Rithm Capital Corp. (NYSE:RITM) Q4 2023 Earnings Call Transcript

Rithm Capital Corp. (NYSE:RITM) Q4 2023 Earnings Call Transcript February 7, 2024

Rithm Capital Corp. misses on earnings expectations. Reported EPS is $-0.00018 EPS, expectations were $0.35. Rithm Capital Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the Rithm Capital Fourth Quarter and Full Year 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instruction] After today’s presentation, there will be an opportunity to ask questions. [Operator Instruction] 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.

Emma Bolla: Thank you and good morning everyone. I would like to thank you for joining us today for Rithm Capital’s fourth quarter and full year 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.

Michael Nierenberg: Thanks, Emma. Good morning, everyone. Thanks for joining our call today. As we report our fourth quarter and full year earnings, another, what I would say a very solid quarter and a very good year consistent with earnings across all of our business lines. As we began 2023, we set out on a path to pivot our business to become more of an alternative asset manager, while maintaining the very same discipline that got us here in asset classes and the operating companies that we own. Book value year-over-year is essentially unchanged despite all the volatility we saw in the markets. There was a little bit of warrant dilution from some warrants that were issued back in 2020 and we distributed a little under $500 million to shareholders.

We continue to create solid earnings quarter-after-quarter and we did a couple of very strategic transactions, which put us in a position to, one, maintain earnings, and two, grow our alternative asset business. In the fourth quarter, we closed on Sculptor. We also announced the acquisition of a leading third-party servicer in SLS, which was acquired from Computershare. We expect that to close sometime here in the first quarter. As we look forward, the growth of our asset management business will be critical to the revaluing of our equity in our company and just the overall valuation of what we do here at Rithm. 2024 and beyond should be a very good investing year and the environments — in the current environment and as we look forward, we are extremely well-positioned to invest in all asset classes, whether that’d be real estate, I think, it’s important to note we have no legacy real estate, credit, structured products, equities, et cetera.

Anything in the financial services sector, we will have a hard look at. The results at both Rithm and the Sculptor companies in ’23 were excellent and the long-term performance in both the REIT and the asset management business put us in a position to be at the top of the pack. This should enable us to grow our credit and real estate businesses while prioritizing results for our LPs and shareholders. To be clear, results matter. This will always trump any growth aspirations we may have as a company. Our mortgage company continues to be best-in-class. We’re a top three or four non-bank mortgage company here in the US. Between Rithm and Newrez, our mortgage company, we have approximately $850 billion pro forma of mortgage servicing rights, which continue to provide great income and great cash flow for our investors.

As we look at the macro environment, yes, the Fed has been clear about their desire to lower rates. However, we don’t see that happening until inflation comes down a little bit closer to the Fed target of 2% and the data softens. Friday’s employment data as well as some of the other recent economic releases that we’ve seen should keep the Fed on hold for the March meeting. Regarding our positioning, we are close to home we have — as we have been in years, as we have hedges against all of our servicing assets. I will now refer to the supplement, which has been posted online. And we’re going to start on Page 3. Start of a new chapter. As we think about, again the repositioning of Rithm as a global alternative asset manager, couple of things to point out on this slide.

At the Rithm level, we have a $35 billion balance sheet, there’s $7 billion of book equity. We paid out $5 billion of dividends since the company was started in 2013. And our total shareholder return for 2023 was 43%. Sculptor, world-class asset management business $33 billion under management in verticals such as real estate, credit, multi-strat funds, and a large CLO business. The combination of the two businesses, or when you think about the different businesses and their performance on both has been — it puts us in a real position to continue to be a formidable player in the all space. Page 4, our financial highlights, 2023. Book value at the end of December was $11.90. Our GAAP net income, we had a loss of $88 million that’s attributable to a write-down of some of our MSR assets.

Earnings available for distribution $247 million or $0.51 per diluted share. Common dividend $0.25. At the end of ’23, we had $1.9 billion of cash and liquidity. And total equity of $7 billion at the Rithm level. For the full year, earnings, $533 million, or $1.10 per diluted share. Earnings available for distribution, $997 million or $2.06 per diluted share. Total economic return 7.2%. Return-on-equity 9.3% from a GAAP perspective and 17.4% for earnings after distribution. Book value was essentially unchanged. And again, this factors in warrants, dividends, et cetera. As we think about our new chapter, what are the dynamics that we’re seeing in the marketplace today and what are some of the things that we’ve done at the Rithm level. In July of last year or second quarter, Goldman announced they were pulling back on their Marcus business.

So we went out and we acquired $1.4 billion of consumer loans from Goldman Sachs. As we think about the banks continuing to retreat, Civic, which was a division of PacWest, we acquired a portfolio of residential transitional loans that were originated by Civic. We expanded our direct lending capabilities to our Genesis Capital business, which makes residential transitional loans to builders and developers throughout the United States. To grow our alternative asset management business, we acquired Sculptor. When we think about funding gaps, dislocated sectors like commercial real estate have a real need for gap capital and equity infusions not having legacy commercial real estate exposure, puts us in a very, very good place from a strategic standpoint.

Underfunded sectors, such as construction financing, provide great opportunities for our Genesis Capital business. As we think about capabilities, the acquisition of SLS, which is truly a third-party servicer helps us grow our fee-based business in the third-party servicing business and we’ll get to those slides in a little bit here. As we think about our performance and we’ll get into some of the numbers shortly. Both the Rithm business and the Sculptor funds had a very, very good 2023. As we think about partnerships, we want to extend our global reach with partnerships throughout the world to create capital solutions to help us deploy more capital and then co-invest alongside of our different business lines that we have here at both the Rithm and the Sculptor levels.

Page 6, Sculptor. $33 billion of AUM under management if you look across the different verticals, large credit business, large real estate business and a great multi-strat fund. And we’ll talk about that shortly. When you look at the clients, 70% of the clients have been partners for over a decade. We’ve deployed, at the Sculptor level $200 billion of capital in credit investments. 70% of the AUM is longer duration. The investment leaders in the business fit over greater than 15 years at Sculptor and then we have one team, one incentive structure, and we want to operate as a team and be really transparent with our LPs and shareholders. Page 7, 2023 performance and looking back. The credit funds, there’s two credit funds. The Tactical Credit Fund net 17.9%, the Credit Opportunities Fund 8.6%, great performance and what I would call a volatile year.

The multi-strat fund was up 12.8% net, that is an — one of the industry leaders in the multi-strat business. On the real estate side, Life-to-Date performance, Real Estate Fund III, 20% net, Real Estate Fund I, 12.6% net. And then, if you look to the right, the performance. since inception, the Tactical Credit Fund was up 10.9% net. The Credit Opportunities Fund 8.8%, very good returns, and then the multi-strat is 10.6%. So overall, as I pointed out in my opening remarks, we’re going to lead with performance and then we’re going to build AUM around performance and hopefully grow our business with strategic LPs and partners throughout the world. As we think about the Rithm approach on Page 8, opportunity, innovation and partnership. I know these are buzzwords.

We expect our private credit — private capital business to continue to grow as there’s a number of sectors that have needs for funding and we see banks pulling back in different areas. Innovation, we’ve been very much on the forefront of creating innovation. Keep in mind, Rithm, which was formerly known as New Residential, was born out of a commercial REIT at Fortress back in 2013. Started out as a — as an MSR-only REIT, and then we’ve grown into this full scale operating business where we have obviously an asset manager. We have the large REIT, and then we have our operating companies as well. And then partnership track records matter. We all know that, and that’s something we’re very, very focused on. Baron’s here, I’m going to let Baron talk about the mortgage company and we’ll take those slides out at — on Page 9.

Baron Silverstein: All right. Good morning. Just turning to Slide 9 and the focus really is that we had a very good year with industry-leading ROE at 19%. We view our platform as a differentiated platform and really structured to continue to succeed in 2024, right? Our Q4 results that you see on the chart on the right there is the servicing segment had $210 million of income in Q4 ’23. Obviously, Michael talked a little bit about his gap mark to market on the MSRs of $296 million. And originations, we have as kind of a baseline basically running the origination business on a breakeven, which we were able to do for all of 2023. Our strategic advantage really is our servicing platform and I’ll go a little bit more on that on the next slide.

But we also really very much differentiate ourselves with the origination model and being in all four of the different channels that you see there, retail, wholesale, correspondent, DTC and our partnership channel, we feel like we’re positioned to growth going into ’24 and going forward. Turning to Slide 10. All right, when we benchmark our servicing platform, you see on the chart on the bottom left is really how we view our growth, right? So we’ve had a 39% CAGR over the last six years. And when you include also what we’re looking at for the acquisition of the SLS servicing business that Michael talked about are — we are almost doubling our third-party fee-based income, which is going from $111 billion at the end of the fourth quarter to $196 billion on a pro forma basis.

And Michael talked that we’re anticipating to close the SLS deal in the first quarter of ’24. There are a lot of continued opportunities for us on the servicing sector and whether that’s to grow MSRs or even to look at third-party servicing market share either on an acquisition basis or on an organic basis, so we continue to grow with our existing counterparties. Turning to Slide 11, which is really just a brief overview of our origination platform. We remain in the retail business. We like the retail business, and we’re focused on looking at our retail business as it continues to align to Newrez overall from a strategic perspective. And our focus really there is to think about our servicing portfolio. The retail business has been excellent at recapture with their relationships with their customers.

And then how do we marry our retail platform and our distributed retail sales leaders to our servicing portfolio across the entire business. Our correspondent platform, cost effective customer and MSR acquisition channel, I would tell you that, we believe that we’re best-in-class in how we position our business and we’re continuing to expand our business into different asset classes as we go downstream with our customers and our growth into co-issue is going to begin in the first quarter of 2024. Our wholesale platform is really focused on alternative products and then a partnership with Rithm in our non-agency products, including closed-end seconds and non-QM. Our Consumer Direct, our centralized sales force as we continue to basically grow out our platform and utilize that as defensive strategy across the entire business.

And last is really our joint venture platform. As we do strategic partnerships with different fintechs, brokerage companies and different builder partnerships as we can continue to drive relationships and grow our origination business across the entire platform. Last thing to really just talk about is on AI on Slide 12. Certainly, it’s been a focus for the entire business for the mortgage industry. And I do agree that it is going to revolutionize the mortgage industry. We made an announcement yesterday as a strategic partnership with Microsoft. And really what it talks about is just implementing self-service tools for our employees. And with respect to policies, procedures, guidelines, and data. And then that way, our employees, salespeople or processing, our operations teams can really just focus on their customers and servicing our customers at all times.

Our view on AI across the Board is it’s going to have significant benefits for our platform as we continue to evaluate different ways to better serve our customers, but also become more efficient across the entire operating business. So on that, I’ll turn it back to Mike.

Michael Nierenberg: Thanks, Baron. So just a couple of more slides just to get through and then we’ll go to Q&A. Just a couple of minutes on the Genesis business or a minute on the Genesis business. Genesis Capital is a business we acquired from Goldman back in 2021. They make loans to builders and developers, they’re all typically first lien mortgages. Attachment points are anywhere from 65% to 70% LTVs. Coupon rates can range anywhere from SOFR plus kind of 400 to 700. So when you look at the portfolio on an unlevered basis, the coupons on these underlying loans are anywhere from, call it, 8%, 9%, 10% up — all the way up to 12%. There’s points going in and points going out. I bring this up because it’s a great direct lending business.

And when you think about where we’re going to go in the alt space and think about the potential to grow in the direct lending space, whether it be in this business or other business lines, I think this is a good example of something that we feel we’re a good market leader in. The business itself will do something close to $2.5 billion, we think, in ’24. It’s been a very good business for us. Banks continue to retreat in that space. And from an overall income standpoint and ROE, it’s been a good business and we expect to grow that over time. The last slide I’ll talk about, it’s just our single-family rental business. We have about 4,200 homes pretty consistent with where we were at the end of Q3. We have about $1 billion on homes, $200 million in capital.

We are very small in the context of this arena. We intend to grow this through private funds that will be like — if you think of it almost like a public-private partnership with Rithm, the public company. The reason we haven’t scaled up more so in the past couple of years is because we thought rates were going to go up and they did go up. Cap rates we thought needed to go higher and they are higher. So when we look at the opportunity today, we think the opportunities are going to be some — are going to be more likely in the Build to Rent space as is clearly a shortage of housing here in the US. And we expect to hopefully deploy large pools of capital and partner with different builders throughout the US over the course of the next couple of years as we continue to create capital for this business.

After that, if you look at the segment performance, you can have a look at that separately. And now we’ll turn it back to the operator for Q&A.

Operator: We will now begin the question-and-answer session. [Operator Instruction] At this time, we will pause momentarily to assemble our roster. The first question comes from Bose George with KBW. Please go ahead.

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Q&A Session

Bose George: Hey, everyone, good morning. Can you talk about your excess capital position, including sort of pro forma for the SLS acquisition?

Michael Nierenberg: Current cash on hand, we announced at the end of Q4 were roughly $1.9 billion. Today, I think our cash and liquidity is something about $1.7 billion and so that’s kind of where we stand. We expect the SLS acquisition to fund most likely in early March.

Nick Santoro: Yes. And post-SLS acquisition, we expect us to be at around $1.3 billion and $1.4 billion of liquidity, Bose.

Bose George: Okay. I mean is there a good way to think of sort of cash available for deployment versus — because obviously, you have to keep a certain level of liquidity at all times. So just as things come up, like how much capital do you have available for deployment post that acquisition?

Michael Nierenberg: Yeah, it’s probably $400 million, Bose. One of the things that we set out over the quarter of the past couple of years is to carry excess cash and liquidity during our balance sheet. We’ve done that. We really haven’t hit the capital markets since 2020. Clearly, we’re monitoring some — in the mortgage company, well for example, some of the peers that have been out there raising capital in the high-yield markets. So we’ll continue to evaluate all sources of capital. And then also keep in mind, as we grow our alt space, the teams are on the road and having discussions with various LPs and — around capital formation. So I think you could expect 2024 to be a year of some capital formation at the Rithm level as well as at some of the other operating companies as well as Sculptor.

Bose George: Okay. Great. Thanks. Actually, another quick one. Just what is the final goodwill number for Sculptor?

Michael Nierenberg: Goodwill and intangibles, approximately $325 million.

Bose George: 325 million. Okay, great. Thanks.

Michael Nierenberg: You bet. Thanks, Bose.

Operator: The next question comes from Eric Hagen with BTIG. Please go ahead.

Eric Hagen: Hey, good morning. Hope you’re doing well. Couple of questions around recapture and the portfolio. Just as a big correspondent letter, I mean, how effective do you expect to be with recapture in that channel including the MSRs that you bought from SLS, is there sort of a recapture estimate that you’re using as you bring that on board?

Michael Nierenberg: I’ll let Baron take it in a sec. I think when you look at the recapture business of whether it’d be us or anybody else in the marketplace, you have to look at apples-to-apples. 99% of our portfolios added the money including the SLS stuff from a recapture standpoint or added the money from a refinancing standpoint, I should say. When you think historically in the mortgage business, refi recapture depending upon the product type, Ginnie Mae or a HUD type loans are typically easier because those are easier to refinance or recapture, and you’ve seen that with some of our peers in the marketplace over the years. So those numbers are going to be higher. On Fannie Freddie products, typically, those recapture numbers are a little bit lower.

The cohort of recapture today are significantly added the money just based on where rates were and where they are now. So when we think about recapture, I think you could assume that our refi recapture numbers are going to be north of 50% and I think purchase recapture is a much more difficult thing. It’s something that we continue to work on. Huge — we have a huge group of folks in our data business as well as the servicing folks are working with the origination folks. But I think overall, you’re going to see refi recapture in a normalized market, probably with a six handle would be my guess. And I think that’s consistent with where the industry has been and knowing that because we helped form some of these companies in my prior life, in our prior life.

And I think you’ll see on the Ginnie Mae product higher numbers. Baron, I don’t know if there’s anything you want to add there.

Baron Silverstein: No. That’s right.

Eric Hagen: Okay, great. Hey, you mentioned some unsecured debt being raised in the sector and possibly looking into some unsecured yourself. Maybe you can flesh out how you think about your appetite there? And do you feel like the capital that’s being raised by some of the other services will drive kind of change the competitive dynamic in the market in any way?

Michael Nierenberg: Yeah. I’m not — I think we all do what we do. We’re all respectful of each other. We’ve been — the — whether it be Cooper, whether it be Penny and some of the other folks who’ve all been at it a long time. When we look at the high-yield market and we look at where we’re financed, SOFR today is 5.25, 5.5. So if you think about your MSR financing, let’s assume it’s whatever, 250 to 300 over. So that’s give or take, 8%. If we could issue a high-yield unsecured debt in the public markets, we’re going to explore that heavily. So the short answer to your question is we’re hungry.

Eric Hagen: Got it. Thank you guys very much.

Michael Nierenberg: Thanks, Eric.

Operator: The next question comes from Doug Harter with UBS. Please go ahead.

Douglas Harter: Thanks. Michael, you said that you’re kind of closer to home on hedging for MSRs, obviously it’s been continued to be volatile in rates. If you could just give us a little update as to kind of when you added those hedges and kind of how they performed in the first quarter?

Michael Nierenberg: Sure. So I think if you look at Q4, the 10-year close, I think, at like 388 or 389, something like that. So you had a massive rally between Q3 and Q4. Our GAAP results reflected our write-down of our MSR book which was significantly higher than the $88 million that we reported in kind of the GAAP loss. So it’s really an MSR mark. When I look at — when you think about that, that $88 million versus I think the total mark we took it down was 280 or something like that, which I think is probably a little bit higher than others in the industry, that 280 million versus the 88 shows you that when we look at the broad scale of our business, we have a lot of other assets from a duration perspective that we’re longer.

When you look at Q1, and Nick, you should just — if you could dust out what we think the P&L is as of now. When we look at Q1 from a hedging perspective, we have rates, we have mortgages that are hedging out our MSR book. As — and when I — what I said in my opening remarks, whereas as close to home as we’ve been in a few years. That is because we have billions and billions of dollars of hedges versus our MSR asset. For the quarter, you could assume and this reflects the hedges. Book value is probably where we are now is north of $12 a share. So that reflects the gains that you’re going to see in both the MSR book as well as what we’re seeing in our hedges.

Douglas Harter: Great. And I guess, would your expectation be to kind of still try to — from this point, try to run pretty close to home or given the move in rates, do you adjust that? Kind of how are you thinking about rate risk at this point?

Michael Nierenberg: I think what I would say from a market perspective, I thought the past — or we felt, the past couple of years from an overall market standpoint, listening to the Fed was why we were set up to be on the short side. Listening to the Fed now, there’s — obviously, there’s a ton of Fed speak about their desire to lower rates, even though when you look at the economy or you go out for dinner here in New York City or anywhere else, things feel pretty good. When you look at the probability rate cuts, we think March is off the table barring some unforeseen geopolitical event or something else. June right now, when you look at the probability of a rate cut is at 90%. So we’re not going to fight the Fed. We will be closer to home, everywhere from a duration standpoint because, again, we won’t fight the Fed, and we think from an edge standpoint, you’re going to see a lot more volatility in the markets this year than — or going into the end of Q4 as well as into this year versus what we’ve seen in the past couple of years.

Past couple of years, it was straight up. Now it’s a little bit harder to predict. So we’re going to be close to home.

Douglas Harter: Great. Thank you, Mike.

Michael Nierenberg: Thanks, Doug.

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

Kevin Barker: Great. Thanks for taking my questions. Just regards to the new segment information. Are you viewing these four segments as basically the way you’re going to manage the business on a go-forward basis? Or do you see some of the different segments interacting with each other whether it’s asset management, handling the investment portfolio or handling the mortgage loans receivable? How should we think about Rithm as a whole, just given these different segments going forward? Thanks.

Nick Santoro: Hey, Kevin. Well, first, thank you for noticing the new segment. And the answer to your question is yes. It’s the way we anticipate managing the business on a go-forward basis. So as you have noticed, we have it set up, mortgage company, Genesis business, asset management business and the investment portfolio that sits at the REIT. To answer your second question, we do envision some asset management activity occurring between the segment as we move forward.

Kevin Barker: And so when you — moving forward, right, there could be different structures, whether it’s a REIT, the asset management business or a C-Corp within this. How do you envision that playing out? And can you give any updates on timing and how you think about structurally Rithm and what it looks like, whether it’s six or 12 months down the road? Thanks.