Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Rithm Capital Corp (RITM, Financial) reported strong contributions from all business lines, showcasing diversified growth.
- The company completed several strategic acquisitions, including SLS and Great Ajax, enhancing their servicing and commercial mortgage capabilities.
- Rithm Capital Corp (RITM) added $40 billion of excess MSRs, demonstrating the power of their franchise.
- The company reported a book value of $12.39 per diluted share and a GAAP net income of $213 million, or $0.43 per diluted share.
- Rithm Capital Corp (RITM) maintained a 9.2% dividend yield, reflecting strong shareholder returns.
Negative Points
- Market volatility is expected to persist due to geopolitical uncertainties, which could impact future performance.
- The company faces competitive pressures in the mortgage origination market, potentially affecting profitability.
- Rithm Capital Corp (RITM) is concerned about the refinancing market, with current mortgage rates and home insurance costs posing challenges.
- The company’s MSR portfolio is largely out of the money, with 96% of MSRs having a gross whack of roughly 4%, limiting refinancing opportunities.
- There is uncertainty regarding the valuation and capital structure of the company, with ongoing discussions about potential listings and high-yield issuances.
Q & A Highlights
Q: On the MSR portfolio, given its growth, do you have an estimate for how much amortization you might incur going forward, including on the excess MSRs bought during the quarter? How do you feel about the leverage in the MSR portfolio?
A: Michael Nierenberg, Chairman of the Board & CEO: The excess MSRs are very seasoned, with an average of around 15 years. Amortization will be steady. Current coupon mortgage rates are roughly 6.2%, and home insurance is up significantly. With 96% of our MSRs out of the money, amortization came in roughly at 6 CPR. We don't see a robust refinancing market currently, and our focus on recapture is high. We will be more frequent issuers in the high-yield market and may use securitizations around our MSR business.
Q: What's the growth outlook for Genesis? Do you feel like lower interest rates could catalyze new production there?
A: Michael Nierenberg, Chairman of the Board & CEO: Genesis has grown substantially and is a credit-first business. We focus on strong sponsors, including builders and those renovating homes. The business could grow significantly over time as there's a huge need in the direct lending space, especially as regional banks pull back.
Q: For NewRez, do you think a listing is needed to bridge the valuation gap compared to peers?
A: Michael Nierenberg, Chairman of the Board & CEO: We are working closely with internal and external advisors to maximize our capital structure. Having everything under the Rithm umbrella gives us flexibility. We are looking at anything and everything to increase value for shareholders, including potential listings.
Q: Can you discuss the outlook for continued growth on the origination side for NewRez?
A: Baron Silverstein, President of NewRez LLC: We don't have a specific market share target. We focus on where we have the best return. Correspondent has been the best place for profitability. Our core focus is expanding our brand, improving customer experience, and offering better products to gain market share.
Q: Can you talk about the Sculptor business and what drove the sequential increase in AUM revenue?
A: Michael Nierenberg, Chairman of the Board & CEO: The increase was due to off-cycle realizations of prior investments across the platform. It will be episodic over time, reflecting the nature of the business until we grow real AUM generating fee-related earnings.
Q: Do you have any statistics on how much of the MSR portfolio is now in higher rate mortgages or close to current coupons?
A: Baron Silverstein, President of NewRez LLC: Approximately $100 billion notional with a coupon of 6% and above.
Q: Can you discuss the commercial real estate opportunity and how you see it playing out in terms of adding investments to the Rithm balance sheet?
A: Michael Nierenberg, Chairman of the Board & CEO: Recently, we've been buying AAA CMBS, which looks like it generates 10% returns with leverage. The Sculptor team is best in class, focusing on niche real estate private equity investments. Rithm will focus more on direct lending off the balance sheet, potentially partnering in the future.
Q: Can you discuss what drove comp expenses lower in the quarter for asset management and size the crystallization in the second quarter?
A: Michael Nierenberg, Chairman of the Board & CEO: Comp expenses typically hit in the fourth quarter. In the second quarter, we saw realizations of $50 million. The decrease in comp expenses was due to off-cycle realizations of investments across the platform.
Q: At what level of mortgage rates might you see a refi market, and how can you take advantage of that from a recapture perspective?
A: Michael Nierenberg, Chairman of the Board & CEO: With a gross whack of 4%, current mortgage rates at 6.2%, and higher home insurance costs, we don't see a robust refi market. The origination market remains competitive, and our focus is on retaining customers and cash flow from MSRs.
Q: Any thoughts on managing the Series A and B prefs that float in the back half of the year?
A: Michael Nierenberg, Chairman of the Board & CEO: We will likely keep them for now but may take them out over time as the yield curve steepens and the Fed cuts rates. Our hedging strategy is neutral, with significant protection for our MSR portfolios.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
