Rithm Property Trust Inc. Q3 FY2025 Earnings Call

Hello, and thank you for being here. My name is Tiffany, and I will be your conference operator today. I would like to welcome everyone to the Rithm Property Trust Third Quarter 2025 Earnings Call. I will now turn the call over to Emma Hoelke, Associate General Counsel. Emma, please proceed.

Thank you, and good morning, everyone. I would like to thank you for joining us today for Rithm Property Trust Third Quarter 2025 Earnings Call. Joining me today are Michael Nierenberg, Chief Executive Officer of Rithm Capital and Rithm Property Trust; and Nick Santoro, Chief Financial Officer of Rithm Capital and 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'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, and thank you for being with us today for the Rithm Property Trust call. During the quarter, there wasn't a lot of activity. When we took over the company last June, it was losing about $10 million each quarter, but now the company is roughly stable in terms of earnings, and we're still providing a $0.06 dividend. We've sold several residential assets and acquired some commercial real estate floaters, which have higher yields and good liquidity. Looking at our additions and sales, if we find interesting opportunities, we can liquidate some assets to reinvest in higher-yielding or strategic assets. Our main question is how to proceed from here. We have a few options: recapitalize the vehicle with a new equity offering linked to asset pools or fixed income instruments, consider liquidating the company, especially since the book value is $5.30 while the stock trades around $2.40, presenting a significant value opportunity for investors, or maintain our current course. However, if we choose to stay the course, it won't be for the sake of merely keeping things the same. Yesterday, on our earnings call, we discussed our new acquisition, the Paramount transaction, where we've agreed to take a large office REIT private in New York City and San Francisco. We’re excited about that deal and its potential returns. A question from the call was whether we would consider adding this to Rithm Property Trust, and I confirmed that we would. In the long term, we’re developing a direct lending business that could fit well within Rithm Property Trust. We will collaborate with our Genesis partners, which focus on making construction loans to mid-tier sponsors, rather than large players. We've successfully grown our production from $1.7 billion to likely over $5 billion this year. The yields on those assets are attractive, and we're building a solid business around it. As we evaluate equity relative to book value and our plans, I'll reiterate that we won’t simply continue operations for the sake of it. We need to strategize on growth, and eventually, we might consider an auction process for the company to realize its true book value. I'll move to our small presentation deck— Page 3 starts with an overview of Rithm Property Trust, which was previously known as Great Ajax, a residential mortgage REIT that we took over and rebranded with a focus on commercial real estate investments. We completed a small preferred equity offering, raising cash, and currently have about $100 million in cash and roughly $300 million in total equity, while our portfolio stands at about $308 million. This vehicle should allow us to continue our search for growth opportunities. I often refer to Blackstone’s mortgage REIT, BXMT, as an example of creating a successful vehicle around a pool of assets. Turning to Page 4, our financial highlights indicate the company remained flat quarter-over-quarter while maintaining a $0.06 dividend. Our cash and cash equivalents at the end of the quarter were $81 million, with total equity at $292 million. On Page 5, we originated a $21 million loan for a grocery-anchored retail center near Seattle, which should yield mid-teens returns. This opportunity excites us, although we need to execute our plans effectively. Regarding Rithm Property Trust, there’s no legacy baggage, and we see significant upside potential for growth. Page 6 shows that since taking over, we have stabilized earnings, but we need to make more substantial moves to generate significant earnings moving forward. Page 7 illustrates the potential future state of our portfolio, which we view as more opportunistic in nature compared to others. I’ll now turn it back to the operator to open the floor for questions. Please feel free to ask anything.

Your first question comes from the line of Tom Catherwood with BTIG.

Michael, obviously, you laid out a bunch of different avenues that you could go forward with, with the three that you laid out at the beginning. But maybe just take the 'stay the course' one for this question. You talked last quarter about $50 million of loans kind of being pretty close to the finish line. You did $21 million this quarter. What does that kind of pool in closing look like right now?

There are a few points to address. First, I mentioned the Paramount deal, which is significant—it's $6.60 on 13 million square feet. Depending on Board approval, the company might engage in that transaction. We're collaborating with our Genesis partners on our business model, which includes multifamily loans and residential transitional loans. At Rithm and Rithm Property Trust, we aim to expand our direct lending operations. We've been bolstering our team to support this growth, and we see this initiative as an ideal fit. In the previous quarter, we discussed $50 million in loans, and this quarter, we completed a $21 million loan that we're pleased with. We chose to pass on some opportunities, particularly in light of the upcoming mayoral election. Specifically, we're not pursuing rent-stabilized loans in New York City at this time. We also decided against proceeding with a Rosewood Hotel project in Dallas after conducting due diligence but not feeling comfortable with it. In total, this quarter, we secured the $21 million loan, and we currently have approximately $100 million in cash and liquidity. Moving forward, our focus will be on direct lending and seeking out more opportunistic investments.

Great. Appreciate that. And then on Paramount more specifically, I know the deal is still coming together, obviously hasn't closed, so all options are on the table. But when we think of that company, it had historically had a part of its business that was dedicated to making opportunistic commercial real estate loans, whether that was mezz positions, preferred positions, so be it. Is the potential thought to carve off whatever may be remaining of that or whatever capacity that exists within their funds? Or is this potentially RPT taking a position somewhere else in the capital stack as you go towards that closing? And again, if you can't talk about it, I fully understand, just trying to get ideas of what this might look like.

Yes. No, it's a good question. They had some legacy funds. I would assume for purposes of this discussion, there's nothing to do with Rithm Property Trust and those funds. It would likely be a position that would be pari passu alongside Rithm, our parent company, obviously, on the underlying properties. So when you think about it, there's 13 assets between New York and San Francisco, and it would be a position in those specific assets on the property side.

Got it. Michael, you mentioned the discount to book value, and I understand that. However, when we examine the commercial real estate mortgage sector, the discounts are significant and have increased, especially following the bankruptcy of Tricolor, the situation with First Brands, and the recent regional banking issues. Overall, commercial mortgage REITs are facing a collective concern regarding credit risk. You are positioned at the intersection of various credit mechanisms. What is your current perspective on the actual credit risks present, whether in real estate or other sectors, and what do you believe is being overreacted to at the moment? This isn't just impacting RPT; it's affecting everyone. What are your thoughts on the current market?

So I think it's bifurcated. I think there's a couple of situations. One is a lot of the legacy commercial real estate REITs were still saddled with bad loans that need to get, and I'm not saying bad loans. Let's just say, underwater loans that need to get worked out. We do not have any of those here at our firm. And that goes for both on the Rithm level and on the Rithm Property Trust level. So when we set out on a mission to kind of rebrand this vehicle, we said we're going to get into the commercial real estate space again because we don't have any legacy issues. So I think when you look across the spectrum, there's a number of what I would say, REITs out there that are still working through some of their issues and this vehicle is clean. So I think that's one. Two, when you think about credit and you think about like even when we think about this Paramount deal, why office? Not everybody can do office because a lot of folks are still reworking their existing office portfolio. So we looked at that as a real opportunity for us because, one, we as a company have a need for 100,000 square feet. So we're in the market looking at office pretty much every day, and we have a really good pulse on what's happening in the market. As we think about credit, the capital markets for commercial real estate are wide open. You're seeing more and more CMBS get done prior to us announcing this deal; the company did a CMBS deal on 1301 Sixth Avenue. So I think the credit markets are wide open with the breadth of the Rithm team and our other affiliates, there's a ton of things to look at. I will say in commercial real estate, and I'm sure you know this, you got to be really, really careful, not just in commercial real estate and everything, but in commercial real estate, particularly when you have one-way risk on a single type of property. So when we think about where we could go with this in the direct lending space and create more diversified pools of assets or diversified lending around the business, it gives us pretty good comfort that we're going to be able to do wonderful things here. What I would say on the discount to book is, quite frankly, if we could all get paid in equity at these kind of levels, I think we'd love to do that. So the net of it is we're extremely optimistic about where we could go. The thing is you need capital to grow. And with the stock trading at whatever, 50% of book, it's very difficult. My view and our view is not to dilute shareholders. But if there's a way to grow out of this with something meaningful and some sizable offering associated with a pool of assets, we'll consider that.

Your next question comes from the line of Craig Kucera with Lucid Capital Markets.

I wanted to circle back to the Paramount transaction. Can you give us a sense of what the economics of that might look like for RPT? I mean, is that sort of in the ballpark of what you've done this year with the, call it, the office senior sub deal of maybe 12% or the retail asset at 11%?

The Paramount deal is more equity-based. We're playing around with a couple of different structures. Are there different ways to think about this? So I don't have a specific answer. But on the surface, when you look at the Paramount deal and the way that we're doing this, we paid $6.60 for the company. That equates to about $1.6 billion before some of the, what I would say, fees and noise around this. So that gets you roughly $1.8 billion. The amount of cash that sits on the balance sheet is a little south of $500 million, that gets you to $1.3 billion. Rithm, the parent will put in, give or take, about $300 million of equity. The contemplation, again, subject to Board approval would be for Paramount to put in about $50 million. So that gets you to a little under $1 billion. Rithm, the parent will then be raising, and we're in the market now, a fund around the remaining $1 billion. And that's the so-called funding of the vehicle. When we look at economics, here's how to think about this. We are assuming going in a cap rate a little bit south of 7%, our going in so-called cost per foot is about a little under $600 a foot. When you think about replacement costs, the replacement cost, including land in New York City is likely something around $3,000 a foot. So effectively, you're going in to acquire Class A office buildings at about a 75% discount to replacement cost. When you look at the stabilized cost, you're in the low 700s, and we think our exit strategy here, just to give you a sense, is something around 6% on New York and 6.5% to 6.75% on San Francisco. What that does based on a $50 million equity check gives you about a 2x MOIC on that $50 million and a 20-plus percent return based on our assumptions. So we are extremely excited about this transaction. This is in investing, and we like to think of us and our business as more opportunistic investing. You very rarely have the opportunity to deploy a large amount of capital in Class A office assets that are located in two of the gateway cities in the U.S., which are obviously in New York and San Francisco in a dislocated market where we think we're going to generate outsized returns for our investors. So that's the investment thesis here. We'd love for Rithm Property Trust to participate in that. And hopefully, we have a good result around it.

I appreciate the color. That was very thorough. I'd like to think about the flip side of that, though. Could you envision a scenario where Rithm Capital could potentially deploy capital into RPT in order to sort of jumpstart the scale of the company?

That's a great question. When considering equity or preferred offerings, we've had several discussions with our banking partners about the possibility of a rights offering where Rithm supports us with a pool of assets. These conversations are ongoing, but I'm not aware of any immediate actions we need to take. One small deal is currently in the market, valued between $80 million and $100 million, being managed by one of the banks, backed by either a pool of assets or a parent guarantee at a discount of 10% to 15%. We need to carefully consider how this arrangement would work for both Rithm Property Trust and Rithm, the parent company. Ideally, we would prefer a cleaner approach, but it's still uncertain where we'll ultimately land.

Got it. And just one more for me. Just in the process of raising capital around this Paramount transaction, I know you're looking for other third-party sources of capital. Has that opened up any potential partners for RPC? Because I believe like in the past, you've said that you are looking for a third party to sort of jumpstart the company.

Yes, we have numerous discussions happening across the firm. Whether it's at the Rithm level or Crestline, which is expected to close on December 1, or even at the Sculptor level, there is significant collaboration as we engage with LPs and other partners. This deal has initiated conversations that we wouldn't have had six months ago, and we are very excited about the opportunities it presents. If we wanted to finance the entire Paramount deal with third-party capital, we could do that immediately. The key consideration for us is how to maximize returns for our shareholders as an organization.

That concludes our question-and-answer session. I will now turn the call back over to Michael Nierenberg for closing remarks.

Great. So thanks for dialing in, and guys, I appreciate the questions. Again, just to be clear, we're going to do anything and all we can to figure out a way to grow earnings in the company, not just grow the company but grow earnings in this company. We do feel that the equity is fundamentally mispriced. I think to some of the questions we heard, a number of these REITs have equity that's fundamentally mispriced. The difference here is we do not have any legacy issues, and it should be onward and upward. We'll keep you posted throughout the quarter and other things that we're doing around the company. If you have any questions, don't hesitate to follow up. With that, happy Halloween. Have a great weekend and look forward to updating everybody soon. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.