Rithm Capital Corp.

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.

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.

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.