Rithm Capital - Q1 2023
May 4, 2023
Transcript
Operator (participant)
Good morning, welcome to the Rithm Capital first quarter 2023 earnings conference call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star. Associate General Counsel, please go ahead.
Emma Bolla (Associate General Counsel)
Thank you. Good morning, everyone. I would like to thank you for joining us today for Rithm Capital's first 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. With that, I will turn the call over to Michael.
Michael Nierenberg (Chairman, CEO, and President)
Thanks, Emma. Good morning, everyone. Thanks for joining us. The first quarter for Rithm continued to show the earnings power of our company. That we would not fight the Fed, and that has proven to be a good strategy as book value is essentially unchanged away from a warrant exercise of 9.3 million shares during the quarter, which impacted book value by $0.23. Over the past two years, despite the Fed raising rates, we grew book value away from the warrant dilution by 12.3% while paying out $1 billion in dividends. Our operating businesses perform well across the board.
The challenges the regional banks are having, and have had, will create greater opportunities for all of our lending business lines, and we also see a huge pipeline of opportunities on both the asset side as well as in, as some potential M&A. I can't remember a period of time when we were working on so many different deals, and we're really excited about what's to come. Cash and liquidity sits in and around $1.5 billion, putting us in a great position to take advantage of the market dislocations we're seeing. We do expect plenty of assets to come out for sale into the marketplace as a result of some of the market dislocations. Our third-party fund business continues to be a major focus as we transition to growing our business as an alternative asset manager.
With that in mind, we are evaluating alternatives for our mortgage company and will likely file an S-1 in the coming month. This will allow us to create other pools. We believe that we will raise significant pools of capital here over the course of the next, you know, three to nine months, which will allow us to grow earnings even more in the near future. Regarding our stock price, I feel that we're extremely undervalued. There are not many investment managers that can point to a 10-year track record with core earnings approximately 13%-15% after paying out four and a half billion in dividends. It's time to see our share price reflect our performance. The notion that financial service companies with operating business lines trade below book or at book does not make sense to me.
To create what we have done in others is not easy. Finally, with the stock back, buyback in place, we will likely begin buying back shares over time. Obviously, we'll balance this versus other pipelines, other investments we have in our pipeline. I'm gonna start with page... I'll start with page 4 actually, the economic landscape. Obviously, with the Fed raising rates yesterday 25 basis points, again, we are not gonna fight the Fed here. With the market expectations that the Fed will lower rates, not have significant interest rate bets and continue to try to keep stable book and grow earnings for our company.
The stress in the banking system will likely continue and again, we do think this is gonna create good opportunities for us as we're gonna see more assets come out for sale to the marketplace. Page 5, earnings. GAAP net income for the quarter, $68.9 million or $0.14 per diluted share. Earnings available for distribution, also known as core earnings, $171.1 million, or $0.35 per diluted share. First quarter common dividend, $0.25. At the end of March, we're trading at a 12.5% dividend yield. Cash and liquidity at the end of the quarter, $1.6 billion. Total equity at the end of the quarter, $6.9 billion. Book value, again, $11.67. That reflects a $0.23 dilution from the impact of the warrant exercise.
Last quarter, just for reference, was $12. Essentially, if you think about it this way, $12 versus $11.90, despite all the volatility we saw in the markets, is a pretty good result for the company. Page 6, you know, the evolution of the company. We've expanded this slide a little bit just to show a little bit more detail. The team is very, very proud as when we are externally managed by Fortress. In 2013, we bought $4 billion of loans from SpringCastle. 2015, the HLSS transaction, which was really transformational for our company at that time. 2017, we still own Prosper. We bought, we own us and Soros and Third Point and Jefferies bought 35% of Prosper for $0.01 in exchange for buying some loans.
We're still in that deal. 2018, Shellpoint NewRez, that was an acquisition that created a fully licensed operating company. 2019, we bought Ditech out of bankruptcy as well as Guardian, which is our property pres business. 2021, we bought Caliber. 2021 and 2022. 2023, we launched our private credit business or private capital business, and we also launched Europe. Real growth, real strategic as we think about where we're, where we're headed with our business. Page 7, Rithm 2.0. I'll spend just a second on this. Operating companies, obviously, you can see to the left. Investment portfolio, what we currently have on our in our business today. When you add our private capital businesses, we continue to work hard and grow that.
We do have some big aspirations to take us to the next level in the alternative asset space. You know, the other thing just to point out when you look at where alternative asset managers trade versus REITs, that's another reason why we're pivoting to growing into an alternative asset manager. Page 9, our mortgage company. I have Baron here. When we get into Q&A, I'm sure Baron will answer some questions. Essentially, a very good quarter for the company. Everybody reports their earnings different in this space. I'd encourage you to have a look at the way that we report versus some of our other friends and peers out there. The origination segment down $11.7 million. That's really just March and February seasonality. I'm sorry, January and February from a seasonality perspective. March was break even.
We laid out our corporate expense, pre-tax income for the company for the quarter, $164 million. We also laid out our pre-tax around potential M&A or potential assets. There's plenty of activity going on. I think the look of the company today won't be the look of the company as we go forward down the road. Third party UPB, we've grown 18% since the beginning of 2022. There's a couple opportunities for us to continue to grow that, we will do that. Delinquencies remain extremely low, we continue to focus on customer retention, obviously reducing expenses, profitability, branding, and anything else that you'd wanna be when you, when you think about a very well-run consumer company. For other metrics, we still have lead service. We have three million customers in our portfolio.
Our total portfolio of MSRs as a company is $600 billion. During the quarter, we funded $7 billion of origination. Baron will talk to what we expect for the rest of the year. With the other slide, just the other point on the slide to take a look at is our GNA numbers, down 53% year-over-year and 12% quarter-over-quarter. Page 10, the origination side. Again, I'm not gonna spend a ton of time here. Once again, pursue any and all opportunities around what we think are gonna create 15%-20% IRRs for that business.
When we look at the funding and the channels, DTC is gonna remain relatively quiet as most of the MSRs that we have in our portfolio are low coupon MSRs. I believe our gross WAC is 3.8%. When you look at JV and retail, same as we get into the season for purchasing homes, that channel will grow. Correspondent and wholesale is really something that you control based on your pricing in the marketplace. Page 11. When we look at the mortgage company and compare that to Rithm as a whole, the mortgage company represents 75% of Rithm's full MSR portfolio. Newly originated MSRs for the quarter, 637. Again, most of the MSRs that we have in our portfolio are well out of the money.
Prepayment speeds are give or take four to five CPR. Page 12. When you look at multiples, our multiple right now is roughly 4.9. That includes all of our seasons. MSR is essentially roughly unchanged in the quarter, again, place. Page 13. Our commercial real estate business, GreenBarn Funding, we're starting to see opportunities across the board there. I like this slide when you think about where we were and where we are. We have a 25-person team, or so now dedicated to focus on opportunities in this space. When you look to the bottom from an investment strategy, we will be doing and are doing some direct lending on assets. We'll be focused on distressed asset strategies or acquiring distressed assets.
We're working with different developers around redevelopment and potential opportunities for equity. When we look at other platform investments, there's a huge need in that space for liquidity, both debt and equity. As you think about the maturity wall coming up where there's roughly a trillion and a half of loans that will mature over the next three years. We do think most loans will get extended. There'll be, you know, the B and C type properties will not. We think that's gonna create a great opportunity for our business as we go forward. Page 14, our Genesis business. We've diversified a lot there from where we were when we first acquired the company. We're adding more and more new sponsors. Some of these are gonna be more around the fix and leverage.
You're gonna see 20%-30% returns. We are gonna grow that business. We're looking at opportunities there with the regional banks, likely contracting from a credit perspective. This will create, again, greater opportunities for us to deploy capital in that space. Single family rental space, very, you know, essentially unchanged quarter-over-quarter. We are looking at a number of opportunities with different builders in the space. I think we're more likely to grow around larger asset acquisitions as well as through our builders that we have relationships where we lend to through the Genesis business. It's a very good business model. We still as an investment company, don't need to deploy capital at what I would say three, four or five cap rates.
We are looking for higher cap rates when we balance out how we deploy capital or invest capital. Finally, the last page, then we'll turn it over to Q&A. Servicer advances, essentially unchanged quarter-over-quarter. There's really not a lot to talk about there. You know, we'll keep our eyes out for down the road to the extent that delinquencies pick up in the space, so we need to deploy more capital for advances. Overall investment portfolio is performing extremely well. Delinquency is very low and, a good quarter for the cust-.
Operator (participant)
To ask a question, you may press star then one on the telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from the line of Bose George with KBW. Please go ahead.
Bose George (Analyst)
Hey, everyone. Good morning. Actually, can I get an update just on book value quarter to date?
Michael Nierenberg (Chairman, CEO, and President)
It's essentially unchanged, I think, from where we, where we ended, on Q1.
Bose George (Analyst)
Okay, great. Actually, can you remind me, are there any other warrants that can still be exercised?
Michael Nierenberg (Chairman, CEO, and President)
No, that's it. Fortress had some and Canyon had some. We had issued some warrants when we did our debt deal back in May of 2020, I think it was. Now they're all taken care of. Everything's been exercised.
Bose George (Analyst)
Okay, great. Then in terms of the MSR opportunity, are you looking more at agencies or at Ginnie Mae? Can you sort of characterize the difference in the returns there?
Michael Nierenberg (Chairman, CEO, and President)
It's probably more, less Ginnie Mae, I would say. It's on the PLS-.
Bose George (Analyst)
Return, right.
Michael Nierenberg (Chairman, CEO, and President)
Yeah. With some term financing or some of our MSR facilities that we currently have.
Bose George (Analyst)
Okay, great. Thanks.
Michael Nierenberg (Chairman, CEO, and President)
Thanks, Bose.
Operator (participant)
Thank you. Our next question is from the line of Eric Hagen with BTIG. Please go ahead.
Eric Hagen (Analyst)
Hey, thanks. Good morning. You know, we know that the origination market is slow, but curious how competitive you feel like you are with rates being volatile? You know, how competitive you feel like you can be if mortgage rates fall even more materially? Is there a channel that you feel like you're more competitive in when rates are volatile and how you think about positioning in those channels and so forth?
Michael Nierenberg (Chairman, CEO, and President)
Baron, why don't you to take that?
Baron Silverstein (President)
Yeah, I mean, the third party channels, I tell you, with some obviously Wells Fargo coming out of the market, that we have some pricing ability to gain some margin back. You know, we see is a lot more competition on just distributed retail, with just less inventory in the market overall. I just think it's gonna be kind of a cyclical aspect of where we can take market share on any one of the particular channels. We like the ability of to have, and maneuver between each one of the different channels.
Eric Hagen (Analyst)
You can support and how to really like, you know, unlock value from those strategies and opportunities. How much leverage do you feel like you can support and comfortably maintain across the business?
Michael Nierenberg (Chairman, CEO, and President)
Eric, in what? In the mortgage company or in just overall?
Eric Hagen (Analyst)
Just overall. As you layer in.
Michael Nierenberg (Chairman, CEO, and President)
Yeah.
Eric Hagen (Analyst)
the new opportunities. Yep.
Michael Nierenberg (Chairman, CEO, and President)
You know, everything that we'll do, I think will... I mean, we're raising pools of capital, more so on the equity side to deploy that capital. We're not here to over-lever the balance sheet. I think really where you look at front-end yields, right? You got funds at five to five and a quarter. When you look at front-end yields and where things are from a financing perspective, it's more likely to do things unlevered or through some kind of term.
Eric Hagen (Analyst)
That's great. Thanks for the detail. Appreciate it.
Operator (participant)
Thank you. Our next question is from the line of Doug Harter with Credit Suisse. Please go ahead.
Doug Harter (Analyst)
Thanks. Michael, as that one slide, kind of portrayed, you guys have been very opportunistic when there's been kind of turmoil in the market. You know, I guess, what opportunities are you seeing from kind of the stress in regional banks? You know, how do you think that, you're positioned to take advantage of that?
Michael Nierenberg (Chairman, CEO, and President)
Hey, Doug. When we look at the regional banks, the one thing I would say being in this business for, you know, 35 years, we don't like to prey on somebody's misfortune. You know, I think what you're seeing around some of the regional banks is most likely driven by a lot of hedge funds. Unfortunately, the, you know, an immature bank and some of the others. There's a lot of business lines, some that really cross over our business, i.e., the Genesis business. I think you'll see, you know, there's. You know, people make loans to local developers, people make loans to all kinds of folks.
When you look at our lending business, whether it be on the Genesis side, the commercial real estate side, and our, and the ability to do some direct lending, and even in, on the mortgage company side. I think those are gonna prove to be businesses that we could really start scaling up even more so. We like the Genesis business because the unlevered returns are roughly become. You're gonna start to see some consumer assets come out. We're working on a couple pools right now. The pipeline of stuff that we're looking at today and just separate MSRs for a second is some of the largest amounts of what I would call good investment opportunities we've seen in years and years.
Raising those pools of private capital, working with third parties around that, I think is gonna prove to be extremely valuable for shareholders. When you look at the mortgage space around, you know, people not making money in origination, you are seeing some selling of MSRs. This is away from what I would call the bigger, you know, the large commercial bank who announced they're getting out of the correspondent business. That's probably, unless they trade cheaper, less interesting to us than some of the M&A opportunities we may be able to pursue and then acquire assets as a result at what I would call attractive levels. I think it's gonna be broad-based. A lot of this stuff is gonna be around the lending business.
Doug Harter (Analyst)
Great. Then, in your prepared remarks, did you mention something about, you know, considering splitting out the mortgage business again?
Michael Nierenberg (Chairman, CEO, and President)
Our stock trades or how poorly our stock trades, I should say. I think for us, when I look at the, you know, the mortgage company and the business that's been created there, we'll likely explore, you know, there's no guarantee which way we're gonna take this thing. We're likely gonna file an S-1. We'll look at the possibility of creating a public entity out of it, which over time could allow us to really further diversify our business model.
Doug Harter (Analyst)
Great. Thank you, Michael.
Michael Nierenberg (Chairman, CEO, and President)
Thanks, Doug.
Operator (participant)
Thank you. Our next question is from the line of Giuliano Bologna with Compass Point. Please go ahead.
Giuliano Bologna (Analyst)
Thank you. Actually following up on that discussion about the mortgage company. I think last quarter, did you make a mention for over the past couple of quarters, kind of mentioned the, you know, the potential for having kind of a separate company out there. I'd be curious, when you think about this, the potential spin co structure, would you wanna move all the MSR assets over with it, or would you rather make a more of a capital-like vehicle out there? You know, and then kind of following up on that same topic, you know, you discussed wanting to have more of an asset manager structure. Could you, in a sense, spin that out and then collect that?
Michael Nierenberg (Chairman, CEO, and President)
Good question. The answer is yes. You know, we'd like to create a, you know, we'd like to be one of the, you know, larger players, this alternative asset space. I think it's likely that you'd have an asset manager below that. You'd have some operating companies, and obviously you'd have your funds business, similar to the more successful, you know, the larger players in the marketplace. Regarding the mortgage company, I mean, quite frankly, it's a little bit frustrating when we put up very consistent earnings quarter after quarter. Book value has grown, as I pointed out, by 12% or so, over the course of the past two years. Yet the, you know, where we trade relative to book is just simply too cheap.
We'll look at any and all opportunities to actually grow our share price. The one thing I would say is, being an investment manager, and I think I pointed this out earlier, we don't need to just buy another MSR to buy another MSR to maintain a servicing portfolio of X. If there's a better opportunity to deploy capital, we'll do that.
Giuliano Bologna (Analyst)
That's great. In terms of those are buying back preferred at a discount, obviously have, you know, yields in the teens. Then even kind of going down that same thread, your high yield notes with the kind of at the holding company level are trading pretty wide and at a discount. You know, it can be accretive to chip away at those in the public markets. Yeah. Reduce interest income and that creates some accretion. I'd be curious if you think about kind of how you think about your securities out there.
Michael Nierenberg (Chairman, CEO, and President)
I think I said in the opening remarks, we will likely pursue some kind of stock buyback or acquire shares as we go forward, assuming the stock continues to trade where it does. The one thing I would point out is, and not that misery likes company, but we're not alone in where, you know, our equity valuation is relative to other peers in the marketplace. The difference is, I think our book value has been stable to higher, where, you know, some other folks probably haven't had that same success. They may trade closer to book.
you know, growing book and then trading at a discount to book versus seeing your book value go down, you know, it's a little bit frustrating, but the short answer is.
Giuliano Bologna (Analyst)
Thank you.
Operator (participant)
Thank you. Our next question is from the line of Henry Coffey with Wedbush. Please go ahead.
Henry Coffey (Analyst)
Yes, good morning. I would just add, Michael, that we look at companies that have aren't earning their dividend, cutting their dividends, see lots of book value stress in companies that like yourselves, that are earning their dividends, that are not seeing a lot of book value stress. It's almost impossible to get the market to differentiate between that. It must be frustrating. The reality is, when we talk to our bank analyst, the banks don't seem yet willing to shed at least single-family and multifamily assets, which would look like some of the richest opportunities out there.
It sounds like you're hearing a slightly different tune, but it also sounds like you're looking at a diverse range of possibilities, not just real estate-related assets. Where the opportunities are coming from for you in sort of general terms?
Michael Nierenberg (Chairman, CEO, and President)
Good morning, Henry. I hope all is well. When we look at opportunities, the consumer space You know, what I would call very live opportunities for us over the next couple of weeks that we're looking at. You know, keep in mind as I went through our chronology of, of what I would call our early years of being born. You know, There was a large transaction around SpringCastle where we bought a large portfolio of consumer loans. If you look at the Prosper deal, as I pointed out, that we did with Soros and others, that was another very good transaction. The consumer stuff we know extremely well. And that'll be front and center here over the next couple of weeks.
I think the Genesis type loans that you see at some of the regional banks, again, those will be front and center for us as well. All of these things yielding, you know, with proper financing are in and around 15%-20% at least. We're really excited about those opportunities. On the mortgage company side, there's a couple, what I would call mortgage company-like things out there that we've that we've looked at over time. We'll continue to look at that. On the commercial real estate space during the quarter, you know, we put out, I think, something around $50 million of net dollars only. Getting more active there. I would say on the commercial side, it's we need to be really patient.
When loans go delinquent, banks don't hold on to delinquent loans, so those will come out over time. When you look at the regional side, you know, the banks are gonna pull back. There's a lot of assets out there. On the Signature side, you know, Newmark has been, I think it's Newmark, has been hired by the FDIC to sell assets there. You're gonna see plenty of opportunities to deploy capital. It could range from consumer to real estate to, you know, to residential side as well as on the commercial side. Realistically, anywhere where we think there's what I would call outsized opportunities for higher ROEs, you know, measuring appropriate risk returns, that's where we'll head.
Henry Coffey (Analyst)
Great. Well, thank you. This is where the new focus plays out and gives you lots of touchpoints. Thanks for that comment.
Michael Nierenberg (Chairman, CEO, and President)
Thanks, Henry.
Operator (participant)
Thank you. Our next question is from the line of Trevor Cranston with JMP Securities. Please go ahead.
Trevor Cranston (Analyst)
Hey, thanks. You talked about your ambitions on the raise, sort of maybe over the next two or three quarters, in that business and some general sort of color around, what kind of traction you've had so far in terms of raising funds. Thanks.
Michael Nierenberg (Chairman, CEO, and President)
Sure. We're out with a what I would call a multi-billion dollar fund right now around financial services, or it's called Rithm Asset Opportunities Fund. We have, you know, I would tell you that it's a huge focus of ours and mine. We've sat on a couple panels at some alternative asset conferences. I've been traveling, but I would tell you probably once a week. So I'm very hopeful that we're gonna have some good success. Some of the stuff that, you know, like anything else in life, it's a relationship business. As and as much as it's a relationship business, it's about past and future performance. Our performance numbers are very good. Our relationships are very good with what I would call our banks and other folks.
As we continue to develop more relationships with LPs and others around the world, I'm very, very hopeful and very optimistic that we're gonna be able to raise large pools of capital. Whose first close either... Some of this could be more specific to what I would call SMA specific strategies as well. I would hope we get a first close here in late Q2 or early Q3 for the fund.
Trevor Cranston (Analyst)
Got it. Okay. That's very helpful. Thank you.
Michael Nierenberg (Chairman, CEO, and President)
Thank you.
Operator (participant)
Thank you. This concludes our question and answer session. I would like to turn the conference back over to Michael Nierenberg, CEO, for closing remarks.
Michael Nierenberg (Chairman, CEO, and President)
Well, thanks for all your questions this morning. Look forward to hopefully another good quarter of performance and the growth of our business as we transition into other sectors that we're currently not deploying a lot of capital in. Look forward to updating you on the next call or over the quarter. Have a great day. Thanks, everyone.
Operator (participant)
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.