Rithm Capital Corp. (RITM) Earnings Call Transcript & Summary

Good morning, and welcome to the New Residential Investor Update Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to BoHee Yoon, Secretary. Please go ahead.

Thank you, and good morning, everyone. I'd like to thank you for joining us for New Residential's investor update call. With me today are Michael Nierenberg, Chairman, CEO and President of New Residential; and Nick Santoro, Chief Financial Officer of New Residential. Throughout the call, we're going to reference the presentation that was posted to our website this morning. If you have not already done so, I encourage you to download the presentation now. I'd like to point out that certain statements 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 supplement regarding forward-looking statements and 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. Reconciliations of these measures to the most directly comparable GAAP measures can be found in our presentation. And with that, I'll turn the call over to Michael.

Thanks, BoHee. Good morning, everybody, and thanks for jumping on the call this morning. We're really excited to update you on the internalization of our management contract. We believe this is a good day for our shareholders and our company. The evolution of New Residential, which began in 2013 as an MSR owner is a terrific story. The company has grown into a great company, investing capital along the large financial services landscape. The growth of our operating business companies, which support our assets, is a strategy that has grown over time and is truly added to our performance. Like all things in life, there is a time for change, and we believe that is now. What is changing? Our name is changing. We will no longer be externally managed. There is no confusion. Our narrative get becomes easier to understand. The same team that gets to the office at 7:00 a.m. to create value for shareholders will not change. Our basic principles of investing will not change, nor will we deviate from our mission, which is to be a prudent manager of shareholder capital, driving excellent returns for our shareholders, which we believe we have done over the past 9 years. We believe the internalization will help drive higher returns as the company will leverage our great team and operating business partners to create estimated savings of $0.12 to [ $0.13 ] per diluted share in savings as we no longer pay a management fee to Fortress. As we all know, the macro environment is difficult. We will maintain higher levels of capital as we look for great opportunities to deploy that capital. Markets are more interesting today than they have been in years, and we look forward to the continued growth of our company and the excellent results we hope to achieve for you, our shareholders. We have a short deck we have prepared, and then we'll have a Q&A session. So if you go to our site, I'm going to refer to the deck that we put up there. I'm going to open on Page 3, the internalization overview. So on June 17, NRZ announced the internalization of its management contract from an affiliate of Fortress Investment Group. The internalization is effective immediately. On Friday evening, we paid Fortress $200 million, of which there will be another 2 payments, each 1 being $100 million each or another total of $200 million by the end of the year. When you look at our team, the team will be the same. NRZ will continue to be managed by our strong management team and intends to retain key personnel across all of our functions, including investments, finance, accounting, tech, legal, tax and treasury. NRZ has entered into a TSA, or a Transition Services Agreement with Fortress. This TSA is effective through the end of 2022, but we targeted a full integration most likely by the end of Q3. What does it mean for shareholders? Internalizing the management function is expected to yield material economic benefits to our shareholders. Annual expected run rate cost savings should be in the vicinity of $60 million to $65 million a year or $0.12 to $0.13 per diluted share. We expect incremental synergies as we leverage our great operating companies that we have across the system and the talent that works within those organizations. The other thing that I think is an interesting one, over the years, I've had a number of conversations with folks about being internally managed versus externally managed. We do believe this will open up some more institutional ownership as we are now internally managed and no longer externally managed. From a value prop, our strategy remains the same. We're focused on generating attractive returns for our shareholders. As I pointed out in my opening remarks, we will continue to maintain high levels of cash and liquidity, and we'll look to deploy that capital opportunistically across the financial services landscape. We have a couple of slides that are a little bit more of a highlight reel, but since inception, NRZ has delivered 168% total economic return, which is about 19% on an annual average, so the returns have been very, very good. Page 4, the internalization is expected to drive long-term savings. This is just really the math. Currently, or prior to Friday, the company was paid in Fortress, $100 million in management fees to be externally managed. The expected effect of the internalization, the management fee will be replaced by compensation, benefits and G&A, which should save the company approximately $40-odd million in annual run rate cost savings. We'll be leveraging the infrastructure across the NRZ ecosystem. The annual benefit -- I'm sorry, the annual benefit is $60 million to $65 million on an annual basis. When you look at book value as we roll forward, we've been pretty vocal about our position in the marketplace. We have a large MSR portfolio. All of our assets on our balance sheet are fully hedged. When you look at the end of Q1, our ending book value per diluted share is $12.56. We expect our GAAP earnings to be something around $1 for the quarter. That includes a mark on our MSR book. And overall, that would theoretically bring our book value to something around $13.60. Factoring the dividend, which we declared on Friday of $0.25, the impact of the $400 million payment of $0.75, we expect June book value to be in and around [ $12.56 ]. Stock currently trades, I believe, a little bit south of $9. So we believe our equity is extremely attractive here. Page 6, when you look at our cash position, post the payment, we expect to have $1.6 billion of cash and liquidity at the end of the month. When we look at our company, we think that the earnings power of the company is extremely diversified with assets plus operating companies providing steady earnings in all rate environments. As I pointed out, we have a $625 billion mortgage servicing right portfolio, which, today, to give you a sense, our current gross WACC is 3.68. Mortgage rates are now with 6 handles. So overall, all of these borrowers have added the money unless they go for a new home or looking to purchase a new home or looking for cash out refis. When we look at our operating companies today, as we all know, the mortgage industry is undergoing a significant change. Rates are up significantly. We've been very well positioned for that from an operating perspective, very, very focused on expenses, and reducing our footprint in areas that we think we need to in this current rate environment. And then as it relates to the mortgage company, we're fully integrated now, and we'll continue to create what we think is going to be a world-class mortgage company in the nonbank sector. Page 7, our value prop, just -- and again, this is a little bit of a highlight reel. If you look in the upper left part of the page, our total shareholder return from inception through June 15 is 81%. If you compare that to the REIT index, the Bloomberg index and the peer group, we think our returns have been very, very good. Total economic return of 168%, as I pointed out earlier, that represents roughly a 19% annual average. Today, through the end of the first quarter, we paid $4 billion in dividends. We're currently trading a little bit south of a 12% dividend yield. When you look at our team, again, no change. The team that we have in place is experienced, times such as the Great Recession in 2008, inverted yield curves going back to 1994, and most recently, a very, very difficult time during COVID in March of 2020. Our balance sheet, substantial cash and liquidity, approximately 99% of our financing are non-mark-to-market. Our portfolio investments continue to be diverse, and we think about our capital as more opportunistic as we deploy capital and not just thinking that we have to deploy the capital to make earnings. Page 8, just a little bit on our rebrand. New Residential, as of or on approximately August 1, will become Rithm Capital. We will trade at a ticker of our RITM on the NYSE. When we think about this, one is, what we're trying to really do is tell a more simple and compelling brand story that doesn't just focus on the residential mortgage market because that's not who we are or who we'll be for the rest of our lives. When we think about investing capital, we are thoughtful. We are systematic. We don't just deploy capital for the sake of doing that. And that's why I keep bringing up that we're sitting on roughly $1.6 billion of cash and liquidity that we'll deploy opportunistically. I would say that the markets today are more attractive than we've seen in years, and we look forward to being able to create more outsized returns on a go-forward basis than you probably have seen in the recent history. As we think about a company position of a diversified manager of assets and operating companies, one is, it just highlights a revolution even more. We think of ourselves more diversified again than just being in the residential space. As we think about it, what does this mean for investors? We'll continue to operate as a REIT. Again, simple -- a more simplified story, less confusion. We'll trade on or about August 1 on the NYSE as RITM. There's no action required by stockholders with respect to any change that we're currently doing. Our new website will go live in the near future. It will be RithmCap.com. And again, most importantly, our mission hasn't changed. We are prudent managers of risk and shareholder capital, and we take it very seriously that it's your capital, and we do all we can to drive good returns for shareholders. So with that, I'll turn it back to the operator. We'll open up for Q&A and answer any questions anybody has.

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

Congratulations on this. You guys have discussed the idea in the recent past of teasing apart the mortgage origination business from the mortgage REIT. Do you feel like internalizing helps maybe accelerate or strengthen that opportunity? And can you just share your thoughts there? And then the second question might be just any thoughts on how the internalization could impact your credit rating with credit rating agencies and just the outlook there as well?

Thanks, Eric. As it relates to capital structure, we look at capital structure every day. We think about capital every day. I don't think that the internalization is going to change how we think about our capital structure today. It is something we continue to look at, what I would call, our operating companies. As I pointed out in my remarks, the mortgage industry is -- has been up against it as rates have risen dramatically. The good news for us is we have a very balanced company. So if rates rally the other way, obviously, we have a great origination tool. But we'll continue to look at better ways if there are better ways, quite frankly, from a capital standpoint, whether we break up into OpCo and the REIT, or how we allocate capital in our different operating companies. Part 2, as it relates to the rating agencies, Nick, I don't know if you want to take that?

Sure. We have had some preliminary conversation and the overall sentiment is positive given that we have a management organization in place and that management will be transitioning to Rithm along with the leverage of the operating companies and leveraging that infrastructure.

Can you just share how much capital you have in the origination segment and the MSR on a pro forma basis?

Sure. So at the end of the quarter, we expect there to be approximately $800 million of capital in the origination business. And there's roughly another $2 billion or so in the servicing book.

And Eric, just to frame that, I think at the time we did the Caliber acquisition, the amount of capital was, what, $2 billion in the origination, it would like [ $2 billion and $2 billion ] or something like that?

Sure. Yes. In total, it was closer to $4 billion for both servicing and [indiscernible] origination.

So as you could imagine, with gain on sale margins evaporating and us rightsizing the organization, we've taken a bunch of capital out of the origination arm and that was -- and that relates to my earlier comment that we'll continue to evaluate how we allocate capital, whether it be to the origination business, the servicing business or some other business line that we're either in or going to enter. So being more opportunistic rather than just say we have to deploy more capital and do this.

The next question comes from Bose George of KBW.

Can you talk about just the trend in core earnings? So you guys gave the range this quarter, the [ $0.26 to $0.31 ]. Where do you think that goes after in the back half of the year?

So we look at the way that we size our dividend. Obviously, this quarter's lower origination gains are for the mortgage company are next to nothing. As we go forward, we're projecting, I think, for the balance of the year for origination gains to be muted or probably pretty flat. We think the earnings power of the company should be without doing anything or deploying the capital right now, we're probably with a 30-something handle. And as much as I hate to give forward guidance, that's kind of how we think about it now. So the core dividend of $0.25, 30-something handle, which is kind of where we've been and sitting on $1.6 billion of cash and liquidity prior to making any more payments or taking any more cash out of the origination arm, I think we'll be in the 30s.

Okay. Great. And then I mean just the ROE that implies is maybe split [ of a 7, 8 ] kind of in that range. I mean to get to, say, a double-digit ROE, is the difference there really the fact that you're sitting on, whatever the $1.5 billion of cash and that gets deployed over time?

Yes. I think it's the cash that we're sitting on, on the balance sheet. I mean, if you look, I mean, agency mortgages, for example, are some of the cheaper levels we've seen in a long time. When you look at other asset classes that we've invested in overtime are at the wides we've seen in years. You couple that with sitting on the $1.6 billion of cash, at some point, we'll deploy some more of that cash. The one question we always get asked by investors, well, how do you think about stock buybacks? I mean, our stock is [indiscernible] change and our book value after everything is about $12.50. So that's another attractive piece that we'll consider. What we want to do, though, is continue to build longer-term value from a return on equity standpoint and not just put the capital out, buy some shares back. It doesn't give a big benefit to shareholders. And we do think that we're going to be able to deploy capital with -- in the 15% to 20% range here in the near future. So if you think about it, $1.6 billion mortgage company on the origination side is $800 million-odd of capital sitting in there. If that business doesn't start making more money, we'll just reduce the amount of capital that sits in the origination business and deploy it elsewhere. But I think part of it was getting -- as we look on a go-forward basis, the macro environment is very, very difficult. I think we've navigated extremely well, driving book value higher, protecting our assets, protecting our balance sheet and building cash. Now as we turn the [ corner ] here, and we do believe the market is going to stabilize at some point here in the near future, we'll deploy more capital into the marketplace.

The next question comes from Kenneth Lee with RBC Capital Markets.

In terms of the rebranding, the Rithm Capital, what's -- how could that potential evolution look like over time? It sounds as if it's going to be a little bit more general, a little bit more diversified. But I just want to see if you can give us some kind of indication there.

Yes. I think we -- if you look where we are now, I think we've built a great company. We have a number of different -- obviously, we have a very robust balance sheet with assets that we're very happy with. A lot of that is focused on the single-family space. We do have investments in a couple of different areas. One is in the consumer space, the old SpringCastle deals. We also have some investments in some, what I would call, structured commercial real estate deals. So I think, over time, you're going to see us really evolve into a more diversified asset manager of the likes of -- when you think about some of the bigger old asset managers in the marketplace, that's who we kind of strive -- that's who we're going to strive to be like. So you'll see more -- much more diversification, I think, as we go forward than what you've seen in the past. When you look at the financial services landscape, it is a massive addressable market among to so many different asset classes. And I think one is, we have a great management team here and a great group of folks that -- and I pointed out in my opening remarks, we get to work every day at 7:00 a.m. look and -- trying to figure out how we make money for our shareholders. To the extent that we enter different asset classes, we'll bring in the appropriate expertise that will work alongside us to help drive returns. So we're super excited about the future, the name change and just the ability to navigate across all these different asset classes that we think are going to yield very good returns for shareholders.

Got you. Very helpful. And just one follow-up, if I may. What's the current expectation around Fortress' equity ownership of New Residential in terms of the share ownership over the near term as after this change?

The current equity that's owned by Fortress is relatively immaterial. Fortress currently holds about 518,000 shares, and Fortress [ principals own] 1.8 million shares. So it's pretty immaterial.

The next question comes from Kevin Barker with Piper Sandler.

I just -- will you be rebranding the entire company to the forward looking to your customer base as well? Or will you just have the holding company be Rithm Capital and then the NewRez brand underneath it for the...?

Yes. Kevin, it will just be the holding company, which will be Rithm Capital. And then underneath, you'll have NewRez, which will still operate as the mortgage company, and we have a door, which is our single-family rental business. We have Guardian. So all the underlying subs will still operate along under their own name with the parent being Rithm Capital.

Got it. Okay. And then with this agreement, how long you guys been negotiating with Fortress on potential internalization or termination of this agreement? Was this something that's been going on for recently? Or is this something that's been going on for a while?

I don't -- yes, I think -- I mean, quite frankly, from my perspective, it's -- I don't really know the length of time that it's been going on from a negotiation standpoint because there are separate parts. But I would assume it's been going on for a little bit.

Did you mean like months or years? Or -- I'm just trying to understand like the thought process behind it as it developed over time.

Yes. It's been going on for months.

Okay. And then is there...

The whole thought process here, Kevin, is how do we drive higher returns for shareholders. And we think that the companies evolve over the past 9 years to be what we feel is a very good, diversified asset manager with a great team. And the time was -- we thought that we've been thinking about this, how do we drive more shareholder returns and this is one example of how we think we're going to be able to do that.

Yes, certainly aligns interest [ closer with ] shareholders. And then was there any specific way that the termination fee was calculated? There probably was some documentation from the agreement back several years ago, but was there anything specific calculation on how that $400 million was determined?

Yes. Kevin, that's not for me to discuss because there's special committees on both sides and different advisers. So that part, I'm not [indiscernible].

The next question comes from Giuliano Bologna with Compass Point.

Congrats on the transaction here. So one thing I was curious about was from thinking about capital allocation, I realize something similar came up before. But when you think about allocating capital, what you're obviously mentioning is that there are a lot of opportunities. And in many ways, opportunities are better than you've seen in the last few years. But with your soft trading in the premarket indicated at $9, buying back stock is roughly 40% return on that capital. And they also permanently remove some shares, which has an ongoing benefit. I'm curious how you weigh that versus deploying capital in the mid-teens or high teens [indiscernible], and how you weigh the different equations there? And I think there's still [ about $200 ] million outstanding on the current authorization.

Yes. I think one is we wanted to get through this what we view as a material change in our corporate life here. I think with Friday's announcement, it kind of opens the doors a little bit because we made a payment of $200 million. We have plenty of cash on our balance sheet. So we will evaluate the ability to buy back equity and/or preferreds as we look at our cap stack. So I think it does make sense here. And then the question is how much you deploy and what do you have in reserves, et cetera. But we agree with you. We think it makes a lot of sense here.

That makes sense. And then from a slightly different angle, you've obviously said that on a go-forward basis, you can kind of open up the funnel in some [indiscernible] business. I'm curious when you say that, are you looking at more consumer assets. You obviously have the legacy Springleaf transaction and some of the platform there, and you also have Prosper in the mix. I'm curious if you're looking at similar types of transactions on the consumer finance side, or is it more still going to be a little bit more real estate tied or real estate focused?

I think -- the good thing about who we are is, we can invest along whether it be the consumer space, the commercial space, the resi space. I don't think we'd come out specifically and say what we're targeting right now. I do think, on the consumer space, there's more time to be patient here as we think about the credit cycle, as we look at the resi space, same kind of thing, although we think residential homeowners are extremely well equitized here. So I think it's one of those things that we're going to be diverse. We're going to be broad. We're going to look for the right opportunities to deploy capital. And if our equity is cheaper than certain things, and we think that we have enough runway, then we'll deploy more capital in our equity. But I don't think we're going to target, for example, a Springleaf transaction versus a Prosper transaction versus some commercial real estate deal. We'll go across the spectrum and just focus on things that we think are going to provide really good returns for shareholders. And that could be a buyback of stock.

The next question comes from Jay McCanless with Wedbush.

Three from us, I think, #1, could you talk about the operating efficiencies on Slide 4 and where there might be potential upside in the numbers that you put in there?

Sure. So when we look at operating efficiencies, if you look, for example, in our mortgage company, Baron Silverstein, who's President of that company, we worked together for 25 or 30 years. We know each other extremely well. And when we leverage the internal resources across some of the other operating companies we have, we think we're going to be able to save from an overall expense load. I think the same thing goes when I look at our investment business, which is run by Charles Sorrentino. Charles works on, not only, quite frankly, just the NRZ balance sheet, but he works on some of the other things that we're doing in the mortgage company and our SFR business and some of the other things. So leveraging the resources we have internally across all of our operating businesses as well as our investment business with people that have been around, quite frankly, we've worked together, Charles and I have been together since 2008. Baron and I have been together since forever. And working together with these folks who have seen, like I always say, the good, the bad and the ugly, I think is going to make us a much, much better company as we kind of release everybody across these different investment strategies. So that's where we're going to be able to have some what we think are material saves.

Second question, could you tell us, as a percent of the unpaid balance, what the mark looks like for the mortgage servicing rights this quarter?

Sure. So I'll give it to you in kind of from a multiple perspective. I pointed out that our gross WACC on our portfolio is 3.68, with mortgage rates north of 6% right now. The multiple where we have everything marked on a weighted basis is a 4.86 multiple, which we think has more room to go to the upside when you think about it from a mark perspective. So we have actually -- I mean, just for everybody on the phone, we pulled back on our origination a bit here rather than just deploy capital into the marketplace for the sake of doing that at some of the higher multiples that others may be originating mortgages at. And the reason that we're doing that is because we have $630 billion of them. We really don't need any more right here. So if the market does reset, we do think it will reset and there'll be some gain on sale, which will come back as you're going to see smaller operators roll over because they're not able to make money, that's going to give us an added edge as well. So when you look at our MSR portfolio, $630-odd billion, 4.86 multiple, 3.68 gross WACC, we feel like we're in great shape there.

Okay. And then my third question and understanding I've talked about this a lot already, but when you look at the range of investments out there, whether it's CRE or other areas you might want to go into, I guess, what do you think right now are the most attractive areas that you might deploy some of the capital into? And how does that look relative to your historical range of investments?

So I think where we are today versus -- I mean, obviously, during COVID, there were great opportunities to deploy capital. Where we are today, I think, is we're at -- and it's not just in the mortgage market, quite frankly, not that we're going to go buy corporate bonds. But when you look across the entire -- whether it be on the fixed income universe, or you look at even some valuations on some of these different operating companies, we do think there's value. That doesn't mean we're going to rush out and put -- we always have to have x amount of capital on our balance sheet for reserves and other things that we want to keep excess cash for. That doesn't mean we're going to go deploy $1 billion tomorrow. I think in the space that we currently operate in, you've seen a free fall in all credit spreads. For example, if you look at whether it be in the commercial space, whether you look in the resi space, you look at even in some of the consumer space, there's some very good short duration assets that are offering good yield right now. The one thing that for where we are in the marketplace is your real cost of financing is substantially higher than where it was a year ago. You have to be mindful of how you deploy capital, what is truly your unlevered return and what your [ real levered ] return is. But I think there are opportunities across the spectrum, but we're going to be thoughtful. Again, we think our stock is very, very attractive here relative to other things that we look at in the marketplace. So that could be an area that we actually enter pending the window being open and things like that.

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

Well, thanks for everybody joining and support. If you have any follow-up questions, give it the buzz. We look forward to continuing to do what we been doing, which is putting up great returns, working hard for your capital and living for another day. So with that, we will have a more formal earnings call in probably early August or early July. We haven't announced that yet. But at least I think everybody has a preview. You know what the dividend is. You have a sense of what our core earnings are. You know what our GAAP earnings look like. And thanks, again, for your support, and look forward to updating you on the next call. Stay well.

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