RITHM-CAPITAL Earningcall Transcript Of Q2 of 2024

Michael Nierenberg -- Chairman, President, and Chief Executive Officer

Thanks,  Emma.  Good  morning,  everyone,  and  thanks  for  joining  the  call.  Rithm  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; Newrez, our mortgage company; Genesis, our RTL lender, and our portfolio of

assets  generated  very  strong  returns.  The  scope  to  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  Newrez  platform,  56  billion  in  owned  servicing,  and  another  100  billion  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 Rithm at the top of the house.

We  completed  the  previously  announced  acquisition  of  the  Management  Contract  of  Great  Ajax,

which  was  a  residential  mortgage  REIT,  which  is  now  we're  going  to  transition  that  into  an

opportunistic  commercial  mortgage  REIT,  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 the expectations,

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 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 going to

start with Page 3. Baron, who's with me, will focus on the mortgage company.

So now to Page 3. This slide demonstrates the kind of the power of the overall franchise. If you look

back in history in just a little bit, taking you backwards, 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 Rithm

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,  GAAP  net  income  of  $213  million  or  $0.43  per

diluted share, earnings available for distribution $231 million or $0.47 per diluted share; dividend 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 on equity 15%, and cash and liquidity at the end of Q2 was $1.5 billion. Page

5 and 6, I'm going to talk a little bit about the value, our intrinsic value in 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  $11.22,  book  value  $6.1

billion. When you look at the sum of the parts there are -- you can compare us to anybody else in, I

think, in the business when you look at some of this but like Newrez, the mortgage company, there

were 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 and the sum of the parts valuation, we assume roughly book value there. Our

Genesis  business  which  continues  to  generate  very  good  returns  and  grow  we  put  at  1.2  to  1.5

times multiple on that business. And then Sculptor just put in at our acquisition cost of one point -- 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 range of value

between roughly $13 and $16 per share or price to book value of one point -- at the low of one times

on GAAP measures, of 1.3 times at the high end. The valuation lift, you can -- again, you can make

up whatever number you want, it's between 15% and 45%. We'll get there at some point and I do

think the -- when you look at the real math behind all of our numbers, we're really -- we think it's a

great value prop for our shareholders and LPs. Page 6, just looking at, again, talking about the -- I'm

not going to spend a ton of time on this, I 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 ensure or do the best we can to make sure that we generate great results for

our shareholders and LPs. Page 7, Rithm 2.0, why are we different today? Again, we have our direct

lending businesses, and that could be Newrez, that could be the Genesis Capital business.

One of the slides I'll get to in a minute just talks about Rithm Commercial. It's really more of direct

lending of the Rithm balance sheet. It doesn't compete with any of our other strategies. And 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 during the quarter, we bought a

large pool of excess MSRs that was $40-odd billion, and we did that in partnership with the Sculptor

franchise.  So  the  power  of  the  franchise  and  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

Sculptor  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

markets  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 2022.

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 2022. Again, another

direct  lending  business.  During  the  quarter,  we  did  our  first  securitization  --  rated  securitization  in

lowering our cost of capital there at the Genesis level. Financing.

The  financing  market  is  extremely  healthy  these  days.  If  you  look  at  --  whether  you  look  at  your

Bloomberg or you look at the say 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,  we  --  Sculptor  closed  two  CLOs  during  the  quarter  for  $780

million. They also had a new investment in the real estate credit fund.

And then the other -- 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  9,  and  then  I'm  going  to  turn  it  over  to  Baron.  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  will  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 -- the 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 and 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 toward Japan where people

think they're going to earn more interest income. So it will be interesting to see how that plays out.

Market volatility, we believe will continue to persist. The geopolitical world or environment that we all

live  in  is  not  that  comforting  and  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, Ares announced, they raised $34

billion for 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 -- one last comment on commercial real estate, and then we'll

get back to that in a minute. We have -- 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 Baron, who will pick up on Slide 10.

Baron Silverstein -- President, NewRez

All right. Thank you, Michael. Good morning, everyone. We wrapped up another great quarter here

at  Newrez  and  we're  firmly  in  growth  mode,  gaining  market  share  and  just  focused  on  disciplined

management and also expansion of our third-party client base.

We're now the second-largest nonbank servicer and the fifth-largest lender in the industry. And our

growth is through our originations business, it is really just to drive and allows us to meet customers

where and how they want to be met. And then we're there with our recapture engine that really sets

us well for our 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  and  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 owned 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  and  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 as best positioned it's ever been,

and I'm looking forward to continuing to tell the Newrez story to the market. Back to you, Michael.

Michael Nierenberg -- Chairman, President, and Chief Executive Officer

Thanks, Baron. 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  the  very  same  sponsors  that  we're

providing capital to.

In the quarter, I think we did something close to $300 million of production. When we first acquired

the  company,  they  were  doing  something  between  $1.5  billion  and  $2  billion  of  production.  This

year,  we'll  hit  $3-plus  billion  in  production.  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 who are floating rate, 64% loan to value. And when you look at

the overall portfolio of what's been done to date, delinquencies are only 2% which shows the strong

credit culture of that business. On Sculptor, I gave you a few comments before. As the company we

closed  the  transaction  toward  the  end  of  November,  if  you  think  about  it  this  way,  December  is  a

holiday month, getting through a little bit of transition stuff.

So the partnership and working together has really been for about six months here. Very excited for

the  prospects  of  that  business.  A+  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 rate.

It's  about  performing  --  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 toward the end of the year. The real estate

credit  fund  took  in  a  $100  million  of  new  capital,  but  this  helps  increase  Sculptor's  obviously

long-term  AUM,  more  importantly  gives  capital  to  invest  in  what  we  think  is  one  of  the  best  real

estate, both lending and investment periods that we've seen in our careers.

What I would say when you 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  Rithm  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  period  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 Rithm, we have a slide in here on Page 16, Rithm 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  Rithm,  very  same  team  that  built  Rithm,  formerly  known  as

New Residential. Over the course of Q2, selling down legacy residential, reperforming 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  will  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 Rithm level, whether it be commercial real estate, residential, consumer or any

of the direct lending businesses. So overall, before -- I'll leave the segment performance.

You  could  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 Baron's

comments. There are public company peers out there who have done a great job.

Baron  and  the  team  have  done  a  great  job  at  the  Newrez  side  as  well.  And  again,  honing  in  on

performance first, AUM growth later, and driving returns for our LPs and shareholders. With that, I'll

turn it back to the operator, and we'll open it up for Q&A.

Operator

Questions & Answers: