Rithm Property Trust Inc. Q4 FY2024 Earnings Call

Thank you for standing by. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rithm Property Trust Fourth Quarter 2024 Earnings 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. Thank you. I would like to hand the call over to Emma Bolla, Associate General Counsel of Rithm Capital. You may begin your conference.

Thank you, and good morning, everyone. I would like to thank you for joining us today for Rithm Property Trust’s fourth quarter 2024 earnings call. Joining me today are Michael Nierenberg, CEO of Rithm Capital and of Rithm Property Trust and Mary Doyle, CFO of Rithm Property Trust. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Rithm Property Trust website, www.rithmpropertytrust.com. If 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 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 us. I have some short comments and then we'll just go to the supplement and then we'll do a little bit of Q&A. As we think about this vehicle, we took over the management contract of what was formerly known as Great Ajax in June of 2024. For the first time in three years, we're happy to report the company had a positive economic result in Q4. While $0.06 a share is a start, we look forward to our ability to continue growing earnings and our capital base. When we took over the company, the thought was, with the commercial real estate market extremely dislocated, we were going to turn this vehicle into one that gets out of the so-called legacy residential non-performing loan business, not that we're out of it as a firm, but in this vehicle and turning it into an opportunistic vehicle focused on commercial real estate. So in doing that, we repositioned the balance sheet, we shored up all the financing around the assets. We sold down legacy residential positions and reinvested the proceeds into high-quality commercial real estate. In doing all that, you're going to see the economic result, which for the quarter, again, we made $0.06 per diluted share from a GAAP perspective. And we're still maintaining the dividend of $0.06, with the belief that we're going to continue to grow out of this so-called hole that was part of this company for many years. How are we going to get there? We need more capital. So when we think about the stock price, we think the equity is extremely undervalued. So we'll likely be in the market in Q1 with a preferred equity deal. This will help us shore up our capital base and give us more capital to invest, which will hopefully create more earnings for our shareholders. We'll continue to sell down legacy assets that don't meet our current return thresholds. The balance sheet is, for the most part, very, very clean. There's a bunch of retained interest that sit on the balance sheet that we can't sell; those will be there for quite some time. The liability structure is issued with very low rates, so we feel good about that. And again, there’s not much we could do there. Finally, we're going to seek M&A opportunities to truly grow the company. Our pipeline of M&A across the firm is extremely broad, and we are optimistic that we're going to be able to do something here. The playbook is very similar to new residential. When we started that vehicle at Fortress in 2013, we began with roughly $1 billion of capital. Today, it has $7.8 billion. Along the way, we did a bunch of M&A and purchased several assets. Frankly, I think we’re going to be able to do the same here. Rithm Property Trust was formerly known as Great Ajax. We repositioned the company to take advantage of what we think is one of the better investing opportunities we've seen in many years in the commercial real estate sector. The pipeline today is roughly $1 billion of potential deals we're evaluating. We’re extremely selective. In terms of financial results for the quarter, we achieved $2.9 million in GAAP income, $0.06 per diluted share. EAD earnings available for distribution was $0.01. Again, this was our first positive result in three years. We maintained our dividend at $0.06 per common share. Our cash liquidity at the end of Q4 is $64 million, with total shareholder equity of $247 million. Our book value is $5.44, essentially unchanged from Q3. Rates across the curve are up approximately 60 basis points. If you think about the result, with rates up 60 basis points and book value unchanged, a lot of it is due to our investing activities. We sold down under $340 million of legacy residential mortgage assets and deployed around $50 million into commercial real estate. GAAP net income grew from a loss of $13 million in Q2 to a positive result of $2.9 million, and EAD grew from a loss of under $10 million to about flat. We also improved all financing arrangements within the company. Looking ahead, commercial real estate debt targets low double-digit returns. We see potential opportunities to deploy capital at higher returns, but for now, that’s how we're thinking about it. We don't see any legacy issues that will cause problems for the company. We're very comfortable about the opportunity ahead of us.

Thank you. Our first question comes from the line of Tom Catherwood with BTIG. Your line is open.

Thank you, and good morning everybody. Michael, first off, congratulations on reaching profitability in Q4. It was great to see that. I appreciate your comments regarding the opportunities and the growth strategy going forward. Now that you've been under the hood at RPT for over eight months, how has your view on commercial real estate evolved? Are the opportunities that you're pursuing the same as they initially were, or have they shifted over time?

Good question, Tom. Here's what I would say regarding opportunities in commercial real estate. We've deployed hundreds of millions of dollars into different opportunities. While there are opportunities to do so, we've seen a lot of office deals over the past year and half. Not everything works. We are starting to see more opportunities, including working with large money-center banks where we could provide a B note or mezz note on some underlying loans, which helps from a capital standpoint at the bank. For us, it creates that double-digit yield that we're targeting. On a go-forward basis, we believe you will see more opportunities. There is plenty of capital out there chasing these deals. We see our expertise at Rithm with the ongoing support from Sculptor and our track record to reposition capital. We’re looking for debt opportunities and some more opportunistic situations, noticing that we do not need to limit ourselves to office space; we have the expertise in various areas including the loan sector and working with larger banks on distressed opportunities.

I appreciate those thoughts. I wanted to ask about the slower pace of loan sales out of banks noticed in '24. Were you surprised by that, and could that accelerate in '25?

I do think it will accelerate in '25. When looking at banks, unless forced to take that mark, they're likely to hold on to assets. The banking sector had a great run, reflected in their fantastic earnings. However, we think they’ll write down more problem real estate assets due to increased expectations of rates staying higher for longer. As an example, the 10-year note has increased from approximately 460 today. With the general belief that rates won't come back down quickly due to the Fed holding positions, I believe we will witness increased problems in commercial real estate as issues arise from higher debt service costs. As such, I think we will see more assets come to market.

Got it. Appreciate your insights. Lastly, regarding the preferred equity deal, do you have a magnitude in mind as of this point? Will it be growth capital or some dedicated to address higher coupon unsecured notes you have on the balance sheet?

It will be a combination of both. If there was a highly accretive transaction, we intend to pursue those as well. Our stock is trading at around $2.85, while the book value is about $5.5. We prefer not to issue stock at this level if possible. Tapping into the preferred market is our priority, even if at a higher coupon rate. There are covenants around the unsecured, and we need to buffer the capital base connected to some of that unsecured debt. Presently, we’ve deployed capital, and we have liquidity on the balance sheet, but the objective is to facilitate both addressing high-yield notes and raise further capital for growth.

Understood. Thank you, Michael.

Thank you.

Our next question comes from the line of Jason Stewart with Janney. Your line is open.

Hi, Michael, good morning. As you think about the evolution of strategy, moving some capital structure down to the middle part, how do you think the financing needs to evolve to meet your needs in achieving ROE and the term financing of assets?

Yes, when we partner with one of our large money-center banks, we will typically seek financing in conjunction with any potential loan, unless the unlevered return justifies an investment without leverage. Rithm Property Trust has good access to financing opportunities. The Rithm balance sheet is robust, with financing in place for all related activities. We will ensure we only proceed with transactions that meet our return requirements.

I'm examining Slide 7 and thinking of ROE. If you shift from senior to sub to increase gross ROEs, where do you see the sweet spot within the capital structure in relation to financing?

We are not going to orient ourselves solely around high-yield opportunities without assessing the fundamentals first. There is substantial demand for financing, and we find ourselves well-positioned to evaluate opportunities. For instance, last year we did $4 billion in production from residential transitional loans. We will navigate these opportunities carefully; credit and valuation matter fundamentally to our operations. And there remains significant potential for capital deployment.

Thanks for your time. I appreciate the insights.

Thanks, Jason.

Our next question comes from the line of Stephen Laws with Raymond James. Your line is open.

Hi, good morning, Michael. I wanted to discuss the initial capital allocation to CRE assets. Can you talk about the potential ramp on the current equity base and how high it could go?

Good question. Currently, our actions are largely focused on commercial real estate. If we decide to tap the market for preferred equity, we could use that opportunity to also enhance other investments. With our prior experiences and existing abilities, I envision positive growth trajectories for our capital allocations as we optimally mix our legacy assets and commercial investments.

Can you share any updates on investment activity in January? In a broader context, how do you view the attractiveness of additional CMBS investments versus senior and mezzanine loan opportunities in your pipeline?

We are looking at both CMBS investments and senior, mezzanine loans. It's going to be a combination, ensuring we adhere to our underwriting standards. We are actively assessing hundreds of potential M&A opportunities while keeping in mind our investment track record. We remain well-informed and are consistently evaluating the best options moving forward.

Are the securities on your balance sheet that are available for sale likely to be rotated into CRE whole loans, or do you think they will stay part of the longer-term targeted asset mix?

Forward levered yields on the remaining investment portfolio range from 12% to 18%. There's no immediate pressure to sell unless we identify a more lucrative redeployment opportunity. We closely monitor our residential and commercial assets, as we only want to sell under favorable conditions.

Any investment activity in January you can share?

We've engaged in some new CMBS deals at the top of the capital stack, but nothing substantial. Currently, we have $65 million of cash on hand and are eager to raise additional funds this quarter to strengthen our position and prepare for further capital deployment. When we identify highly accretive opportunities, we're ready to return to the marketplace.

Fantastic, appreciate the time this morning, Michael. Thank you.

Our next question comes from the line of Doug Harter with UBS. Your line is open.

Hey, Michael, can you discuss the appeal of structural leverage like a B note compared to financing through warehouse lines, and which currently offers better return opportunities?

We will explore all avenues. There will be a combination of both structural leverage and assessment of warehouse lines. It's crucial to underwrite loans meaningfully. Until this vehicle reaches scale, we won’t actively engage in securitization markets. However, through partnerships with our subsidiaries, we can leverage strong capital relations for our core commercial real estate goals.

Great. Appreciate it, thank you, Michael.

Thanks, Doug.

There are no further questions at this time. I would like to hand things back over to Michael Nierenberg for some closing remarks.

I appreciate you all joining the call and asking your questions. It's helpful for all of us here at Rithm Property Trust and Rithm Capital. In closing, this vehicle will be much more active moving forward. Our track record of creating shareholder value is apparent in our previous work. The same team that built Rithm Capital is the group behind Rithm Property Trust, and we’re excited about our potential growth opportunities. Expect an upcoming capital markets push in the near future. Growing earnings and bolstering share price is paramount for us. We look forward to updating you; have a great day, and thank you.

Thank you. This concludes today's conference call. You may now disconnect.