Rithm Capital (RITM) Q3 2023 Earnings Call Transcript

Rithm Capital (RITM 0.81%)
Q3 2023 Earnings Call
Oct 26, 2023, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning ladies and gentlemen and welcome to Rithm Capital Corp conference call. [Operator instructions] Please note, this event is being recorded. I would like now to turn the conference over to Emma Bolla, associate general counsel. Please go ahead.

Emma Bolla -- Chief Legal Officer

Thank you and good morning, everyone. I would like to thank you for joining us today for Rithm Capital's third-quarter 2023 earnings call. Joining me today are Michael Nierenberg, chairman, CEO, and president of Rithm Capital; and Nick Santoro, chief financial officer of Rithm Capital. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Rithm Capital website www.rithmcap.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.

Mike Nierenberg -- Chairman, President, and Chief Executive Officer

Thanks, Emma, and good morning, everyone. Thanks for joining us. Really exciting times for our company. From an earnings perspective in this overall operations in the quarter a very, very, solid quarter, core business lines continued to perform extremely well.

The positioning we put in place over the course of the past couple years has continued to pay dividends as they create solid earnings, book value growth, and high levels of liquidity. We expect this to continue into the future with the Fed signaling higher rates for a longer period of time. The global macro backdrop for investing puts our company in a great place to take advantage of where we believe the markets are headed. As you know, we have been very vocal about repositioning the company into more of an alternative asset manager.

Before I go there I want to be clear, the core business lines which have gotten us to this point are crucial to the future of our company. We believe Rithm 1.0 which is our existing core business, plus Rithm Private Capital will be a huge lift for our investors, shareholders, and our employees. With the Sculptor announcement we add great investment talents to our already terrific team. This expands our capabilities globally into all areas of credit, real estate, consumer, and other strategies that I'm sure we will launch at some point here in the near future.

We're also working on another transaction that upon consummation grows our asset management business to 50 billion of AUM. These transactions are transformational for us and continue our narrative toward being a leading global asset management business. We are extremely excited by the prospects of growing our business in the private sector and most importantly, adding partners who want to win with us and grow with us as growing with our partners will increase revenue, earnings, benefit our shareholders and LLPs who invest with us. At year-end we estimate the following that our business will look like this.

Now these are all projections assuming that everything closes and the deals happen, we will have 50 billion of AUM in the asset management business, 7.2 billion of equity capital, a $35ish billion balance sheet, and plenty of liquidity with a bunch of new partners in the private capital business. Back to the core business during the quarter we announced the acquisition of SLS. SLS is a mortgage company with a $135 billion of servicing of which $85 billion or so is true third-party servicing. Consistent with our rate view this deal will bolster our servicing business, add capacity and clients in our third-party business, grow our special servicing business, and increase earnings.

Our total servicing portfolio of investments from a notional perspective grows to $840 billion upon the settlement of the SLS deal. This includes mortgages that we service, investment in what will call excess MSRs, and legacy MSRs which are serviced by others. To be clear, this is not a race for us about size. We care about servicing our customers and making money for our shareholders and LPs.

Regarding the mortgage company, we continue to be vigilant on expense reduction initiatives, particularly in the origination segments. We expect the origination business to remain under extreme pressure with mortgage rates at 8%. So how do we think about this, it's great for our servicing business. As I pointed out we have $840 billion on a notional basis of mortgage servicing assets.

Lower prepayment equals one thing for our servicing business that debt. Lower prepayment equals one thing for our servicing business that's more earnings and more cash flow. On the commercial real estate side debt space remains a very big focus of ours going forward with no legacy assets and very attractive valuations. You could expect us to allocate more capital to this sector going forward.

If you recall we acquired GreenBarn, which was formerly known as Senlac/Normandy Partners at the end of last year. Since then we've made some opportunistic investments and will continue to do so. Right now we see the debt side extremely attractive. There's so much more I could talk about and we're really excited for our company and the prospects ahead.

So what I'll now do is I'll flip to Page 3 in our supplement and I'll take you through the deck and then we'll open it up for Q&A. Rithm from an overall focus standpoint $35 billion of assets after a dividend payment tomorrow of 4.9 billion of dividends paid in 10 years, 7.2 billion of book equity, and a 23% total year-to-date shareholder return. When we look at our expertise I would think of us as an asset management business in all areas of mortgage, real estate, and as we add expertise around the housing credit, there's no business line that we will -- that we shouldn't be in number one. Number two, if there's no business line that we will be in unless we have the expertise in-house.

The right side of this slide powered by partnership. We want to deploy opportunistic capital, we want to create more partners. Now this is a very different thing from where we grew the company in the public markets as we go forward, again we're going to grow more in the private market because our equity trades at a substantial discounted book and we think it's a better opportunity for us to deploy capital in the private markets. Page 4, just talking about our financial highlights in the quarter, GAAP net income a $193.9 million or $0.40 per diluted share.

Earnings available for distribution $280.8 million or $0.58 per diluted share, this includes a realized gain of $0.15 related to the sale of excess MSRs during the quarter. Dividend, $0.25, cash and liquidity at the end of the quarter $1.9 billion, and again total equity at $7.2 billion. I do want to point out to the right side of the page here, the book value growth from the end of Q4 2020, which at that time it was $10.87 to where we are now, which is $12.32 in spite of the 10-year note rising from 91 basis points to the end of the quarter where it was 4.60% to where today it's almost 5%. The evolution of Rithm, Page 5, you can see the company was started while we were all at Fortress in 2013.

It began with $1 billion of equity, today we have $7.2 billion of equity and as you look at the timeline and you look at our acquisition pipeline, we've grown substantially over the years. Everything's been targeted around what I would call mortgage and real estate, the addition of the Sculptor transaction, and some of the other things we are working on. We will grow not only our real estate presence, but also our credit presence and we look forward to continued growth as we go forward. Page 6, this talks about our private capital is going to help us generate recurring earnings and performance fees for Rithm shareholders and also for the folks that we manage capital for at the LP level.

We want to create partnerships with investors through specific SMAs, co-investment, as well as the funds that we continue to work on and we'll continue to roll out. The other thing to point out is the business continues to benefit from all the work that's been done over the years as we've created our own in-house origination and servicing platforms and those will continue to grow as we go forward. Page 7, the Sculptor transaction update, obviously a lot of press around that. We're super excited to bring this deal to a close and bring it in-house.

What I would say on this deal is very little to no overlap between Sculptor and our business and we're super excited to get this thing wrapped up. The expertise that we bring in-house is in my mind is going to be second to none. If you think about it our existing investment team coupled with the Sculptor investment team is going to create an asset management business that is going to be extremely formidable in the space. Page 8 just talks about the SLS deal.

Really what it is, is a servicing deal, there's very little on the origination side. The idea here is, again, it's not about so-called scale, this increases our third-party special servicing business to almost $200 billion. So it's a real fee for service business. The other thing, what it does for us is it increases our capacity in the special servicing space.

So as we go forward, and you think about the macro -- the global macro picture, if the economy in the U.S. does slow down, and there's a need for more special servicing, there's going to be nobody better than call it new res and our business to take to work with homeowners and consumers around that. Commercial real estate, Page 9, this really just talked about our expertise in-house. Currently, we have 25 to 30 investment professionals.

As many of you know, we don't have any -- we have not traditionally been a large player on the commercial real estate space as the company was built more around the residential space and consumer side. With the opportunity set that we see right now in the marketplace, extremely what I would call robust, and having no legacy assets, we're extremely excited to grow that business and put up what I would call great returns for our shareholders and LPs. On the loan side, the residential home loan side, keep in mind as I pointed out before our manufacturing capability in our mortgage company, as well as in our Genesis business, which provides loans to builders, it gives us I think, a very, very good competitive advantage over just a traditional asset manager as we're able to manufacture our own assets. When we look at -- as we think about deploying opportunistic capital, the rate environment and the macro environment for what we do is probably -- it hasn't been this good in probably 25 or 30 years.

I'm going to take you through a slide in two pages, which talks to where yield levels are. And when you add and you think about unlevered returns of something between 8% and 12% on senior cash flow, we think it's a great time to deploy capital, and will continue to be a great time to deploy capital in the very assets that we manage money for. Page 12 just talks about a number of different strategies. I'm not going to spend any time on this but as we think about mortgage loan, servicing rights, commercial real estate, debt, etc., everything -- not everything but most things look very attractive to us.

Page 13, if you just have a look to the right side of the page, over the course of the past couple of years, look at the yield profiles and the different asset classes that we invest capital in, everything that -- not everything again, but most things look extremely attractive to us. And as we raise more and more capital around our funds business, we're hopeful that we're going to be able to generate what I would call real outsized returns in the asset classes that we have expertise in. And then finally, without -- I'm not going to take you through the segment performance. You could have a look at that but, I think the net of where we are as an organization is we're a very different company than where we were a couple of years ago.

We will remain true to our core business, the routes that got us here. But overall performance has been very, very good. And with that, I'm going to turn it back to the operator and we'll open it up for Q&A.

Questions & Answers:

Operator

Thank you. [Operator instructions]

Mike Nierenberg -- Chairman, President, and Chief Executive Officer

OK. We are ready. Are there any questions?

Operator

OK. The first question comes with Kim Chang with BTIG. Please go ahead.

Eric Hagen -- BTIG -- Analyst

This is Eric Hagen from BTIG. Good morning. Hey, how are you doing guys? Alright, So I don't mean to be so short-term focus but how have MSR valuations maybe trended in October, are there any bulk packages, maybe even some opportunities that you feel like could emerge between now and like year-end or kind of early next year? How we're just looking at the MSR market right now? Thank you.

Mike Nierenberg -- Chairman, President, and Chief Executive Officer

Yeah. Here's what I would say on MSR. I think we were modest in how we thought about our gains in the quarter. As many of you know, we are a buyer short.

MSRs have negative duration, at some point where you're going to see as multiples being kept on what I would say some of the legacy MSRs. So the short answer is modest, modest movement in March. I think our weighted average MSR multiples of 5.1, at this point. There's still room to go.

We are still a buyer short, and we're going to remain that way until we think we see things change. The Fed has signaled that higher for longer, the economic data has been reasonably what I would say, OK, to probably not as soft as the Fed would like it to be. So we're going to stay the course. Regarding other packages, there's always going to be things that come up.

As we all know, the banks from a capital perspective, there's a lot of regulation and rules running around right now. The banks are, nobody's really happy about it from a banking perspective. I think this will create more opportunity as banks have to hold more capital against certain assets, that could create opportunities for us. But again, Eric, I just want to point out as we think about capital deployment, we do think strategically where we think we're going to in 15% to 20% returns on our capital.

If we see a package of MSRs that we think we could achieve those returns, we'll have a hard look at it. If not, we're likely not going to play in that sector because like I pointed out, we have 840 billion notional amount of MSRs and we can manufacture our own.

Eric Hagen -- BTIG -- Analyst

Yeah. That's a great color. Hey, so from a financing standpoint, like how much headroom did you have to borrow more on the secured MSR funding and what was like your tolerance level going forward as you look to Sculptor and you look at closing Computershare, how much headroom do you guys have and all that? Thanks.

Mike Nierenberg -- Chairman, President, and Chief Executive Officer

Cash and cash and liquidity at the end of the quarter was give or take about $2 billion. I think that's increased a little bit as we go into Q4. Candidly, I think the capital markets, folks, my partner Charles and Sanjeev do a great job around our balance sheet and working with our lenders around certain things. So there's plenty of room to go.

We're not looking over our balance sheet though, right here. I think you'll see other sources of capital come in, including private capital from third parties.

Eric Hagen -- BTIG -- Analyst

Yeah. Really helpful. Thank you, guys. Appreciate it.

Mike Nierenberg -- Chairman, President, and Chief Executive Officer

Thanks, Eric.

Operator

Thank you. The next question comes with Bose George with KBW. Please go ahead.

Bose George -- Keefe, Bruyette and Woods -- Analyst

Good morning. Just wanted to follow up on the performance quarter to date. Just can you get -- in terms of book value can you just give us an idea where that is now?

Nick Santoro -- Chief Financial Officer and Chief Accounting Officer

We've booked value at the end of Q3 at $12.32, which was up from $12.16. It's probably modestly higher with rates up a little bit. You know, like I said, we are a buyer short on our overall business. So depending upon what happens with rates here, part of this calculus as a REIT, we have to have agency mortgages.

So you have a little bit of a basis thing from a whole pool perspective, depending upon what happens with the basis. The basis today is as wide as it's been since the SBB crisis. And we expect that to remain under a little bit of pressure here with the deficit where it is and the government continuing to have to sell a lot of debt. I think the refunding announcement will be a little bit of a catalyst where the mortgage market goes.

As we know obviously mortgages are there's a lot less supply that comes into play, the challenges that the banks are not really able to buy anything just based on where they are from a capital perspective. But overall, I would say we're trending higher, and it just depends on where we go with some of our marks around the MSR business.

Bose George -- Keefe, Bruyette and Woods -- Analyst

OK. Great. Thanks. And then actually on this sheet that we show the yields, so on the conventional MSR you showed 9% to 10%.

What's the leverage that you use on that and what are the funding costs, what's kind of the levered ROEs on the investment?

Nick Santoro -- Chief Financial Officer and Chief Accounting Officer

It's typically something around 60 to 65 kind of advanced rates, what I would say. And right now funding costs in and around certain things depending on we have term funding, and they're likely around SOFR Plus 250ish. SOFR 250 to 300. The other thing is we have a bunch of term financing that's already existing on our MSR that's been outstanding for a few years based on capital markets issuance that we've done, which is lower obviously.

Bose George -- Keefe, Bruyette and Woods -- Analyst

OK. Great. Thank you, both.

Operator

The next question comes with Kevin Barker with Piper Sandler. Please go ahead.

Kevin Barker -- Piper Sandler -- Analyst

Great. Thanks for taking my questions. I just wanted to follow up on the plans for Sculptor and the more you spin-off. Obviously, there's a lot of moving parts there.

And, there's different things that need to come into place. But ideally, how do you see this playing out as far as a tiny perspective, and then how much capital you think will remain in the mortgage company, I know you addressed it previously but just love to the refresh there, as all that plays out. Thanks.

Mike Nierenberg -- Chairman, President, and Chief Executive Officer

So we have the S1 on file. We continue to evaluate alternatives, as we all know taking a mortgage company, or quite frankly, any company public right now is a little bit of a challenging task. The idea around the mortgage company as a way is the thought is to try to figure out a way to recycle capital. I think one of the things we're going to do when you think about MSRs for example, we're working on different funds, not necessarily just specific MSRs, but really more specific to what I would call the mortgage company as a capital vehicle.

And what I mean by that is, you have the origination business and the MSR side, as rates do rally at some point in our careers going forward. You want the folks that are deploying capital in these funds to be able to realize what I would call either recapture or not give up that MSR. So I would say the mortgage company and the recycling of the capital, there is fluid. As it relates to the bigger picture, I've been pretty vocal.

We are going to, and I alluded to this in my opening comments, I truly believe by the end of Q4 that there is a possibility, we'll have 50 billion of AUM, as an asset manager, you think of like the biggest and best alternative asset managers out there, they have their C Corp, they have a REIT, and then they have their private capital business. That's ultimately where I think we'll be. And then hopefully, at some point down the road, we'll have an insurance leads. So we're working on all of these things.

The capital formation around our businesses is going to be as we know, our stock is $9, book value is $12.30. The capital formation side will likely be more in the private capital business than it will be in the public markets at this point, just based on how poorly I think REIT stocks trade. But, it's safe to say, based on our ambitions and where we're headed, and I think the progress that we have made, that we will be a real global alternative asset manager by the end of the year.

Kevin Barker -- Piper Sandler -- Analyst

OK. And so, are there any specific points that we should look for the see that this really has legs, and we start to see like it really playing out? Is it S1 on the mortgage company or the closing of Sculptors or certain particular points that you're looking for, really say this is going to play out as expected?

Mike Nierenberg -- Chairman, President, and Chief Executive Officer

Sure. So I think Sculptor obviously is an important piece as we go into the asset -- grow our asset management business. I'd also say that we are an asset manager, we just operate under the wrapper of a REIT. Sculptor is very important in the asset management side, we're working on another what I would call sizable transformational transaction that we expect to get done by the end of the year as well.

And that gets you on the asset management business to where we want. On the mortgage company side, the cash flow that we get from that as a corporation, or at the Rithm level is you know awesome. So if you think about it, you look at earnings for the quarter where $0.42 or whatever it is plus $0.43 plus $0.15, for the excess, when I look at the mortgage company overall, and I look at our ROE, and I look at where we were minus the one timers, I think actual return on equity for the quarter is something around net-net 15%. Is that right? You know, on an annual basis, I think we're trending toward annual ROE of about 30%.

So, we're not looking to give up any of these assets because on a go forward basis in this rate environment, the mortgage company will help as well as all the other things that we have going probably contribute to something between $0.35 and $0.40 -- $0.45 run rate on our core business. We don't want to give that up, we just want to figure out a way to manufacture more capital at the cheapest basis, and then figure out how we can deploy that capital, in what I would call today's great investing environment. But overall, we're not giving up on the mortgage company, things that we're looking at are expenses, we're looking at retail, clearly, because that business really doesn't make any money right now, when you think about true volumes and cost to run that business. But overall, we're really happy with the asset that we have.

We just have to figure out a way to generate more capital because we think the investing environment is that good. That's why we're running around the globe, quite frankly, on our private capital business.

Kevin Barker -- Piper Sandler -- Analyst

Right. Thanks for all the color, Michael.

Mike Nierenberg -- Chairman, President, and Chief Executive Officer

Thanks, Kevin.

Operator

Thank you all very much. And with that we can -- and this concludes our question-and-answer session. I would like to turn the conference back over to Michael Nierenberg for any closing remarks. Please go ahead.

Mike Nierenberg -- Chairman, President, and Chief Executive Officer

Great. So thanks for dialing in everybody. Stay well and we look forward to updating you on more developments and as things change in our in our company. Have a great day.

Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Emma Bolla -- Chief Legal Officer

Mike Nierenberg -- Chairman, President, and Chief Executive Officer

Eric Hagen -- BTIG -- Analyst

Bose George -- Keefe, Bruyette and Woods -- Analyst

Nick Santoro -- Chief Financial Officer and Chief Accounting Officer

Kevin Barker -- Piper Sandler -- Analyst

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