Rithm Capital - Q4 2023
February 7, 2024
Transcript
Operator (participant)
Good morning, and welcome to the Rithm Capital Q4 and Full Year 2023 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero on your telephone keypad. 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 then two. 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 Hoelke (Deputy General Counsel, Corp. and Securities)
Thank you, and good morning, everyone. I would like to thank you for joining us today for Rithm Capital's Q4 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. With that, I will turn the call over to Michael.
Michael Nierenberg (Chairman, CEO and President)
Thanks, Emma. Good morning, everyone. Thanks for joining our call today. As we report our Q4 and Full Year Earnings, another, what I would say, 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 continued 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 Q4, 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 Q1. 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.
The environment, in the current environment, and as we look forward, we are extremely well-positioned to invest in all asset classes, whether that 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 2023 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, you know, three or four non-bank mortgage company here in the U.S. 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 gonna start on page three. Sort of a new chapter as we think about, again, the repositioning of Rithm as a global alternative asset manager. A 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, we've 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 the performance on both, has been, puts us in a real position to continue to be a formidable player in the alt space. Page four, 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 our 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 twenty-three, 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, what are the dynamics that we're seeing in the marketplace today, and what are some of the things that we've done at, at the Rithm level? In July of last year or, or Q2, Goldman announced they were pulling back on, their, their markets 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 through 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 six, 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. 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, 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 in what I would call a very volatile year. The Multi-Strat Fund was up 12.8% net. That is one of the industry leaders in the multi-strat business. On the real estate side, life to date performance, Real Estate Fund Three, 20% net, Real Estate Fund One, 12.6% net. And then if you look to the right, the performance since inception, the Tactical Credit Fund is 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 gonna lead with performance, and then we're gonna build the AUM around performance and, and hopefully grow our business with strategic LPs and partners throughout the world.
As we think about the Rithm approach on page eight, 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, you know, 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 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 is here. I'm gonna let Baron talk about the mortgage company and we'll take those slides out on page nine.
Baron Silverstein (President)
All right. Good morning. Just turning to slide 9, you know, and the focus really is that we had a very good year with industry-leading ROE at 19%. You know, 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 2023. Obviously, Michael talked a little bit about his GAAP mark to market on the MSRs of $296. And originations, you know, we have as kind of a baseline, you know, and basically running the origination business on a break even, 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 2024 and going forward. Turning to slide ten, 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.
When you include also what we're looking at for the acquisition of the SLS servicing business that Michael talked about, we are almost doubling our third-party fee-based income, which is going from $111 billion at the end of the Q4 to $196 billion on a pro forma basis. Michael talked that we're anticipating to close the SLS deal in the Q1 of 2024. 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, you know, either on a acquisition basis or on an organic basis, we continue to grow with our existing counterparts. Turning to slide 11, which is really just a brief overview of our origination platform. You know, 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. You know, and our focus really there is to think about our servicing portfolio. The retail business has been excellent at recapture with the 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. 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 gonna begin in the Q1 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 a 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.
Really what it talks about is just implementing self-service tools for our employees and, you know, with respect to policies, procedures, guidelines, and data. Then that way, our employees, salespeople, our processing, and our operations teams can really just focus on their customers and servicing our customers at all times. You know, our view on AI across the board is it's gonna 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. On that, I'll turn it back to Mike.
Michael Nierenberg (Chairman, CEO and President)
Thanks, Baron. So just a couple, a couple more slides just to get through, and then, and then we'll go through Q&A. Just a couple 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 what? Builders and developers. They're all typically first-lien mortgages. Attachment points are anywhere from 65-70 LTVs. Coupon rates can range anywhere from SOFR plus kind of 400-700. So when you look at the portfolio on an unlevered basis, the coupons on these underlying loans are anywhere from, call it, you know, 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 we think about where we're gonna 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, you know, close to $2.5 billion, we think, in 2024. 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 is 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 of homes, $200 million in capital. We are very small in the context of this arena. We intend to grow this through private funds. That'll be like a... 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 years is because we thought rates were gonna 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 gonna be more likely in the build-to-rent space, as there's clearly a shortage of housing here in the U.S., and we expect to hopefully deploy large pools of capital and partner with different builders throughout the U.S., over the course of the next couple years as we continue to create capital for this business. After that, you know, 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 (participant)
We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. Once again, it is star, then one to ask a question. At this time, we will pause momentarily to assemble our roster. The first question comes from Bose George with KBW. Please go ahead.
Bose George (Managing Director and Senior Equity Research Analyst)
Hey, everyone. Good morning. Can you talk about your excess capital position, including sort of pro forma for the SLS acquisition?
Michael Nierenberg (Chairman, CEO and President)
Current cash on hand, you know, we announced at the end of Q4, we 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.
Baron Silverstein (President)
Yes. And post SLS acquisition, we expect us to be at around $1.3 billion-$1.4 billion of liquidity post.
Bose George (Managing Director and Senior Equity Research Analyst)
Okay. I mean, is there a good way to think of that as sort of cash available for deployment versus, you know, because obviously you have to keep a certain level of liquidity at all times? So just, you know, it's as things come up, like how much capital do you have available for deployment post that acquisition?
Michael Nierenberg (Chairman, CEO and President)
Yeah, it's approximately $400 million, Bose. You know, one of the things that we set out over the course of the past couple of years is to carry excess cash and liquidity on our balance sheet, and we've done that. We really haven't hit the capital markets since 2020. Clearly, we're monitoring some, you know, in the mortgage company world, for example, some of the peers that have been out there raising capital in the high yield markets. So we'll continue to, you know, evaluate all sources of capital. And then also keep in mind, you know, as we grow our alt space, the teams are on the road, you know, 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, you know, at the Rithm level, as well as at some of the other operating companies, as well as Sculptor.
Bose George (Managing Director and Senior Equity Research Analyst)
Okay, great. Thanks. Actually, another quick one. Just what was the final goodwill number for Sculptor?
Baron Silverstein (President)
Goodwill and intangibles, approximately $325 million.
Bose George (Managing Director and Senior Equity Research Analyst)
325. Okay, great. Thanks.
Michael Nierenberg (Chairman, CEO and President)
Thanks, Bose.
Operator (participant)
The next question comes from Eric Hagen with BTIG. Please go ahead.
Eric Hagen (Managing Director)
Hey, good morning. Hope you're doing well. Couple questions around recapture in the portfolio. You know, just as a big correspondent lender, 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 (Chairman, CEO and President)
I'll let Baron take it in a sec. I think, you know, when you look at the recapture business, of whether it be us or anybody else in the marketplace, you have to look at apples to apples. 99% of our portfolio is out of the money, including the SLS stuff, from a recapture standpoint, or out of 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 HUD-type loans are typically easier because there's 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 gonna be higher. On the Fannie Freddie products, typically, those recapture numbers are a little bit lower.
The cohorts of recapture today are significantly out of 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 gonna be north of 50%. And I think, you know, purchase recapture is a much more difficult thing. It's something that we continue to work on. You know, 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 gonna see refi recapture in a normalized market, probably with a six handle, would be my guess.
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 products higher numbers. Baron, I don't know if there's anything you want to add there?
Baron Silverstein (President)
No, that's, that's right.
Eric Hagen (Managing Director)
Okay, great. Hey, you, 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, you know, your appetite there. And do you feel like the capital that's being raised by some of the other servicers will drive, you know, kind of change the competitive dynamic in the market in any way?
Michael Nierenberg (Chairman, CEO and President)
Yeah, I'm not, you know, I think we all do what we do. You know, we're all respectful of each other. We've been, we, you know, whether it be Cooper, whether it be Penny, and some of the other folks, we've all been at it a long time. When we look at the high yield market, and we look at where we're financed, so for today, it's 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 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.
Nick Santoro (CFO and Chief Accounting Officer)
Got it. Thank you, guys, very much.
Michael Nierenberg (Chairman, CEO and President)
Thanks, Eric.
Operator (participant)
The next question comes from Doug Harter with UBS. Please go ahead.
Douglas Harter (Equity Research Analyst)
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, you know, give us a little update as to kind of when you added those hedges and kind of how they've performed in the Q1?
Michael Nierenberg (Chairman, CEO and President)
Sure. So I think if you look at Q4, the tenure closed, I think, at like 3.88 or 3.89, something like that. So you had a massive rally between Q3 and Q4. Our GAAP result reflected our, our write-down of our MSR book, which was significantly higher than the $88 million that we reported in, in kind of the GAAP loss. So it's really an MSR mark. 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 versus the $88 million 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 were longer.
When you look at Q1, and Nick, you should just if you could just dust off 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 you know, and when I said in my opening remarks, we're 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, you know, where we are now is north of $12 a share. So that reflects the gains that you're gonna see in both the MSR book as well as what we're seeing in our hedges.
Douglas Harter (Equity Research Analyst)
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, you know, given the moving rates, do you adjust that? You know, kind of how are you thinking about rate risk at this point?
Michael Nierenberg (Chairman, CEO and President)
I think, yeah, what I would say from a market perspective, I thought the past or we felt the past couple of years from a overall market standpoint, you know, 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 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 gonna 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 know, you're gonna 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 gonna be close to home.
Douglas Harter (Equity Research Analyst)
Great. Thank you, Michael.
Michael Nierenberg (Chairman, CEO and President)
Thanks, Doug.
Operator (participant)
The next question comes from Kevin Barker with Piper Sandler. Please go ahead.
Kevin Barker (Managing Director)
Great. Thanks for taking my questions. Just in 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, you know, asset management handling the investment portfolio, or handling the mortgage loans receivable? How should we think about, you know, Rithm as a whole, just given these different segments going forward? Thanks.
Nick Santoro (CFO and Chief Accounting Officer)
Hey, Kevin. Well, first, thank you for noticing the new segments. And, the answer to your question is yes. It's the way we anticipate managing the business on a go-forward basis. So if you, 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 segments as we move forward.
Kevin Barker (Managing Director)
So 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? You know, and, and can you give any updates on timing, and how do you think about structurally, Rithm and what it looks like, whether it's six or 12 months down the road? Thanks.
Michael Nierenberg (Chairman, CEO and President)
Hey, Kevin. You know, it's gonna... I think, not that I think, I know, our business will continue to evolve. We closed Sculptor at the end of... I think at the end of November, we wanna simplify our story and our structure, and that's why I think Nick created these different columns or verticals, you know, in our financial reporting. Sculptor, you know, there's obviously a huge desire, one, to put up great results, number two, to grow AUM. That is gonna be our asset management business. The REIT itself currently sits as a REIT.
What you could expect from us over time, and I think we've been pretty vocal about that, to become, I think, a world-class asset manager, we need to continue to simplify our story, we need to raise funds. The REIT's gonna be the REIT, and it's no different than some of the larger players in the marketplace, whether it be Blackstone or Ares or folks like that. I do think, you know, when we look at our pipeline of opportunity in everything that we do, things are gonna continue to change, for sure. And our sole... not our sole goal, but our goal is to grow our asset management business and the fees associated with that, because that's gonna drive a higher terminal value on our underlying business.
But again, we need to lead with performance, and one of the reasons I wanted to highlight, in our deck, the performance, both at the Sculptor level and the Rithm level, because the results are terrific, and we have, you know, what I would call really good investment professionals across both platforms. Things could come together over time, but, you know, for now, it's onward and upwards. So things will change, but, I think you could assume that we'll be something closer to, you know, we're not gonna be Blackstone, obviously, but to a Blackstone-type structure or an Ares-type structure.
Kevin Barker (Managing Director)
Okay, thank you for all that detail. And then just to follow up with Baron, you know, there's quite a bit of momentum on growing servicing fee revenue. Obviously, there's a lot of headwinds on the mortgage side, but as you move forward to 2024, do you anticipate, you know, mortgage origination revenue to have a greater share of the overall revenue mix, just given maybe a little bit of pickup in origination volume? Or do you anticipate, you know, servicing revenue to continue to be the main driver? Thank you.
Baron Silverstein (President)
I mean, going into 2024, I think stability in rates is a benefit, right, across the board. There is the lock-in effect for consumers that have those low interest rates, right? I use this term. So for them to sell a home today, you know, is more challenging, you know, from an affordability perspective. But we expect more activity in the mortgage sector. I do think it's going to be slower than maybe what certain people hope, but I do believe that 2024 is definitely gonna be a better year from mortgage production, you know, overall. You know, our focus is certainly ongoing from, you know, expense reduction across the board, you know, certainly on the origination side, but also on the servicing side, to make sure that we run as efficient as possible.
I talked a little bit about AI as well, but you know, we still look at the business very opportunistically across each one of our different verticals, the different channels, you know, from an opportunistic perspective and, you know, even from the servicing perspective that Michael talked about. But I do think that you're gonna see a better year in originations in 2024.
Michael Nierenberg (Chairman, CEO and President)
Yeah, and we're, and we're starting to see that now, right?
Baron Silverstein (President)
That's right.
Michael Nierenberg (Chairman, CEO and President)
I think-
Baron Silverstein (President)
Q1 came in-
Michael Nierenberg (Chairman, CEO and President)
Yeah
Baron Silverstein (President)
... already better than, you know, certainly better than December. I was not surprised, but, you know, we're certainly seeing momentum coming into, you know, the months as we get closer to spring.
Michael Nierenberg (Chairman, CEO and President)
And the other thing, Kevin, is, you know, when you look at the platform on all the different origination businesses, for example, we just, you know, we just made some strategic changes in the retail platform, taking expenses out and trying to align that business with the goals of the company, which quite frankly, is profitability. The other thing is, you know, there's obviously the variability on the way you produce your MSRs and how you think about gain on sale there. So, you know, there are levers that you could pull that would obviously drive higher earnings, you know, in the origination segment versus low earnings in the servicing segment.
Kevin Barker (Managing Director)
Great. Thank you for all that color. Appreciate it.
Michael Nierenberg (Chairman, CEO and President)
Thanks.
Operator (participant)
The next question comes from Stephen Laws with Raymond James. Please go ahead.
Stephen Laws (Managing Director and Head of Real Estate Finance)
Hi, good morning. Michael, you know, I wanted to talk about, you know, growth, organic versus, you know, additional acquisitions, specifically with, you know, Sculptor or, or excuse me, asset management business as well as maybe the retail channel. You know, do you, you know, I saw Sculptor, I think, is out raising, I believe, a $6 billion fund for CRE. You know, do you have any targets on AUM growth as far as organically, would you look at adding, you know, maybe smaller asset managers and complementing what you've already got in place? And same with retail. Seems like, I believe market share maybe made June 19th, but attractive margins there and some compelling pieces of that business. Is that something you may look to acquire as well?
Michael Nierenberg (Chairman, CEO and President)
So first, on the Sculptor side, yeah, you know, everybody's out meeting with clients and LPs around the platform, which is wonderful. The real estate guys have a fund. They're out marketing, you know, it's, I believe it's, you know, something around a $3 billion fund that could grow over time. The credit businesses continue to grow, look to grow the funds there. You're not gonna grow—I mean, the noise is gone, right? So we're moving forward. Whatever was in the past at the organization is out, gone, moving forward. So I'm—we're highly confident and really excited about the prospects of growing AUM, but more, you know, more on the FRE side. But you have to lead with performance.
So, what I said in the opening remarks, and this goes for any one of the businesses that we have, where we are fiduciaries of capital, whether it be LPs or public shareholders, first and foremost, we need to drive good earnings there and good returns. And when you look at '23 and looking prior to that, both at the Sculptor level as well as at the Rithm level, we've delivered there. So that's gonna help us grow AUM. I don't have a specific target. I'd love to tell you it's, you know, you hear, you know, the bigger players talk about how much dry powder and how big their AUM is. Yeah, we'd like to, we'd like to be there. We're just not right now. But I think over time, we're gonna grow those businesses.
We could grow strategically through some acquisitions, which we look at acquisitions, I would say, every single day. So I think you could expect more acquisitions as we go forward in the asset management space. You know, the teams we currently have in place are world-class. If you look at the, you know, the results at the asset management level, and here at the Rithm level, you know, I'd put us up against anybody, candidly, and this is not being disparaging against anyone. When you look at the retail side, you know, retail is a hard business. We, you know, we've taken some pretty aggressive measures here beginning of the year to align the production side with proper P&L that we expect out of the business.
When you look at the overall business with SLS, the third-party business, as well as what we have here between both the Rithm level and the Newrez level, I think, including excess MSRs that we have, I think we have something about $850 billion or some number like that of MSRs. So we have a lot of customers that we should be able to drive origination volumes through. If something was a giveaway from re-on the retail side that we thought we could actually make money with, we'd have a hard look at it. But I think now we're pretty happy where we are. We are actively recruiting salespeople because we do think mortgage origination will pick up over time.
Stephen Laws (Managing Director and Head of Real Estate Finance)
Great. And one follow-up. You know, given the Sculptor acquisition closed and we've got SLS closing likely this quarter, you know, can you talk about the expense side? You know, any synergies you think can work out as we move through the year? Do you feel like the operating expenses are pretty accurate or, sorry, steady state as we move forward? Kind of talk about potential there to drive some higher ROEs. Thanks.
Michael Nierenberg (Chairman, CEO and President)
On the SLS side, we haven't closed yet, so what I would say is there's gonna be significant synergies and saves, I think, around that line of business. We're looking at other platforms that I think are gonna be able to add revenue to the business and same. Those should, if you know, if we're successful, that will add additional synergies and create more expense saves. At the Sculptor level, you know, Sculptor is its own thing from an asset management standpoint. It's, you know, as we go forward and we can create synergies between, for example, shared services. You know, when I look at the Fortress model, and that's where we came from, we had a good shared service model, and I think we'll continue to look at things around that.
The investment teams, though, are gonna be the investment teams.
Stephen Laws (Managing Director and Head of Real Estate Finance)
Great. Thanks for the comments this morning.
Michael Nierenberg (Chairman, CEO and President)
Thank you.
Operator (participant)
The next question comes from Jay McCanless with Wedbush. Please go ahead.
Jay McCanless (Managing Director of Equity Research)
Hey, good morning. Thank you for taking my questions. The first question, Michael, you talked about there being some gaps in CRE, gap funding. I guess, where, where do you see the opportunities right now for Rithm to be involved? And, if rates stay at these levels and don't go down until later in the year, how do those opportunities evolve?
Michael Nierenberg (Chairman, CEO and President)
So, you know, there's, I think there's a ton of opportunities. I mean, office is obviously for sale, for example. We've looked at a number of different opportunities in office because most folks are shying away from that. You know, when we look at the real estate market today, what I would say is we equate it to some of the, you know, the best investing environments we've seen, quite frankly, in our careers. And this takes us back to, you know, I'm not sure everybody on this call is born, but the early 1990s, which were the RTC days, when the government was liquidating all these thrifts, those were great opportunities to deploy capital.
You look at the great financial crisis, you look at the dot-com crisis, you look at where we are today with rates, you know, and, and you know, as a result of COVID and people not being in the office, there's great, great opportunities. As the banks write some of their assets down, I think what you're gonna find over time is once they write them down, they would look to part with them off their balance sheet as long as they're not strategic. We've done some investing in the office space recently, around the, around the debt side, where we've looked at, for example, a deal that was originated a few years back with a, with a, I, I think, a total market cap of about $2.4 billion.
We just, we acquired a pool of debt with a, you know, the first dollar of loss at roughly $900 million. So if you think about that, 2.4-9, you know, $900 million, stuff's down significantly, and as long as you think you have the expertise to underwrite it, we're gonna, we're gonna deploy capital there. The real estate guys on the Sculptor side, they're out, you know, doing their thing around both equity and debt. Again, the story is the same. It's, you know, we're in one of the better real estate investing environments that we've seen in our careers.
There is a need for funding because whether it be, you know, some of the traditional real estate players who have a fair amount of legacy commercial real estate are gonna be less aggressive in certain areas... or when you look at the banks who are going to be less aggressive, I think it puts us in a great place between both Rithm and Sculptor to take advantage of these opportunities.
Jay McCanless (Managing Director of Equity Research)
So if you could take that a step further, and when you're thinking about acquisitions in the alternative asset space, what makes sense? What are you guys taking an eye at or taking a look at right now?
Michael Nierenberg (Chairman, CEO and President)
Anything that could be synergistic with our existing business, that we think, you know, we have the pieces in place to win at both the Sculptor and Rithm level. We don't need anything else. I think part of this is as we think about real earnings for shareholders, you know, when you look at the way we trade, quite frankly, I think that we trade poorly from an equity perspective. If we could change the narrative where we trade more like an alternative asset manager and you pick up several multiples versus EBITDA, I think we're gonna be, you know, I think the, the opportunity for us and our shareholders and, and LPs is a great one. So that's how we're thinking about it. But, you know, the Sculptor real estate guys are world-class. The credit guys are world-class.
The Master Fund and, you know, and Jimmy and that team, I mean, we have all the pieces in place. You know, at the Rithm level, I'm sitting, Charles is here with me. I think we all punch above our weight. We have a world-class team, and we don't really need anything else. It's just more, what can be accretive for our equity holders and the business.
Jay McCanless (Managing Director of Equity Research)
Okay. Thank you, Michael. And one more, if I may. If rates do stay high this year, are there acquisition opportunities you think to build out the Genesis platform? Anything you're seeing that looks interesting there?
Michael Nierenberg (Chairman, CEO and President)
Yeah, I think scale wins, in those business lines. I mentioned earlier, you know, this year should be, give or take, $2.5 billion or so, in our origination business. I do think there are—there will be platforms and/or people, honestly, we don't need a—you don't need a lending platform if you have the platform, if you could acquire teams of people, which I know, you know, we're currently looking at, looking to do right now.
Jay McCanless (Managing Director of Equity Research)
Okay, sounds great. Thank you.
Michael Nierenberg (Chairman, CEO and President)
Thank you.
Operator (participant)
The next question comes from Giuliano Bologna with Compass Point. Please go ahead.
Giuliano Bologna (Managing Director)
Good morning, and congrats on the good results this quarter. One thing I'm curious about asking you is, and this might be hopefully not too convoluted, is, you know, I'm curious if there's been, you know, progress on raising MSR funds. And I think we all know that there's a large opportunity for both deals out there. And I'm curious how you think about, you know, the growth of the mortgage company and the MSRs. I realize the SLS deal is still there and, you know, hopefully closing soon. But, you know, I'm curious how you think about, you know, allocating those to your balance sheet versus, you know, potential fund vehicles at this point.
Michael Nierenberg (Chairman, CEO and President)
You know, there, there's constant dialogue between what I would call the asset management business under Sculptor and at the Rithm level, as we think about the balance sheet and balance sheet investing. I brought up the SFR funds, for example, that we're likely gonna grow that business away from the public company. I think there was an article about, you know, a large, one of the larger asset managers raising money, a billion-dollar fund around the build-to-rent space. We intend to do something similar there. On the MSR side, we will. You know, we continue to evaluate MSR funds, candidly. I mean, you know, when you look at where you create these, they're created anywhere from an 8%-10% unlevered type of yield. So you, you got to make sure that resonates with folks.
There are you need to have the operating business and have a great recapture/origination business in my, in our mind, to make this work. You know, we, we've had these discussions with a number of folks. You know, I've been overseas four times in the past year. So we've had a ton of these discussions, and we'll continue to do so. But it has to work within our business. The last thing I'll point out, you know, when you look at the Sculptor business, you know, we have credit funds. The credit funds have structured products in them. Some of the best results are, you know, when they take advantage of, for example, the March 2020 period during COVID, when, you know, assets were essentially a giveaway, and the team pounced on those and created great results.
So we don't necessarily need a dedicated fund per se, when we have the credit funds and we have the real estate funds at the Sculptor level or the Multi-Strat Fund.
Giuliano Bologna (Managing Director)
That's very helpful. And then, obviously, you know, it won't be an overnight process, but, you know, pivoting to more of an alternative asset manager model, you know, will probably take some time. I'm curious, you know, you've talked about the potential for doing something or talk about confidentially filing an S-1 to the mortgage company in the past. Obviously, the SLS deal probably pushes that back a little bit, you know, in terms of timing to get that done. You talked about moving the SFR business into fund vehicles.
I'm curious, when you think about, you know, the pivot of moving some of the balance sheet assets to kind of third-party service or, you know, asset management and moving some more of the AUM to asset management for the Rithm level, you know, how long you think that will take or what the milestones could be over the next few years?
Michael Nierenberg (Chairman, CEO and President)
You know, if we could do it in two weeks, we would do it in two weeks. It's going to take some time. You know, we can. Listen, do we need the biggest balance sheet? The answer is no. Does the balance sheet help? The answer is yes. You know, we look at strategic things that we could do together, no different than I think the large, you know, the larger players in the alt space. When we look at things that we could do together with the Sculptor folks, there are things we will do together, you know, at those levels. It's gonna take. It'll take some time. You know, ideally, you'd want to do more in the so-called, you know, the fund business.
The other thing I'd just to point out, you know, one of the beautiful things about our business is we do have $7 billion of permanent capital and, you know, from an equity perspective. And I think that's highly valuable. So as we look going forward, if we could create more vehicles that are going to give us what I would call permanent, you know, equity from a permanent capital standpoint, we'll continue to look at that as well. But transferring or not transferring, just creating more assets off balance sheet, I think is gonna help from a valuation standpoint as well.
Giuliano Bologna (Managing Director)
That's very helpful. I appreciate it, and I'll jump back in the queue.
Michael Nierenberg (Chairman, CEO and President)
Thank you.
Operator (participant)
The next question comes from Jason Weaver with Jones Trading. Please go ahead.
Jason Weaver (Head of Specialty Finance and Real Estate Research)
Hey, good morning, guys. Thanks for taking my question, and this is Jason Weaver, by the way. I was wondering, Michael, can you elaborate a bit on how you see the integration going for SLS within the larger Newrez ecosystem once you close in March? You know, what's the expected duration of that and the time to achieve the synergies you mentioned in an earlier question?
Michael Nierenberg (Chairman, CEO and President)
You know, we signed the deal. Things are happening as we speak now. You know, we're gonna try to concentrate geography more so than just have geography across, you know, every state here in the U.S. But things continue, and we expect that integration to be pretty seamless 'cause it's a servicing business, you know, for the most part. You know, when you look at our servicing sites, we have Greenville, South Carolina, we got Fort Washington in PA, we got Tempe, Arizona, and then we have, you know, a couple sites in Texas. Those are our main sites. I think you could assume that it's gonna continue that way, but acquiring a servicing asset and putting it on your servicing platform is a lot different from going out and acquiring full-scale operating businesses.
Jason Weaver (Head of Specialty Finance and Real Estate Research)
All right. Thank you for that. And, just as a follow-up, on the origination side of things, I was wondering if you have any update on possible new developments for new, joint venture partnerships there?
Baron Silverstein (President)
We evaluate them, just like, you know, Michael talked about from different strategic transactions. With the origination business, you know, obviously being pretty slow, most of our partnerships are on the realtor side, which is obviously a pretty slow business as well. I will tell you that we're more focused on, I would say, you know, fintech relationships or other relationships that might be accretive for our entire business overall. So it's something that we constantly look at, even on any type of acquisition, say, if someone's trying to sell a platform, and then we can utilize, you know, the joint venture kind of structure as an alternative.
Jason Weaver (Head of Specialty Finance and Real Estate Research)
All right. Thank you for that color.
Michael Nierenberg (Chairman, CEO and President)
Thank you.
Operator (participant)
The next question comes from Trevor Cranston with JMP Securities. Please go ahead.
Trevor Cranston (Managing Director)
Hey, thanks. Good morning. You know, looking at slide 16, you guys have made quite a bit of progress on the servicing cost per loan. As you look forward, you know, post SLS in particular, can you talk about sort of how you see that evolving and if you have sort of a target of where you think you can get to on the efficiency of the servicing platform?
Michael Nierenberg (Chairman, CEO and President)
Yeah, I mean, look, you know, there's a fair amount of operating leverage that we continue to get from the consolidation that we've done and the consolidation of the different Rithm sub-servicing that we moved into the Newrez ecosystem. We're gonna continue to get that operating leverage with the acquisition of SLS. Michael briefly talked about that, you know, the time period of when we can move that in. We think it's gonna be very quick. They're gonna come onto our proprietary servicing system, utilizing our processes, you know, and they have, you know, the third-party business is obviously very strategic for us in bringing those clients onto our platform, some of which we already had relationships with that we're gonna continue to grow, and others that were our new relationships.
But, you know, I would say that it's very seamless. Or from a cost perspective and overall efficiency, you know, I talked about this before, that is one of my top priorities, to continue to drive costs down. You see the cost per loan here, that continues to go down. Obviously, that's just all about operating leverage in our benchmark. And we think we're the best in the business. We really do.
Trevor Cranston (Managing Director)
Got it. Okay, that's helpful. And then a follow-up on the question about opportunities on the commercial real estate side. Can you talk about sort of how you think about, you know, how much capital you have available to pursue those opportunities on Rithm's balance sheet, you know, versus pursuing the opportunities potentially in managed funds? Thanks.
Michael Nierenberg (Chairman, CEO and President)
You know, I think that on the managed funds, that business will continue to run itself. You know, Steve Orbuch and, and Nick Hecker and their team will continue to run their business the way that they do. We look at some one-off stuff here on the, on the Rithm balance sheet. This is not where one, one division is gonna compete with the other. They do very, very different things than I think... For example, I brought up this, this debt deal that we did. They do very different things than I think what you're gonna see on the Rithm balance sheet.
You know, if you, if you recall, we about in, at the end of 2022, we brought in a, you know, a world-class group of folks at, which was, which is named GreenBarn, David Welsh and Dave Schonbraun and their team, who have been instrumental in, in some of the stuff that we've looked at here. So, I think you're gonna see, you know, some investment on the Rithm balance sheet. Clearly, we wanna grow the funds business, and, and Steve and Nick will continue to do what they do, and, and the results, you know, stand for themselves. So, it'll be a, a different type of investing business than I think what you see there.
There could be times when we partner, no different than I think what you'd see at, you know, for example, at Blackstone, in some of their private funds and what they do between the private funds and their REIT.
Trevor Cranston (Managing Director)
Okay, that makes sense. Thank you.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to Michael Nierenberg, CEO, for any closing remarks.
Michael Nierenberg (Chairman, CEO and President)
Thanks for joining. A lot of good dialogue, some good questions. Any follow-up, you know, you know how to reach us. Appreciate the support and, and have a great day. Thanks, everyone.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.