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spk02: Good morning and welcome to the Rhythm Capital first quarter 2023 earnings conference call. All participants will be in the listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Emma Bola, Associate General Counsel. Please go ahead.
spk00: Thank you, and good morning, everyone. I would like to thank you for joining us today for Rhythm Capital's first quarter 2023 earnings call. Joining me today are Michael Nierenberg, Chairman, CEO, and President of Rhythm Capital, and Nick Santoro, Chief Financial Officer of Rhythm Capital. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Rhythm Capital website, www.rhythmcap.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.
spk01: Thanks, Emma. Good morning, everyone. Thanks for joining us. The first quarter for Rhythm continued to show the earnings power of our company. With the high levels of volatility seen in the markets as a result of the regional banking crisis, our investment portfolios performed extremely well. We have been clear from the beginning that we would not fight the Fed, and that has proven to be a good strategy as book value is essentially unchanged, away from a warrant exercise of 9.3 million shares during the quarter, which impacted book value by 23 cents. Over the past two years, despite the Fed raising rates, we grew book value away from the warrant dilution by 12.3% while paying out $1 billion in dividends. Our operating businesses perform well across the board. The challenges the regional banks are having and have had will create greater opportunities for all of our lending business lines, and we also see a huge pipeline of opportunities on both the asset side as well as some potential M&A. I can't remember a period of time when we were working on so many different deals, and we're really excited about what's to come. Cash and liquidity sits in at around $1.5 billion, putting us in a great position to take advantage of the market dislocations we're seeing. We do expect plenty of assets to come out for sale into the marketplace as a result of some of the market dislocations. Our third-party fund business continues to be a major focus as we transition to growing our business as an alternative asset manager. With that in mind, we are evaluating alternatives for our mortgage company and will likely file an S-1 in the coming month. This will allow us to create other pools of liquidity to the extent we create a public entity and further diversify our business model. On the capital raising side, we believe that we will raise significant pools of capital here over the course of the next three to nine months, which will allow us to grow earnings even more in the near future. Regarding our stock price, I feel that we're extremely undervalued. There are not many investment managers that can point to a 10-year track record with core earnings approximately 13% to 15% after paying out $4.5 billion in dividends. It's time to see our share price reflect our performance. The notion that financial service companies with operating business lines trade below book or at book does not make sense to me. To create what we have done in others is not easy. Finally, with a stock buyback in place, we will likely begin buying back shares over time. Obviously, we'll balance this versus other investments we have in our pipeline. Now I'll refer to the supplement which has been posted online. And I'm going to start with page, I'll start with page four, actually, the economic . Obviously, with the Fed raising rates yesterday, 25 basis points, again, we are not going to fight the Fed here. With the market expectations that the Fed will lower rates here in, you know, towards the end of the year, we are going to continue to maintain our course, which is not to fight the Fed, stay close to home, not have significant interest rate bets, and continue to try to keep stable book and grow earnings for our company. The stress in the banking system will likely continue, and again, we do think this is going to create good opportunities for us as we're going to see more assets come out for sale to the marketplace. Page five, earnings. Gap net income for the quarter, $68.9 million of 14 cents per diluted share. Earnings available for distribution, also known as core earnings, $171.1 million, or 35 cents per diluted share. First quarter common dividend, 25 cents. At the end of March, we're trading at a 12.5 percent dividend yield. Cash and liquidity at the end of the quarter, $1.6 billion. Total equity at the end of the quarter, $6.9 billion. Book value, again, $11.67. That reflects a 23-cent dilution from the impact of the Warren exercise. Last quarter, just for reference, was $12. So essentially, if you think about it this way, $12 versus $11.90, despite all the volatility we saw in the markets, is a pretty good result for the company. Page six, the evolution of the company. We've expanded this slide a little bit just to show a little bit more detail. The team is very, very proud of what's been created. The company was born in 2013 as a result of the banks selling MSRs. when we're externally managed by Fortress. In 2013, we bought $4 billion of loans from Springcastle. 2015, the HLSS transaction, which was really transformational for our company at that time. 2017, we still own Prosper. We own 35% Us and Soros and Third Point and Jefferies bought 35% of Prosper for a penny in exchange for buying some loans. We're still in that deal. 2018, Shell Point New Res, that was an acquisition that created a fully licensed operating company. 2019, we bought Dytek out of bankruptcy as well as Gordian, which is our property pres business. 21, we bought Caliber. 21, we bought Genesis, which is our business purpose lender. And then at the end of 22, we bought Green Barn. We internalized our manager in 22. And then 23, we launched our private credit business or private capital business, and we also launched Europe. So real growth, real strategic as we think about where we're headed with our business. Page 7, Rhythm 2.0. I'll spend just a second on this. Operating companies, obviously you can see to the left, investment portfolio, what we currently have in our business today, and then when you add our private capital businesses, we continue to work hard and grow that. We do have big aspirations to take us to the next level in the alternative asset space. You know, the other thing, just to point out, when you look at where alternative asset managers trade versus REITs, That's another reason why we're pivoting to growing into an alternative asset manager. Page nine, our mortgage company. I have Barron here, so when we get into Q&A, I'm sure Barron will answer some questions. Essentially, a very good quarter for the company. Everybody reports their earnings different in this space. I'd encourage you to have a look at the way that we report versus some of our other friends and peers out there. The origination segment down 11.7 million. That's really just March and February seasonality. I'm sorry, January and February from a seasonality perspective. March was breakeven. We laid out our corporate expense, pre-tax income for the company for the quarter, $164 million. We also laid out a pre-tax ROE, excluding the MSR mark for Q1, which is a little under 15%. When we look at the space today and we look at the opportunities around potential M&A or potential assets, there's plenty of activity going on. So I think the look of the company today won't be the look of the company as we go forward down the road. Third-party UPB, we've grown 18% since the beginning of 2022. There's a couple opportunities for us to continue to grow that, and we will do that. Delinquencies remain extremely low. And we continue to focus on customer retention, obviously reducing expenses, profitability, branding, and anything else that you'd want to be when you think about a very well-run consumer company. For other metrics, we still have lead service. We have 3 million customers in our portfolio. Our total portfolio of MSRs as a company is $600 billion. During the quarter, we funded $7 billion of origination. Barron will talk to what we expect for the rest of the year. And then with the other slide, just the other point on the slide to take a look at is our G&A numbers down 53% year-over-year and 12% quarter-over-quarter. Page 10, the origination side. Again, I'm not going to spend a ton of time here. Once again, $600 billion of MSRs. We don't need to buy another MSR unless we think they're extremely attractive. Right now, we do think they're extremely attractive, and we will likely – pursue any and all opportunities around what we think are going to create 15% to 20% IRRs for that business. When we look at the funding and the channels, DTC is going to remain relatively quiet, as most of the MSRs that we have in our portfolio are low-coupon MSRs. I believe our gross WAC is 3.8%. When you look at JV and retail, same as we get into the season for purchasing homes, that channel will grow. And then correspondent and wholesale is really something that you control based on your pricing in the marketplace. Page 11, when we look at the mortgage company and compare that to Rhythm as a whole, the mortgage company represents 75% of Rhythm's full MSR portfolio. Newly originated MSRs for the quarter, 637. Again, most of the MSRs that we have in our portfolio are well out of the money. Prepayment speeds are give or take four to five CPR. Page 12, when you look at multiples, our multiple right now is roughly 49. That includes all of our seasons. MSRs essentially roughly unchanged in the quarter. Again, four to five CPR for the full portfolio. Unlevered returns give or take something between an 8 and 10 percent right now is what we're seeing in the marketplace Page 13 or commercial real estate business Green barn folks We're starting to see opportunities across the board there I like this slide when you think about where we were and where we are. We have a 25 person team or so now dedicated to focus on opportunities in the space and When you look to the bottom from an investment strategy, we will be doing and are doing some direct lending on assets. We'll be focused on distressed asset strategies or acquiring distressed assets. We're working with different developers around redevelopment and potential opportunities for equity. And then when we look at other platform investments, There's a huge need in that space for liquidity, both debt and equity. As you think about the maturity wall coming up where there's roughly a trillion and a half of loans that will mature over the next three years. We do think most loans will get extended. There'll be, you know, the B and C type properties will not. And we think that's going to create a great opportunity for our business as we go forward. Page 14, our Genesis business. We've diversified a lot there from where we were when we first acquired the company. We're adding more and more new sponsors. Some of these are going to be more around the fix and flip business. During the first quarter, we did a little under $400 million. Asset yields there are unlevered anywhere from 10% to 12%. With a tad of leverage, you're going to see 20% to 30% returns. We are going to grow that business. We're looking at opportunities there with the regional banks likely contracting from a credit perspective. This will create, again, greater opportunities for us to deploy capital in that space. Single-family rental space, essentially unchanged quarter over quarter. We are looking at a number of opportunities with different builders in the space. I think we're more likely to grow around larger asset acquisitions as well as through our builders. that we have relationships where we lend to through the Genesis business. It's a very good business model. We still, as an investment company, don't need to deploy capital at, what I would say, three, four, or five cap rates. We are looking for higher cap rates when we balance out how we deploy capital or invest capital. Finally, the last page, and then we'll turn it over to Q&A, servicer advances, essentially unchanged quarter over quarter. There's really not a lot to talk about there. We'll keep our eyes out for down the road to the extent that delinquencies pick up in the space that we need to deploy more capital for advances. But overall, investment portfolio is performing extremely well. Delinquency is very low and a good quarter for the company. So now we'll turn it back to the operator for Q&A.
spk02: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on a telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question is from the line of Bose George, with KBW. Please go ahead.
spk06: Hey, everyone. Good morning. Can I get an update just on book value quarter to date?
spk01: It's essentially unchanged, I think, from where we ended Q1. Okay, great.
spk06: And actually, can you remind me, are there any other warrants that can still be exercised?
spk01: No, that's it. So Fortress had some and Canyon had some. We had issued some warrants when we did our debt deal back in May of 2020, I think it was. So now they're all taken care of. Everything's been exercised.
spk06: Okay, great. And then in terms of the MSR opportunity, are you looking more at agencies or at Ginnie Mae? And can you sort of characterize the difference in the returns there?
spk01: It's probably more, less Ginnie Mae, I would say. It's on the PLS side as well as on the conventional side. And anywhere that we think we could generate kind of 15% to 20% returns is what we're focused on right now.
spk06: And that's a levered return, right?
spk01: Yeah, with some term financing or some of our MSR facilities that we currently have.
spk06: Okay, great. Thanks.
spk01: Thanks, both.
spk02: Thank you. Our next question is from the line of Eric Hagen with BTIG. Please go ahead.
spk04: Hey, thanks. Good morning. You know, we know that the origination market is slow, but curious how competitive you feel like you are with rates being volatile. How competitive do you feel like you can be if mortgage rates fall even more materially? And is there a channel that you feel like you're more competitive in when rates are volatile and how you think about positioning in those channels and so forth?
spk01: I want you to take that.
spk05: Yeah, I mean, the third-party channels, I tell you, with some, obviously, Wells Fargo coming out of the market, that we have some pricing ability to gain some margin back. And, you know, what we see is a lot more competition on just distributed retail with just less inventory in the market overall. and I just think it's going to be kind of a cyclical aspect of where we can take market share on any one of the particular channels, and we like the ability to have and maneuver between each one of the different channels.
spk04: Yep, that's helpful. Well, you know, as you guys think about incorporating the third-party capital, pivoting to new businesses and such, and you think about the leverage that you can support and how to really, like, you know, unlock value from those strategies and opportunities, How much leverage do you feel like you can support and comfortably maintain across the business?
spk01: And, Eric, in the mortgage company or in just overall?
spk04: Just overall, as you layer in the new opportunities.
spk01: Yep. You know, everything that we'll do, I think we'll – I mean, we're raising pools of capital, more so on the equity side, to deploy that capital. We're not here to over-lever the balance sheet, I think. really where you look at front-end yields, right? You've got funds at five to five and a quarter. When you look at front-end yields and where things are from a financing perspective, it's more likely to do things unlevered or through some kind of term structure with leverage. So there's, you know, I think you could actually see us reduce leverage as we go forward with more longer-term financing.
spk04: That's great. Thanks for the detail. Appreciate it.
spk02: Thank you. Our next question is from the line of Doug Harter with Credit Suisse. Please go ahead.
spk07: Thanks. Michael, as that one slide kind of portrayed, you guys have been very opportunistic when there's been kind of turmoil in the market. You know, I guess what opportunities are you seeing from kind of the stress in regional banks and, you know, how do you think that you're positioned to take advantage of that?
spk01: Hey, Doug. So when we look at the regional banks, the one thing I would say, being in this business for 35 years, we don't like to prey on somebody's misfortunes. So I think what you're seeing around some of the regional banks is most likely driven by a lot of hedge funds. And unfortunately, a number of these folks are up against it. When you look at the business lines that they have in the regional banks, whether it's the First Republic, which is now owned by J.P. Morgan, you looked at Signature Bank and some of the others, there's a lot of business lines, some that really cross over our business, i.e. the Genesis business. I think you'll see people make loans to local developers, people make loans to all kinds of folks. When you look at our lending business, whether it be on the Genesis side, the commercial real estate side, and the ability to do some direct lending, and even on the mortgage company side, I think those are going to prove to be businesses that we could really start scaling up even more so. We like the Genesis business because the unlevered returns are roughly between 11% and 12% just on the loans themselves. I also think that you're going to see a number of assets come out. You're going to start to see some consumer assets come out. We're working on a couple pools right now. So the pipeline of stuff that we're looking at today, and just separate MSRs for a second, is some of the largest amounts of what I would call good investment opportunities we've seen in years and years. Raising those pools of private capital, working with third parties around that, I think is going to prove to be extremely valuable for shareholders. When you look at the mortgage space around people not making money in origination, you're seeing some selling of MSRs. This is away from what I would call the large commercial bank who announced they're getting out of the correspondent business. That's probably... unless they trade cheaper, less interesting to us than some of the M&A opportunities we may be able to pursue and then acquire assets as a result at what I would call attractive levels. So I think it's going to be broad-based. A lot of this stuff is going to be around the lending business. Great.
spk07: And then in your prepared remarks, did you mention something about, you know, considering splitting out the mortgage business again? Just kind of wanted to make sure I understood that comment.
spk01: Yes. So what we're doing now is when I look at the way how our stock trades or how poorly our stock trades, I should say, I think for us, when I look at the, you know, the mortgage company and the business that's been created there, we'll likely explore, you know, there's no guarantee which way we're going to take this thing, but we're likely going to file an S-1. We'll look at the possibility of creating a public entity out of it, which over time, could it allow us to really further diversify our business model? Great.
spk08: Thank you, Michael.
spk01: Thanks, Doug.
spk02: Thank you. Our next question is from the line of Giuliano Bologna with Compass Pound. Please go ahead.
spk08: Thank you. Actually, following up on that question, discussion about the mortgage company. Last quarter, did you make a mention, or over the past couple quarters, kind of mentioned the potential for having kind of a separate company out there. I'd be curious when you think about this potential spinco structure. Would you want to move all the MSR assets over with it, or would you rather make it more of a capital-like vehicle out there? And, you know, and then kind of following up on that same topic, you know, you discussed wanting to have more of an asset manager structure. Could you, in a sense, spin that out and then collect management and performances for managing and running, you know, the independent mortgage company that, you know, trades separately?
spk01: Yeah, I think I'll take the second part of your question, and the answer is yes. You know, we'd like to create a You know, we'd like to be one of the, you know, larger players. It's an alternative asset space. I think it's likely that you'd have an asset manager below that. You'd have some operating companies, and obviously you'd have your funds business, similar to the more successful, you know, the larger players in the marketplace. Regarding the mortgage company, I think everything's on the table. I mean, quite frankly, it's a little bit frustrating when we put up very consistent earnings quarter after quarter. Book value has grown, as I pointed out, by 12% or so over the course of the past two years, yet where we trade relative to book is just simply too cheap. So we'll look at any and all opportunities to actually grow our share price. The one thing I would say is be an investment manager, and I think I pointed this out earlier, we don't need to just buy another MSR to buy another MSR to maintain a servicing portfolio of X. if there's a better opportunity to deploy capital, we'll do that.
spk08: That's great. And kind of along those lines, I mean, you're also discussing the current valuation. I'd be curious if there's any, you know, merits, I think, you know, a bit more about share repurchases or buying back preferreds at a discount, you know, yields in the teens, and then even kind of going down that same thread, your high-yield notes at the holding company level are trading pretty wide, and there are discounts. So it could be a creative step to chip away at those in the public markets and reduce interest income, and that creates an accretion. I'd be curious if you think about how you think about your securities out there.
spk01: Yeah, I think I said in the opening remarks, we will likely pursue some kind of stock buyback or acquire shares as we go forward, assuming the stock continues to trade where it does. You know, the one thing I would point out is, and not that misery likes company, but we're not alone in where, you know, our equity valuation is relative to other peers in the marketplace. You know, the difference is, I think, our book value has been stable to higher where, you know, some other folks probably haven't had that same success. so then they may trade closer to book. So, you know, growing book and then trading at a discount to book versus seeing your book value go down, you know, it's a little bit frustrating, but the short answer is we'll likely, you know, acquire shares in the open market over time.
spk08: That's great. That's very helpful, and thank you for answering my questions. I will jump back into you.
spk01: Thank you.
spk02: Thank you. Our next question is from the line of Henry Coffey with Redbush. Please go ahead.
spk03: Yes, good morning. I would just add, Michael, that we look at companies that aren't earning their dividend, cutting their dividends, see lots of book value stress, and companies like yourselves that are earning their dividends that are not seeing a lot of book value stress, and it's almost impossible to get the the market to differentiate between that, but it must be frustrating. The reality is, when we talk to our bank analysts, the banks don't seem yet willing to shed at least single-family and multi-family assets, which look like some of the richest opportunities out there. It sounds like you're hearing a slightly different tune, but it also sounds like you're looking at a diverse range of possibilities, not just real estate-related assets. And I was wondering if you could comment on where you think the banks are with this issue and where the opportunities are coming from for you in sort of general terms.
spk01: So good morning, Henry. Hope all is well. When we look at opportunities, the consumer space, there's what I would call very live opportunities for us over the next couple weeks that we're looking at. Keep in mind, as I went through our chronology of what I would call our early years of being born, there was a large transaction around Springcastle where we bought a large portfolio of consumer loans. If you look at the Prosper deal, as I pointed out, that we did with Soros and others, that was another very good transaction. So the consumer stuff we know extremely well, and that'll be front and center here over the next couple weeks. I think the Genesis-type loans that you see at some of the regional banks, again, those will be front and center for us as well. All of these things yielding with proper financing are in and around 15% to 20% at least. So we're really excited about those opportunities. On the mortgage company side, there's a couple what I would call mortgage company-like things out there that we've looked at over time. We'll continue to look at that. On the commercial real estate space during the quarter, we put out think something around 50 million of net dollars on what I would call one distressed property as well as as well as something around a development deal around multifamily so getting more active there I would say on the commercial side it's it's it's we need to be really patient when loans go delinquent banks don't hold on to delinquent loans so those will come out over time when you look at the regional side You know, the banks are going to pull back. There's a lot of assets out there. On the signature side, you know, Newmark has been hired by the FDIC to sell assets there. So you're going to see plenty of opportunities to deploy capital. And it could range from consumer to real estate to, you know, to residential side as well as on the commercial side. So realistically, anywhere where we think there's what I would call outsized opportunities for higher ROEs, you know, measuring appropriate risk returns, that's where we'll head.
spk03: Great. Well, thank you. This is where the new focus plays out and gives you lots of touch points. So thanks for that comment.
spk01: Thanks, Henry.
spk02: Thank you. Our next question is from the line of Trevor Cranston. with JMP Securities. Please go ahead.
spk09: Hey, thanks. You talked about your ambitions on the private capital management side. I was wondering if you could maybe give us a little more color in terms of how much capital you think you might be able to raise sort of maybe over the next two or three quarters in that business and some general sort of color around what kind of traction you've had so far in terms of raising funds. Thanks.
spk01: Sure. So we're out with a, what I would call a multi-billion dollar fund right now around financial services or it's called Rhythm Asset Opportunities Fund. We have, you know, I would tell you that it's a huge focus of ours and mine. We've sat on a couple panels at some alternative asset conferences I've been traveling, what I would tell you, probably once a week. So I'm very, very hopeful that we're going to have some good success. Some of this stuff, like anything else in life, it's a relationship business. And as much as it's a relationship business, it's about past and future performance. And our performance numbers are very, very good. Our relationships are very, very good with what I would call our banks and other folks And as we continue to develop more relationships with LPs and others around the world, I'm very, very hopeful and very optimistic that we're going to be able to raise large pools of capital to deploy in the very same asset strategies that we currently do now. So I would hope that we have a close, first close either, and some of this could be more specific to what I would call SMA-specific strategies. as well, but I would hope we get a first close here in late Q2 or early Q3 for the fund. Got it. Okay, that's very helpful. Thank you.
spk09: Thank you.
spk02: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Michael Nirenberg, CEO for closing remarks.
spk01: Well, thanks for all your questions this morning. Look forward to hopefully another good quarter of performance and the growth of our business as we transition into other sectors that we're currently not deploying a lot of capital in. And look forward to updating you on the next call or over the quarter. Have a great day. Thanks, everyone.
spk02: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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