Rithm Property Trust Inc. Q4 FY2023 Earnings Call

Thank you, and good morning, everyone. I would like to thank you for joining us today for Great Ajax's Second Quarter 2024 Earnings Call. Joining me today are Michael Nierenberg, Chairman, CEO and President of Rithm Capital and CEO of Great Ajax; and Mary Doyle, Principal Financial Officer of Great Ajax. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Great Ajax website www.greatajax.com. 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.

Thanks, Emma. Good morning, everyone, and for those of you joining us this morning, we appreciate you dialing in. Today's call is really about the future. When we first embarked on this from the Rithm perspective, we looked at this vehicle and thought, let's look back at the playbook that we established back at Fortress in 2013, where we saw dislocations in the MSR market. Based on that, we created a vehicle that we seeded with $1 billion of capital. Today, that vehicle is known as Rithm Capital, which has $7.2 billion of equity capital, a large balance sheet, and is a world-class asset manager. We are going to look to do the same playbook, with the difference this time focusing on the commercial real estate market and the dislocations we see there, along with the huge needs for capital. We are going to leverage the same investment teams that came from Fortress with us here and we're really excited about the challenge as we look ahead. The needs for capital in the commercial real estate market, I don't think is something we need to discuss in huge depth, but there are significant needs. When you look at the landscape around commercial real estate REITs, this vehicle today is clean; it has no legacy commercial real estate assets. As we look going forward, what we're going to do is migrate from what I would call reperforming residential assets, sell down those, except for what we need to keep for risk retention, and reinvest into current cash flowing commercial real estate assets, which we've already begun to do. The deal closed, I believe, on June 11th, when Rithm took over the management contract. As we go forward, the full staff here at Rithm is focused on this business around the commercial real estate side. As we think about the commercial real estate investing environment, we believe it's some of the best investment opportunities we've seen, even looking back to the great financial crisis, whether you're looking at office or some of the other segments, particularly where spreads are. For example, even on AAA CMBS, over the past couple of weeks, we've made a few different investments as we've sold down some of the legacy residential side. I want to be clear, it's going to take time to get this vehicle back to a place where it's cash flow positive. It's growing in a meaningful way, but we're very confident that with our existing team, we'll be able to do that. Regarding the dividend and earnings, Mary Doyle, who is the CFO of Great Ajax, is here with us. She'll discuss a bit about the financials this morning. As we look at where we are with the dividend policy, yesterday we had a Board meeting, and the Board voted to keep the dividend the same. We will evaluate the dividend quarter-to-quarter as we consider the ability to grow earnings. The vehicle will need more equity over time, and that equity will likely be raised around what we'll refer to as opportunistic investments. If the dividend yield is where we could raise equity at 6% to 7% and we're able to deploy capital at 12%, it would be hugely accretive for shareholders. For the quarter, the overall numbers reflected losses due to asset sales as the balance sheet continues to get turned over and some mark-to-market issues. Mary will also discuss book value and how to interpret that in the context of what was reported versus actual mark-to-market. That's kind of my opening comments. We'll now flip to the supplement, which has been prepared and is posted online. Again, Mary will take the financial side, and I'll cover some comments. If you start on Page 3, Rithm Capital today has over $7 billion of equity capital, and roughly a $40 billion balance sheet. We own Sculptor Asset Management, a large world-class asset management business. The Great Ajax vehicle will focus on commercial real estate opportunities and other potential opportunistic investments. The same team that got us here on the Rithm side is going to be the same team, plus some, focused on Great Ajax. Regarding the commercial real estate side, we have about 30 real estate professionals here at Rithm and an operating company that we own. So we have significant expertise. This is something we take seriously, and we're truly excited about the prospects moving forward. On the Sculptor side, there are about 35 to 40 folks specialized in real estate investing, and they are world-class commercial real estate investors. I'll now let Mary discuss the financial highlights on Page 4, and then we'll transition back to a couple of other slides before opening up for Q&A.

Sure. Thank you, Michael. We reported a GAAP net loss of $12.7 million, which is significantly lower than the first quarter of 2024. This is driven by mark-to-market losses and additional realized losses on the sale of mortgage loans. If you review the balance sheet, you can see that we are continuing to contract on the asset side and building up cash reserves ready to deploy in the discussed commercial real estate strategy. Earnings available for distribution have also decreased versus the loss last quarter. Just to clarify, earnings available for distribution is what we previously referred to as operating income in last quarter's release. We have some transaction costs, and as we continue to restructure the balance sheet, we are still facing a negative net interest margin, which is contributing to most of that loss. We are declaring a common stock dividend of $0.06 per share. Notably, if you review the balance sheet, we've continued to grow our cash balance from the year-end, notwithstanding the redemption of our convertible debt in April 2024. Book value is at $5.56 per common share. As many of you know, most of our assets are carried at amortized costs. We did move a portion of the loan portfolio to fair value, which is driving losses. However, we have an amortized cost value of $5.56. If we were to move to a full fair value valuation, we'd be around $4.20, and that mainly affects the asset side of the balance sheet. Total stockholders' equity at quarter-end was $253.6 million, which we expect to grow over time. We may face some incremental hits as we continue to sell loans. This is all part of our longer-term strategy to accumulate cash that's ready to be deployed into higher-yielding assets, thereby improving our net interest margin.

Great. Thanks, Mary, for the update. Folks, we'll now flip to Page 5. I want to talk a little about the transition of Rithm and Ajax. Rithm just took over the management contracts from Great Ajax, again with the same team. Some actions taken in the second quarter, as Mary noted, include selling down loans. A lot of those actions occurred prior to our involvement. We redeemed $100 million of convertible senior notes. Overall, the story for us as a team and as a business is about looking ahead at the future and re-positioning the company. Page 6 discusses the compelling commercial real estate opportunities. We are a commercial real estate REIT without any legacy issues, which I believe is significant as we think about growth and the absolute yield levels. We believe we will not only grow this company but actually generate real earnings and hopefully grow the dividend over time. The investing environment is very, very attractive for commercial real estate. The breadth of what we do here at Rithm positions us competitively in this industry. Page 7 provides an illustrative future state portfolio that includes real estate securities, loans, mezzanine loans, and other investments. We will target absolute yield levels with an IRR of approximately lower to mid-teens for this vehicle, and we're confident in achieving that. With that, I’ll turn it back to the operator, and we can open for Q&A.

We will now begin the question-and-answer session. Our first question comes from Eric Hagen with BTIG. Please go ahead.

Hey, good morning. I hope all is well. Can we start by repeating the impact of marking the whole book to fair value? And just looking at the balance sheet, what is the balance of the legacy RPL portfolio right now? And what's in commercial real estate? Thank you.

On the book value question, Eric, full mark-to-market brings us to around $4. I believe Mary mentioned something around $4.23. I can confirm that our marks reflect where we currently stand, and we feel good about them, given the current credit market environment. Regarding future sales, we're looking at approximately $100 million in securities and loans that will be sold to clean up the balance sheet.

Got it. And then on the commercial real estate side, are we discussing mostly securities initially? What's the current balance there, and what returns are you seeing? Thank you.

Yes. Currently, we've made about three investments in that area, primarily in AAA CMBS—highly liquid securities. Used as placeholders right now, we expect a levered return of approximately 12%+, likely between 12% and 15%. We've made three tranches of AAA CMBS.

Is it reasonable to expect that by the end of the year, the remaining $120 million to be sold from the RPL portfolio will be available?

Yes.

Okay. All right. Great. Thank you guys so much. Appreciate it.

Thanks, Eric.

Our next question comes from Stephen Laws with Raymond James. Please go ahead.

Hi. Good morning, Michael and Mary. Michael, as you look at the legacy assets, how much capital of existing capital will be needed to support the first loss pieces or risk retention that you'll need to keep, and what percentage of that capital will be freed up for new targeted investments?

Stephen, to clarify, your question is about how much capital is allocated to the risk retention securities we can’t sell and how much will be released against the intended $120 million in sales. The risk retention assets have approximately $15 million to $16 million in equity capital against them, while the non-risk retention assets combined with some of the RPL and NPL securities are around $35 million to $40 million.

Great. And I appreciate that. To follow up on Eric's question, do you expect this to be largely CRE whole loans in 12 to 24 months, and what mix will securities represent? From an investment sourcing perspective, do you feel you have what you need between GreenBarn and Sculptor, or do you need to build out that origination effort?

At the Rithm level, Sculptor is a world-class real estate investment firm and will continue to cover that across all areas. I believe we have access to everything available in the real estate space without needing new resources. As we advance this vehicle from a Rithm management perspective, you can view Page 7, which offers potential future state portfolios including CMBS, senior loans, mezzanine loans, and other opportunistic investments. We're targeting a mid-teens return, but it will depend on market conditions. If we see some Fed rate cuts and the curve steepens, credit spreads should improve, benefitting the assets on our balance sheet.

Right. It's certainly a good time to be active lending in CRE right now. Good luck with the transition, and thanks for your comments this morning, Michael.

Thank you.

Our next question comes from Jason Stewart with Janney Montgomery Scott. Please go ahead.

Hey, good morning. Thank you. On Slide 7, Michael, it sounds like this outlines how the portfolio will grow. Regarding opportunistic investments, are we focusing on CRE mortgage or platform-based operating businesses? How do you foresee this evolving through the cycle? Thanks.

We see a lot of opportunities coming through our scope of business across residential, commercial, consumer, and other sectors. While not every opportunity pans out, we have a plethora of potential investments to review. In time, we could see some M&A activity. A bank might approach us with a portfolio they believe in, and we could explore that. The crucial aspect is that growing our earnings will require additional equity capital over time. To achieve that, we must ensure there's something substantial on the other side to justify raising equity while deploying it to achieve a 15% return. As I mentioned earlier, with a 6% to 7% cost of equity capital and deploying at 15%, it should benefit shareholders. However, it's important to understand this is a long-term plan.

Yes, understood. And lastly, in the near term, in terms of the senior loan focus, is there a geography or asset class that we should expect you to concentrate on initially?

No, currently, we are using excess cash to deploy into highly liquid AAA CMBS. We are open to considering anything. For instance, one of our recent investments was in Columbia Property Trust, which involved a distressed office portfolio. Our approach is to analyze the risk-adjusted returns before making investment decisions.

Great. Thank you.

Thanks, Jason.

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

Thanks for dialing in. Thanks for the questions. We're excited about this one. It’s a clean canvas in a lot of ways. Looking forward, we believe the opportunities ahead for this vehicle are special. We aim to maintain our focus on the commercial real estate space, leveraging our expertise. We look forward to updating you throughout the quarter and on next quarter's call. Enjoy the rest of the summer, and thank you for joining us.

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