Good morning and welcome to the Rithm Capital Second Quarter 2024 Earnings Call. All participants will be in 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 Bolla, 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 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.

Thanks, Emma. Good morning, everyone, and thanks for joining the call. Rithm had an excellent quarter with strong contributions from all of our business lines. While we continue to focus on the direct lending business lines which have gotten us to this point, the growth of our alternative asset business is very important to the revaluation of our company. During the quarter; Newrez, our mortgage company; Genesis, our RTL lender, and our portfolio of assets generated very strong returns. The scope to business, which we have owned since November of last year is seeing excellent performance in credit, real estate, and in the multi-strat fund. AUM is stable, and the teams are having great conversations with LPs. During the quarter, we did several transactions. We closed the previously announced acquisition of SLS, which is a mortgage company. This deal added to the Newrez platform, 56 billion in owned servicing, and another 100 billion third-party servicing. We closed on our previously announced investment in our Sculptor CLO business, a captive CLO equity fund. This helps support the franchise, generates great returns for the house, and should increase enterprise value for both Sculptor and Rithm at the top of the house. We completed the previously announced acquisition of the Management Contract of Great Ajax, which was a residential mortgage REIT, which is now we're going to transition that into an opportunistic commercial mortgage REIT, which will help generate fee-related earnings for shareholders as we reposition the company and grow it. We also added 40 billion of excess MSRs, where we partnered with Sculptor on this acquisition. This shows the power of our franchise. Looking at the macro picture, we are extremely well-positioned for the future and the expectations, and with the expectations of the Fed lowering rates beginning in September, this bodes…

Alright, thank you, Michael. Good morning, everyone. We wrapped up another great quarter here at Newrez and we're firmly in growth mode, gaining market share and just focused on disciplined management and also expansion of our third-party client base. We're now the second largest nonbank servicer and the fifth largest lender in the industry. And our growth is through our originations business, it is really just to drive and allows us to meet customers where and how they want to be met. And then we're there with our recapture engine that really sets us well for our rate rally. Our servicing platform has a scale and long history of third-party servicing for our clients, and we continue to gain market share. And gain market share, not only on bringing new clients but also gaining wallet share on our existing customer base. So our view overall is we can continue to grow our business and both organically and inorganically, but stay focused on our operational excellence while maximizing performance for our shareholders. Moving to Slide 11, we delivered another strong quarter, and that's just building upon the foundation we've already constructed over the last few years. Our second quarter pretax income was $248 million, delivering a 23% ROE, excluding mark-to-market on the owned portfolio. 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 1st that Michael mentioned earlier. We added $56 billion in owned MSRs and $98 billion in third-party MSR servicing, growing our MSR portfolio 28% quarter-over-quarter and third-party servicing 92% quarter-over-quarter. We also completed the transition of all 800-plus thousand SLS loans onto our servicing platform which we believe to be the first in the industry to move so many loans in such a short period of time while still minimizing homeowner disruptions and maximizing cost and expense management. Our originations business also performed well in spite of overall margin pressures, with production volume up 35% quarter-over-quarter, led by our correspondent and wholesale channels but also benefited from the addition of co-issue capabilities and growth in both non-QM and home equity originations overall. Overall, I'll just say, I believe our business is as best positioned it's ever been, and I'm looking forward to continuing to tell the Newrez story to the market. Back to you, Michael.

Thanks, Baron. A few more slides for me, and then we'll open up for Q&A. Genesis Capital, again, that's our transitional lending business, very focused on high-quality loans to extremely strong sponsors. Most of the time, there's a full recourse back to the very same sponsors that we're providing capital to. In the quarter, I think we did something close to $300 million of production. When we first acquired the company, they were doing something between $1.5 billion and $2 billion of production. This year, we'll hit $3-plus billion in production. And as I mentioned, the EBITDA on that business is going to be up a little bit north of 50% since the time that we acquired that. When you look at Page 13, again, very strong ROE, and this is a common theme for us. It's not only what we do is about growth. It's about generating good returns for shareholders and LP. For the quarter, 18% ROE. We also originated 65% of our loans who are floating rate, 64% loan to value. And when you look at the overall portfolio of what's been done to date, delinquencies are only 2% which shows the strong credit culture of that business. On Sculptor, I gave you a few comments before. As the company we closed the transaction 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 six months here. Very excited for the prospects of that business. A+ team, when you think about the folks that are running that business from the credit to the real estate side to the multi-strat teams, been around for 30-plus years. Again, it's not an AUM rate.…

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

Hey thanks, good morning. 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?

So let me -- you give 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. Here's what I would say on amortization, and this is more of a broader theme on the mortgage market. Current coupon 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 two 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 continuing 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…

Super thoughtful, thank you so much. 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?

Yes, the company has grown pretty substantially. This business, 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, etcetera, 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.

Yeah, that’s really helpful. Thank you guys so much.

Thanks Eric.

The next question comes from Bose George with KBW. Please go ahead.

Hey and good morning. 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?

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 2024, 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, six times EBITDA something like, I think, coup in PFSI are 9 times, just to give you a sense. So...

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

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.

Okay. Great. And then actually just one more on Newrez. The $2.7 billion of book value that you show 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?

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

Okay, great. Thank you.

Thanks Bose.

The next question comes from Stephen Laws with Raymond James. Please go ahead.

Hi, good morning. 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 2025, 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?

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. 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 the market is headed.

Thanks Baron. 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 how we think about that line moving forward?

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.

Thanks. And lastly, I think the Series A and B for us 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?

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 5.33, we get paid for SOFR or SOFR plus 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.

Right, thanks guys.

Thank you.

The next question comes from Crispin Love with Piper Sandler. Please go ahead.

Thanks, good morning everyone. 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, not from the first quarter? And then can you just size the crystallization in the second quarter?

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.

That is helpful, thanks Michael. 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?

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 -- the 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. I am 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 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.

Thanks, very helpful and appreciate you taking my questions.

Thank you.

[Operator Instructions]. The next question comes from Trevor Cranston with Citizens JMP. Please go ahead.

Hey, thanks. 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 or close to current coupons and what the scale of the recapture opportunity could be in a potential rally of rate scenario? Thanks.

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

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? Thanks.

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 re-performing 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.

Okay, makes sense. Thank you.

Thank you.

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 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.

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