Rithm Capital Corp.

Good morning and welcome to the Rhythm Capital second quarter 2024 earnings call. All participants will be in 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 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 second quarter 2024 earnings call. Joining me today are Michael Nirenberg, Chairman, CEO, and President of Rhythm Capital, Nick Santoro, Chief Financial Officer of Rhythm Capital, and Barron Silverstein, President of New Res. 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, and thanks for joining the call. Rhythm had an excellent quarter with strong contributions from all of our business lines. While we continue to focus on the direct lending business lines, which have gotten us to this point, the growth of our alternative asset business is very important to the revaluation of our company. During the quarter, Nures, our mortgage company, Genesis, our RTL lender, and our portfolio of assets generated very strong returns. The Sculptor business, which we have owned since November of last year, is seeing excellent performance in credit, real estate, and in the multi-strat fund. AUM is stable, and the teams are having great conversations with LPs. During the quarter, we did several transactions. We closed the previously announced acquisition of SLS, which is a mortgage company. This deal added to the New Res platform $56 billion in owned servicing and another $100 billion in third-party servicing. We closed on our previously announced investment in our Sculptor CLO business, a captive CLO equity fund. This helps support the franchise, generates great returns for the house, and should increase enterprise value for both Sculptor and Rhythm at the top of the house. We completed the previously announced acquisition of the management contract of Great Ajax, which was a residential mortgage rate, which is now we're going to transition that into a opportunistic commercial mortgage rate, which will help generate fee-related earnings for shareholders as we reposition the company and grow it. We also added $40 billion of excess MSRs where we partnered with Sculptor on this acquisition. This shows the power of our franchise. Looking at the macro picture, we are extremely well positioned for the future. And with the expectations of the Fed lowering rates beginning in September, this bodes very well for our company. This will help lower our borrowing costs and hopefully lead to higher earnings. We do believe a steeper curve will lead to higher prices and tighter spreads as the cost of finance from mortgage-related assets comes down with SOFR going lower on a nominal rate basis. This will generate solid returns and earnings for the business and good returns for our LPs and shareholders. One thing you'll see that's a little bit different in our presentation this time is a couple of slides illustrating the sum of the parts of our business. I'm hopeful that this will help show the value of our company and the value proposition for our shareholders and LPs. I'll now refer to the supplement which has been posted online. I'm gonna start with page three. Barron, who's with me, will focus on the mortgage company. So now to page three. This slide demonstrates the kind of the power of the overall franchise. If you look back in history, and just a little bit taking you backwards, the company was started in 2013 with $1 billion of equity capital. Today we have $7.3 billion of permanent capital. We paid out over $5.4 billion of dividends. Total economic return is 189%. When you look at the Sculptor franchise, and you look at the breadth of that investment team, whether it be in real estate, whether it be around the multi-strat fund, whether it be in credit, you look at the power of the rhythm franchise on the investment side, there is not a sector that we don't have expertise in, whether it be in credit, real estate, mortgage, or on the consumer side. And then when you look at the power of our direct lending businesses and our continued desire to grow those, I'm really excited for the future of what our company will be. As you look at Q2 financial highlights, book value $12.39 per diluted share. Gap net income of $213 million, or $0.43 per diluted share. Earnings available for distribution, $231 million, or $0.47 per diluted share. Dividends still $0.25. That's a 9.2% dividend yield as of the end of June. Economic return for Q2, 3.7%. Earnings after distribution return and equity, 15%. And cash and liquidity at the end of Q2 was $1.5 billion. Page five and six, I'm going to talk a little bit about the value or intrinsic value and the sum of the parts. Going back, and again, we'll go back to the end of June, end of Q2, current valuation, at the end of Q2 was $5.4 billion in market cap. Share price at the end of June was $1,122. Book value, $6.1 billion. When you look at some of the parts, and there are, you can compare us to anybody else, I think, in the business when you look at some of this. But like New Res, the mortgage company, there are public peers out there. We put a range of 1.1 to 1.5 times. I would encourage you to look at some of the public companies that trade out there. On the investment portfolio, some of the parts valuation, we assume roughly book value there. Our Genesis business, which continues to generate very good returns and grow, we put a 1.2 to 1.5 times multiple on that business. And then Sculptor, we just put in at our acquisition costs at one times our acquisition cost. What that does, and I don't know what the exact number should be, it gets us to a a range of value between roughly $13 and $16 per share, or price to book value at the low of one times on gap measures of 1.3 times at the high end. The valuation lift, again, you can make up whatever number you want, is between 15% and 45%. We'll get there at some point. And I do think when you look at the real math behind all of our numbers, We're really, you know, we think it's a great value prop for our shareholders and LPs. Page six, just looking at, again, talking about the, I'm not going to spend a ton of time on this. I'd encourage you to have a look at this. You look at where we think current value is today and where we think it could go. Again, this is why people buy equities. And from a performance standpoint, as a team here, both across all of our platforms, We take it to heart to ensure or do the best we can to make sure that we generate great results for our shareholders and LPs. Page seven, Rhythm 2.0. Why are we different today? Again, we have our direct lending businesses, and that could be New Res, that could be the Genesis Capital business. One of the slides I'll get to in the middle just talks about Rhythm Commercial. It's really more direct lending off the Rhythm balance sheet. It doesn't compete with any of our other strategies. And, you know, one of the things you'll see is the leverage of the overall platform. One of the things I opened up in our opening remarks is if you look, you know, during the quarter we bought a large pool of XSMSRs that was $40-odd billion, and we did that in partnership with the Sculptor franchise. So the power of the franchise in the way that we look at it and where we think we're going to go from both the investment side, our direct lending business, And then as time goes by, the sculpture business should hopefully continue to grow. And the great results that they're currently seeing there will help lead to more LP investments. When we look at page 8, just talking about the market a little bit, I spoke about what we did in the quarter. Genesis Capital, just to give you a sense on that business, we acquired that in December, I believe, of 22. EBITDA growth in that business since the time that we acquired that is probably up something around, I think it's up about 50% since we acquired the company in June of 22. Again, another direct lending business. During the quarter, we did our first securitization, rated securitization and lowering our cost of capital there at the Genesis level. Financing, the financing market's extremely healthy these days. If you look any, you know, whether you look at your Bloomberg or you look at the SAIP, There are tons and tons of securitizations and deals that come to market, as well as in the high-yield space, and I'll talk about that in a minute as well. When we look at our Sculptor franchise, I did mention Sculptor closed two CLOs during the quarter for $780 million. They also had a new investment in the real estate credit fund, and then some of the other things we did, we completed our acquisition of Great Ajax, And again, going back to performance first, that is the most important thing for us, not just AUM growth, but performance first. Page nine, and then I'm going to turn it over to Barron. Just key macroeconomic themes. We do think the Fed is going to lower rates if the data continues in September by 25 basis points. That'll lead to lower cost of financing on mortgage-related assets, as I spoke about earlier. The yield curve should continue to steepen with the front end doing better or the back end selling off. You could make an argument that when you look at true net Treasury supply, I was reading yesterday, I think the Treasury deficit is about $35 trillion. We expect roughly $1 trillion of net supply to hit the Treasury market this year. When you look at that, you think about the Bank of Japan raising rates this morning. What does all that mean? Potentially, you could see some capital get recycled back towards Japan. where people think they're going to earn more interest income. So it'll be interesting to see how that plays out. Market volatility, we believe, will continue to persist. You know, the geopolitical world, that environment that we all live in is not that comforting. And, you know, there will be a lot, we believe there'll be a lot more market volatility. Private credit will continue to expand. You just saw this morning, Aries announced they raised $34 billion for a new private credit fund. It's a big world. There's a lot of opportunity for us out there, and we're excited to actually seize on that opportunity. That's kind of it for now. I think I do have one last comment on commercial real estate, and then we'll get back to that in a minute. There is a ton of demand and a ton of incoming that we have as an institution for folks looking for capital in the credit space in the commercial real estate world. And I'll talk about that in a few. So with that, I'll turn it over to Barron, who will pick up on slide 10.