Rithm Property Trust - Q2 2024

Transcript

Operator (participant)

Good day, and welcome to the Great Ajax Second Quarter 2024 earnings call. All participants will be in 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, then two. Please note, this event is being recorded. I would now like to turn the conference over to Emma Bolla. Please go ahead.

Emma Bolla (Associate General Counsel)

Thank you, and good morning, everyone. I would like to thank you for joining us today for Great Ajax's second quarter 2024 earnings call. Joining me today are Michael Nierenberg, Chairman, CEO, and President of Rithm Capital, and CEO of Great Ajax, and Mary Doyle, Principal Financial Officer of Great Ajax. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Great Ajax website, www.greatajax.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, and for those of you that are joining us this morning, we appreciate you dialing in. Today's call is really about the future. When we first embarked on this from the Rithm perspective, we looked at this vehicle and thought, let's look back to the playbook that we established back at Fortress in 2013, where we saw dislocations in the MSR market. And based on that, we created a vehicle that we seeded with $1 billion of capital, and then today, that vehicle is known as Rithm Capital, which has $7.2 billion of equity capital, large balance sheet, and is a world-class asset manager.

We are going to look to do the same playbook, with the difference this time, looking at the commercial real estate market and the dislocations we see there and the huge needs for capital. So we're gonna leverage the very same investment teams that came from Fortress with us here, and we're really excited about the challenge, as we look ahead. The needs for capital in the commercial real estate market, I don't think it's something that we need to go into huge depth on, but there are huge needs. When you look at the landscape around commercial real estate REITs, this vehicle today is clean. It has no legacy commercial real estate assets.

And as we look going forward, what we're going to do is, migrate from what I would call reperforming residential assets, sell down on those or sell those down, other than the stuff that we need to keep for risk retention and reinvest into current cash flowing commercial real estate assets, which we've already begun to do so. The deal closed, I believe, on June eleventh, when Rithm took over the management contract. And as we go forward, you know, full staff here at Rithm focused on this business around the commercial real estate side. As we think about the commercial real estate investing environment, we think it's some of the best, best investment opportunities that we've seen, even looking back to the great financial crisis.

Whether you look at office or you look at some of the other things, particularly where spreads are, for example, even on AAA CMBS, where, you know, over the course of the past couple of weeks, we've made a few different investments there as we've sold down some of the legacy residential side. The one thing I wanna be clear about, it's going to take time to get this vehicle back to a place where it's cash flow positive, it's growing in a meaningful way, but we're very confident that with our existing team, we're going to be able to do that. As we think about the dividend and we think about earnings, obviously, and Mary Doyle, who's the CFO of Great Ajax, is sitting with us.

She'll talk a little bit about the financials this morning, but as we look at where we are, look at the dividend policy, yesterday, we had a board meeting. The board voted to keep the dividend the same. We will be evaluating the dividend quarter-to-quarter as we think about the ability to grow earnings. The vehicle will need more equity over time, and that equity will likely be, hopefully raised in and around what we'll call opportunistic investments. So as you think about that, if the dividend yields, where we could raise equity, is in and around, call it 6%-7%, we're able to deploy capital at 12%, it is gonna be hugely accretive for shareholders.

For the quarter, you know, when you look at the overall numbers, there were losses due to asset sales as the balance sheet continues to get turned over, as well as some mark-to-market issues. Mary is also gonna talk about book value, and how to think about that in the context of what was reported versus actual mark-to-market. That's kind of my opening comments. We'll now flip to the supplement, which has been prepared and which is posted online. Mary will, again, take the financial side. I'll take just some comments. If you start on page 3, like I pointed out in the opening remarks, Rithm Capital today has $7+ billion of equity capital. You know, it's give or take a $40 billion balance sheet.

We own Sculptor Capital Management, which is a large world-class asset management business. And really, you know, the Great Ajax vehicle is gonna be focused again on commercial real estate opportunities, as well as some other opportunistic investments that we may see come across the platform, and we see plenty. The team, the same team that got us here on the Rithm side is gonna be the very same team, plus some, that's gonna be focused on Great Ajax. On the commercial real estate side, just a side note, when we look at the amount of real estate professionals we have here at Rithm, there's about 30 folks between Rithm and, you know, an opco that we own 50% of at GreenBarn. So we have a lot of real commercial real estate expertise around the house.

This is not something we take lightly, and we're really excited again about the prospects as we look at that going forward. On the Sculptor side, Sculptor has about 35 folks as well, 35 to 40 folks in the real estate business, and they're a world-class commercial real estate investor. I'll let Mary talk a little bit, or as much as she wants, actually, about the financial highlights on page 4, and then we'll get back into a couple other slides and then open up for Q&A. Mary?

Mary Doyle (CFO)

Sure. Thank you, Michael. We reported a GAAP net loss of $12.7 million. This is considerably lower than the first quarter of 2024, and is also driven by mark-to-market losses, as well as some additional realized losses on the sale of mortgage loans. If you look at the balance sheet, you can see that we are continuing to contract on the asset side and build up cash reserves ready to deploy in the commercial real estate strategy that's being discussed. Earnings available for distribution also came down versus the loss last quarter. Just to note that earnings available for distribution is what we previously referred to as operating income in last quarter's release.

We have some transaction costs, and as we continue to restructure the balance sheet, we do still have a negative net interest margin, and that's driving most of that loss. We are declaring a common stock dividend of $0.06 per share. Of note, if you look at the balance sheet, you can see that we've continued to grow our cash balance from the year-end, notwithstanding redeeming our convertible debt in April of 2024. Book value at $5.56 per common share. As most of you know, most of our assets are carried at amortized cost. We did move a chunk of the loan portfolio to fair value, which is driving losses, but we are at an amortized cost value of $5.56.

If we went to a full fair value valuation, we'd be at around $4.20, and that is marking mostly the asset side of the balance sheet. Total stockholders' equity at quarter end is $253.6 million. We expect to grow that over time. We might take some incremental hits as we continue to sell loans. That's all part of the longer-term strategy to grow cash, ready to deploy into higher-yielding assets to improve our net interest margin.

Michael Nierenberg (Chairman, CEO, and President)

Great. Thanks, Mary, for the update. Folks, we'll now flip to page 5. Just to talk a little bit about the transaction of Rithm and Ajax. Rithm just took over the management contract from Great Ajax. Again, same team. Some of the actions that were taken in the second quarter, Mary alluded to selling down loans. A lot of... Some of the, a lot of this stuff happened prior to us quite frankly getting involved. We redeemed $100 million of the convertible senior notes. Again, I think the overall story for us as a team and as a business is looking ahead for the future and how we reposition the company. Page 6, this talks about the commercial real estate opportunities.

You know, we look about... We are a commercial real estate REIT without any legacy issues. I mean, I think that is a huge deal as we think about the growth going forward and, and the absolute yield levels and absolute spread levels. We do believe we're gonna be able to grow this, not just grow it, but actually generate real earnings and, and hopefully grow the dividend over time. Environment, you know, as we discussed, very, very attractive, commercial real estate investing environment. And then overall, the breadth of what we do here at Rithm, I think is, you know, we're, we're happy to match up against anybody in the business. Page seven just gives you a little bit of a, illustrative, you know, future state portfolio. Talks about commercial real estate securities, loans, mezz loans, other investments.

We're gonna target absolute yield levels from an IRR perspective of something between, give or take, you know, a lower to mid-teens type number for this vehicle, and we're confident we're gonna get there. With that, I'll turn it back to the operator, and then we could open up for some 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 are 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. At this time, we will pause momentarily to assemble our roster. Our first question comes from Eric Hagen with BTIG. Please go ahead.

Eric Hagen (Managing Director)

Hey, good morning. I hope all is well. Can we start by repeating the impact of marking the whole book to fair value? And just looking at the balance sheet, what is the balance of the legacy RPL portfolio right now, and what's in commercial real estate? Thank you, guys.

Michael Nierenberg (Chairman, CEO, and President)

So on the book value question, Eric, full mark to market takes us in and around $4. I think Mary alluded to something around $4.23. What I would tell you is that, on all the assets that we have on balance sheet today, they're mark to market. I think we feel very good about the marks where things are. That doesn't mean, you know, you, you'll have a gain or a loss going forward, but I think we feel very good, particularly in light of what's happening in, you know, in the credit markets. As far as total going forward, there'll be some securities and some loans that are gonna be sold. Charles, what's the total gonna be about between loans and securities to clean up the balance sheet? It's about $100 and-

Speaker 7

About $120 million.

Michael Nierenberg (Chairman, CEO, and President)

About $120 million of assets that are left to be sold. And-

Eric Hagen (Managing Director)

Okay.

Michael Nierenberg (Chairman, CEO, and President)

You know, yeah. So it's not much.

Eric Hagen (Managing Director)

Okay, got it. And then on the commercial real estate side, are we talking mostly securities, initially, and what's the balance there right now? What kind of returns are you guys seeing? Thank you, guys.

Michael Nierenberg (Chairman, CEO, and President)

Yeah. Currently, I think we've made about 3 investments. You know, they're mostly AAA CMBS, highly liquid securities. We'll use those as a placeholder now with a levered return of something, probably 12+, something between 12%-15%. And like I said, I think we bought 3 tranches of AAA CMBS.

Eric Hagen (Managing Director)

Mm-hmm. Is it reasonable to expect that by the end of the year, that $120 million left to be sold from the RPL portfolio will be-

Michael Nierenberg (Chairman, CEO, and President)

Yeah.

Eric Hagen (Managing Director)

You know. Okay. All right, great. Thank you guys so much. Appreciate it.

Michael Nierenberg (Chairman, CEO, and President)

Thanks, Eric.

Operator (participant)

Our next question comes from Steven Laws with Raymond James. Please go ahead.

Stephen Laws (Managing Director)

Hi, good morning, Michael and Mary. Curious, Michael, as you look at the legacy assets, you know, and you think about it maybe in percentage terms, you know, how much capital of existing capital will be needed to support kind of the, you know, first loss pieces or risk retention that you'll need to keep? And how much-- what percentage of that capital will be freed up to go into new targeted investments?

Michael Nierenberg (Chairman, CEO, and President)

So, Steven, just to so we understand the question. Your question is how much capital is allocated to the risk retention securities we're not able to sell, and then how much is going to get released against the $120 million that we intend to sell?

Stephen Laws (Managing Director)

That's correct.

Michael Nierenberg (Chairman, CEO, and President)

Is that the question?

Stephen Laws (Managing Director)

Yes.

Speaker 7

Yeah, the risk retention assets have approximately $15 million-$16 million worth of equity capital that sit against them. And, you know, the non-risk retention assets, along with some of the RPL and NPL securities, are probably in and around, let's just call it $35 million-$40 million worth of equity capital.

Stephen Laws (Managing Director)

Great. And then to appreciate that, to follow up on Eric's question, you know, as you think about, you know, whether it's 12 or 24 months out, you know, do you expect this to be largely CRE whole loans? You know, how big of a mix will securities be? You know, and I guess along those lines, from an investment sourcing standpoint, do you feel you have everyone you need between the GreenBarn and Sculptor teams, or do you need to build out that origination effort?

Michael Nierenberg (Chairman, CEO, and President)

Yeah, I think, just, just so we're clear, you know, at the Rithm level, Sculptor, you know, Sculptor is a world-class, what I would call real estate, investor, investment business, and they'll continue to do that. Across our entire business from a platform perspective here at Rithm, and Sculptor, I, I believe that we see pretty much everything that comes out in the real estate space, so we don't need anything new. On the... As we go forward and think about this vehicle at the, at the, you know, from a Rithm management perspective, if you look at page 7, we gave, a little bit of a potential future state portfolio, which has some CMBS, some senior loans, some potential mezz loans, and then some opportunistic investments. Everything kind of geared around a mid-teens, mid-teens type return.

Part of it's gonna be what the market's gonna give us, right? If you get a couple Fed rate cuts and the curve steepens out here, I think credit spreads overall will continue to do better. You know, by default, the assets that we're gonna have on balance sheet should do better, and that should help grow book value as well. I think it's a little bit of a TBD, but the one thing so we're all clear about is that, you know, this is almost like a blank canvas with some of that with $250 million of equity. That the goal is gonna be to grow this not only from an equity perspective, but really from an earnings standpoint, so we earn out of the whole that the current dividend is paying.

But like I said before, we're gonna evaluate the dividend quarter-to-quarter.

Stephen Laws (Managing Director)

Great. Well, certainly a good time to be active lending in CRE right now and, yeah, good luck with the transition, and thanks for the comments this morning, Michael.

Michael Nierenberg (Chairman, CEO, and President)

Thank you.

Operator (participant)

Again, if you have a question, please press star, then one. Our next question comes from Jason Stewart with Janney Montgomery Scott. Please go ahead.

Jason Stewart (Equity Research Analyst)

Hey, good morning. Thank you. Excuse me. On slide 7, Michael, it sounds like... And this is sort of a progression of how the portfolio will grow. And when you get down to opportunistic, is that gonna be focused on CRE mortgage or is that platform-based operating businesses? How do you see that evolving through a cycle?

Michael Nierenberg (Chairman, CEO, and President)

I think it's, you know, we don't know. I mean, we see a ton of stuff, honestly, that comes across, right? If you think about Rithm and the scope of our business, whether it be on the residential side, the commercial side, the consumer side, and everything else that we look at, you know, there are a ton of opportunities that not everything pans out, obviously, when you underwrite them, but there's a ton of opportunities that come across the platform. You could envision at some point there could be some M&A activity, quite frankly. You could have a bank that might come in and say, "You know, we wanna sell X amount of loans, and we believe in that portfolio of loans." I think the main thing to think about here is we're not just gonna be able to grow through earnings.

We're gonna need more equity capital over time. And to the extent that we hit, you know, that we need more equity capital, there's gotta be something on the other side that makes it accretive for us to come to market to say, "Okay, we wanna raise equity because we're deploying capital at a 15% return." So if you think about it, again, going back to my earlier example, if you have 6%-7% cost of capital on the equity side, and you're able to deploy it at 15, it should be a home run for shareholders as we go forward. It's gonna take time, though, so we're all clear.

Jason Stewart (Equity Research Analyst)

Right. And along those lines, how willing are you to take the blank canvas in this clean balance sheet and acquire something that might be highly distressed but has some issues to work through? How do you balance those two?

Michael Nierenberg (Chairman, CEO, and President)

You know, I think in our history at Rithm/New Residential, we've demonstrated a willingness to do so. A good example would be Ditech, when we took that out of bankruptcy, and it had a lot of hair on it. And it's been a grand slam. You know, a lot of the acquisitions we've done over the years, if you look at, you know, we did the Caliber deal, that was a great one. You look at a number of the... We did HLSS and HLSS and some subsequent investments with Ocwen. Those were great ones. So yeah, I mean, you know, that's part of our DNA. You know, you're not gonna be able to go, you know, regular way to say, okay, you're gonna compete against, you know, XYZ, and all of a sudden, everything's gonna be 15%-20% returns.

We're gonna have to do some stuff with hair on it, for sure.

Jason Stewart (Equity Research Analyst)

Yeah, understood. Last one from me. Just more near term, in terms of the senior loan focus, is there a geography or an asset class that we should expect you to focus on first?

Michael Nierenberg (Chairman, CEO, and President)

No, I mean, you know, for now, we're taking excess cash, and we're deploying in AAA CMBS that are highly liquid. Again, I think we'll look at anything. You know, if you look at some of the investments we made in the real estate space on the Rithm balance sheet, you know, we made an investment. It was in the press in CXP, which is Columbia Property Trust. It was a distressed portfolio of office. So I think we'll look at anything. If it underwrites and we feel like the risk-adjusted returns warrant that investment, we'll try to do that.

Jason Stewart (Equity Research Analyst)

Great. Thank you.

Michael Nierenberg (Chairman, CEO, and President)

Thanks, Jason.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Michael Nierenberg for any closing remarks.

Michael Nierenberg (Chairman, CEO, and President)

Thanks for dialing in. Thanks for the questions, guys. We're excited about this one. I mean, I think it's, you know, again, it's a clean canvas in a lot of ways. I don't wanna sound like an artist, but, you know, as we look forward, we think the opportunity set put in front of us around this vehicle is gonna be something that's gonna be special. You know, we wanna make sure that we're focused on the commercial real estate space. We have a lot of expertise around the house, and we look forward to updating you throughout the quarter and on next quarter's call. So have a great rest of the summer, and thanks for dialing in.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.