Good morning, and welcome to the Rithm Capital Second Quarter 2022 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Phil Simon. 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 2022 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 to the Rithm Capital website this morning. 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 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 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 Mike.

Thanks, Phil. Good morning, everyone, and thanks for joining us. The second quarter was a period of extreme volatility. I'm very proud of our team as we navigated some of the most difficult markets we've seen in many years. We saw interest rates rise dramatically, credit spreads widen and liquidity in the market has become challenged. We positioned our company for higher rates in our portfolios rose in value. As a result, book value increased to 12.98 from 12.56 before the internalization payment of Fortress. Our company, formerly known as New Residential, rebranded to Rithm Capital and internalized its management contract. The result of that transaction will add approximately $0.12 to $0.15 in core earnings as we create synergies not only within the investment manager, but also in our operating business lines. In addition to our synergies, we've been very focused on our expense reduction and happy to announce that our expenses in our mortgage company have been reduced by half. Our approach to investing is that we don't need to be the biggest, we just want to be the best, deploying capital at times where we see real returns. If a division or a sector will not yield great returns for our shareholders, we will pivot and deploy capital elsewhere. A good example of this is how we reduced the capital in our origination business from approximately $2 billion at the time we closed the Caliber transaction to $650 million today. As we look at the financial services sector, we believe the next 6 to 12 months will provide us with the opportunity to deploy capital with teens type returns, driving earnings higher and creating more value for shareholders. We'll be adding some great talent in business lines where we have not been as active in the past. As…

[Operator Instructions] Our first question comes from Bose George with KBW.

Can I get an update on book value quarter-to-date? And also, I assume you haven't put on any hedges on the MSR yet?

Yes. So I'll take the second part. Nicola will give you a little bit of color. It's still early in the quarter. As far as MSR hedges against a 3.6% gross WACC. We haven't really -- I mean yesterday, we bought a little bit under $1 billion in mortgages. But in general, we haven't gone out to hedge the MSR because our MSRs, we feel, are different. There is that delta between where we're going to start to see prepays pick up, but we think that we're pretty far away from that. As far as book value, Nick, you want to take that?

Book value given change in rates is approximately, call it, $11.75 to $12 a share.

And then actually, what are your thoughts on the bulk MSR market in terms of seeing opportunities there?

So we can manufacture our own MSRs, and I pointed that out when we think about our origination business. I think we have kept the multiple that we put on MSRs no matter what rates do because, again, we don't want to get into a period of time. You've seen massive moves in rates. So I think the high we saw in 10-year rate was about 3.45 this morning, it's 2.55. So if you put on a 6-and-change coupon mortgage, you're going to see the likelihood of that going away and you got to be able to recapture that. So we've kept our -- what I would call our multiples. We will see, I think what you're going to see in the mortgage company business, I don't -- you're going to see people roll over. You're going to see companies go out of business. We've seen a little bit of that already. That will or could present an opportunity for us to acquire MSRs. I don't think we're there yet. We do have an appetite if the multiples are right. But the one thing both to keep in mind is your cost of capital on MSR financing and everything else put you at roughly kind of 10-ish percent levered return. So I think we're going to be really patient unless the MSR market cheapens up here. I think there's other places to deploy capital. And we have $650 billion of them or something like that.

Actually one quick one on servicing technology. Any update there in terms of what you guys are going to do?

Yes. I think that we continue to evaluate that. I think we're getting closer to making a decision. So stay tuned.

Our next question will come from Eric Hagen with BTIG.

Congrats on the transition here. A couple here. So with respect to the capital in the origination segment, should we think of that being sort of a baseline amount the company would need to keep there at its current size or the current amount that you're originating? And what might change that? And then how should we think about the growth in Genesis in the SFR business against the backdrop of what you discussed as lower home prices and just a bumpier environment in general?

First of all, capital in the mortgage company will go up if gain on sale goes up. I mean, it's just -- I think it's pretty binary, or unless we could figure out a better way to generate more kind of net income, not just gross revenue for the business. As you think about Genesis, those guys are pros. They've been around a long time. Charles Sorrentino and I were out on the West Coast last week, we spent a couple of days together. The ability to do different things in the real estate industry is something that I think gets us extremely excited to work with the Genesis folks. So I think we'll see things expand. We want to be cautious about where we are in the cycle as it relates on the building side because you are going to start to see that slow down. But I think with our capital, with the relationships that those folks have, I think you can see some good growth there. It may be in a non-traditional way than they're currently doing that. And then finally, on the SFR space, we've raised our cap rates. We're not acquiring a lot of properties here just because we think home prices will slide a little bit. We're in the market with a securitization now so we monitor what the ROE is on that in conjunction with where we've acquired the properties. So I think you'll see a more patient approach from us than potentially others and maybe the way that others look at their capital. But we'd like to see cap rates go up a little bit here based on where rates are. And if not, we may pivot to lower cap rates. But I think for now, we're going to be a little bit patient here because we think there's other areas we can make more money by deploying that capital.

When we think about a market yield applied to the existing MSR portfolio, where would you say that shakes out right now?

Probably 10-ish would be my guess based on where speeds are and our gross WACCs on a levered basis.

On a levered basis, how about an unlevered basis before you apply the levered?

8-ish. Some of the season stuff could be a little bit higher, but it's -- you're probably in and around 10.

Would you say there's a meaningful difference in ROE between the MSRs that you service yourself versus subservice from others?

You mean our subservicing?

The loans that you service in-house, the mortgage company versus --

Yes. So I mean, listen, we made some early purchases appears back from United Wholesale and Quicken. Obviously, those guys are very good in refinancing anything and everything they possibly can. So -- but they're already burned out. So I would say that our own servicing stuff is probably a little bit better here. We have subservicing with Ocwen, those portfolios continue to perform extremely well.

Our next question will come from Doug Harter with Credit Suisse.

Michael, as you look to deploy your capital, do you think the opportunities are going to come in kind of asset purchases or potentially acquisitions of other companies?

It depends. I think on the asset side, we're waiting for the shoe to drop if the shoe does drop. So I think to one of the earlier questions around MSR values. If MSRs went down, obviously, we would sit there and bounce on them and buy more MSRs. I think for us, it's a total return play. At some point, you want to deploy a little bit more capital. I think even if you listen to some of the comments from Jamie Dimon around the stress test and you think about bank capital, that will have an impact on the entire system as people think about financing their business. You see the banks taking breakdowns on some of their leveraged loan positions. That will have an impact on how people finance. So maintaining higher levels of capital. But we do think there could be some opportunities that even down the road that may come out of the banks. I'd love to see it more on the asset side, quite frankly than we would see on the operating side. But to the extent that there is some great opportunities there, we'll look at either one. I think we'll be a little bit agnostic, but buying distressed assets typically is the way that folks have made a lot of money in the past.

And then as you look at the commercial real estate opportunity, I guess where is Rithm today as far as kind of having the right people in place to be able to take advantage of that opportunity? Is that something you need to hire? Or I guess where are you in that opportunity?

So the one thing that I would tell you, doing this for a long period of time, and you need -- we want great people to be part of our organization. I think we're at a point we're pretty close. We will be making an announcement hopefully within the next couple of weeks to 30 days about a team or a partnership in the commercial real estate space. While saying that between Charles and myself who have been in the business for a long, long time, evaluating commercial real estate debt, I think, is something that we have extreme expertise in doing. But we're currently -- we're pretty close on being ready to announce something to the marketplace. It's not buying a company; this is bringing on a team or developing a partnership with a team of who we think are A+ quality floats who are going to help us drive more earnings for shareholders.

Our next question will come from Giuliano Bologna with Compass Point.

I guess going back a little bit around the MSR discussion. I'm curious if it would make sense -- on the hedging side, if it makes sense to hedge out more of your new production or are there subsets of the portfolio that make sense to hedge in the sense that the new production maybe coming on is obviously coming on at a much higher WAC but would make sense to go out and hedge some of those -- some of the new production most the aggregate portfolio?

Yes, great question. But here's what I would say. We've slowed down our production in the mortgage company. So we have less to hedge overall at the higher WACC level than our existing portfolio. And I point that out because we have $600-odd billion of these things. While saying that, it's a very valid point, and we are looking to -- I don't know if this is just a bear market rally to 2 55 on 10s. I mean, these market moves are extremely dramatic. The one thing I would say about the MSR business is that these MSRs are much more -- there they have a lot less negative duration today than they did going back a 1 year or 2 ago. So what I think you'll see from us is we'll put on more heads against some of the higher coupon stuff, which is, I think, really where your question is. I think that being mindful should -- I mean we do think defense is going to get to -- we've been spending some time with some of our economic consultants, I'll call them. We think the Fed is going to get to 3.5%, 4% on funds rate. Does that mean 10s are going to I don't think so. So we want to make sure that we're not trapped here. But I do think the MSR asset will not go up as much in value. So we have to be mindful of market moves and rates. While saying that again, though, some of the higher coupon stuff with mortgage spreads where they are, we'll have some mortgages against those. We started that yesterday.

That makes sense. Then just a little bit of a different question around the MSRs. You guys have roughly $2 billion of deposits. I'm curious roughly what kind of yield you're generating on those deposits? And then just a general sense of like what were the best index bee historically the closest to tracking roughly around where the yield you're able to generate on those custodial deposits?

So we have -- I think the number is something -- it depends on the time of the month, but I would assume something in the vicinity of $12 billion on average during the month. And those are generating something fairly close to the funds rate -- Fed funds. Very much on top of working with our bank counterparties to make sure that we're getting appropriate rates on our deposits -- a big part of the business. Yes. No, I said it's a big part of our -- it's one of the things the inputs into our business right now. It's a big deal.

It can be a big driver in MSR earnings power, but I'll jump back in the queue.

Our next question will come from Trevor Cranston with JMP Securities.

Okay. A question on the gain on sale margin. They bumped up pretty nicely in the second quarter. I guess, as you guys have moved through July so far, would you say that margins are kind of holding steady at the level you had for the second quarter? How should we think about how that's trending heading into 3Q?

Yes. At least in July, we have seen margins maintain or increase and that includes July. So we've continued to do that in the strategy that Michael talks about.

Okay. Got it. And then on the MSR portfolio, it looks like the prepaid speed was about 11 in the quarter. Can you kind of give an outlook on kind of where you think speed will settle in with -- in terms of turnover speeds, assuming that the portfolio stays pretty substantially out of the money?

Your guess is as good. I think it's like 10.67%. Now I don't -- I think it depends on your view of housing. I don't -- I still believe -- our view on housing is probably a little bit more negative like I said earlier than the market is. Your speeds are all going to be related to turnover. We have 5- to 6-year season kind of MSRs. So I don't know, I think we should stay something around here. Keep in mind, our DTC business is fairly large around recapture. So to the extent that we could actually pick up some of these folks that may even sell their house and go for -- to purchase a new home. We have the Caliber side, we have both the DTC side and the retail side on the Caliber side. So that should help us. So hopefully, we stay in and around these levels. I think the other thing is it depends on what the absolute level of rates settle in. Think about it. We were talking before about a 3.5% to 4% terminal funds rate and you got a 2.85 to 2.90 front-end 2-year note. We do think rates will push higher. And again, like I mentioned, I don't know if this is a fair market rally. The market is a little bit ahead of its or non or people just really play in the slowdown.

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

So thanks, everybody, for joining. Again, super excited about the next chapter in our lives. The ticker is our RITM that goes live today. And again, I think the most important thing to get -- I think we had a great quarter. We're sitting on a lot of cash. The most important thing to get out of this call is, as we pivot to Rithm, I think you'll see more of an investment manager style than just being all in on the resi side. And we look for great opportunities. It doesn't mean we won't get bigger in resi, but we look for great opportunities to deploy capital. Appreciate your support. Have a great rest of the summer. Any questions, you know how to reach us. Thank you very much.

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