Rithm Capital Corp.

Good day and welcome to the RISM Capital third quarter 2024 earnings conference call. All participants are in 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 third 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 us. So during the quarter, we had a very strong quarter across all of our business lines. You know, before I get into the, what I would call the meat of our business, I wanted to point out a couple things before we go into the deck. First of all, you'll see a value slide depicting the sum of the parts analysis, which we put in last quarter, and again, we put it in this quarter. Quite frankly, I believe our equity is very cheap when you look at peers in the business and our actual results. We have a best-in-class lending business, a large balance sheet, and an asset management business with huge upside. Last quarter, I got a couple questions on our equity raise, and I just wanted to address that as well. We raised $300 million. I got asked, what are you going to do with the money? So you understand our thought process. Since 2021, we have deployed $5.8 billion. We haven't raised any equity. while growing our earnings by approximately 60%. I would say that's pretty impressive. We have funded our growth with our operating businesses, balance sheet, and a little bit of high yield debt. As we think about risk, there are multiple wars going on. We're in the middle of what could be a highly contested election. And as many of you know, we are always engaged in activity to grow our platform through M&A. So I would say all of these factors are good reasons why we want to have more capital. Now back to our operating companies, New Res and Genesis. Our lending businesses produced excellent results. Genesis had a record quarter, and we could not be more thrilled with that platform. As banks pull back, we win. In New Res, we have a portfolio of $875 billion-ish of mortgage servicing rights, which include both owned servicing rights and third-party servicing. These assets have been great. Our origination business had another very good quarter with increased volumes and profitability. On the asset management side, Sculptor, which was acquired less than a year ago, last November. Performance is extremely good across all of our verticals, including real estate, credit, and its multi-strat fund. The teams are out raising money and we're starting to see inflows across the entire platform. This past quarter, the real estate group announced their first closing of their multi-billion dollar SRE Fund 5. We're very pleased with how well the fundraising is going despite such a challenging environment and expect that fund to be oversubscribed. A true testament to the team. We look forward to when you will see meaningful contributions from the Sculptor franchise to the bottom line of Rhythm. On Great Ajax, the REIT we took over, the management contract on in Q2, We have repositioned the residential assets in the company and look forward to growing the vehicle with opportunistic investments in the commercial space. We've done this before while building new residential at Fortress, going back to 2013, and we'll do it again. The commercial real estate business today is in one of those periods where we feel current capital deployment will be hugely rewarded down the road, and being patient, searching for the right investments will reward our shareholders. One last note on AJAX. Last week, we announced we are changing the name from Great AJAX to Renton Property Trust, which should happen in the fourth quarter. Now I'll refer to the deck, which has been posted online. So on page three, the way to think about the company today is effectively across all of our business lines, we manage $80 billion of assets. We have $7.8 billion of permanent capital in the public markets. And again, we have a $875-ish billion servicing portfolio. So real scale across all of our business lines. We don't need anything today when you look at the verticals that win and you think about the current market environment. So where are we going and what do we want to do here? One, obviously we want to grow AUM, but what matters first is performance. And when you look across the platform, all cylinders are firing. We want to expand our direct lending. So what does that mean? Obviously, we have New Res and Genesis, which contribute meaningfully to our business. We're going to continue to look at other areas in financial services where we could expand our direct lending. On new market opportunities, we're always looking to grow. But again, we want to be prudent and think about different areas where we could grow that we have real expertise around the house. and that we're going to make a meaningful contribution to the bottom line of Rhythm for our shareholders. We're obviously continuing to try to grow our private capital business. I mentioned during the quarter, we're starting to see real inflows in the Sculptor business. At the Rhythm level, we're out looking at other opportunities to raise capital as well. And then again, we continue to look to expand into new investment verticals. For the quarter, an excellent quarter. This is the 20th consecutive quarter where our earnings available for distribution was greater than common dividends paid. Book value up 8% since 2021. Very stable quarter over quarter. One note on that, when the Fed announced earlier this year that they wanted to start cutting rates, we got very close to home, which is where we are today. You're going to see, I believe, you'll see very little book value increase volatility as we go forward. Dividend yield, we currently traded 8.8%, and that's as of 9-30-24, and we closed the quarter with roughly $2 billion of cash and liquidity. For the quarter, GAT net income, $97 million, 20 cents per diluted share. Earnings available for distribution, $270 million, or 54 cents per diluted share, with a return on equity number of 18%. Book value closed the quarter at $6.4 billion, $12.31 per common share. Today it's roughly $12.5 or something in and around that. We paid $0.25 in dividends and, again, $2 billion of cash and liquidity in our balance sheet. Page five, sum of the parts. I'm not going to spend a ton of time on it. Have a look at it. Bottom line is we traded in and around $10.5 to $10.60 or something like that. Book value today is give or take $12.5. If you look at the value of our parts and compare us to peers, I personally have a very strong view that our equity is extremely attractive here and think there's significant upside. Page six, this was some of the earlier comments that I referred to. When you look at our capital deployment since 2021, if you look to the left part of the page, Jan of 2021, earnings available for distribution were 34 cents. Today we're 54 cents. We've deployed $5.8 billion of capital since 21. That includes acquiring different operating platforms and included in that a Sculptor. We bought a billion-four consumer loans from Goldman. We acquired Genesis Capital. We bought Caliber. We bought SLS. When you think about all those transactions and you think about actually the portfolio growth and not going out to raise a ton of equity, it's a great story. Earnings available. As I look at, again, earnings growth, roughly 60%, and our CAGR is 14%. So I think the team should be really proud of those numbers. And again, that should dispel any of the questions about why we're raising $300 million of equity in a quarter. When we look at the next phase of growth, like I said earlier, we don't really need anything. We want to raise more money in our private capital business so our balance sheet grows a little bit less as we go forward. We want to continue to put up what I would call very good results across all of our platforms and, you know, From a credit perspective, there's a lot of talk about everybody growing private credit. We're in that camp as well, and we want to grow our private credit. But just keep in mind, we've been in these businesses for 10 years. When you think about direct lending, you think about the mortgage company we built. You think about Genesis Capital. You think about secured credit, unsecured credit, whether it be at Sculptor, whether it be at Rhythm. You think about real estate. We've been in these sectors for a long, long time. And now it's just creating more scale around our private capital business. On New Res, you know, we built this company, quite frankly, from scratch. While at Fortress, you know, if you go back to the Fortress days, we built Mr. Cooper. Obviously, those guys have done a great job. But if you look at where we are today, we are, I think we're a top three mortgage company. bank, non-bank mortgage originator and servicer in the U.S. Large portfolio service, you know, over 4 million customers. Huge third-party business as we grew through our SLS acquisition. Company makes a lot of money in third quarter. You know, if you look where we are from a production standpoint, through Q3, we're 41 billion in origination. and that's higher than where we were in all of 23. Genesis Capital, another great story. We acquired this company from Goldman's Merchant Bank, I believe, in 22. Earnings, just to give you a sense, when we bought the company, I think we were doing something around $50 million in EBITDA. This year we should do something between, you know, give or take $90 million of EBITDA. Production numbers are up. from $2 billion, and we may close the year at something around $3.5 to $4 billion. So real good story. Most importantly here is when you look at the portfolio, delinquency numbers are extremely low, sponsor growth is high, and the return on equity, and that's how we think about all our businesses, return on equity for our shareholders is extremely high. Sculptor, what I would say in Sculptor is, again, we go back to November of last year. Closed on the company, I believe, around November 20th. It's a great business. Great business. Has a ton of upside. Teams are doing really well. Every day it gets better. When you look at real returns for the LPs that Sculptor and the leadership serve, they're great. I mean, there's just no reason why this company is not going to grow in significant scale as we go forward. There's plenty of room for us. There's plenty of room for our overall franchise. And again, it's performance first, and that's the Sculptor mentality. I opened up in one of the quotes, performance is, you know, that's our mantra. We want performance before we grow AUM. And when you look at this platform, there's nothing that disputes that way of thinking. On the commercial real estate business on page 11, You know, we do some balance sheet investing at the rhythm level. We've been pretty methodical there. I do think over time that when we look at rhythm, we look at great Ajax. What you're going to see is more strategic partnerships, I think, off the rhythm balance sheet as we look forward. We do think around the real estate business today that we're in one of those periods of time, as I pointed out in my opening remarks, that... current capital deployment is going to be hugely rewarded down the road as we look at the real estate business. Page 12, just talking about the macroeconomic themes. Obviously, we're in a period where who knows what's going to happen with this election. When you think about inflation, you think about deficits, you think about yields. I think regardless what you're going to see, you could see higher yields in the long end. We have seen a steepening of the yield curve, which is where the front end should be anchored here, but I think you could see higher long-term rates, you know, on the back end as deficits continue to balloon. Another common theme, asset-based finance. Everybody's talking about asset-based finance. As I pointed out, we've been doing this for, you know, I've been in the business forever, and we've been doing this together as a group for a long, long time, so there's nothing different here. When you look at banks, banks continue to look for capital relief. around either their balance sheets or some of the things that they're doing. We're very active in what I would call credit risk transfer. For credit risk transfer, we've done some large transactions with some of our large money center banks, and we'll continue to do that as we go forward. On the consumer side, consumers continue to remain resilient. We don't see any real degradation or deterioration in consumer credit. And then I brought up on the real estate side from a cycle standpoint. Barron's going to take us out and talk about NewRez and the mortgage company, and then I'll jump back in a little bit later in the queue. Barron?