Earnings Call Transcript - RPT Q1 2025

Operator, Operator

Thank you for standing by and welcome to the Rithm Property Trust First Quarter 2025 Earnings Conference 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’d now like to turn the call over to Emma Bolla, Associate General Counsel of Rithm Capital. You may begin.

Emma Bolla, Associate General Counsel

Thank you, and good morning, everyone. I would like to thank you for joining us today for Rithm Property Trust’s first quarter 2025 earnings call. Joining me today are Michael Nierenberg, Chairman, CEO and President of Rithm Capital and CEO of Rithm Property Trust, and Nick Santoro, CFO 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. 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, CEO

Thanks, Emma. Good morning and thanks for dialing in. Just I'm not going to give you the long Rithm update, but speaking about this company that we manage here at Rithm, the company is in great shape. If you think about when we took it over in June of ‘24, the company had a lot of what I would call re-performing loans, very low coupon assets on the balance sheet. The team's done a great job repositioning the company, selling down those assets and redeploying into current cash flow, higher yielding assets in the commercial space. One note is this company has no legacy commercial real estate exposure to the downside. So when you think about where we are today, the company has, give or take, about $300 million of equity and is sitting on almost $100 million of cash. We did a capital raise in the quarter, so things are in very, very good shape. The growth story here is similar to what we did with Rithm, which was formerly known as New Residential, where we grew the company from $1 billion of permanent capital to roughly $8 billion today, and it generates $1 billion a year. This will take a bit more time, obviously, because of where the equity trades, and I'll talk to that in a minute as I flip through the deck. But in general, I'd say the company's in really good shape. We're excited about the ability to grow this company and generate real earnings for shareholders and see the equity price right itself to a more normalized valuation. So with that, I'm going to start on page three and I'll just flip through this quickly and then we'll have some Q&A. When you think about the company, it is managed by Rithm Capital and our teams here at Rithm Capital. There are roughly 75 folks internally that focus on our operations at Rithm Capital and Rithm Property Trust. That doesn't include, obviously, some affiliates, such as Sculptor and some of the different op-cos. The team here has a ton of experience, whether it be in the residential or commercial space. My partner, Charles Sorrentino, has been with me since 2008, running different trading desks on the sales side and has a lot of experience in commercial real estate as do our other team members focused on this company. If you flip to page four, for the quarter, GAAP income was $1.1 million or $0.02 per diluted share, and earnings available for distribution was approximately $0.75 million or $0.02 per diluted share. The first quarter dividend we paid was $0.06, which we hope should continue and, over time, ideally that grows. Cash and cash equivalents, as I pointed out, are $97 million and total equity is $295 million. The GAAP book value today is $5.40. If you consider that relative to the stock, it currently trades at about $2.85, making the equity extremely undervalued. We saw a pop after last quarter's earnings calls and then, with the volatility we observed in the markets, the equity price subsequently hit hard, but we feel very confident in our business position and our ability to create real shareholder value for those invested in the equity. Page five depicts that in the first quarter, we deployed $65 million in various CRE debt. This includes $47 million of AAA CMBS bonds with a roughly 11% yield. We also split a loan between Rithm Capital and Rithm Property Trusts, a $35 million loan at SOFR plus $800 million on a midtown office building with a good sponsor, translating to a return of 12% or 13%, not including fees. During the quarter, we completed one of the first preps done in a long time, raising $52 million of capital. While we're eager to grow earnings, we want to be mindful of the volatility in the markets. We're seeking great opportunities to deploy capital at what I call high-return levels. We are seeing plenty more opportunities right now but need to be patient. Here in the quarter, we sold $21 million of legacy residential assets, and we continue to grow earnings in the company. Page six illustrates potential earnings growth. We should assume that as we look for either strategic transactions or assets to acquire, we will have the ability to raise and grow earnings around that. We continue to hunt for that, but due to market volatility, we believe things will come our way, but we plan to be extremely patient. Page seven looks ahead at our opportunity with RPT. One point to make is about the stock price, $2.85 versus a $5.40 book value, which should say enough. When you look at this page, consider why CRE debt matters; there is evident repricing of assets and dislocations. An article referenced the Chicago market, with a 1.7 million square foot office building being returned to the lender. I'd encourage you to look at that article. For our exposure in this business at Rithm Property Trust, there is no legacy commercial real estate exposure, and we feel very positive about that with our strong team. Moving forward, we see a robust pipeline and will continue to focus on opportunistic investing while waiting for the right time to deploy capital and drive higher earnings and higher growth. Lastly, on page eight, we illustrate what the future state of the portfolio might look like. We will have some CMBS, senior loans, a bit of mezzanine, and some opportunistic investments. We're not looking to go all-in on any one strategy concerning the company. We're looking for diversification across all these different asset classes. So with that, I’ll turn it back to the operator for questions.

Operator, Operator

Thank you. Your first question comes from a line of Jason Stewart from Janney Montgomery. Your line is open.

Jason Stewart, Analyst

Hi, thanks. Good morning.

Michael Nierenberg, CEO

Good morning.

Jason Stewart, Analyst

In terms of the volatility that we've seen, has that changed sellers' motivations? Has it changed the activity level in the market? Are you seeing any movement there?

Michael Nierenberg, CEO

You have wider spreads across the board, whether in high yield, investment grade, or the residential side of the market. While saying that, we've seen some stability over the course of the past couple of weeks, and I think it has taken a more prominent role in the narrative around tariffs. However, I do believe we will see more opportunities across all of our platforms. The beauty of where this company sits, along with its parent at Rithm, is we see a ton of deal flow from all our counterparties, whether that be in the banks, or our sourcing teams across the country who are actively looking for assets and deals to put capital to work. There's plenty to do, but we must be careful. For instance, the Chicago office building mentioned in the article illustrates how many deals are funded with AAA CMBS. If you look at the conduit markets, those markets have been quiet lately, so you are seeing more single property deals coming to market with wider spreads, but we have to tread cautiously.

Jason Stewart, Analyst

Thank you. And then when you say you're looking for diversification, does that mean that you've shifted your thoughts on a platform or a transformative acquisition?

Michael Nierenberg, CEO

No, it's more of the same. We are still looking at platforms and origination businesses. The key for all of us in the alternative business and capital management is how to take our origination engines and use them to seed balance sheets or funds. We've done well at the parent level, and that's something we want to extend to Rithm Property Trust.

Jason Stewart, Analyst

Got it. Okay, I'll jump down. Thank you.

Michael Nierenberg, CEO

Thanks, Jason.

Operator, Operator

Your next question comes from a line of Tom Catherwood from BTIG. Your line is open.

Tom Catherwood, Analyst

Thanks. Good morning, everybody.

Michael Nierenberg, CEO

Good morning.

Tom Catherwood, Analyst

Maybe starting with the $17.5 million subordinate mortgage, this was your first investment in the subordinated mezzanine loan category on page eight that you highlighted, Michael. How is your $1 billion pipeline divided between that category and CMBS senior loans and opportunistic investments at this point?

Michael Nierenberg, CEO

This was, I would actually categorize it as an opportunistic investment. We partnered with a couple of large money center banks on this and split it between Rithm Property Trust and Rithm Capital. We aim to not orient ourselves solely around loans or bonds. It's going to be a diversified portfolio. We think that is a good way to create risk limits around the portfolios that we will deploy capital in. There isn't a formula; we evaluate each asset. This is an example of collaborating closely with our banking partners. We are currently evaluating another opportunity with some major money center banks here in New York to put capital out.

Tom Catherwood, Analyst

Got it. Appreciate that. And then, you mentioned the preferred issuance in Q1 and you're sitting on nearly $100 million in cash on the balance sheet. When are you thinking of starting to pay down that higher coupon corporate debt? And kind of beyond that, what are the next steps in the company's balance sheet evolution?

Michael Nierenberg, CEO

The corporate debt is currently at a coupon of 9.875%. It will likely remain outstanding for a while here, as long as we can deploy capital above that rate. The preferred stock is treated as equity, unlike the debt. As we scale the company up, that rate will likely decrease by 100 basis points when we receive an upgrade. Unless there is some transformative deal executed where we raise much capital, the corporate debt will stay in place for now. A growth strategy could come from the Rithm family of companies or through partnerships.

Tom Catherwood, Analyst

Got it. And then that may partially answer my last question, but I want to go through the thought process anyway. In terms of dividend coverage, if we look at the current pace, you're improving earnings from Q4 to Q1. You added $0.01 a share, and we look at the $0.06 dividend per quarter. At this current rate, it would be another four quarters to fully cover the dividend. Understand that transformative acquisitions or investments can accelerate that process, but outside of a transformative event, are there any other items that can help accelerate reaching break-even on the dividend?

Michael Nierenberg, CEO

I believe it's about growing earnings and reducing lower coupon assets on the balance sheet. The challenge with those lower coupon assets is they are often retained interests, thus we cannot sell them. Conversely, the liability costs on those lower coupon assets are very low due to their issuance in securitization trusts. Growth will predominantly come from deploying capital at returns that are more accretive to overcome the earnings deficit. I believe REITs are fundamentally attractive relative to other companies. For instance, Rithm trades around 5 times to 6 times earnings, while larger alternative asset managers trade at 30. Companies like this trade at 50% of book value. The value is evident. If we didn’t pay dividends and instead redeployed capital at 10% returns, the overall equity price should rise, because we would be retaining earnings and growing at double-digit rates. Therefore, we will stick to our dividend policy and seek growth to address the situation; the sector is quite cheap currently. I believe that the expansion of this vehicle will likely involve third-party partners over time.

Tom Catherwood, Analyst

Got it. Appreciate the answers. Thanks, Michael.

Michael Nierenberg, CEO

Thank you.

Operator, Operator

Your next question comes from a line of Randy Binner from B. Riley. Your line is open.

Randy Binner, Analyst

Hey, good morning. I have a couple of balance sheet-related questions. I think on the last call, you mentioned there would be less sale activity regarding the legacy portfolio. I believe it was $21 million this quarter, and it sits at about $100 million. So, is the ability to continue to reduce the legacy portfolio relatively limited going forward or is there good potential? How should we think about that remaining amount?

Michael Nierenberg, CEO

Yes, it's relatively limited. We will make progress where possible, as long as we don't sacrifice value. Our aim is to maintain a clean balance sheet. The balance sheet is indeed clean, but with the legacy assets, the real equity associated with those is quite low. After the quarter end, there may be about $25 million of UPB that could potentially be sold, but it’s constrained by Dodd-Frank requirements for most securitization trusts.

Randy Binner, Analyst

That's helpful. And then just on the unrealized gain that appeared on the income statement, I think that's related to the AAA CMBS, but would like to confirm. I imagine that would be marked lower this quarter. Is that where that unrealized gain activity is stemming from?

Michael Nierenberg, CEO

No, I believe the unrealized gain was related to the sale of legacy assets. We did not sell any of our AAA floating rate CMBS in the quarter.

Randy Binner, Analyst

I mean, I think this is an unrealized gain.

Michael Nierenberg, CEO

Where do you see that?

Randy Binner, Analyst

The way I read it, the $4.4 million.

Nick Santoro, CFO

The $4.4 million unrealized loss you see this quarter has an offset in OCI. So it's relatively flat in values quarter-over-quarter.

Randy Binner, Analyst

Understood. Got it. I appreciate that clarification. Thank you.

Michael Nierenberg, CEO

Thank you.

Operator, Operator

Your next question comes from a line of Jade Rahmani from KBW. Your line is open.

Jade Rahmani, Analyst

Thank you very much. A bit of a follow-up to Randy's question, but in terms of the balance sheet for those of us new to the story, what percentage is a core longer-term hold, whether it be from the legacy assets or new investment, and what percentage of that is commercial real estate in the new debt investment strategy?

Michael Nierenberg, CEO

In terms of legacy holds, there are probably about $25 million of residential assets that could be sold at this point, and there's not much cash linked with those. The overall core balance sheet aims to deploy capital in commercial real estate assets. That's what this vehicle is set up to do. We're also exploring opportunistic investments adjacent to our core expertise. The core hold will likely consist of more commercial real estate assets as we deploy close to $100 million of capital that we currently have. I believe we need to retain about $50 million of that for covenants tied to some of our high-yield debt and to manage the mark-to-market of some legacy assets on our balance sheet, so that $50 million is intended for deployment into commercial real estate assets.

Jade Rahmani, Analyst

Thanks. Secondly, can you give some color on the team that you've put together to focus on commercial real estate? I know you have these affiliate companies, GreenBarn and Sculptor. Could you elaborate on the experience within commercial real estate? I've seen many newcomers in the space, and if the experience doesn't match their duration, issues may arise. So it would be beneficial to understand the team's qualifications?

Michael Nierenberg, CEO

I'll start with my partner Charles, with whom I've collaborated on various projects since 2008, running parts of Bank of America, including all commercial real estate. Charles directed some of the trading businesses. Internally, we've added about half a dozen regional individuals focused on commercial real estate. In addition to that, the staff on our various investment initiatives is quite robust. Regarding GreenBarn, we own 50% of their operating company. I would consider them more of a sourcing engine for us presently. Sculptor is a separate entity, but overall our real estate experience is extensive.

Jade Rahmani, Analyst

Thanks very much. Lastly, what are you observing from the banks? One of your peers in commercial real estate noted the emergence of several special situations in the quarter. We've seen banks retreat from direct lending in CRE while remaining engaged in the credit facility side and potentially looking to divest non-performing loans. What are your observations, especially regarding large money center banks?

Michael Nierenberg, CEO

Our relationships continue to prevail on the senior side, and they are seeking partners like us and others. Posturing more aggressive credit criteria is anticipated, especially as banks analyze loans that have gone bad. If they don't foresee resolving these loans, selling them becomes their recourse. We're likely to see more non-performing loans if credit conditions deteriorate; however, banks will be particular; after all, not all commercial real estate assets are alike. Thus, we will witness a degree of diversification from banks, but we continue to observe banks actively lending. We conduct a significant amount of business with them, and I believe this trend will persist.

Jade Rahmani, Analyst

Thanks a lot.

Operator, Operator

Your next question comes from a line of Doug Harter from UBS. Your line is open.

Doug Harter, Analyst

Thanks. Michael, can you talk about the balance between looking to grow the business for scaling and hopefully increasing earnings power versus your disposition towards issuing equity that might dilute current book value?

Michael Nierenberg, CEO

The book value is $5.40 while the stock is at $2.85. The company holds about $100 million in cash and plans to maintain about $50 million at all times until we grow the balance sheet. The anticipated growth will likely require third-party contributions, potentially through acquisitions of other companies as a means to create scale here. The company must increase its relevance, evidenced by a requirement for about $300 million of equity to achieve that scale. Growth will not be sacrificed. However, we must find a way to drive this organization forward and boost earnings. There’s currently no specific strategy; it could come from a third-party option if an attractive transaction arises that promises significant earnings upside. One of the reasons for the preferred stock issuance was to avoid diluting shareholders, and we will likely use this strategy again.

Doug Harter, Analyst

I appreciate the answer, Michael. Thank you.

Michael Nierenberg, CEO

Thanks, Doug.

Operator, Operator

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

Michael Nierenberg, CEO

Thanks, everyone, for asking the questions. Thanks for dialing in. Have a great week.

Operator, Operator

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