New Residential Investment Corp

LSE:0K76

Earnings Call Analysis

Rithm Capital's Strong Q2 with Diverse Growth

Rithm Capital had an impressive quarter, delivering strong contributions across its business lines. Newrez, the mortgage company, saw its servicing portfolio grow significantly, adding $56 billion in owned servicing and $100 billion in third-party servicing. Genesis Capital's production volume exceeded $300 million, expecting to hit $3 billion in production this year. Additionally, the Company closed significant transactions, including acquiring SLS and Great Ajax. With the Fed expected to lower rates in September, Rithm Capital anticipates reduced borrowing costs, enhancing future earnings. Overall, the Company is well-positioned for growth, focusing on operational excellence and strategic acquisitions.

Strong Financial Performance in Q2

Rithm Capital reported a stellar second quarter with significant contributions from all business segments. The company's GAAP net income reached $213 million, amounting to $0.43 per diluted share. The pre-tax income stood at $248 million, delivering an impressive return on equity (ROE) of 23%, excluding mark-to-market impacts on the portfolio【4:0†source】【4:1†source】.

Strategic Acquisitions Fuel Growth

Key acquisitions during the quarter have bolstered Rithm's market position and operational scale. The company closed the acquisition of SLS, adding $56 billion in owned mortgage servicing rights (MSRs) and another $100 billion in third-party servicing to its Newrez platform. This acquisition exemplifies Rithm's strategy to grow both organically and inorganically while maintaining a focus on operational excellence【4:3†source】【4:5†source】.

Robust Originations and Portfolio Management

The originations business showed resilience amidst margin pressures, with production volume surging by 35% quarter-over-quarter. The addition of co-issue capabilities and growth in both non-qualified mortgage (non-QM) and home equity originations drove this performance. The successful transition of over 800,000 SLS loans to Rithm's servicing platform, executed without significant homeowner disruption, underscores the company's effective portfolio management【4:9†source】.

Diversification and Strategic Investments

Rithm's diversification strategy has paid off, with the Sculptor and Genesis Capital businesses contributing strong returns. The Sculptor unit, in particular, is performing well across credit, real estate, and multi-strategy investments. With stable assets under management (AUM) and growing investor confidence, these segments are expected to contribute even more to Rithm’s bottom line. Genesis Capital achieved approximately $300 million in production this quarter, highlighting an increased EBITDA growth of over 50% since its acquisition【4:1†source】【4:4†source】.

Positive Market Outlook and Guidance

Looking ahead, Rithm is well-positioned for future growth, driven by expectations of lower Federal Reserve rates starting in September. This is anticipated to lower borrowing costs, enhance earnings, and create opportunities for expanded financing in mortgage-related assets. The company's proactive approach to hedging and asset management aims to capitalize on these favorable market conditions【4:4†source】【4:6†source】.

Value Proposition for Shareholders

Rithm's intrinsic value and sum-of-the-parts analysis suggest a significant upside for shareholders. With a market cap of $5.4 billion and a book value of $6.1 billion, the company's valuation is pegged between $13 and $16 per share. This represents a potential valuation lift between 15% and 45%, making it an attractive investment opportunity【4:0†source】【4:7†source】.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to the Rithm Capital Second Quarter 2024 Earnings Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Emma Bolla, Associate General Counsel. Please go ahead.

[Emma Bolla, executive]

Thank you, and good morning, everyone. I would like to thank you for joining us today for Rithm Capital's Second Quarter 2024 Earnings Call. Joining me today are Michael Nierenberg, Chairman, CEO and President of Rithm Capital; Nick Santoro, Chief Financial Officer of Rithm Capital; and Baron Silverstein, President of Newrez.

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.

[Michael Nierenberg, executive]

Thanks, Emma, and 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 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 Newrez 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 funds. 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 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. There's 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 going to start with Page 3. Baron, who's with me will focus on the mortgage company. So now to Page 3. This is the -- 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, 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 on 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 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 $11.22. Book value $6.1 billion.

When you look at the sum of the parts, and 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 1.5x. 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 a 1.2 to 1.5x multiple on that business And then Sculptor, we just put in at our acquisition cost of one point -- at 1x 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 1x on GAAP measures, of 1.3x at the high end.

The valuation lift, you can -- 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 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 in LPs.

Page 6, 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 hard 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 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 '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 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 closed -- Sculptor closed 2 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, 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 will be interesting to see how that plays out.

Market volatility, we believe will continue to persist. The geopolitical world that -- 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, executive]

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, is really just to drive and allows us to meet customers where and how they want to be met, right? 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 pretax income was $248 million, delivering a 23% ROE, excluding mark-to-market on the owned portfolio, right? Excluding MSR mark-to-market, our pretax 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 1 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 800,000-plus 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, executive]

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 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. So the partnership and working together has really been for about 6 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 race. 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 2 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 a $100 million of new capital. With 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 at 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 some -- 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]

[Operator Instructions] The first question comes from Eric Hagen with BTIG.

[Eric Hagen, analyst]

On the MSR portfolio, just given its growth, I mean, 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? And 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?

[Michael Nierenberg, executive]

So let me -- you gave me too many questions. But on the excess MSRs, these are legacy MSRs where we own the very same MSRs. It was the 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. So -- and 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. Hence what I would say on amortization, and this is more of a broader theme on the mortgage market. Current Cooper mortgage rates are roughly 6.82%, home insurance is up probably 25% to 50% when you look on an annual basis. So when I think about those 2 things and I look at our MSR portfolio, where 96% of our MSRs are added the money, call it gross WAC, roughly 4%, 282 basis points added the money on our MSRs.

Yes, I'm worried about MSRs. I'm more worried about how we hedge them in 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 -- yesterday, there was some more home price data that was released. Home prices are continue 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 are going to -- I think we're estimating something around $1.6 trillion. I don't -- 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 recapture -- our focus on recapture, brand building and everything else that's going on in the mortgage company is extremely high these days. So amortization, 6, 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. I -- we've been on the road for the course of the past kind of 6 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 in 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 use 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 will pay down some of the secured financing, but we're excited again about telling our story.

[Eric Hagen, analyst]

Super thoughtful. 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?

[Michael Nierenberg, executive]

Yes, the company has grown pretty substantially. This business, and 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 the 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 housings coming off, et cetera, that will drive, 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 space as the regional banks pull back.

[Operator]

The next question comes from Bose George with KBW.

[Bose George, analyst]

Actually, I wanted to talk about Newrez. As you noted and as shown on Slide 5, some of the peers are valued very -- quite a bit higher than you are in the market. So for Newrez, I mean, do you think that a listing is something that needs to be done to bridge that gap? Or kind of how are you thinking about that?

[Michael Nierenberg, executive]

Bose, I knew you were going to ask that question. We get this -- this is something that's a recurring theme for us. We're working very closely internally as well as with our -- some of our external advisers, some of our banking friends on maximizing our capital structure so we get properly valued.

I think the reason that we put in Slides 5 and 6 is really to show the value of the franchise. Having everything under the Rithm 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 put a little bit north of $1 billion 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. And when you look at the mortgage company compared to others, obviously, it's very -- 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 at, give or take, 6x EBITDA something like, I think, COOP and PFSI are 9x, just to give you a sense.

[Bose George, analyst]

And so just to sort of summarize, is it fair to say that listing remains an option. Is that fair to say?

[Michael Nierenberg, executive]

Yes. I don't know if it's just a direct listing or something. But yes, I mean, again, it's -- we're looking at anything and everything as a way to increase value for shareholders.

[Bose George, analyst]

Okay. Great. And then actually just one more on Newrez. The $2.7 billion of book value that you've shown on Slide 5, so is that allocating all of the corporate debt to Newrez? Is that how you get from the $4 billion of book value down to that level?

[Michael Nierenberg, executive]

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

[Operator]

The next question comes from Stephen Laws with Raymond James.

[Stephen Laws, analyst]

Baron, can you touch on volumes and market share. A strong quarter, particularly in corresponding. Can you talk about outlook back half of the year into '25, rates seem to be coming down. What channels do you expect to drive growth? And kind of -- 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?

[Baron Silverstein, executive]

We don't really have 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 the best place for us to basically have the best overall return, best profitability. And then we've really been able to kind of drive the business there. And we talked about that in the first quarter.

Second quarter, actually, we were able to drive additional market share in wholesale. And while we did give up margin from where we were in the first quarter, we were very happy with kind of how we were able to position ourselves overall from our market share growth going into the second quarter.

Our core focus, really, as Michael talked about it as well, is given the size of our servicing portfolio is really kind of expanding our brand, being there for our customers, improving our customer experience. And then we believe we can gain significant market share without actually going out to the market overall by just continuing to offer 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 [indiscernible].

[Stephen Laws, analyst]

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

[Michael Nierenberg, executive]

Yes, I think it's going to be -- again, it's -- this is more of what I would say is of a growth story or a rebuilding of the so-called growth story. Again, it's -- 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 Sculptor franchise, but it will be episodic over time.

[Stephen Laws, analyst]

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

[Michael Nierenberg, executive]

Sure. So 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, the mortgage company, for example, could have -- just using rough math, $10 billion to $15 billion of escrow deposits. If the Fed cuts rates, SOFR is [indiscernible], we get paid SOFR or SOFR+ 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. But 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, if 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 I would -- where we could tell you that the overall protection of that book is probably at the highest level that we've seen in years.

When the Fed was raising rates, quite frankly, we were biased the other way for higher rates and short the bond market, here we're neutral right now. So just to give you a little bit more color on the hedging strategy.

[Operator]

The next question comes from Crispin Love with Piper Sandler.

[Crispin Love, analyst]

Just looking at Sculptor and 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?

[Michael Nierenberg, executive]

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, it's -- 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, it's like I mentioned, it is an off-cycle period where you're seeing realizations on some of the investments across the broader platform. Hopefully, that's helpful.

[Crispin Love, analyst]

That is helpful. And then just on the Newrez 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 could take advantage of that on a recapture perspective when we do get there?

[Michael Nierenberg, executive]

Yes. So here's what I'd say. If our gross WACs are 4%, you got a 6.82% mortgage rate. You got home insurance costs higher, and you got a -- [indiscernible] numbers yesterday, I think it's $35 trillion with the expectation that there will be a couple of trillion dollars of issuance coming to the treasury market. I still think while the curve -- we do believe the curve is going to steepen out and that the Fed will likely lower rates here in September, I don't know where long REITs 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 asking Baron about the correspondent business. The mortgage origination business, when you really, really break it down is not that profitable. Retaining the customer is -- 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 refi market will pick up, then it could become a capacity issue where you're able to drive more outsized 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 correspondent side, and we're pretty large players in the correspondent side.

I think in general, the market is 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. And just -- those are just thoughts -- my thoughts on the origination market and where we think about origination gains.

Keep in mind, the other thing I'd 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.

[Operator]

The next question comes from Trevor Cranston with Citizens JMP.

[Trevor Cranston, analyst]

A 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 the MSR is in higher rate mortgages are close to current coupons and what the scale of the recapture opportunity could be in a potential rally of rate scenario?

[Baron Silverstein, executive]

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

[Trevor Cranston, analyst]

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 Rithm balance sheet versus doing that in other funds or through the Great Ajax vehicle?

[Michael Nierenberg, executive]

So on the Great Ajax side, what we've been doing recently is buying AAA CMBS which when you put a turn of leverage on, it looks like it's a teens-type returns versus in that vehicle before where you had kind of reperforming and nonperforming loans. And if you think about it, if you're a dividend payer, you got -- 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 has 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 Rithm balance sheet, it's small. We don't have a large amount of capital outstanding. We have, 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 Rithm 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 Rithm as more direct lending of the balance sheet. At some point, we'll have partners as well, and Sculptor is really a funds business with all third-party capital with, quite frankly, best-in-class from an overall investment professional standpoint.

[Operator]

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

[Michael Nierenberg, executive]

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.

[Operator]

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