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Good morning, and welcome to the Rithm Capital First Quarter 2023 Earnings Conference Call. All participants will be in the listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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 Rithm Capital's first quarter 2023 earnings call. Joining me today are Michael Nierenberg, Chairman, CEO and President of Rithm Capital; and Nick Santoro, Chief Financial Officer of Rithm Capital. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Rithm Capital website www.rithmcap.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. The first quarter for Rithm continued to show the earnings power of our company. With the high levels of volatility seen in the markets as a result of the regional banking crisis, our investment portfolios performed extremely well. We have been clear from the beginning that we would not fight the Fed and that has proven to be a good strategy as book value is essentially unchanged away from a warrant exercise of 9.3 million shares during the quarter, which impacted book value by $0.23.
Over the past two years despite the Fed raising rates, we grew book value away from the warrant dilution by 12.3%, while paying out $1 billion in dividends. Our operating businesses perform well across the board. The challenges the regional banks are having and have had will create greater opportunities for all of our lending business lines and we also see a huge pipeline of opportunities on both the asset side, as well as in some potential M&A. I can't remember a period of time when we were working on so many different deals and we're really excited about what's to come.
Cash and liquidity sits in and around $1.5 billion, putting us in a great position to take advantage of the market dislocations we're seeing. We do expect plenty of assets to come out for sale into the marketplace as a result of some of the market dislocations. Our third party fund business continues to be a major focus as we transition to growing our business as an alternative asset manager. With that in mind, we are evaluating alternatives for our mortgage company and will likely file an S-1 in the coming months. This will allow us to create other pools of liquidity to the extent we create a public entity and further diversify our business model.
On the capital raising side, we believe that we will raise significant pools of capital here over the course of the next three to nine months which will allow us to grow earnings even more in the near future. Regarding our stock price, I feel that we're extremely undervalued. There are not many investment managers that can point to a 10 year track record with core earnings approximately 13% to 15% after paying out $4.5 billion of dividends. It's time to see our share price reflect our performance. The notion that financial service companies with operating business lines trade below book or at book does not make sense to me. To create what we have done in others is not easy. Finally, with the stock buyback in place, we will likely begin buying back shares over time. Obviously, we'll balance this versus other pipelines -- other investments we have in our pipeline.
Now I'll refer to the supplement which has been posted online and I'm going to start with Page -- I'll start with Page four actually, the economic landscape. Obviously, with the Fed raising rates yesterday 25 basis points, again, we are not going to fight the Fed here with the market expectations that the Fed will lower rates here towards the end of the year. We are going to continue to maintain our course, which is not to fight the Fed, stay close to home, not have significant interest rate bets and continue to try to keep stable book and grow earnings for our company. The stress in the banking system will likely continue. And again, we do think this is going to create good opportunities for us as we're going to see more assets come out for sales in the marketplace.
Page 5, earnings. GAAP net income for the quarter is $68.9 million or $0.14 per diluted share, earnings available for distribution also known as core earnings $171.1 million or $0.35 per diluted share. First quarter common dividend, $0.25, at the end of March we're trading at a 12.5% dividend yield. Cash and liquidity at the end of the quarter, $1.6 billion, total equity at the end of the quarter is $6.9 billion. Book value, again, $11.67, that reflects a $0.23 dilution from the impact of the warrant exercise. Last quarter, just for reference, was $12. So essentially, if you think about it this way, $12 versus $11.90 despite all the volatility we saw in the markets is a pretty good result for the company.
Page 6, the evolution of the company. We've expanded this slide a little bit just to show a little bit more detail. The team is very, very proud of what's been created. The company was born in 2013 as a result of the bank selling MSRs under the -- when we externally managed by Fortress In 2013, we bought $4 billion of loans from SpringCastle, 2015 the HLSS transaction, which was really transformational for our company at that time. 2017, we still own Prosper. We bought -- we own 35% in [Soros] (ph) and [ThirdPoint] (ph) and Jefferies, bought 35% of Prosper for $0.01 in exchange for buying some loans. We're still in that deal. 2018, Shellpoint, NewRez, that was an acquisition that created a fully licensed operating company. 2019, we bought Ditech out of bankruptcy as well as Gordian, which is our property press business. 2021 we bought Caliber, 2021 we bought Genesis, which is our business purpose lender. And then at the end of 2022 we bought GreenBarn, we internalized our manager in 2022 and then 2023, we launched our private credit business or private capital business and we also launched Europe. So real growth, real strategic as we think about where we're headed with our business.
Page 7, Rithm 2.0 I'll spend just a second on this. Operating companies, obviously, you can see to the left, investment portfolio what we currently have in our business today. And then when you add our private capital business as we continue to work hard and grow that, we do have some big aspirations to take us to the next level in an alternative asset space. The other thing, just to point out, when you look at where alternative asset managers trade versus REITs, that's another reason why we're pivoting to growing into an alternative asset manager.
Page 9, our mortgage company, I have Baron here. So when we get into Q&A, I'm sure Baron will answer some questions. Essentially, a very good quarter for the company. Everybody reports their earnings different in this space. I'd encourage you to have a look at the way that we report versus some of our other friends and peers out there. The origination segment down $11.7 million, that's really just March and February seasonality. I'm sorry, January and February from a seasonality perspective. March was breakeven. We laid out our corporate expense, pretax income for the company for the quarter of $164 million. We also laid out a pretax ROE excluding the MSR mark for Q1, which is a little under 15%. When we look at the space today and we look at the opportunities around potential M&A or potential assets, there's plenty of activity going on. So I think the look of the company today won't be the look of the company as we go forward down the road.
Third party UPB, we've grown 18% since the beginning of 2022. There's a couple of opportunities for us to continue to grow that. We will do that. Delinquencies remain extremely low and we continue to focus on customer retention, obviously, reducing expenses, profitability, branding and anything else that you'd want to be when you think about a very well-run consumer company. For other metrics we service. We have 3 million customers in our portfolio. Our total portfolio of MSRs as a company is $600 billion. During the quarter, we funded $7 billion of origination. Baron will talk to what we expect for the rest of the year. And then the other slide – the other point on the slide to take a look at is our G&A numbers down 53% year-over-year and 12% quarter-over-quarter.
Page 10, origination side. Again, I'm not going to spend a ton of time here. Once again $600 billion of MSRs, we don't need to buy another MSR unless we think they're extremely attractive. Right now we do think they're extremely attractive and we will likely pursue any and all opportunities around what we think are going to create 15% to 20% IRRs for that business. When we look at the funding and the channels, DTC is going to remain relatively quiet as most of the MSRs that we have in our portfolio are low coupon MSRs. I believe our gross WAC is 3.8%. When you look at JV and Retail, same as we get into the season for purchasing homes, that channel will grow and then corresponding in the wholesale is really something that you control based on your pricing in the marketplace.
Page 11. When we look at the mortgage company and compare that to Rithm as a whole, the mortgage company represents 75% of Rithm's full MSR portfolio. Newly originated MSRs for the quarter, 6.37%, again, most of the MSRs that we have in our portfolio are well out of the money. Prepayment speeds are give or take 4% to 5% CPR.
Page 12. When you look at multiples, a multiple right now is roughly 4.9 times, that includes all of our seasons. MSR is essentially roughly unchanged in the quarter. Again, 4% to 5% CPR for the full portfolio, unlevered returns, give or take something between an 8% and 10% right now is what we're seeing in the marketplace.
Page 13. Our commercial real estate business, GreenBarn and folks. We're starting to see opportunities across the board there. I'd like to slide when you think about where we were and where we are, we have a 25 person team or so now dedicated to focus on opportunities in the space. When you look to the bottom from an investment strategy, we will be doing and are doing some direct lending on assets. We'll be focused on distressed asset strategies or acquiring distressed assets. We're working with different developers around redevelopment and potential opportunities for equity. And then when we look at other platform investments, there's a huge need in that space for liquidity, both debt and equity as you think about the maturity wall coming up where there's roughly $1.5 trillion of loans that will mature over the next three years. We do think most loans will get extended. There'll be -- the B and C type properties will not. And we think that's going to create a great opportunity for our business as we go forward.
Page 14, our Genesis business. We've diversified a lot there from where we were when we first acquired the company. We're adding more and more new sponsors, some of these are going to be more around the fix and flip business. During the first quarter, we did a little under $400 million asset yields there are unlevered anywhere from 10% to 12% with a tad of leverage. You're going to see 20% to 30% returns. We are going to grow that business. We're looking at opportunities there with the regional banks, likely contracting from a credit perspective. This will create, again, greater opportunities for us to deploy capital in that space.
Single family rental space, essentially unchanged quarter-over-quarter. We are looking at a number of opportunities with different builders in the space. I think we're more likely to grow around larger asset acquisitions, as well as, through our builders that we have relationships where we lend to through the Genesis business. It's a very good business model. We still as an investment company don't need to deploy capital at, what I would say, three, four or five cap rates, we are looking for higher cap rates when we balance out how we deploy capital or invest capital.
Finally, the last page and then we'll turn it over to Q&A. Servicer advances, essentially unchanged quarter-over-quarter. There's really not a lot to talk about there. We'll keep our eyes out for down the road to the extent that delinquencies pick up in the space that we need to deploy more capital for advances. But overall, investment portfolio is performing extremely well, delinquency is very low and a good quarter for the company.
So now, we'll turn it back to the operator for Q&A.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Bose George with KBW. Please go ahead.
Hey, everyone. Good morning. Actually, can I get an update just on book value quarter to date?
It's essentially unchanged I think from where we ended Q1.
Okay. Great. And actually, can you remind me, are there any other warrants that can still be exercised?
No, that's it. So Fortress had some and Canyon had some. We had issued some warrants when we did our debt deal back in May of 2020. So now they're all taken care of. Everything's been exercised.
Okay, great. And then in terms of the MSR opportunity, are you looking more at agencies or at Fannie Mae? And can you sort of characterize the difference in the returns there?
It's probably more -- less Fannie Mae, I would say. It's on the POS side as well as on the conventional side. In anywhere that we think we could generate kind of 15% to 20% returns is what we're focused on right now.
And that's a levered return, right?
Yes, with some term financing or some of our MSR facilities that we currently have.
Okay, great. Thanks.
Thanks, Bose.
Thank you. Our next question is from the line of Eric Hagen with BTIG. Please go ahead.
Hey, thanks. Good morning. We know that the origination market is slow, but curious how competitive you feel like you are with rates being volatile? And how competitive do you feel like you can be if mortgage rates fall even more materially? And is there a channel that you feel like you're more competitive in when rates are volatile and how you think about positioning in those channels and so forth?
I wants you to take that.
Yes. I mean, the third party channels tell you with some -- obviously, Wells Fargo coming out of the market that we have some pricing ability to gain some margin back. And what we see is a lot more competition on just distributed retail with just less inventory in the market overall. And I just think it's going to be kind of a cyclical aspect of where we can take market share in any one of the particular channels and we like the ability to have and maneuver between each one of the different channels.
Yes, that's helpful. Well, as you guys think about incorporating the third party capital, pivoting to new businesses and such. When you think about the leverage that you can support and how to really unlock value from those strategies and opportunities, how much leverage do you feel like you can support and comfortably maintain across the business?
Eric, in what -- in the mortgage company or in just overall?
Just overall. As you layer in the new opportunities.
Everything that we'll do, I think we'll -- I mean we're raising pools of capital more so on the equity side to deploy that capital. We're not here to over lever the balance sheet. I think really where you look at front end yields, right, you got funds at 5% to 5.25%. When you look at front end yields and where things are from a financing perspective, it's more likely to do things unlevered or through some kind of term structure with leverage. So there's, I think you could actually see us reduce leverage as we go forward with more longer term financing.
That's great. Thanks for the detail. Appreciate it.
Thank you. Our next question is from the line of Doug Harter with Credit Suisse. Please go ahead.
Thanks. Michael, as that one slide kind of portrayed you guys have been very opportunistic when there's been kind of turmoil in the market. I guess, what opportunities are you seeing from kind of the stress in regional banks and how do you think that your position to take advantage of that?
Hey, Doug. So when we look at the regional banks, the one thing I would say being in this business for 35 years, we don't like to prey on somebody's misfortune. So, I think what you're seeing around some of the regional banks is most likely driven by a lot of hedge funds and unfortunately, a number of these folks are up against it. When you look at the business lines that they have in the regional banks, whether it be First Republic, which is now owned by JPMorgan, you look at Signature Bank and some of the others, there's a lot of business lines, some that really crossover our business, i.e. the Genesis business. I think you'll see there's -- people make loans to local developers, people make loans to all kinds of folks when you look at our lending business whether it be on the Genesis side, the commercial real estate side and the ability to do some direct lending. And even on the mortgage company side, I think those are going to prove to be businesses that we could really start scaling up even more so. We like the Genesis business because the unlevered returns are roughly between 11% and 12% just on the loans themselves.
I also think that you're going to see a number of assets come out. You're going to start to see some consumer assets come out. We're working in a couple of pools right now. So the pipeline of stuff that we're looking at today and just separate MSRs for a second is some of the largest amounts of what I would call good investment opportunities we've seen in years and years. Raising those pools of private capital, work with third parties around that, I think it's going to prove to be extremely valuable for shareholders.
When you look at the mortgage space around people not making money in origination, you are seeing some selling of MSRs. This is away from what I would call the bigger -- the large commercial bank who announced they're getting out of the correspondence business. That's probably the -- unless they trade cheaper less interesting to us than some of the M&A opportunities we may be able to pursue and then acquire assets as a result that what I would call attractive levels. So I think it's going to be broad based. A lot of the stuff is going to be around the lending business.
Great. And then, in your prepared remarks, did you mention something about considering splitting out the mortgage business again? Just kind of wanted to make sure I understood that comment?
Yes. So what we're doing now is, when I look at the way how our stock trades or how poorly our stock trades, I should say. I think for us, when I look at the mortgage company and the business that's been created there, we will likely explore -- there's no guarantee which way we're going to take this thing. But we're likely going to file an S-1. We'll look at the possibility of creating a public entity out of it, which over time could allow us really further diversify our business model.
Great. Thank you, Michael.
Thanks, Doug.
Thank you. Our next question is from the line of Giuliano Bologna with Compass Point. Please go ahead.
Actually following up on that discussion about the mortgage company. I think last quarter you did make a mention for over the past couple of quarters kind of mentioned the potential for having kind of a separate company out there. I'd be curious, when you think about the potential [indiscernible] structure. Would you want to move all the MSR assets over with it or would you try to -- would you rather make a more of a capital light vehicle out there? And then kind of following up on that same topic, you discussed wanting to have more of an asset in our infrastructure. Could you in the sense spend that out in [indiscernible] management and performance fees for managing and running the independent mortgage company, but trade separately?
Yes, I think -- I'll take the second part of your question and the answer is yes. We'd like to create a -- we'd like to be one of larger players in the alternative asset space. I think it's likely that you'd have an asset manager below that. You'd have some operating companies and obviously you'd have your funds business similar to the more successful, the larger players in the marketplace. Regarding the mortgage company, I think everything is on the table. I mean, quite frankly, it's a little bit frustrating when we put up very consistent earnings quarter after quarter. Book value has grown as I pointed out by 12% or so over the course of the past two years, yet the -- where we trade relative to book is just simply too cheap. So we'll look at any and all opportunities to actually grow our share price.
The one thing I would say is, being an investment manager and I think I pointed this out earlier, we don't need to just buy another MSR to buy another MSR to maintain a servicing portfolio of X. If there's a better opportunity to deploy capital, we'll do that.
That's great. And kind of along those lines, I mean, [indiscernible] the current valuation. I'd be curious if there's any merit, I think a bit more about share repurchases or buying back preferred for a discount. You also have yields in the teens. I know you didn't have going down that same thread. Your high yield notes at the holding company level are trading pretty wide at a discount. So it could be accretive to chip away those in the public markets and reduce interest income and create some accretion. I'd be curious if you think about -- how you think about your securities out there?
Yes, I think, I said in the opening remarks, we will likely pursue some kind of stock buyback or acquire shares as we go forward assuming the stock continues to trade where it does. The one thing I would point out is and not the misery likes company, but we're not alone in where our equity valuation is relative to other peers in the marketplace. The difference is, I think our book value has been stable to hire where some other folks probably haven't had that same success. So then they may trade closer to book. So, growing book and then trading at a discount to book versus senior book value go down. It's a little bit frustrating, but the short answer is, we'll likely acquire shares in the open market over time.
That's great. That's very helpful and thank you for answering my questions. I will jump back in the queue.
Thank you.
Thank you. Our next question is from the line of Henry Coffey with Wedbush. Please go ahead.
Yes. Good morning. I would just add, Michael, that we look at companies that are have aren't earning their dividend, cutting their dividend, see lots of book value stress and companies that like yourselves that are earning their dividends that are not seeing a lot of book value stress and it's almost impossible to get the market to differentiate between that, but it must be frustrating. But the reality is, when we talk to our bank analyst, the banks don't seem yet willing to shed at least single family and multifamily assets, which would -- which look like some of the richest opportunities out there. It sounds like you're hearing a slightly different tune, but it also sounds like you're looking at a diverse range of possibilities not just real estate related assets. And I was wondering if you could comment on where you think the banks are with this issue? And what the opportunities -- where the opportunities are coming from for you in sort of general terms?
So, good morning, Henry. [indiscernible] as well. When we look at opportunities, the consumer space there, what I would call, very live opportunities for us over the next couple of weeks that we're looking at. Keep in mind, as I went through our chronology of, what I would call, our early years of being born, there was a large transaction around SpringCastle where we bought a large portfolio of consumer loans. If you look at the Prosper deal, as I pointed out that we did with [Suros] (ph) and others, that was another very good transaction. So the consumer stuff we know extremely well and that will be front and center here over the next couple of weeks.
I think the Genesis type loans that you see at some of the regional banks, again, those will be front and center for us as well. All of these things yielding with proper financing are in and around 15% to 20% at least. So we're really excited about those opportunities. On the mortgage company side, there's a couple, what I would call, mortgage company light things out there that we've looked at over time. We'll continue to look at that. On the commercial real estate space, during the quarter we put out, I think, something around $50 million of net dollars on, what I would call, one distressed property, as well as something around a development deal, around multifamily. So getting more active there.
I would say on the commercial side, we need to be really patient. When loans go delinquent, banks don't hold on to delinquent loans, so those will come out over time. When you look at the regional side, the banks are going to pull back, there's a lot of assets out there. On the signature side, [Newmark] (ph) has been -- I think it’s Newmark, has been hired by the FDIC to sell assets there. So you're going to see plenty of opportunities to deploy capital. And it could range from consumer to real estate to residential side as well as on the commercial side. So realistically, anywhere where we think there's, what I would call, outsized opportunities for higher ROEs Measuring appropriate risk returns, that's where we'll head.
Great. Well, thank you. This is where the new focus plays out and gives you lots of touch points. So thanks for that comment.
Thanks, Henry.
Thank you. Our next question is from the line of Trevor Cranston with JMP Securities. Please go ahead.
Hi. Thanks. You talked about your ambitions on the private capital management side. I was wondering if you could maybe give us a little more color in terms of how much capital you think you might be able to raise sort of maybe over the next two or three quarters in that business and some general sort of color around what kind of traction you've had so far in terms of raising funds? Thanks.
Sure. So we're out with a, what I would call, a multibillion dollar fund right now around financial services or as called Rithm asset opportunities fund. We have -- I would tell you that it's a huge focus of ours and mine. We've sat on a couple panels at some alternative asset conferences. I've been traveling, what I would tell you probably once a week. So very, very hopeful that we're going to have some good success, some of this stuff like anything else in life, it's a relationship business. As much as it's a relationship business, it's about past and future performance. And our performance numbers are very, very good, our relationships are very, very good with whatever we call our banks and other folks. And as we continue to develop more relationships with LPs and others around the world, I'm very, very hopeful and very optimistic that we're going to be able to raise large pools of capital to deploy in the very same asset strategies that we currently do now.
So I would hope that we have a close -- first close either and some of this could be more specific to what I would call SMA specific strategies as well. But I would hope we get a first close here in late Q2 or early Q3 for the fund.
Got it. Okay, that's very helpful. Thank you.
Thank you.
Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Michael Nierenberg, CEO for closing remarks.
Well, thanks for all your questions this morning. Look forward to hopefully another good quarter of performance and the growth of our business as we transition into other sectors that we're currently not deploying a lot of capital in and look forward to updating you on the next call or over the quarter. Have a great day. Thanks, everyone.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.