Rithm Capital Corp.

Good morning ladies and gentlemen and welcome to Rhythm Capital Corp conference call. All participants will be in a listen only mode. Should you need assistance please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation there will be an opportunity to ask questions. To ask a question you may press star then one on your telephone keypad. To withdraw your question please press star then two. Please note This event is being recorded. I would like now to turn the conference over to Emma Bowler, 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 third quarter 2023 earnings call. Joining me today are Michael Nirenberg, 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. And with that, I will turn the call over to Michael.

Thanks, Emma. Good morning, everyone. Thanks for joining us. Really exciting times for our company. From an earnings perspective and just overall operations in the quarter, a very, very solid quarter, core business lines continue to perform extremely well. The positioning we put in place over the course of the past couple years continues to pay dividends as it creates solid earnings, book value growth, and high levels of liquidity. We expect this to continue into the future with the Fed signaling higher rates for a longer period of time. The global macro backdrop for investing puts our company in a great place to take advantage of where we believe the markets are headed. As you know, we have been very vocal about repositioning the company into more of an alternative asset manager. Before I go there, I want to be clear. The core business lines which have gotten us to this point are crucial to the future of our company. We believe Rhythm 1.0, which is our existing core business, plus Rhythm Private Capital will be a huge lift for our investors, shareholders, and our employees. With the Sculptor announcement, we add great investment talent to our already terrific team. This expands our capabilities globally into all areas of credit, real estate, consumer, and other strategies that I'm sure we'll launch at some point here in the near future. We're also working on another transaction that upon consummation grows our asset management business to 50 billion of AUM. These transactions are transformational for us and continue our narrative towards being a leading global asset management business. We are extremely excited by the prospects of growing our business in the private sector and most importantly, adding partners who want to win with us and grow with us as growing with our partners will increase revenue, earnings, benefit our shareholders and our LPs who invest with us. At year end, we estimate the following, that our business will look like this. Now, these are all projections, assuming that everything closes and the deals happen. We'll have $50 billion of AUM in the asset management business, $7.2 billion of equity capital, a $35-ish billion balance sheet, and plenty of liquidity with a bunch of new partners in the private capital business. Back to the core business. During the quarter, we announced the acquisition of SLS. SLS is a mortgage company with $135 billion of servicing, of which 85 billion or so is true third-party servicing. Consistent with our rate view, this deal will bolster our servicing business, add capacity and clients in our third-party business, grow our special servicing business, and increase earnings. Our total servicing portfolio of investments from a notional perspective grows to $840 billion upon the settlement of the SLS deal. This includes mortgages that we service, investment in what we'll call excess MSRs, and legacy MSRs which are serviced by others. To be clear, this is not a race for us about size. We care about servicing our customers and making money for our shareholders and LPs. Regarding the mortgage company, we continue to be vigilant on expense reduction initiatives, particularly in the origination segments. We expect the origination business to remain under extreme pressure with mortgage rates at 8%. So how do we think about this? It's great for our servicing business. As I pointed out, we have $840 billion on a notional basis of mortgage servicing assets. Lower prepayments equals one thing for our servicing business, that's more earnings and more cash flow. On the commercial real estate side, that space remains a very big focus of ours going forward. With no legacy assets and very attractive valuations, you could expect us to allocate more capital to the sector going forward. If you recall, we acquired Green Barn, which was formerly known as Senlac slash Normandy Partners at the end of last year. Since then, we've made some opportunistic investments and will continue to do so. Right now, we see the debt side extremely attractive. There's so much more I could talk about, and we're really excited for our company and the prospects ahead. So what I'll now do is I'll flip to page three in our supplement, and I'll take you through the deck, and then we'll open it up for Q&A. Rhythm, from an overall focus standpoint, $35 billion of assets, After our dividend payment tomorrow, $4.9 billion of dividends paid in 10 years, $7.2 billion of book equity, and a 23% total year-to-date shareholder return. When we look at our expertise, I would think of us as an asset management business in all areas of mortgage, real estate, and as we add expertise around the house in credit, There's no business line that we shouldn't be in, number one. Number two is there's no business line that we will be in unless we have the expertise in-house. The right side of the slide, powered by partnership. We want to deploy opportunistic capital. We want to create more partners. Now, this is a very different thing from where we grew the company in the public markets. As we go forward, again, we're going to grow more in the private markets because our equity trades at a substantial discount to book. And we think it's a better opportunity for us to deploy capital in the private markets. Page four, just talking about our financial highlights in the quarter. Gap net income $193.9 million, or 40 cents per diluted share. Earnings available for distribution, $280.8 million, or 58 cents per diluted share. This includes a realized gain of 15 cents related to the sale of excess MSRs during the quarter. Dividend, 25 cents. Cash and liquidity at the end of the quarter, $1.9 billion. And again, total equity at $7.2 billion. I do want to point out to the right side of the page here, the book value growth from the end of Q4 2020, which at that time it was 1087 to where we are now, which is 1232, in spite of the 10-year note rising from 91 basis points to the end of the quarter where it was 460. to where today it's almost 5%. The evolution of Rhythm, page 5. You can see the company was started while we were all at Fortress in 2013. It began with $1 billion of equity. Today we have $7.2 billion of equity. And as you look at the timeline and you look at our acquisition pipeline, we've grown substantially over the years. Everything's been targeted around what I would call mortgage and real estate, the addition of the sculptured transaction and some of the other things we're working on will grow not only our real estate presence, but also our credit presence. And we look forward to continued growth as we go forward. Page six just talks about our private capital business. This is a slide you've seen before. The thing I want to point out on the right side of the page, private capital is going to help us generate recurring earnings and performance fees for rhythm shareholders and and also for the folks that we manage capital for at the LP level. We want to create partnerships with investors through specific SMAs, co-investment, as well as the funds that we continue to work on and will continue to roll out. The other thing to point out is the business continues to benefit from all the work that's been done over the years as we've created our own in-house origination and servicing platforms, and those will continue to grow as we go forward. Page 7, the Sculptor transaction update. Obviously, a lot of press around that. We're super excited to bring this deal to a close and bring it in-house. You know, what I would say on this deal, there is very little to no overlap between Sculptor and our business, and we're super excited to get this thing wrapped up. The expertise that we bring in-house is, in my mind, is going to be second to none. If you think about it, our existing investment team coupled with the Sculptor investment team is going to create an asset management business that is going to be extremely formidable in the space. Page 8 just talks about the SLS deal. Really what it is is a servicing deal. There's very little on the origination side. The idea here is, again, it's not about so-called scale. This increases our third-party special servicing business to almost $200 billion. So it's a real fee-for-service business. The other thing what it does for us is it increases our capacity in the special servicing space. So as we go forward and you think about the macro, the global macro picture, if the economy in the U.S. does slow down and there is a need for more special servicing, there's going to be nobody better than, you know, then call it new res in our business to take to work with homeowners and consumers around that. Commercial real estate, page nine. This really just talks about our expertise in-house. Currently, we have 25 to 30 investment professionals. As many of you know, we don't have any, we have not traditionally been a large player on the commercial real estate space as the company was built more around the residential space and consumer side. With the opportunity set that we see right now in the marketplace, extremely what I would call robust. And having no legacy assets, we're extremely excited to grow that business and put up what I would call great returns for our shareholders and LPs. On the loan side, the residential home loan side, keep in mind, as I pointed out before, our manufacturing capability in our mortgage company, as well as in our Genesis business, which provides loans to builders, gives us, I think, a very, very good competitive advantage over just a traditional asset manager. as we're able to manufacture our own assets. When we look at, as we think about deploying opportunistic capital, the rate environment and the macro environment for what we do is probably, it hasn't been this good in probably 25 or 30 years. I'm going to take you through a slide in two pages, which talks to where yield levels are. And when you look at that and you think about unlevered returns of something between 8 and 12%, on senior cash flow, we think it's a great time to deploy capital and will continue to be a great time to deploy capital in the very assets that we manage money for. Page 12 just talks about a number of different strategies. I'm not going to spend any time on this, but as we think about mortgage loans, servicing rights, commercial real estate, debt, et cetera, everything, not everything, but most things look very attractive to us. Page 13, if you just have a look to the right side of the page, Over the course of the past couple years, look at the yield profiles on the different asset classes that we invest capital in. Not everything, again, but most things look extremely attractive to us. And as we raise more and more capital around our funds business, we're hopeful that we're going to be able to generate what I would call real outsized returns in the asset classes that we have expertise in. And then finally, I'm not going to take you through the segment performance You could have a look at that. But, you know, I think the net of where we are as an organization is we're a very different company than where we were a couple years ago. We will remain, you know, true to our core business, the roots that got us here. But overall performance has been very, very good. And with that, I'm going to turn it back to the operator and we'll open it up for Q&A.