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.

All right. Thank you, Michael. Good morning, everyone. We wrapped up another great quarter here at New Res. And, you know, we're firmly in growth mode, gaining market share, and just focused on discipline management and also expansion of our third-party client base. We're now the second largest non-bank servicer and the fifth largest lender in the industry. And our growth is tremendous. through our originations business is really just to drive and allows us to meet customers and how they want to be met, right? And then we're there with our recapture engine that really sets us well for a rate rally. Our servicing platform has a scale and long history of third-party servicing for our clients and we continue to gain market share and gain market share not only on bringing new clients but also gaining wallet share on our existing customer base. So our view overall is We can continue to grow our business, both organically and inorganically, but stay focused on our operational excellence while maximizing performance for our shareholders. Moving to slide 11, we delivered another strong quarter, and that's just building upon the foundation we've already constructed over the last few years. Our second quarter pre-tax income was $248 million, delivering a 23% ROE, excluding mark-to-market on the OWN portfolio. Excluding MSR mark-to-market, our pre-tax income increased 7% quarter-over-quarter, reinforcing the strength of our balanced business model overall. Key drivers include the acquisition of SLS, which closed on May 1st that Michael mentioned earlier. We added $56 billion in owned MSRs and $98 billion in third-party MSR servicing, growing our MSR portfolio 28% quarter-over-quarter and third-party servicing 92% quarter-over-quarter. We also completed the transition of all 800 plus thousand SLS loans onto our servicing platform, which we believe to be the first in the industry to move so many loans in such a short period of time, while still minimizing homeowner disruptions and maximizing cost and expense management. Our originations business also performed well in spite of overall margin pressures, with production volume up 35% quarter over quarter, led by our correspondent wholesale channels, but also benefited from the addition of co-issue capabilities and growth in both non-QM and home equity originations overall. Overall, I'll just say, I believe our business is in the best position it's ever been, and I'm looking forward to continuing to tell the new Russ story to the market. Back to you, Mike.

Thanks, Barron. A few more slides for me, and then we'll open up for Q&A. Genesis Capital, again, that's our transitional lending business. Very focused on high quality loans to extremely strong sponsors Most of the time there's a full recourse back to this to the very same sponsors that that we're providing capital to In the quarter, I think we did something close to 300 million of production, you know when we first acquired the company they were doing something between one and a half and two billion in production this year will hit three plus billion in production and And as I mentioned, the EBITDA on that business is going to be up a little bit north of 50% since the time that we acquired that. When you look at page 13, again, very strong ROE. And this is a common theme for us. It's not only what we do is about growth. It's about generating good returns for shareholders and LP. For the quarter, 18% ROE. We also originated 65% of our loans were floating rate, 64%. percent loan to value. And when you look at the overall portfolio of what's been done to date, delinquencies are only 2 percent, which shows the strong credit culture of that business. On Sculptor, I gave you a few comments before. The company, we closed the transaction towards the end of November. If you think about it this way, December is a holiday month, getting through a little bit of transition stuff. The partnership and working together has really been for about six months here. Very excited for the prospects of that business. A-plus team, when you think about the folks that are running that business from the credit to the real estate side to the multi-strat teams, been around for 30-plus years. Again, it's not an AUM race. It's about performing great results. putting up great returns for shareholders and the LPs that support these businesses. And that's something we look forward to growing over time as performance continues to be very good. Q2 highlights. I mentioned the CLOs closed two CLOs for $780 million. You'll see more activity in the CLO business as we go through here towards the end of the year. The real estate credit fund took in $100 million of new capital. This helps increase sculptors. Obviously, long-term AUM, more importantly, gives capital. Look at the overall platform on the real estate side. Really, no legacy like office, for example. And it puts us in a very, very unique position between the sculptor real estate folks and some of the direct lending we're doing out of the rhythm commercial side. We have solutions for everybody. And again, being that we're in what we believe is one of the best real estate investing periods with fresh capital, no legacy issues on balance sheet, we're excited about where that business is going to go. Overall performance during Q2, as I pointed out earlier, was very, very strong. When you look at the rhythm, we have a slide in here on page 16, rhythm on the commercial side. We pointed out, if you look to the right side of the page, Great Ajax. Great Ajax is a permanent capital vehicle that's externally managed by Rhythm, very same team that built Rhythm, formerly known as New Residential. Over the course of Q2, selling down legacy residential, re-performing loan assets, redeploying capital into the commercial world. Capital base today is about $250 million of equity. We look forward to growing that over time. And I think the way that'll likely occur is if there's some great investment or opportunities to deploy capital, potentially raising capital both in the public markets alongside with potentially some third party capital that come in as well. A ton of experience around the house in all of our verticals. We will not enter something unless we have expertise there, whether it be at the sculptor level, whether it be at the rhythm level, whether it be commercial real estate, residential, consumer, or any of the direct lending businesses. So overall, I'll leave the segment performance. You can have a look at that yourselves, and we'll get into Q&A. But overall, very good quarter, very excited where the business is going. I'd really encourage you to take a look at some of Barron's comments. There are public company peers out there who have done a great job. Barron and the team have done a great job at the New Res side as well. And again, honing in on performance first, AUM growth later, and driving returns for LPs and shareholders. With that, I'll turn it back to the operator, and we'll open it up for Q&A.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're 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 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Eric Hagan with BTIG. Please go ahead.

Hey, thanks. Good morning. Hey, on the MSR portfolio, just given its growth, do we have an estimate for how much amortization you might incur going forward, including on the excess MSRs that you bought during the quarter? How are you feeling about the leverage in the MSR portfolio? Do you feel like your capital allocation could maybe shift if rates drop sharply at either end of the yield curve going forward?

You gave me too many questions. On the excess MSRs, these are legacy MSRs. We own the very same MSRs. It was a liquidation of an MSR fund. It's very, very seasoned, probably something in the tune of 15-year season. Amortization will be very, very steady there. Those are really going back to our early thesis at New Residential. These are credit-impaired mortgage servicing rights. Those are currently serviced, just to give you a sense, at Cooper, so it goes back to our relationship there as well. We have recaptured provisions with Cooper on that portfolio. On the amortization front, if you look at the slides, I think amortization came in roughly at 6 CPR. Here's what I would say on amortization, and this is more of a broader theme on the mortgage market. Current coupon mortgage rates are roughly 682. Home insurance is up probably 25% to 50% when you look on an annual basis. So when I think about those two things and I look at our MSR portfolio, we're 96% of our MSRs are out of the money. Call it gross WAC roughly a 4%, 282 basis points out of the money on our MSRs. yeah, I'm worried about MSRs. I'm more worried about how we hedge them and MSR marks. I don't think you're going to have a huge refinancing market right now. We're not seeing that. We're not seeing a lot of turnover in our portfolio. I think when you look at the housing market, home prices, you know, yesterday there was some more home price data that was released. Home prices are continuing to increase, although activity levels are down. So it's almost like I'm not sure why they're increasing, quite frankly. So I do think something needs to give, but I don't see a robust origination market. The other thing I would say is today the capacity in the origination market is extremely high because production numbers, I think for this year we're estimating something around $1.6 trillion. There's a lot of capacity. I don't see a lot of refinancing activity. I think there are headwinds against the refinancing activity. While saying all that, our focus on recapture, brand building, and everything else that's going on in the mortgage company is extremely high these days. So amortization six will increase if rates continue to rally here, but I don't see a huge move right now in the levels of refinancing activity we're going to see. As far as how we finance our business, great question. We've been on the road for the course of the past six weeks in multiple cities. We will be a more frequent issuer over time in the high yield market, relying less on some of the bank funding that we get. The other thing we'll likely do is we'll hit the capital markets with more securitizations around our MSR business. We've done that over the course of the years. So I feel good about where we are. One of the more important things I want to get out there is that there's no race for us as far as size and how we think about assets in the MSR world. Currently, I would tell you we have everything we need. We see most opportunities that are put in front of us. The business will grow if we think the opportunity set creates a great return for shareholders and LPs. If not, we have plenty of other places we could deploy capital. I used the commercial real estate sector as an example. I brought up the Sculptor franchise as an example on this captive CLO equity fund. So looking at us, thinking about us in all these different direct lending businesses, being in the investment business, I think we feel very good about where we are capital allocation, where we are from an overall financing perspective. You will see more high yield over time from us. That'll pay down some of the secured financing, but we're excited again about telling our story.

Super thoughtful. Thank you so much. You know, what's the last one here? I mean, what's the growth outlook for Genesis? I mean, do you feel like lower interest rates could catalyze a lot of new production there, and how much do you maybe expect to produce there? Do you feel like you could allocate more capital over there over time? The company's

Yeah, the company has grown pretty substantially. This business, I will say, is a credit-first business. There are some new market participants that are entering the market who are fairly well capitalized. While saying that, our business is focused on some of the strongest sponsors, whether they be builders, whether they be folks that are renovating homes, whether they be bridge loans. some of the strongest sponsors in the business, we're going to continue with a credit-first business. So as long as credit performs, we'll grow. If credit doesn't perform or we're concerned about markets or headwinds and housing's coming off, et cetera, that'll drive, you know, I think the overall direction of the business. But we think the business could grow pretty substantially over time as there's a huge need in the direct lending spaces as the regional banks pull back.

Yep. That's really helpful. Thank you guys so much.

Thanks, Eric. The next question comes from Bose George with KBW. Please go ahead.

Hey, guys. Good morning. Actually, I wanted to talk about New Res. You know, as you noted and show in slide five, some of the peers are valued, you know, very, quite a bit higher than you are in the market. So for New Res, I mean, do you think that a listing is something that needs to be done to bridge that gap or, you know, kind of how are you thinking about that?

I knew you were going to ask that question. This is something that's a recurring theme for us. We're working very closely internally as well as with some of our external advisors, some of our banking friends on maximizing our capital structure so we get properly valued. I think the reason that we put in slides five and six is really to show the value of the franchise. having everything under the rhythm umbrella gives us a lot of flexibility. If you look at, just to give you a sense, if you look at capital deployment in 24, we've done, from an asset perspective, I think we've acquired about 4.2 billion of assets. We've done a bunch of financing in and around the business. We've put a little bit north of a billion dollars of equity work, equity to work. What's going to end up happening is, one is we want to illustrate the power of the franchise, and I think you see that in our numbers When you look at the mortgage company compared to others, obviously, it's extremely undervalued or the overall franchise is undervalued. To Eric's questions around capital structure, you're going to see more high yield. Hopefully, that enables us to tell a better story around some of the financing stuff that we do, but in general, we are looking at anything and everything as a way to get our equity and our company performing in line with what I would call some of the pure play mortgage players out there. If you look where we trade, we trade a give or take six times EBITDA, something like that. I think Coop and PFSI are nine times, just to give you a sense.

To summarize, is it fair to say that listing remains an option?

Is that fair to say? Yeah. I don't know if it's just a direct listing or something, but Yeah, I mean, again, we're looking at anything and everything as a way to increase value for shareholders.

Okay, great. And actually, just one more on New Res. The $2.7 billion of book value that you show on slide five, so is that allocating all of the corporate debt to New Res? Is that how you get from the $4 billion of book value down to that level?

Yes, it is, Bose. It's allocation of the corporate sector.

Okay, great. Thank you.

Thanks, Bose.

The next question comes from Steven Laws with Raymond James. Please go ahead. Hi, good morning.

Barry, I want to touch on volumes and market share. You know, strong quarter, particularly in correspondence. Can you talk about outlook, you know, back half of the year into 25? You know, rates seem to be coming down. You know, what channels do you expect to drive growth? And kind of, you know, I don't know if you have market share targets. I know it's dependent on margins.

but can you talk about your outlook for continued growth on the origination side we don't we don't really have a you know a target for where we're basically looking at from a market share perspective we look at the markets and we take advantage of where we feel like we have the best return for the company overall right and correspondent today has been, you know, the best place for us to, you know, basically have the best overall return, best profitability. And then we've really been able to kind of, you know, drive the business there. And we talked about that in the first quarter. Second quarter, actually, we were able to drive additional market share and wholesale. And, you know, while we did give up margin from where we were in the first quarter, you know, we were, you know, very happy with kind of, know how we were able to position ourselves overall from you know our market share growth going into um you know the the second quarter you know our our core focus really as michael talked about it as well is you know given the size of our servicing portfolio is really kind of you know expanding our brand being there for our customers improving our customer experience you know and then we believe we can gain significant market share without actually going out to the market overall by just continuing to offer you know, better products for our customers overall. And that's how we kind of evaluate the business today versus necessarily having a target as to where we think we are.

Thanks, Barron. Michael, can you talk about the Sculptor business? AUM revenue was up a pretty good bit sequentially. You know, I believe performance fees typically occur end of year. So kind of can you talk about what drove that sequential increase and how we think about that one moving forward?

Yeah, I think it's going to be, again, this is more of what I would say is of a growth story or a rebuilding of the so-called growth story. Again, so I think what you saw in the quarter is in some off-cycle realizations of some prior investments across the platform. But again, it's going to be lumpy, and that's truly just the nature of that business until you grow real AUM that's generating fee-related earnings. So the way I would think about it is a little bit of off-cycle realizations. Shows the power, honestly, of good investments within the overall scoped or franchise, but it will be episodic over time.

Thanks. And lastly, I think the Series A and B preps float this quarter or back half of the year. Any thoughts to taking those out or how you think about managing your you know, that part of the capital stack in the coming months.

Sure. So, you know, one of the things when you look at our business overall, whether it be at the mortgage company, whether it be at the bond portfolio, you know, the mortgage company, for example, could have just using, you know, rough math, 10 to 15 billion of escrow deposits. If the Fed cuts rates, SOFR is 533. We get paid SOFR or SOFR plus a fee on our deposits, that we have with the large banks. So if you think about it this way, those are floating rate. I think $400 million is resetting now. At some point, we'll take those out, quite frankly. But for now, I think they'll likely stay there. As the markets, as the yield curve steepens and the Fed cuts rates, we'll either do an exchange offer or come back to market to take those out over time. But the point is, you look at the broad business model and how we think about duration and how we think about hedging, this is just one piece of the overall pie. The other thing, just a quick note on hedging, we're not going to fight the Fed here. We've added a significant amount of hedge to our MSR portfolios where we could tell you that the overall protection of that book is probably at the highest level that we've seen in years. You know, when the Fed was raising rates, quite frankly, we were biased the other way, you know, for higher rates and short the bond market. Here we're, you know, we're neutral right now. So just to give you a little bit more color on the hedging strategy. Great. Thank you. Thank you.

The next question comes from Crispin Love with Piper Sandler. Please go ahead.

Thanks. Good morning, everyone. Just looking at Sculptor Building on a previous question there. So it shows solid profitability, revenues improved, comp expense was down over about 15% or so. Can you discuss what drove comp lower in the quarter for asset management, whether it was seasonal or not from the first quarter? And then can you just size the crystallization in the second quarter?

So the comp numbers typically hit in the fourth quarter and you'll see more, most likely you see probably more realizations in the fourth quarter. During the second quarter, I think we saw realizations of $50 million. So what you'll see is, again, you're going to see more comp expenses hit in the fourth quarter. You'll probably see more realizations in the fourth quarter. For this quarter, like I mentioned, it's just an off-cycle period where you're seeing realizations on some of the investments across the broader platform. Hopefully that's helpful.

That is helpful. Thanks, Michael. Just on the New Res side, you did mention earlier you don't expect to see a refi market in the near term, but can you discuss at what level of mortgage rates you might need to get to to drive refis for you and then how you can take advantage of that on a recapture perspective when we do get there?

Yeah, so here's what I'd say. If our gross WACs are 4%, you've got a 682 mortgage rate, you've got a home insurance cost higher, and you've got a, you know... I think it's $35 trillion, with the expectation that it'll be a couple trillion dollars of issuance coming to the Treasury market. I still think, while we do believe the curve's going to steepen out and that the Fed will likely lower rates here in September, I don't know where long rates ultimately go. So I'm probably less bullish on the origination market, maybe, or we are, more so than others. I think the one thing to keep in mind, and the prior question asked in Barron about the correspondent business, the mortgage origination business, when you really, really break it down, is not that profitable. Retaining the customer and keeping that MSR so you have cash flow is important. So if we break it down and think about one unit of somebody that took out a 7% mortgage and mortgage rates go to 6%, and you want to refi that person, and you're competing against every other mortgage banker out there, really think about the real origination gain you're going to see. I'm probably less constructive on origination gains than others, doing this for a long period of time. I do think if you got into a so-called COVID-like scenario, if you're going to play that and you think that the refined market will pick up, then it could become a capacity issue where you're able to drive more outside origination gains. But when you look and you think about some of the best in the business, whether they be at the wholesale side, whether it be at the correspondence side, and we're pretty large players in the correspondence side, I think in general, the market's going to remain extremely competitive on the origination side. And the main thing for us to do is to try to keep our customers and keep the cash flow from the MSR side. Those are just my thoughts on the origination market and where we think about origination gains. Keep in mind, the other thing I'll point out, when you think about the correspondent business, you're buying a closed loan. So you buy a closed loan, you deliver it to the agencies, and then you just capitalize your MSR. So you have to think about what that advantage you're going to have in the correspondent business as well. So it's a pretty competitive market.

Thanks. Very helpful and appreciate you taking my questions. Thank you.

Again, if you have a question, please press star, then one. The next question comes from Trevor Cranston with Citizens JMP. Please go ahead.

Hey, thanks. Follow-up question on the servicing portfolio and potential for refi. Obviously, the weighted average WAC is pretty far out of the money on the servicing book, but do you guys have any... statistics on sort of how much of it, how much of the MSR is, you know, and higher rate mortgages are close to current coupons and, you know, what the scale of the recapture opportunity could be in a potential rally in rates scenario. Thanks.

Yeah, so we have approximately $100 billion notional with a coupon of 6% and above.

Got it. Okay. On the commercial real estate opportunity, can you guys maybe dive into a little bit how you see that playing out in terms of potentially adding some investment to Rhythm Balance Sheet versus doing that in other funds or through the Great Ajax vehicle? Thanks.

So on the Great Ajax side, what we've been doing recently is buying AAA CMBS, which when you put a Turner leverage on, looks like it's a team's type returns versus in that vehicle before where you had kind of re-performing and non-performing loans. And if you think about it, if you're a dividend payer, you're really not getting a lot of cash flow. The coupons there were big discounts. And here we're generating cash flow assets. When you look at the real estate opportunity, the Sculptor guys are best in class. I mean, they've done a fantastic job in creating great returns for their LPs for 20-plus years. The team's been together. The leadership there has been together for 20-plus years. Big focus on what I would say real estate, private equity, more niche-type investing over time. I mentioned in my opening remarks more capital coming in now on the credit side there as well. When you look at the rhythm balance sheet, it's small. We don't have a large amount of capital outstanding. All of us that have been doing this for a long period of time have a ton of relationships with different folks in the business. But what you'll see off the rhythm balance sheet is more of a direct lending business today, not competing with anything on other sides of the house. At some point, maybe you do stuff together. But for now, I would look at rhythm as more direct lending off the balance sheet. At some point, you know, we'll have partners as well. And Sculptor is really a funds business with all third-party capital with, you know, quite frankly, best in class from an overall investment professional standpoint. Okay. Makes sense.

Thank you. Thank you.

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

Well, thanks for the questions. Have a great rest of the summer. Have a look at our deck. I do think there's some good information in there, and always happy to do follow-up with everybody. Thanks so much.

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