Rithm Property Trust Inc. Q3 FY2024 Earnings Call

Good day, and welcome to the Great Ajax Third Quarter 2024 Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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.

Thank you, and good morning, everyone. I would like to thank you for joining us today for Great Ajax's third 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 on the Great Ajax 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.

Thanks, Emma. Good morning, everyone, and thanks for joining the Great Ajax earnings call. During the quarter, our mission has continued to be pretty much the same as what we discussed on our prior earnings call, which is to sell down legacy, what I would call, negative carry residential assets and redeploy the capital into real cash flowing CMBS, with the intent for the company to reach breakeven as soon as possible from an earnings perspective, which we expect to happen by the end of Q1. Obviously, this is before dividends. Regarding the dividend, while the company does not make money today, we are hopeful that we will continue to earn our way out of this deficit while maintaining the current dividend of $0.08. Obviously, there are no guarantees. As I mentioned in the past, our playbook will be similar to what we've done at Fortress and what some of the other large alternative asset managers have done in the past, which is to grow earnings while looking for transformational opportunities to grow the company. As I pointed out, we've done that before while we were at Fortress, and that was in 2013 when new residential was born out of a legacy mortgage REIT known as Newcastle. Regarding the balance sheet, today, we'll continue to unwind the legacy residential assets that are on our balance sheet while attempting to maintain book value. Book value during the quarter was $5.47, which is essentially unchanged from the $5.50 something number that was reported last quarter. While saying that, we're just not going to give away many of these smaller assets that sit on the balance sheet, so we will be patient. Again, we're going to continue to grow our earnings and earn our way out of this deficit. Looking at other assets that sit on the securitization on the balance sheet, the largest portion comprises some legacy securitizations where the actual cost of funds is 2.68%, so there's no reason to call those transactions, and they will stay outstanding for a while. Regarding opportunities, we'll be patient. This past week, we bid on $1 billion of assorted commercial real estate loans; about half were multi-family and half were office. Obviously, they wouldn't all go into this vehicle, but just to give you a sense, we are starting to see a little bit of movement and starting to see some banks come out with some assets. While saying that, we need to ensure that whatever transactions we pursue around this balance sheet are huge winners. So, we're going to be patient here as well and continue to grow our way out of this earnings deficit. With that, I’m going to now refer to the supplement posted on the website. Page 3 shows that Great Ajax is an externally managed real estate investment platform. We intend to change the name from Great Ajax to Rithm Property Trust at some point in the fourth quarter. We took over the management of the company on June 11th of this year. Between that time and where we are now, we've made tremendous progress cleaning up the legacy positions that sit on the balance sheet. When you consider this vehicle and the market opportunity ahead, think of it as a clean platform. There's not much there. I'm confident that we will find the right transaction or transactions to transform this into a real winner. Patience will be rewarded for investors if you're willing to wait. To recap, we have a committed team here that is working aggressively on any and all opportunities within this space. Looking back to my time at Fortress, we started new residential with a $1 billion of capital, and today we're roughly at $7.5 billion to $8 billion of permanent capital, which exemplifies a good success story. We're very committed to grow this vehicle, but we have to be smart about how we do that. The third quarter financial highlights include a GAAP net income loss of $8 million, or $0.18 per diluted share. Earnings available for distribution were negative $5.4 million, or $0.12 per diluted share. We declared a dividend in the third quarter of $0.06; I think I misquoted earlier when I said $0.08, so it will be $0.06. The dividend yield currently stands at 7.2% as of September 30. Cash and equivalents on the balance sheet total $84 million. Of that $84 million, approximately $30 million is available for investment, with some of that money already committed. We intend to keep a reserve of roughly $50 million, and stockholder equity is just under $250 million. During Q3, we sold $85 million of residential mortgage loans, generating a little under $18 million in cash. Since the end of Q1, the company has sold roughly 91% of its legacy residential mortgage loans held for sale. Additionally, we sold $62.7 million of residential securities, generating $14 million in cash. During the quarter, the team closed $100 million of AAA CMBS at roughly a 12% levered return. When looking at the bottom of the page, you can see what's really left on the balance sheet. There isn't a lot remaining. The middle part of the page shows the breakout of our commercial real estate investing. Importantly, net interest income has increased from $1.6 million to $3.6 million, which is a 126% increase, closing at the end of Q3. We expect to run this company to breakeven before dividends and, hopefully, we can cover the dividend no later than the end of Q1. We've made progress in moving all of the legacy servicing to Shellpoint Mortgage, one of our wholly-owned subsidiaries at Rithm, which has driven servicing expense saves, likely around 30%. We have shifted much of our financing from daily mark-to-market to either non-mark-to-market or non-daily mark-to-market with margin holidays, which has improved our cost of funds by 28 basis points. We have significant ongoing initiatives focused on cleaning up the remaining legacy assets and sourcing opportunities in the commercial space. The playbook remains the same — we will focus on cleaning up the remaining small items on the balance sheet and redeploying capital. As we look at the real estate sector, there is much discussion about commercial real estate currently. The time is now. We see a plethora of opportunities, but there are also significant risks related to various investments, so we must be extremely cautious. The first large transaction we undertake with this vehicle will be critically important, and we'll exercise patience as we start to see some flow emerge from banks. The portfolio snapshot on Page 9 illustrates potential future scenarios; it could evolve into something completely different. Our goal remains to establish a cash-flowing portfolio that provides returns in the low to mid-teens for Great Ajax or Rithm Property Trust shareholders. We are also personally vested in this company’s success. With that, I will turn it back to the operator for questions. Thank you.

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

Thank you, and good morning, everybody. Michael, Rithm has succeeded with the hit and where they aren't type strategy since its inception. Now that you've been digging in with Ajax, soon to be RPT, what segment or segments of the commercial real estate debt universe have the dislocation and mispricing that match a Rithm type investing strategy?

Good morning, and thanks for the question. I'll give you an example of the portfolio we bid on last week. I mentioned before there was some multifamily in there, some affordable housing, and then there was some office. The one thing we need to be cognizant of is having a large real estate team. When evaluating these asset classes, we must focus on things that are truly cash flowing. For instance, does the office sector fit this vehicle? The answer is no. Does affordable housing fit? Potentially. However, many of these loans are approaching maturity walls over the next year or so. You'll likely see more of these loans coming out from banks, particularly from the workout groups, which will be our focus. We're determined not to engage in large single-property deals. I've mentioned that we have been acquiring some AAA CMBS, which provide a low double-digit return and are fairly liquid, allowing us to pivot if we devise a strategy or secure a portfolio that makes sense. Furthermore, while we are not ruling anything out, it must be solidly cash flowing to enable this company to return to profitability.

Got it. Appreciate that answer, Michael. Following up on that, although it's a crystal ball type question, in the past you've mentioned that rate cuts by the Fed might spur transaction activity. However, is there a scenario where lower rates might give borrowers and banks some cushion to ride out distress, resulting in fewer opportunities in the market? Or is there just too much out there for that to be the case?

I think first of all, rates have backed up significantly over the past month or so, with 10-year bonds now around 4.10% and the short end trading at around 4%. Historically, a 6.5% coupon mortgage is not considered high, nor is a 10-year note around 4% or 4.25%. The real issue lies with the equity in these properties, and we've seen equity wiped out in many large deals, particularly in the office space. Therefore, there will be opportunities to recapitalize a number of these assets that we closely monitor on a daily basis. Regardless of whether the Fed cuts rates, there remains a substantial demand for both equity and debt financing within the commercial real estate sector, and this will stimulate activity. Once banks decide to take an impairment on an asset, they typically want to divest. Looking at the large banks holding numerous distressed assets, their robust quarterly earnings enable them to clean up their balance sheets without keeping capital against these assets. Thus, I believe you will continue to see assets flow to market regardless of whether rates are at 3.5% or 5%.

Understood. Appreciate that insight. Lastly, you've invested a substantial amount in the third quarter by purchasing AAA tranches of CMBS. Have you deployed any of that cash balance so far in October? Additionally, beyond the $31 million of residential mortgage loans remaining in the held-for-sale bucket, are there other smaller investments on your balance sheet that you might consider monetizing in the near-term?

As of today, between $20 million and $25 million remains available for equity investment in securities or similar avenues. Considering the balance sheet, there are numerous small odd-lot positions leftover from the Great Ajax balance sheet, but they do not contribute significantly to cash flow. When reviewing the total amount of real equity, there isn’t much left in the portfolio. I mentioned earlier that our book value now stands at $5.47, and we are fairly confident in that. There are $30 million in loans, with various scattered items, including zero-coupon loans from Habitat for Humanity. This illustrates the range of projects we're working on to tidy up our balance sheet. We will plan to refinance several of these loans or pursue short sales if necessary. In general, I believe our balance sheet is in solid shape. As for cash available for deployment, it is between $20 million and $25 million. Looking at our larger capital structure, we have $100 million of debt with a 10.25% coupon, which we are addressing. It will require some time to position this company where we want it to be. We await a large transformational deal or loan group set to progress us forward. For now, I want to assure the market and shareholders that we will continue to deploy some capital. I think we will be fully invested in commercial assets by the end of Q4, while keeping an eye out for favorable opportunities and maintaining our current dividend policy.

Got it. Thank you for all the insights, Michael. That’s all for me.

Thank you.

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

Hi. Good morning. Michael, a lot was covered in your comments with Tom, but just to tie it together, you mentioned $20 million to $25 million remaining as investable capital. Also, in your prepared remarks, you mentioned a potential breakeven this quarter and supporting the dividend in Q1. Should we interpret Q1 as the full quarter impact of deploying these remaining proceeds into likely AAA CMBS?

Yes, I think it ties into a few factors. Firstly, we need to address our $100 million debt with a 10.25% coupon. Next, deploying our remaining capital is essential. Lastly, we will continue to clean up the balance sheet. However, I want to clarify that I'm not convinced we will reach breakeven this quarter. It appears more realistic for Q1, especially pre-dividend if we can devise capital strategies effectively. So, broadly speaking, I perceive Q1 as more feasible.

Great. I found the slide on Page 8 regarding bank lending quite interesting. Multi hasn't changed much, but construction and non-multi CRE banks seem less active or interested. Should we expect you to lean in that direction, or is the current focus more on seeking that significant opportunity with timing uncertain?

I think it’s both. We don't feel the need to concentrate on any specific asset class, returning to Tom's inquiry. Our Genesis operation includes a significant construction/multifamily lender, and there could be collaborative opportunities as we move forward. Multifamily remains a strong REIT asset for us, and we will keep monitoring that. Opportunities stemming from our ownership of Great Ajax are plentiful. Thus, we are not committed to any specific lending vertical but wish to diversify. As for the banks, their reluctance to engage in construction loans opens avenues for our Genesis business and may lead to future collaboration with Great Ajax.

Lastly, it's still early to comment on the financing side, but I noticed progress on improving and reducing the cost of financing facilities. Do you envision this vehicle will primarily rely on bank lines, or might it explore the markets for CLO or seek other financing alternatives away from these options?

I believe the bank lines will apply specifically to the securities portfolio. Ultimately, we will want to explore the debt markets or equity markets for alternative security options as well.

Great. I appreciate your comments this morning, Michael. Thank you.

Thanks, Stephen.

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

I appreciate the questions everyone and stay tuned. This is all about the future. We're looking to take this vehicle and create great earnings for our equity holders and shareholders who join us along this endeavor. Thank you, and have a great week. Take care.

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