $0.48 per diluted share. Our common dividend is at $0.25. Cash and liquidity at the end of Q1 was $2 billion, and the total economic return for Q1 is 4.5%. As you flip to Page 5 and you look at where we were when this company was first started, just a quick snapshot going back in history, the company started in 2013 at Fortress to take advantage of dislocations in the MSR market as banks were selling MSRs due to Basel III capital constraints. So we started the business with $1 billion of equity. Today, we're at $7.1 billion. What started out as strictly an owner of excess MSRs today is a full-scale asset manager with capabilities in credit, real estate, and all kinds of lending businesses, as well as in the mortgage space. As we go forward, we will look to increase our scale in our alternatives business. We will look to add insurance over time. As we think about our offerings, we'd like to tap the retail markets, and we'll continue to tap the institutional market. So a lot of exciting things hopefully ahead for Rithm in our operating companies on a go-forward basis. Q1 activity, if you flip to Page 6, when you look at what we did on the Newrez side, Baron is going to talk about the mortgage company a bit here. The origination platform continues to grow market share. We've had organic growth in the third-party servicing franchise. That's due to both the SLS side as well as, quite frankly, our excellence in the servicing business with clients that we know and that we already service loans for. As you think about where the banks are with the regional banks retreating, the Genesis business, as I pointed out earlier, had a record quarter in origination. They're on target to do about $3 billion in origination. When we first launched the platform, I think we were in and around $2 billion. When you look at the credit markets, during Q1, we issued $775 million of senior unsecured notes. We also tendered for 50% of our outstanding issue. Currently, we have $275 million of outstanding senior unsecured notes, which are due in '25. When you look at the Sculptor platform, again, the CLO captive equity investment platform, we seeded that. Obviously, every time we do a CLO deal, there are third parties that buy the CLO equity. When you look at our investment in Sculptor and in this platform, I think that on a go-forward basis, we are only scratching the surface of what we could achieve together. When we look at performance, there are strong risk-adjusted returns at both Rithm and Sculptor platforms, we lead with performance and with this performance we're going to see more AUM come on our platform. And then, when we look at partnerships, we continue to expand our global reach and try to create capital solutions with different LPs and shareholders on a go-forward basis. Sculptor, Page 7. Just a couple of highlights here. Again, total AUM is $32 billion. The credit business between credit and real estate is $24 billion. Of that $24 billion, roughly $15 billion can be found in the CLO business, and the company has been outstanding for many years. Over the course of the past, I think the company began in '94. When you look at AUM today at $32 billion and the acquisitions which closed in November of '23, we're super excited about where this platform is going. When you look at the overall returns on Page 8, the performance between credit, real estate, and the multi-strat front, quite frankly, I believe our returns are second to none. Both the credit markets, the real estate markets, and what we're doing overall, I think are in a position today to truly execute on some of the best investment environments that we've seen in many years. On the Newrez side, on Page 9, delivered 23% ROEs, huge numbers, quite frankly. PTI ex-mark-to-market increased by 22% quarter-over-quarter. The Servicing business continues to perform extremely well. From a UPB standpoint, we grew the servicing business 15% year-over-year. I know at some point when we get into Q&A, there'll be some questions regarding going out and buying bulk packages, we'll address that. But, quite frankly, between where we are today and as we get through more slides, you'll see that between our subservicing business and our own servicing, we have approximately $850 billion of MSR exposure in the house. This is not a race to get bigger. This is a race to generate more earnings. When you look at the right side of the page, for the quarter, Servicing excluding mark-to-market stood at $220 million, our MSR mark-to-market was $195 million. Originations made $42 million, and then obviously, with corporate expenses, the net number there is $408 million. So great quarter, great job done by the team overall. On Genesis Capital, I pointed out before, record originations $840 million in commitments, 66 different sponsors. The business continues to perform extremely well. First quarter ROE was something between 13% and 15%, and new clients continue to come to the platform as banks continue to pull back in the areas that we operate. And then finally, what we'll do is let's get into the segment performance. I'll just take Page 13, and then Baron is going to take the mortgage company stuff. On the servicing portfolio, again, $857 billion of total servicing. When you look at our earnings stream and think about where we are today as a business, couple that with the Sculptor platform on the outside and think about earnings in the platform. The ability to make investments, whether at the Sculptor level or other things over the course of time, I truly believe there is a huge growth opportunity for us. And again, it's not just an AUM thing, it's real earnings that we're going to generate for shareholders and LPs. Total owned servicing stands at $572 billion. Of that, 99% of the portfolios are in the money. Gross WAC on our total portfolio is currently around 3.90. The SLS acquisition adds $150 billion of servicing, of which $100 billion of that is third-party servicing. With that, why don't we go to Page 15, and I'll turn it over to Baron who will take it from there.

Baron Silverstein, President of Newrez

Good morning, and thanks, Michael. As Michael mentioned, just another good quarter for us as we continue to grow on the foundation that we've built over the last few years, and our core focus is on strategic growth and continued cost leadership. We've executed on synergies across all of our platforms. We've internalized most of the Rithm third-party servicers. We unified our brand strategy, and we are now focused on growing our business, growing our platform, and modernizing our customer and employee experience through digital and AI initiatives. On Slide 16, our Servicing business continues to perform well. As Michael mentioned, we're expecting to close the SLS acquisition in the second quarter and it's going to add an additional $149 billion of owned and subservice MSRs, while adding co-issue MSR acquisition capabilities. Away from SLS, we continue to see additional opportunities to gain market share, including picking up wallet share with our existing third-party customer base, and we continue to evaluate MSR bulk packages, but there are also other strategic acquisitions that we look at as well. Overall, the consumer also performs well with muted prepayment speeds and historically low delinquencies. Across it all, we remain focused on maintaining operational excellence and cost management, even after adding a million loans onto the platform last year and an expected additional $700,000 loans with the SLS transaction. Going to Slide 17 on the Origination side. And similar to servicing, our origination business was able to take advantage of market opportunities while remaining disciplined on strategic growth. While the market remains historically muted in terms of origination volume, we grew originations overall by 21% quarter-over-quarter, while also increasing margins, both of which were driven by our correspondent channel. We have strong momentum in our non-agency products originating over $185 million of non-QM loans in the first quarter, almost back to levels we were seeing in 2022 on a quarterly basis. Our home equity originations were also up 70% quarter-over-quarter with approximately $81 million in funded volume, and we expect to see increasing growth in our home equity originations as we move into the months and quarters to follow. Our retail channel, including our JV, after the changes we disclosed we made in the first quarter, was able to breakeven in the first quarter, which is a big win for us, and I would say for our team across our entire platform. While the home purchase market continues to show positive signs regardless of interest rates, we have significant upside in growing our purchase market share through retention strategies, which began with our Newrez Home Rewards program launched in February. On Slide 16, we, like the rest of the industry, view AI as a technology that will have a transformative impact on our scale business. We have an incredible amount of data across our entire platform. While our AI platform branded RESI is in its early days, currently focused on employee education and onboarding, we see broad applications through originations and servicing. We also believe our proprietary technology provides a strategic advantage, allowing us to be nimble, control costs, while delivering custom solutions to our enterprise clients. While we always remain focused on expense management, our near-term AI initiatives are driven by applying the best customer experience, which in turn will create future efficiencies. We're really just starting to tell the Newrez story more broadly. On a final note, we will be hosting an Investment Community Day to dig in further on our business, and more details can be found on the Rithm Cap website. Back to you, Michael.

Michael Nierenberg, Chairman, CEO and President

Thanks, Baron. Good work. Just a couple of last slides for me, and then we're going to open it up for Q&A. On the GreenBarn side, just so everybody knows, David Welch, David Schonbraun, and that team have 25 investment professionals at this time when we do investments off the GreenBarn shelf. Typically, it's done on the Rithm balance sheet, so I would think of it as a Rithm related investment strategy right now. On commercial real estate, we do not have any legacy commercial real estate in the house. So things there are as we see opportunities and want to deploy capital on the Rithm balance sheet, we will do so. Adoor, just to touch on our single-family rental strategy, we have 4,200 units. The name of the game there is scale. I know that the growth in the Adoor business will come in a co-investment fund alongside our public company, where we have about $200 million of equity capital committed to that business. But we need significant scale there, and we continue to be thoughtful regarding what we think cap rates are and where we believe we can deploy capital overall in that business. Finally, on the portfolio side, on the consumer loan business, we do opportunistic investing in consumer loans. Everyone knows that in June or July of '23, we bought $1.4 billion of consumer loans from Goldman. That $1.4 billion, just to give you a sense, is now down to $800 million; it amortizes extremely quickly. I think the average life of that cash flow will probably be over the next 1.5 to 2 years. So overall, things from a portfolio standpoint are extremely stable and performing well, quite frankly everywhere. With that, we'll turn it back to the operator for Q&A.

Operator, Operator

And our first question comes from Bose George of KBW.

Bose George, Analyst at KBW

Could I get an update on book value quarter-to-date? You noted that the hedges had taken the balance sheet up. So yes, just an update would be great?

Michael Nierenberg, Chairman, CEO and President

We're in and around $12.30 to $12.40 right now, Bose. During the quarter, we still have a little bit of a short bias. Overall, I would say as the market continues to sell off, if it does, what you're going to start to see is obviously, MSR values will be capped. I've said this for a long time. I think last quarter we had a very conservative mark on our MSRs as well as where we are today. But what you're going to see is a backup in rates will, at some point, the duration flips from negative duration to positive duration. So we have to all be pretty thoughtful of that. But right now, it's all $12.30 to $12.40.

Bose George, Analyst at KBW

Okay. Great. That's helpful. And then I wanted to switch and get any updated thoughts on the timing of any potential spin. And also, does the remaining company need to be any larger in terms of scale? Or is it more just the right market conditions for you to do something?

Michael Nierenberg, Chairman, CEO and President

Well, when you look at the mortgage company and a couple of our peers out there, they're trading above book. Clearly, we look at where we are, and we trade below book overall. So what we're trying to do is, obviously, we need to assess the capital in each segment of our business. But as we evaluate whether to take this company public, whether it would be a spin or just take it public, it is still a work in progress. What we're trying to do, if you think about the power of our franchise, the earnings from our overall investment business, including the mortgage company, create significant advantages for us to be able to make investments and other things that we may want to pursue that are non-mortgage-related. So to give that up today, we're not sure that, that's the right thing, but we continue to evaluate that and work with our advisers on which way we're going to go with it.

Operator, Operator

The next question comes from Eric Hagen of BTIG.

Eric Hagen, Analyst at BTIG

Just looking at the results from Sculptor, I mean when do you expect that might improve and turn positive? And do you have a target rate of return for the investment in the CLO equity that you made in Sculptor?

Michael Nierenberg, Chairman, CEO and President

Eric, there's a couple of ways to think about this. One is the enterprise value that we're creating by making investments in the Sculptor franchise should lead to a higher overall equity valuation for Rithm at the parent level. In other words, as we grow our CLO business and we create management fees for Sculptor or we make investments in other things, whether alongside Sculptor or in Sculptor directly, what that's going to do is increase the value of Sculptor. So that's part one. Part two is when you look at the earnings, they are going to be lumpy for now. Typically, when you look at whether it would be the multi-strat fund or some of the other funds that Sculptor has, you'll see earnings when you have realizations. Most of the earnings, I think you're going to see, at least for '24, are geared towards the fourth quarter. Obviously, with more results as good as they are and as we think about the business, that will continue to hopefully bring more AUM back to the platform. Then you're going to start to see the real lift in not only enterprise value at the Rithm level, but also at the platform level at Sculptor.

Eric Hagen, Analyst at BTIG

Yes, that's really helpful. Really helpful. Do you feel like the equity in the investment portfolio is relatively stable at this point? And what could get you to maybe direct more capital there even ahead of a spin-off and how would you allocate the preferred equity in the capital structure among the different segments of the portfolio at this point?

Michael Nierenberg, Chairman, CEO and President

On the preferred equity, you're referring to the four series that we have outstanding. We have two that are going to reset this year, which we will likely address. When we look at capital, we ended the quarter with $2 billion of cash and liquidity. Today, it's a tad lower. We're going to fund SLS here, hopefully, extremely short in the near future. We'll deploy capital when we think that we have the right risk-adjusted return. I pointed out earlier in my opening remarks, the credit markets today look as good as they've looked in years. The high-yield indexes, I think, are in and around 360. When you look at absolute yield levels and what we're able to achieve, it's a ripe environment for us to deploy capital, whether it would be in the mortgage market or just other things. So we'll continue to be opportunistic. We obviously have a lot of things that I think are bigger from a corporate perspective, not necessarily short term, but more in the long term, how we create a true global asset management business. That's where we're focused, alongside operational excellence in our mortgage company and Genesis and the other things that we have in the company. On the preferreds, again, addressing the series that are coming up here in the near future.

Operator, Operator

The next question comes from Doug Harter of UBS.

Douglas Harter, Analyst at UBS

Michael, as you think about the transition to kind of more of an asset management model. How should we think about timing and/or which of the business lines will see third-party capital raised first?

Michael Nierenberg, Chairman, CEO and President

The Sculptor franchise has $32 billion of AUM. When you look at the leadership team there, between Jimmy and Brett Klein on the credit side and Steve Orbuck and Nick Hecker at the real estate side, it's a great team. It hasn't been easy, obviously, to raise money going back the past couple of years due to the noise around the platform. That's why we have the platform, quite frankly. When you look at where the actual performance and what that's going to lead to over the next couple of years, we're super excited as far as bringing more money into the credit strategies, the real estate strategies, and the multi-strat funds. The returns are good. I think returns will bring in more capital, and that's going to be from both existing LPs and hopefully from a bunch of new LPs. There's a lot of marketing that continues around the platform. So money is going to flow, but it's going to take a little bit of time here. Performance is going to bring in new pools of capital, for sure.

Douglas Harter, Analyst at UBS

And I guess just on Sculptor, can you just talk about how retention has gone since the deal closed relative to your expectations?

Michael Nierenberg, Chairman, CEO and President

Great. We've lost a couple of bodies, but that's to be expected in any acquisition. We've added new talent. There's a lot of incoming resumes that want to join the platform, whether at the Sculptor level or at the Rithm level—people are excited about where we are and what we're doing. There's no lack of anything. The investment team is solid, and the results are solid as well. There's no issues whatsoever on the retention side.

Operator, Operator

The next question comes from Stephen Laws of Raymond James.

Stephen Laws, Analyst at Raymond James

First, can you talk about mortgage rates moving back towards highs and what you're seeing in the pipeline there regarding the sensitivity of borrowers to rates? Outline your expectations for volumes near term and how you see that progressing through the year?

Michael Nierenberg, Chairman, CEO and President

Baron, do you want to hit on the mortgage rates?

Baron Silverstein, President of Newrez

The market remains predominantly a purchase market. For us, it’s about delivering excellent service to our customers and making sure they understand who we are as a company and what we can otherwise deliver, either through products or quality service. We think we have a lot of upside in our customer retention from an origination perspective. As mentioned in our talking points, we'll remain opportunistic through all of our different channels for ongoing growth. We're not going to basically look at the market and, as Michael's used this term, fight the Fed, but in light of the market interest rates being higher, we will remain nimble and very cost-efficient in our origination business and cost-efficient on our servicing business; this way, we can perform in every market.

Stephen Laws, Analyst at Raymond James

Great. Then changing gears a little, can you touch on the announcement with Great Ajax and your vision there, including how you think about the fees benefiting Rithm with that relationship?

Michael Nierenberg, Chairman, CEO and President

Yes. Great question. As we look at Great Ajax, it's a platform that's going to be externally managed, assuming that shareholder vote is affirmative for us. The idea there is to grow that into a commercially traded real estate REIT that has no legacy commercial real estate exposure with the management fees that will flow into NewCo, which will be a management company. I think that is the start when you think about Sculptor and fees that are going to be generated over the years, that will flow into a management company. With Great Ajax and some of the other things we have on our plate today, that's really the goal.

Operator, Operator

And our next question will come from Jason Weaver of Jones Trading.

Jason Weaver, Analyst at Jones Trading

Michael, you mentioned in your prepared remarks that you were anticipating it, but can you talk about what you're seeing about incremental returns on the MSRs out there right now? As well as if you're looking at anything closer to the current production coupon?

Michael Nierenberg, Chairman, CEO and President

Here's how we evaluate the MSR business. We see a lot of bulk packages; many of them are small. When I say bulk, there were a couple of large from wells that went back over the course of the past year. When we look at where we could produce an asset versus where we could buy an asset, if we think we could produce the asset at a cheaper level. We're always going to do that because we're creating enterprise value around our mortgage company versus just going out and buying an asset. Our whole theme is creating more enterprise value that goes to Sculptor, the mortgage company, and other things around some of our other subsidiaries or business lines. As we evaluate whether it be lower coupon MSRs or total returns, if we could buy an MSR at an unlevered 10 with a little leverage, it's a 12 versus buying a distressed commercial real estate asset out of 15. Obviously, we will opt for that at 15. Everything is total return-oriented regarding how we think about investing in MSRs or some other asset class. We generate MSRs organically with every loan that we create. We'll evaluate that versus where we can buy that in the secondary market. MSR values overall, the weighted average mark, give or take for the industry right now is if rates did sell off another 50 or 100 basis points, at some point, that duration becomes capped or you get longer is something to consider in that asset class.

Jason Weaver, Analyst at Jones Trading

Understood. And then on the Genesis business, I was wondering if you could provide a little more context around the greater sponsor demand you noted. Given a little relief in the rate front thus far this year, is this really just a function of banks pulling back from that business?

Michael Nierenberg, Chairman, CEO and President

I think it's both, actually. I think—listen, banks are always a little bit hesitant regarding the construction angle. When you look at our overall business lines, think about it this way. Somebody comes to us with a development of multi or single-family rentals. Genesis will go out and make that loan on the single-family rental side or make that loan to the sponsor, who will then construct single-family rental homes. We're seeing a lot more of what I would classify as crust platform origination today than in years past. Our Genesis business, when I said 66 different sponsors, the banks are pulling back a little bit, but the team itself is doing a great job in broadening the sponsorship. When we first acquired this business, the amount of concentration with one large sponsor was around 25% or 30%. Today, it's spread out significantly, and from a risk-adjusted basis, we are much better positioned than we were when we acquired the platform from Goldman.

Operator, Operator

The next question comes from Trevor Cranston of JMP Securities.

Trevor Cranston, Analyst at JMP Securities

You guys talked a lot about growth opportunities across the entire platform, some of which are non-reach investment portfolio opportunities. When you think about the overall capital deployment you guys have and the return opportunity out there, can you give us an update on how you think about the dividend level for the overall company in light of all that?

Michael Nierenberg, Chairman, CEO and President

The dividend, we outperform our dividend, and hopefully, we will continue to do that quarter after quarter. The calculation for us is if we can deploy capital at a 12%, 13%, 14%, 20% return, using 15% on average. If we could deploy capital at a 15% rate of return versus a dividend yield of 9% or something around that, everything we do from an investment standpoint will be accretive versus giving money back. So that's how we think about it.

Operator, Operator

The next question comes from Crispin Love of Piper Sandler.

Crispin Love, Analyst at Piper Sandler

When you're thinking about acquisitions in the alternative asset management space, what do you believe makes the most sense for you over the intermediate term? What types of firms and investments would you be looking at and most interested in? Do you expect there to be opportunities in this area in 2024?

Michael Nierenberg, Chairman, CEO and President

There are plenty of firms out there for sale. What I would say is we have a business today in Sculptor. We really don't need anything other than performance. Again, performance will bring more AUM back to the platform. We don't need to buy anything. We are going to try to grow our credit business and our real estate business. The three pillars of Sculptor are real estate, credit, and multi-strat funds. We are going to grow these three different verticals. We're going to grow them through performance. Performance has been great, and that will bring in AUM. The firm is extremely stable, a great partner in Rithm, and we are off to the races. I don’t think we need anything more than that. If a platform comes up that we find highly accretive to the overall alternative space, of course, we'll look at it. It’s the same as Baron running the mortgage company—if another mortgage asset is for sale that we think is attractive, of course, we’ll pursue it. But we have all the pieces in place to continue growing and producing great returns for LPs. Unless something extremely attractive arises, we’ll stay the course.

Operator, Operator

This concludes our question-and-answer session. I'd like to turn the call back over to Michael Nierenberg for any closing remarks.

Michael Nierenberg, Chairman, CEO and President

Thanks for everyone's questions. Thanks for joining us this morning. As I said before, super excited about where we are overall as a firm and look forward to continuing to hopefully deliver great results for our LPs and shareholders going forward. I look forward to updating you along the way. Have a great day. Thank you.

Operator, Operator

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