Good day, and welcome to the Rithm Capital Fourth Quarter and Full Year 2022 Earnings Conference 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 Phil Sivin. Please go ahead.

Thank you, and good morning, everyone. I'd like to thank you for joining us today for Rithm Capital's fourth quarter and full year 2022 earnings call. Joining me today are Michael Nierenberg, Chairman, CEO and President of Rithm; and Nick Santoro, Chief Financial Officer of Rithm Capital. Throughout the call, we are going to reference the earnings supplement that was posted to the Rithm Capital website, www.rithmcap.com this morning. If you've not already done so, I'd 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 earnings supplements 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. Reconciliation 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 dialing in. 2022 was a transformational year for us in many ways. First, on the market, our broad experience in financial services investing served our shareholders well as we navigated some of the more difficult fixed income markets we've seen in a few years. With the Federal Reserve raising rates seven times for a total of 425 basis points, the mortgage basis widening between 70 and 100 basis points, high yield index wider by almost 200 basis points and investment grade bond spreads wider by at least 25 basis points, capital markets essentially shut down during different periods. We managed to grow our book value by 5% during 2022, generated a GAAP return on equity of 15%, 11% on our core business and an economic return of 14%. This doesn't happen by chance. With a disciplined approach to investing, spending time with our partners, positioning the company and our balance sheet for higher rates, we generated a very good result during these difficult times. Unfortunately, the equity does not reflect the performance with the stock price trading at too large of a discount, in my opinion, to book, and we'll continue to do all we can to see us normalize towards book. During the year, in June, the company rebranded to Rithm Capital as the management contract was internalized. The results of these actions were to drive more earnings to our shareholders and begin the transition to an alternative asset manager. In the fourth quarter of 2022, we launched our private funds business with the intent of raising third-party funds. Our funds business will be a subsidiary of Rithm Capital with all management fees and performance fees flowing through the parent. This will enable us to generate more earnings for our shareholders…

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Bose George with KBW. Please go ahead.

Hi, everyone. Good morning. Wanted to ask just about the potential cadence for growth in alternative assets, and there's obviously a lot of chatter in the MSR market about Wells potentially selling, et cetera. I mean, is there a potential for something meaningful kind of happening in that area?

So – good morning, Bose. Yeah, on the private capital business, when you look at where our equity trades, we trade at, give or take, 20 to – I'm sorry, roughly out of 80% of book. When you think about where we are in the marketplace now with the investment opportunities, typically, what happens is the investment opportunities will present themselves at a time when your equity is trading at a discount, which is really where we are now. Couple that with our pivot from Fortress into being internally managed, we think the private credit business is going to be a big win for shareholders, and it's going to be a big win for all of us, as we're able to deploy capital more opportunistically and have access to those large pools overall throughout the financial services landscape that we invest capital in. As you think about Wells and MSR opportunities, yes, I mean, to the extent that wells or anybody else comes out with large pools of MSRs that we think the risk-adjusted returns are attractive, we're going to pounce on those opportunities. The one thing I would say, counter to that is we do have $600 billion of MSRs. We manufacture our own MSRs every day. So we're in a really good place in that business. But to the extent that things come out a little bit cheaper than where we are able to create them, we're going to be all over that. And we are starting to see some opportunities there.

Okay. Great. Thanks, And then actually, I wanted to ask about the servicing technology. You've mentioned a couple of times that there might be some opportunities to monetize that or move up internally. Just any update there?

Currently, our servicing plan is we have a bunch of servicing that's moved to Service [Director] (ph), which is our own software. We continue to have dialogue and explore other ways to create value for shareholders with other -- either third-party software or third-party servicing systems. I would say right now, we're steady as she goes.

Okay. Great. Thanks.

Thanks, Bose.

The next question comes from Doug Harter with Credit Suisse. Please go ahead.

Hey, Doug.

Doug, your line…

Good morning. You mentioned talking about potential opportunities in Europe. Do you envision that kind of being on balance sheet, or would that be through the private capital?

Most likely through the private capital, could be a little bit on balance sheet. We'll be pretty selective there. I mean, what I would say over the years and how long I'm doing this in some of my partners, Charles and others, managing businesses in Europe and having identified an individual to run our European business, who should come online in Q2, I think we're going to look for more situations around distressed debt, and we'll likely raise some capital around that business, more likely in private funds. But I think initially it could come out of the public company. Doug? Doug?

It looks like we lost Doug. The next question comes from Eric Hagen with BTIG. Please go ahead.

Hey, Eric.

Hey, good morning, guys. How are you doing? The MSR portfolio looks really stable here, maybe two questions. The first, just asking about your expectations for recapture and the piece that isn't subserviced directly by you, how you think about that?

I would say everything kind of -- everything is out of the money at this point. We do have some servicing with Cooper that goes back to our longstanding relationship with Jay and his team and when we were at Fortress when Cooper was [owning the] (ph) equity funds there. We have some stuff with Loan Care. We'll continue to work with some third parties. We just want to make sure the economics are aligned with the best way to think about recapture for our shareholders. But -- with -- as I pointed out earlier in my remarks, with the weighted average coupon in the US housing market, give or take around 3.5 or so percent, these things are so far out of the money. You're not going to see a ton of recapture. Our thing and probably similar to, I think, the approach that Rocket's had, customer retention is a huge deal. Acquiring customers is a huge deal. We have three million of them. So that's a win. How we roll out other products to them, whether it be in consumer things, credit cards and other things is something that we are working hard on. And again, it's not necessary to do a transaction on the mortgage side because if they're not going to refinance, how do you keep them? How do you develop brand awareness? So we're spending a lot of time on the marketing side, as well as thinking about other [LOBs] (ph) that can be accretive and drive more earnings for shareholders.

Yeah. That's helpful detail. Thanks. And then another one on the MSR. Do you have a rough idea for how big of a margin call you could withstand in that portfolio? And anything that could bring about a margin call other than a change in interest rates? And really just how you cushion for that risk in the portfolio more generally? Thanks.

Have either make sure your financing is done in the capital markets in term structures, which we do or make sure that you have non mark-to-market facilities, which we have. As it relates to shocks, I don't think we'll see a bigger shock than we saw in 2020, and we withstood that extremely well. The other thing is with our financing facilities, all non mark-to-market, the team graded in capital markets, and we have term structures on pretty much all of our, what I would call, non-agency assets, we feel really good where we are.

Yeah. Great. Thank you guys very much.

The next question comes from Kevin Barker with Piper Sandler. Please go ahead.

Good morning. Thanks for taking my questions. I just wanted to follow-up on the origination side. Do you see any particular opportunities emerging within certain channels that may make it more advantageous to invest in that space? I appreciate the comments around limited amount of refi opportunity with mortgages at 3.5%. But there are certain channels that may be opening up, whether it's correspondent, broker or even proportions of the shelter business. Is there anything in there you see that you can reinvest in?

Baron, do you want to take it?

I mean, I think you're right, Wells exiting correspondent has certainly opened things up in that sector. Michael talked about non-QM. We feel like the wholesale channel where we can basically utilize brokers to try to expand there, and you continue to see activity on the retail side. And you see it from an M&A perspective, Michael talked about that in the third quarter earnings as well. So I think that there are -- it feels like there are more opportunities within origination. So I would also just echo Michael's comment, we're not growing to grow. So we're going to be strategic in how we look at different opportunities.

And Kevin, I mean, there's been a lot of work, obviously, on the retail side. We've consolidated the retail side with the shelter business. So we've taken out a lot of expense, and that's -- you can think of that almost like an internal merger. You look at the correspondent business and pricing is still extremely competitive today when we put our rates. We're doing a fair amount of origination, but it's still despite the fact that Wells has pulled out of correspondent, we're still -- the pricing around MSRs has been pretty competitive and pretty aggressive. While saying that, we do think some mortgage companies are going to need some solutions, and there could be opportunities for either M&A work. But I think right now, we're in all the channels that we need to be. And unless something is accretive, there's just no reason for us to do it.

And then could you just give us an update from an operational perspective, where you are with all the various integrations that have taken place and you've done a ton of work the last couple of years, but is there any other bigger integrations that still need to be finalized within the origination channel or even in the servicing channel?

No, there's some servicing assets moving from the legacy Caliber MSP side to Service Director. That should be done, I think, in the second quarter. On the origination side, that's all set. And really some of the opportunities and as you think about the Genesis business, you think about the mortgage company, we have a ton of resources in all these different companies. The saves for shareholders are going to come as we integrate more around tech. One of the things we're going to do is we're going to create a tech hub that sits at the top of the house for all of our operating businesses that will create efficiencies and save us some money. And we look forward to doing that. But I think it's really going to be saves in and around synergies on bringing these operating businesses together, not necessarily just the mortgage company.

Thank you, Michael. Thank you, Baron.

Thanks Kevin.

[Operator Instructions] The next question comes from Stephen Laws with Raymond James. Please go ahead.

Hi, Good morning. Michael, looking at the new segments, you really pieced together a broad investment platform. As we take maybe more of a medium-term outlook, say, two to four years, which of these segments do you think have the ability to have outsized growth or an outsized capital allocation as you think about what the business should look like in a handful of years?

I think we're going to be -- well, here's what I would say. Our approach, and this goes back to when the company was first formed at Fortress has always been to be more opportunistic investors rather than just being an investor to deploy capital to do that. Including our capital formation when we would do an M&A deal, we would typically raise capital around M&A deals, not just to raise capital. So when you look at where we are going forward, let's use the GreenBarn company. GreenBarn was formerly the old Normandy partners, and they rebranded to Senlac. They do redevelopment work in office here in office here in the Northeast and they have a very good footprint with a great track record that goes back, I think, to the mid-90. David Welsh, who leads that business, a great guy and a great operator. That's a good example of something that will be grown strategically over time, and we like to allocate more capital then. We'll probably -- we'll also use either capital from the balance sheet and third-party funds to grow that business. MSRs, as I pointed out, we have $600 billion. We can go out and buy another X hundreds of billions, but we want to make sure the risk adjusted returns are something that warrant either growing that or if you thought about it, if your last dollar of capital was X, where would you put that money? We like the Genesis business a lot. I think at some point, you'll see some consumer companies come out towards the end of the year from folks in the private equity business that have some of these. So that could be an opportunity for growth. We're seeing some other opportunities around MH and other things. So it depends, but it's really going to be more opportunistically across the board, not just to grow a certain sector that we're in. The one thing I want to be clear to everybody on the phone and others that will listen to this is that we will always stay true to our core competency, which is financial services. So even on the funds that we're raising, we are going to stay whether it be in the commercial space, residential space, consumer space, everywhere where we have experience or have the teams that have experience, that's where we're going to deploy capital. So it's going to be more opportunistic where we think we could generate what I would call teens type returns. And if you look at our track record going back to 2013 in our core business, our real returns are probably in and around 12% on a return on equity basis while paying a $4.5 billion of dividends.

Great. Thanks Michael.

Thank you.

The next question comes from Trevor Cranston with JMP Securities. Please go ahead.

Thanks. Good morning.

Good morning.

Just one more question on the origination segment. You guys have, obviously, done a lot to reduce the expense level of the company over the course of the year. Would you say that the run rate numbers you show on slide 12 for expenses, is that kind of fully reflective of everything you've done, or are there any actions you've taken that are still able to show up in the Q4 expense numbers for originations?

I would say that's fully reflective of what we've done. And go-forward reactions are actions are not going to be material.

And Trevor, I think it all depends on the rate market. As I pointed out in my opening remarks, I thought the way that we positioned the company last year to higher rates was and that included unfortunately, reducing head count pretty dramatically in the business. Going back to Kevin's question about integration, we're through that. But we're going to have to adapt to markets. I think right now, we feel real good where we are head count. We feel real good where we are, the way the company is positioned, but we want to make sure that, obviously, that we manage expenses across our entire operating platform and that will include all of our businesses.

Got it. Okay. You mentioned potentially looking to add mortgages and hedge out the fair value of the MSR at some point. Can you maybe expand on a little bit what you'd be looking for in the market to start trying to implement that strategy? Thanks.

If we think the Fed is done, and we feel that the rate -- like -- I mean, here our general view, or my general view is that mortgages will do better over time. You'll have periods of volatility. When we think the Fed is closer to being done, I think we'll begin adding some hedges. Across our broader portfolios, all of our portfolios are hedged with either interest rate swaps and/or mortgages. And for now, I think in the MSR business, we'll stay the course. But at some point, we'll likely have a more balanced portfolio where the MSR business will hedge. And the other thing to keep in mind there is a 3.5% coupon is not going to refinance right now other than just through housing turnover. So that's an area where, unless we think the mortgage basis is really cheap, we don't need to hedge out that coupon right now. And even if the Fed is done, unless we think 10-year rate is going to go to whatever 1.5% and you have some COVID type event, then we'll react to that accordingly. But for now, I think it's -- we got to stay the course. The other thing I would tell you about our team, and we have third-party consultants on the economic side that we meet with monthly, we have a very strong presence, I think, in the markets as we think about the macro picture, and that's something that's really, really important for us to maintain discipline in the business and make sure we try to catch both the ups and downs of where rates go and mortgages go.

Great. Thanks guys. Thank you.

Thank you.

The next question comes from Giuliano Bologna with Compass Point. Please go ahead.

Good morning and congrats on continued execution in a tough environment here. One thing I was curious about it’s probably the -- I think it was kind of addressed earlier on in the Q&A, but I'd like to see a slightly different angle. You obviously mentioned raising private capital on the fund side. And one of the slides is a little about on your MSR funds. I'd be curious if you think there's any opportunity to leverage the mortgage company, leverage the sub-servicing capabilities to do some sort of acquisition of MSRs from a fund perspective, because there's obviously a lot of capital chasing the MSR asset class? And, obviously, if the reports are correct and Wells looking at $200 billion to $250 billion MSRs on top of everything else in the market, there could be a lot of supply. I'm curious if that could be an opportunity for the Rithm platform as a whole that's an external capital and the fees and also leverage the sub-servicing?

The answer is yes, yes and yes. If there were three questions. If there were two, I'm going to give you yes and yes. Right now, what I would tell you on the sub-servicing side, we have a very good sub-servicing business. That will grow. There's a little bit of uncertainty. There's a couple of large sub-services that potentially could come to market. We're extremely well-suited to be in a position to, what I would say, grow our sub-servicing and take out costs, where I think that gives us an edge over others. On the MSR front, same thing. We think MSRs are extremely attractive here. We do think there'll be some supply. Obviously, the Wells announcement until that actually comes, we'll see what happens. But we'll add as long as we think the risk-adjusted returns have teens in front of them.

That makes sense. And this is hopefully not a three-part question, but when I look at the servicing side, CPR was down at 5% at just on a dollar basis, it looks like the amortization was 4.9% in the quarter. Obviously, that trend can continue in the short-term into the first quarter, and then obviously move around throughout the year. I'm curious, how long do you think the CPR is going to stay at near historic lows? And I have the same, on the other side of that, I'm curious how far out you think like the origination platform back to profitability, remove a little bit of a drag on the great servicing performance?

So let's take the last part of the question. On the origination side, I think we should be back to profitability, either Q1 or early Q2. We've taken actions, obviously, on the retail side, which is a very difficult business, as you can imagine. And I feel like we're well-positioned now there. And in some of the earlier comments, we merged our JV business, the shelter business with retail. So again, creating more synergies and taking on more expense. Regarding MSRs and speeds, I mean it's going to come down to housing turnover. I'm not sure who's going to refinance a 3.5% coupon until mortgage rates go back towards the lows and housing becomes a little bit more affordable. So I think we're in this for a bit. I don't see -- there's no reason for somebody -- the reason you see probably less housing transactions is, why would somebody sell their house unless they need to, if they have a 2.5% or 3% coupon mortgage rate. So I think it's really going to come down to housing turnover, if home prices cheapen up, and I think it's more likely you'll see growth in the rental markets as things are less affordable today.

That’s great. I really appreciate the answers to reference. And I’ll jump back in the queue. Thank you.

Thank you.

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

Thanks. I just had a follow-up on the gain on sale margin trend. So this quarter order, I mean, it looked like the gain on sale margin is up for each of the channels. I was curious if the markets bottomed, or is it just more of your volume going down and you're being more selective in terms of engagement?

Bose, we did see some improvement in margin in the quarter. And you also do see some impact from adjustments to prior quarter pull-through adjusted rates. So that impacted the margin for the quarter as well. But we are seeing improvement.

Okay. Actually, can you just explain the prior quarter adjustments?

In terms of prior quarter, you always estimate what your pull-through adjusted rate is when determining your margin for a given quarter. And to the extent you come in better in the long -- we think actually come in better, you will see improvement in margin in the current quarter.

Okay, great. Thanks very much.

Thanks Bose.

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

Thanks, everybody, for dialing in. Look forward to updating you throughout the course of the quarter and on our next call. Appreciate the support for Rithm.

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