Rithm Property Trust - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 comprehensive income was $1.1M ($0.02 per diluted share) and EAD was $0.7M ($0.02 per diluted share); book value per share was $5.40. Management maintained the $0.06 quarterly common dividend and ended the quarter with $97.4M of cash.
• The company deployed ~$64M into CRE debt (including $47M UPB of AAA CMBS at ~11% levered yield and a $17.5M SOFR+800 mezz/senior subordinate loan) and issued $52M of 9.875% Series C preferred, bolstering liquidity for accretive deployment.
• Versus consensus, “Primary EPS” of $0.02 beat $0.015*, while revenue of -$0.89M missed $4.83M*, driven by realized losses on legacy RMBS sales and mark-to-market impacts; management emphasized patience and focus on high-teens unlevered opportunities to grow EAD.
• Strategic narrative: no legacy CRE downside, robust pipeline (~$1B), and tight capital discipline; valuation disconnect cited with stock near ~$2.85 vs $5.40 book value as a potential catalyst when earnings scale improves.
• Governance/organizational update: Nicola Santoro, Jr. appointed CFO/CAO; the company continues as an externally managed REIT under Rithm Capital.

Values retrieved from S&P Global for estimate comparisons (*).

What Went Well and What Went Wrong

What Went Well

• Capital deployment and liquidity: ~$64M UPB in CRE debt, including $47M AAA CMBS (~11% levered) and a $17.5M SOFR+800 subordinated loan; $52M preferred issuance lifted cash to $97.4M.
• Positive EAD and comprehensive income: EAD of $0.7M ($0.02/share) and comprehensive income of $1.1M ($0.02/share) supported dividend maintenance and book value stability.
• Strategic clarity and team depth: “We have no legacy commercial real estate exposure… the company is in really good shape… sitting on almost $100 million of cash,” with seasoned CRE credit capabilities across Rithm’s platform.

What Went Wrong

• GAAP net loss and revenue miss: Q1 GAAP diluted EPS was -$0.08; total revenue/(loss), net was $0.25M, reflecting realized losses on legacy RMBS sales and fair value impacts on securities.
• Legacy asset runoff constraints: Management noted limited remaining ability to sell certain low-coupon legacy residential assets due to retained interests and risk-retention requirements.
• Dividend coverage timing: EAD improved but still below dividend; management highlighted growing earnings through redeployment into higher-return CRE assets to reach breakeven coverage.

Transcript

Operator (participant)

Thank you for standing by, and welcome to the Rithm Property Trust Q1 Earnings Conference Call. all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. I'd now like to turn the call over to Emma Bolla, Associate General Counsel of Rithm Capital. You may begin.

Emma Bolla (Associate General Counsel)

Thank you, and good morning, everyone. I would like to thank you for joining us today for Rithm Property Trust Q1 2025 Earnings Call. Joining me today are Michael Nierenberg, Chair and CEO and President of Rithm Capital and CEO of Rithm Property Trust, and Nick Santoro, CFO of Rithm Capital and Rithm Property Trust. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Rithm Property Trust website, www.rithmpropertytrust.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 (CEO)

Thanks, Emma. Good morning, and thanks for dialing in. You know, just I'm not going to give you the long Rithm update, but, you know, speaking about this company that we manage here at Rithm, the company is in great shape. You know, if you think about when we took it over in June of 2024, the company had a lot of what I would call re-performing loans, very low coupon assets on the balance sheet, and the team's done a great job by repositioning the company, selling down those assets, and redeploying into current cash flow, higher yielding assets in the commercial space. You know, one note is this company has no legacy commercial real estate exposure to the downside. When you think about where we are today, the company has, give or take, about $300 million of equity. It's sitting on almost $100 million of cash.

We did a capital raise in the quarter. Things are in very, very good shape. The growth story here is going to be one that is similar to what we did with Rithm, which was formerly known as New Residential, where the company was seeded with roughly $1 billion of capital, and we grew it from $1 billion of permanent capital to roughly $8 billion today and grew, you know, balance sheet earnings. That company makes $1 billion a year. This will take a little bit more time, obviously, because of, you know, where the equity trades, and I'll talk to that in a minute as I flip through the deck. In general, I would say the company's in really good shape.

We're excited about the ability to grow this company and put up real earnings for shareholders and see the equity price right itself to a more normalized valuation. With that, I'm going to start on page three, and I'll just flip through this quickly, and then we'll have a little bit of Q&A. When you think about the company, it is managed by Rithm Capital, and our teams here at Rithm Capital, there's roughly 75 folks internally that focus on all of our, what I would call, both Rithm, Rithm Capital, and Rithm Property Trust. That doesn't include, obviously, some of our affiliates such as Sculptor and some of the different opcos. The team here has a ton of experience, whether it be in the REIT space or the commercial space.

You know, my partner here, Charles Sorrentino, has been with me since 2008, running different trading desks on the sell side and has a ton of experience in the commercial real estate, as do our other team members that are focused on this company. If you flip to page four, for the quarter, GAAP income, $1.1 million or $0.02 per diluted share. Earnings available for distribution, $750,000 or $0.02 per diluted share. The Q1 dividend we paid $0.06. That hopefully should continue, and over time, hopefully that grows. Cash and cash equivalents, as I pointed out, $97 million, total equity, $295 million, and the GAAP book value today is $5.40. If you think about that on a relative basis, the stock trades in the current market at about $2.85. We think the equity is extremely undervalued.

We saw a pop after last quarter's Earnings Calls, and then when the volatility we saw in the markets, obviously the equity price got hit pretty hard, but we, you know, we feel very confident in, one, is, you know, where we stand in the business, but number two is the ability to create real shareholder value for folks that are along the equity. Page five, if you look for Q1, we deployed $65 million in various CRE debt. You know, that includes $47 million of AAA CMBS bonds with a roughly 11% type yield. We also did, we split a loan between Rithm Capital and Rithm Property Trust, a $35 million loan at SOFR plus 800 basis points on a Midtown office building with a good sponsor. That is, you know, when you think about that, that is 12% or 13% on unleveraged return, not including fees.

During the quarter, we did one of the first press that got done in a long, long time. We raised $52 million of capital. You know, while I would say we're eager to grow earnings, we want to be mindful of the volatility we're seeing in the markets. We're looking for great opportunities to deploy capital at what I call teen type returns. You know, we're seeing plenty more things to do right now, but we're going to be patient. During the quarter, we sold $21 million of legacy Reggie assets, and we continue to grow earnings in the company. Page six is just a slide showing the potential earnings growth.

I think you should assume for what we're trying to do here is looking for a strategic, either a transaction or assets to acquire, which are going to give us the ability to grow earnings and raise capital around. We continue to be on the hunt for that, like I said, with the volatility in the market, we do think things are going to come our way, but we're going to be extremely patient here. Page seven, looking ahead at the opportunity with RPT. One, it's just, you know, just look at the stock price, $2.85 versus a $5.40 book value. That should say enough. When you look at this page CRE debt, you've seen, obviously, the repricing of assets and dislocations. There was an article in the journal yesterday talking about the Chicago market. There's a 1.7 million sq ft office building on the river there.

Blackstone gave the keys back, and, you know, they're just talking about the state of the so-called office market in Chicago. I'd encourage you to have a look at that article. When you look at our exposure in this business or at Rithm Property Trust, again, there's no legacy commercial real estate exposure. We feel really good about that, and we have a very good team. What to expect as we go forward? We continue to see a pretty robust pipeline. We'll continue to focus on what I would say opportunistic investing and looking for the right time to deploy capital and drive higher earnings and higher growth.

Finally, on page eight, just an illustration of what the future state of the portfolio could look like. You'll have some CMBS, you'll have senior loans, a little bit of mezz, and some opportunistic investments. We're not looking to go all in on any one strategy as it relates to the company. We're looking for some diversification across all these different asset classes. With that, I'll turn it back to the operator, and we'll take some questions.

Operator (participant)

Thank you. We'll now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. Your first question comes from the line of Jason Stewart from Janney Montgomery. Your line is open.

Jason Stewart (Director and Equity Research Analyst)

Hi, thanks. Good morning.

Michael Nierenberg (CEO)

Good morning.

Jason Stewart (Director and Equity Research Analyst)

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

Michael Nierenberg (CEO)

You know, yeah, you have absolutely wider spreads across the board. You know, whether you look at high yields or you look at IG or you look at the residential side of the market. While saying that, we've seen some good stability over the course of the past couple of weeks as Bessent, I think, has taken more of a prominent role in the narrative around tariffs. You know, again, while saying that, I do think that you're going to see more and more opportunities. We're going to see more and more opportunities across all of our platforms.

The beauty of where this company sits along with what I would call its parent at Rithm is we see a ton of deal flow from all of our counterparties, whether that be at the banks or if you look at our sourcing teams across the country that are out there looking for assets and/or deals to put capital to work. There is plenty to do. You got to be careful, though. I mean, you know, I use the Chicago office building as an example, and, you know, in that article, they are talking about how a lot of these deals are funded in, you know, with AAA CMBS. If you look at the conduit markets, those markets have been very, very quiet as of late. You're seeing more single property deals and, you know, that are coming to market at what I would call wider spreads, but we got to be careful there.

Jason Stewart (Director and Equity Research Analyst)

Yeah. Thank you. When you say looking for diversification, does that mean that you've shifted your thoughts on a platform or a transformative type acquisition?

Michael Nierenberg (CEO)

Nope. Jason, it's more of the same. We're still looking at platforms. We're looking at origination businesses. I think the key for, again, not only this company, but for all of us that are so-called in the alts business or managing capital is how do you take your origination engines and use that to either seed balance sheet or seed funds. We've done a good job on that at the parent level, and that's something we'd like to see follow through on Rithm Property Trust.

Jason Stewart (Director and Equity Research Analyst)

Got it. Okay. I'll jump out. Thank you.

Michael Nierenberg (CEO)

Thanks, Jason.

Operator (participant)

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

Tom Catherwood (Managing Director and REIT Analyst)

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

Michael Nierenberg (CEO)

This was an, I would actually look at this as an opportunistic investment. You know, we partnered with a couple of large money center banks, you know, on this. We split it between, like I pointed out earlier, between Rithm Property Trust and Rithm Capital. As we look at this, again, it's not like we want to be all loans or we want to be all bonds. It's going to be a diversified portfolio.

We think that is a good way to create risk limits around the portfolios that we're going to deploy capital in. I don't know that it's any one formula, but we look at asset to asset. We underwrite every single asset that goes on the balance sheet. This was an example of something working close with our banking partners. We're in the middle of another one that we're currently looking at with some of the large, you know, money center banks here in New York to partner with them on putting capital out.

Tom Catherwood (Managing Director and REIT Analyst)

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

Michael Nierenberg (CEO)

The corporate debt, I believe, is nine and seven eighths right now. That probably stays outstanding for a little bit here as long as we think we're able to deploy capital above that. If you think about it, corporate debt versus preferred, the preferred, we get equity treatment. Obviously, the debt, we don't. I think that stays outstanding. As we get an upgrade for the company, you'll see the nine and seven eighths, I think that rate drops by 100 basis points. I think until we get the company at scale, it probably stays outstanding for now, unless, again, there's some transformative deal that we do where we're going to raise a bunch of capital around.

I do think it's very conceivable that the growth in this company could be not only from, you know, kind of the Rithm family of companies, but also from third party and bringing in real partners to grow this vehicle. I think that's more likely than not as we go forward based on, you know, your stock trading roughly half of book value at 50% of book.

Tom Catherwood (Managing Director and REIT Analyst)

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

Michael Nierenberg (CEO)

I think, you know, it's growing earnings and getting rid of lower coupon, quite frankly, lower coupon assets on the balance sheet. The challenge with some of the lower coupon assets on balance sheet are retained interest, and we can't sell those. You know, so that's part of the challenge. The flip side of that is the cost of liabilities on some of those lower coupon assets is obviously very low because they're issued in securitization trusts. I think it would, it's going to be more, quite frankly, it's probably more the same deploy capital at accretive levels to, you know, to grow out of the so-called earnings hole. You know, if you think about it, and I have a very strong view that the, you know, REITs in general are extremely attractive relative to different types of companies.

You look at Rithm, for example, we trade five and a half. You know, we trade at, call it, you know, five to six times earnings. You look at some of the larger alt asset managers that trade at 30. You look at companies like this that are trading at 50% of book value. There's a lot of value here. The other thing that I would say as it relates to dividends, you know, if we didn't pay dividends and we are going to keep with our dividend policy in this company, if you didn't pay dividends and you redeployed the capital at teens type returns, your overall equity price should increase.

Because you're retaining earnings and you're growing at double digit returns. In general, what I would say is policy stays the same. We're going to grow out of it, but the sector fundamentally is extremely cheap right now. Again, you know, going back to my earlier comment, I do think the growth of this vehicle will likely be with some third party partners over time.

Tom Catherwood (Managing Director and REIT Analyst)

Got it. Appreciate the answers. Thanks, Michael.

Michael Nierenberg (CEO)

Thank you.

Operator (participant)

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

Randy Binner (Analyst)

Hey, good morning. Just a couple kind of balance sheet related questions. I guess the first one is, I think on the last call, you had mentioned there'd be, you know, less sale activity or, you know, selling the legacy portfolio. I think it was $21 million this quarter, and it sits at about $100 million. Is that, I think I'm kind of putting all the comments together, but the ability to continue to move on from the legacy portfolio, is it relatively limited going forward or is it pretty good? Like how should we think about that remaining amount that's going to stay?

Michael Nierenberg (CEO)

Yeah, it's relatively limited. I mean, where we can make headway, we will, as long as we think we're not giving up value. You know, the idea is to have obviously the cleanest balance sheet. You know, the balance sheet is very clean. When you look at the true amount of equity that's associated with a lot of the so-called legacy assets we have on balance sheet, it's extremely low. You know, after quarter end, I think we're down to about $25 million in UPB that potentially could be sold. That's not, you know, where we have to hold for Dodd-Frank reasons from old securitization trusts or what have you.

Randy Binner (Analyst)

All right. That's helpful. Just on the unrealized gain that came through the income statement, I think that's related to the AAA CMBS, but just looking to confirm that. I think that would be marked lower this quarter to, you know, at least so far. Is that where that unrealized gain activity is coming from?

Michael Nierenberg (CEO)

No, I think it's just sale of legacy assets actually versus marks. We did not sell any of our AAA floating rate CMBS in the quarter.

Randy Binner (Analyst)

No, I mean, I think this is an unrealized gain.

Michael Nierenberg (CEO)

Where do you see that? The way I read it, the $4.4 million.

Randy Binner (Analyst)

The $4.4 million of unrealized loss that you see in the quarter, there's an offset in OCI. So it's relatively flat on book value, quarter over quarter.

Michael Nierenberg (CEO)

It's enough.

Jason Stewart (Director and Equity Research Analyst)

Understood. Yeah, got it. Got it. That was a geography thing. Okay, perfect. Appreciate that clarification. Thank you.

Michael Nierenberg (CEO)

Thank you.

Operator (participant)

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

Jade Rahmani (Managing Director and Equity Research Analyst)

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

Michael Nierenberg (CEO)

On the legacy hold, again, there's probably, I think we discussed this, about $25 million of kind of resi assets that could be sold, I think, at this point. Again, there's just not that much cash that's associated with those. From an overall core balance sheet, the goal is to deploy capital in commercial real estate assets. That is what this vehicle is set up to do, but also explore if there's opportunistic investments we could do in and around kind of what I would call our core expertise. That's where we're going with the company.

The core hold will likely be more commercial real estate assets that will grow as we, you know, take, for example, the little under $100 million of capital that we have today. You know, we'll keep, I think, $50 million of that needs to be held for either covenants around some of our high yield debt and try to mark to market on some of the legacy assets that are on balance sheet. So that $50 million, let's just say, gets deployed, that'll get deployed into commercial real estate assets.

Jade Rahmani (Managing Director and Equity Research Analyst)

Thanks. Secondly, can you give some color on the team that you've put together to focus on CRE? I know you have these affiliate companies, you know, GreenBarn, Sculptor. Maybe you could talk about the experience that's within commercial real estate. I've seen a lot of, you know, new entrants in the space, and, you know, when the experience set doesn't match a long duration, there could be issues. It'd be helpful to get some color on the team.

Michael Nierenberg (CEO)

I'll start with my partner, Charles, who the two of us have been working together since 2008, you know, running, I mean, one of my prior lives is I ran part of Bank of America, including all the commercial real estate there. Charles ran some of the trading businesses. When you look internally, we've added, what I would say, a half a dozen folks around the hoop here on the commercial real estate side, couple that with, you know, all the other folks that are working on our different investment businesses. It is a pretty robust team. On the GreenBarn side, we own 50% of the opco there. I would look at them more as a sourcing engine for us at this point. Sculptor is a separate entity, but the overall amount of real estate experience here is extremely high, is what I would say. It comes from, you know, various firms as well.

Jade Rahmani (Managing Director and Equity Research Analyst)

Thanks very much. Lastly, what are you seeing from the banks? One of your peers in commercial real estate said they saw, you know, a handful of special situations crop up in the quarter. You know, we continue to see banks pull back from CRE direct lending, but be active in the credit facility side and then maybe look to sell NPLs. What are you seeing from, you mentioned large money center banks, but the banks overall?

Michael Nierenberg (CEO)

You know, our relationships are still putting out money on the senior side, what I would say, and they're looking for partners like us and others. We continue to see that, you know, if you think about a bank, once a loan goes bad, if they do not think they are going to be able to work it out, they are going to sell it. You will see more non-performing loans if credit deteriorates and the banks are going to sell them. In general, I think the banks are going to be specific if you think about the way a bank is run by different credit officers. Banks are going to be specific based on, you know, obviously we all know not every commercial real estate asset is the same. You're going to see some, I think where you're going to see a little bit of diversification from the banks, but, you know, we still see the banks lending. We do a lot of business with the banks, and I think that'll continue.

Jade Rahmani (Managing Director and Equity Research Analyst)

Thanks a lot.

Operator (participant)

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

Douglas Harter (Senior Equity Research Analyst)

Thanks. Michael, can you talk about the balance between, you know, kind of looking to grow to be able to scale the business and hopefully scale earnings power versus, you know, kind of willingness to issue equity, you know, and dilute current book value?

Michael Nierenberg (CEO)

I think it's, you know, again, book value is $5.40, stock is $2.85. If we start there, company sitting on, call it $100 of cash, assume we're going to keep $50 on balance sheet at all times right now until the balance sheet grows, and then we'll keep more cash. The growth will likely be from a third party, I think, is the way that we'd like to bring somebody in. It could be an M&A transaction where we look at another company, and that will help us create some scale here. You know, the company doesn't trade. I mean, we all know, right? It's $300 million of equity for this company to be relevant. I think it's got to be significantly bigger than where it currently is. We won't sacrifice earnings. I said that the same, you know, on the Rithm call on Friday.

You know, we got to figure out a way to grow this thing and grow earnings, more importantly. I don't think the short answer is there's no secret sauce right now, I don't think. It could be third party. If there was a great transaction where we thought, you know, it was going to be highly accretive and we were going to generate a lot more earnings, I think we'd issue equity. You know, one of the reasons we did the preferred route is to not dilute shareholders. We'll likely go down that path again as well.

Jason Stewart (Director and Equity Research Analyst)

Okay. I appreciate the answer, Michael. Thank you.

Michael Nierenberg (CEO)

Thanks, Doug.

Operator (participant)

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

Michael Nierenberg (CEO)

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

Operator (participant)

This concludes today's Conference Call. Thank you for your participation. You may now disconnect.