Good day and welcome to the Rithm Capital’s Second Quarter 2023 Earnings Conference Call. All participants will be in a 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 Bola, 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 2023 earnings call. Joining me today are Michael Nierenberg, Chairman, CEO and President of Rithm Capital; and Nick Santoro, Chief Financial Officer of Rithm Capital. 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 us. As some of you heard last week, we pre-released earnings in conjunction with the announcement we were acquiring Sculptor. These are really exciting times for us, our shareholders and our LPs. Our strategic measured growth in business lines where we try to create an edge is something we're very proud of. Since inception in 2013, when the company was formed by Fortress to take advantage of price dislocations created by higher capital requirements at the banks, we have executed on that plan and along the way, we grew and acquired a number of operating companies in the financial services space. Our mission is to continue to do the very same thing we've done for the past 10 years, drive value for shareholders and LPS with teens type returns. If you think about where we are in the cycle, interest rates are at some of the highest levels we've seen in 20 plus years. Capital requirements in the banking system are headed higher. We are in a period of time where unlevered returns on most of the assets we invest in are between 8% and 12% on an unlevered basis. This period of time from an investment perspective is some of the best environments we have seen in years. The time is now. While we are mortgage REIT, I like to think of us as an asset manager operating as a REIT. Yes, we do invest in all types of assets, both good REIT assets, and non-good REIT assets such as consumer loans and operating companies. Onto the Sculptor acquisition, this should be a great one for everyone, Rithm shareholders, Sculptor LPs, and all of our employees at both respective firms. It is truly transformational for all of us. The acquisition…

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

Hey, thanks, good morning. Got a couple of questions here. I mean how do you think the valuations for other mortgage originators and servicers right now is sort of driving your thinking around the value you could pick up in a spin-off of the originator and servicer? And then just from a timing standpoint, at what point do you maybe run into issues with the REIT test from having Sculptor folded in here? Thanks.

So on the timing of the mortgage company, we announced that we filed a confidential S-1 on that. We continue to work hard with where mortgage companies are trading. I don't know that anybody trades at a significant premium at this point and quite frankly, they don't. We just think the timing is right now with the scale and what the team has done around the new res brand and obviously, the Caliber acquisition and all the other stuff we've done there to bring this company out. I don't necessarily think that we're going to turn around and just sell down the entire thing. I think it's more to give us flexibility, have a true operating company that's listed similar in ways to what Fortress did with backed in Nationstar and Mr. Cooper. So a similar kind of mindset around that. As it relates to your second question, which from a good read test, Nick sitting next to me, we have a ton of experience around how to navigate things, whether it be in taxable REIT subsidiaries and other ways. Obviously, we have a fairly large agency mortgage book, which helps with the whole pool test. So we don't anticipate any issues. I do think over time you'll see an evolution of the company in our capital structure. I alluded to that last week. We're not going to -- the one thing I would tell from an analyst perspective, we're still going to have a mortgage REIT. If you look at some of the best run and larger alternative asset managers, they have REITs, they have a C Corp, they have private funds. I think you should think of us in the same light.

Yes, that's helpful, thank you very much. Diving into the portfolio a little bit. I mean, what do you feel like would take servicing valuations higher from here, like how sensitive do you feel like valuations for MSRs are to an inverted yield curve, do you feel like there's any upside for servicing fields curve were to steep in from here? Thank you guys very much.

I think on the MSR values, they're fine where they are. You have unlevered yields, I would say, anywhere from 8% to 10%. If you do have a view that at some point down the road, we don't have this view that in this year that the Fed is going to cut rates. When short rates start coming down and you see better financing terms, I think the levered asset yield will be in the teens. While saying that, I don't -- doing this for a long, long time, I don't see a ton of upside in yield in pricing in the MSR asset right now. But it is a very, very stable cash flow. I was watching an interview this morning about somebody talking about where we are and fixed income assets going down in value as rates rise, which is absolutely true. This is the one asset that does go up in value and rates rise. I do think we're getting towards the upper end of a value standpoint. Keep in mind, new issue MSRs or whatever, a 4 handle, I think, from a value standpoint. So there's room for those to go. Some of the legacy stuff that with the 3% gross WAC that were originated during the days of COVID when rates essentially went to zero, we'll only prepay if you see housing turnover. So I think there's limited upside for us, we're monitoring where rates are, and you're going to start to see us put more rate hedges on against that asset as we go forward.

Thanks Michael, appreciate it.

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

Hey guys, good morning. Had a couple on Sculptor. First, is there any tangible equity coming with the transaction or is there a goodwill sort of equivalent to the purchase price?

We expect the tangible equity to be about $300 million to $350 million. There's approximately $200 million to $250 million in goodwill, Bose.

Okay, great, thank you. And then to the extent the Marcus deal was done after Sculptor closed, is that the kind of asset that could end up there going forward?

Yes, I think at this time both organizations are going to be run as separate organizations. Obviously, the Sculptor deal is not closed. So Jimmy and that team will continue to lead their business, no different than what we do at the Genesis level or the mortgage company level. Again, it's a wholly owned operating sub is the way that I view that. Yes, I mean, the possibilities are endless. I mean the one thing I would say is you look at our balance sheet, you look at most alternative asset managers don't have larger balance sheets. I think KKR does but there's a lot of work to be done here. If you look at our balance sheet today, on our loan side, we look at our loan book, and I think the -- where that's carried is probably a 15% plus return. Why should we not take that, work with our new partners at Sculptor, and drop that into a fund. It would reduce our balance sheet, we'd create more -- we create some capital and we create more AUM and then we drive more earnings through our asset management business, which theoretically those earnings are going to get valued significantly higher than the way our earnings get valued at the REIT level.

Okay, that makes sense, thanks. And then just rates are up a bit since you guys preannounced, just wondering if we could get just an update on book value?

I would assume it's in and around about the same at this point, 12 -- 15 to 12.25, something in that range. I don't think there's any material move for us right now.

Okay, great, thanks.

Thank you.

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

Thanks. What is the time frame that you expect to see additional assets kind of come available from the banks, from regulatory changes and do you think you'll be kind of up and running with third-party capital to take advantage of that?

I think the answer is it's -- we're seeing it now, obviously, the Marcus loans, Goldman made a decision to get out of that line of business and clearly with a number of our relationships we took advantage of that. I would tell you our pipeline of investments, whether it be company investments and/or asset investments that we're working on is pretty significant right now. So it's here, it's now. You look at -- I'm just looking at some news feeds as we're chatting here. The ADP number from an employment standpoint is well above expectations this morning. You got an employment report tomorrow. So that will likely move rates higher and we're seeing that. As we go forward and think about capital from a third-party standpoint, not only on the -- listen, the Sculptor folks have a pretty significant capital formation team and hopefully with this transaction we will be able to -- or the Sculptor team will be able to leverage that and grow AUM. I look at what we've done on the Rithm side and kind of my travels through this year, with some of my other colleagues here, I think there's plenty of capital that be partnered with us to take advantage of this stuff now.

Great. And then just on the Marcus deals, I was wondering if you could give us a little more detail about kind of the price paid for those loans?

I don't think we disclosed it. Did we disclose it? Did Goldman disclose it?

We did not.

Yes. I don't -- what I would say is it's a discount to par term financing essentially with a 15% to 20% return and roughly a 10% coupon with higher FICO borrowers.

Okay, appreciate it.

Thanks Doug.

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

Good morning and congratulations on a great quarter. Maybe going along this similar lines to some of the other questions, I'd be curious over time now that you'll potentially have Sculptor in a number of months here under the Rithm umbrella, is there a focus on shifting more of the AUM to externally managed. Obviously, you're talking about potentially doing an IPO as part of the mortgage company and pushing more assets potentially into different fund vehicles. Is there a general sense of kind of what your capital allocation should look like going forward or if you want the Rithm side of the equation to be smaller from an AUM perspective and then continue to expand the asset management side at a much higher rate?

Yes. I think asset management businesses get value -- one of the strategic things for us is we want to raise third-party AUM and we've been very, very clear about that. The Sculptor acquisition helps us do that under that umbrella. And last week in our announcement, we were pretty clear we're not going to go out and issue equity here where we don't intend to anyway to -- when we're trading at book values 12.25, whatever that number is and our stock trades in and around $10, we're not going to issue equity here. So based on that and the opportunities for investment that we see today and going forward, it's our desire to work with third-party LPs and grow our business away from our existing balance sheet from a capital perspective and in third-party markets. And that's -- I mean that's where we are headed. If we're successful in doing that, which I believe we will, and you look at some of the larger asset managers and how they've raised capital, we're going to be very successful and our valuation on our equity should go significantly higher. And that's really what the goal is. It seems to improve our equity valuation for shareholders and continue to drive real results for LPs and shareholders.

That sounds great. And then thinking about the -- you obviously mentioned there's a strong pipeline out there of opportunities. When you're looking at opportunities at this point, are you focused more on assets or are there any other operating platforms that you could add that would be accretive or related to the other assets that you're involved in at the moment?

I would say both. If we want to do things where we think we have a reasonable edge or where we could create value, if we could do things that are 15% to 20% returns in today's interest rate environment, I think we're going to try to pounce on that and seize that. And right now, that's kind of where we are. So if it's an operating company, and we're working on some of those now or it's a cheap pool of assets, we'll look at both.

That’s great, thanks for answering my questions and I will jump back in the queue.

Thank you.

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

Hey, thanks, good morning. One more on the Sculptor deal. When you guys talk about it being neutral to earnings in 2024 and accretive in 2025, can you sort of take us through what it is that makes it accretive in 2025, and if there's any sort of assumptions baked into that in terms of AUM growth or anything like that? Thanks.

Yes. I think we're not assuming a lot of AUM growth. I think it comes down to some of the results that are already existing in there, in the portfolio of investments today, and when they're realized. So the expectation is that 2024 and 2025 should be good years for realizing a number of the results as a result of prior investments made. The Sculptor team has a -- they have some great, great business lines and as we start to see results come through from earlier investments, you're going to start to see, I think, a good pop. And I think when you take a step back and look at the valuation of the company and kind of how we valued it and think about the relationship there. And I know, Jimmy, for probably 10 to 12 years now or actually more. That platform and the ability to drive results for LPs is pretty significant and that's what gets us really excited about this acquisition. We can't look at everything like a day one thing. We do have to have a vision as we build business lines, and that's one of the things that I think we've been very successful at and on doing. You take a step back and you look at -- and one of the reasons I wanted to give a little bit of revision is history on the Fortress side, you go back to 13 when Wesley Edens and Randy Nardone came up with, we could make excess MSR a good REIT asset. That propelled -- that started the growth of new residential, which was spun out of NewCastle. So financial engineering and being able to create value for shareholders, you may not see it all day one, but it's something that, as we look forward, we have a vision that goes out not just quarter-to-quarter but something that's a little bit longer than that.

Sure, okay, appreciate that. Thank you.

[Operator Instructions]. The next question comes from Kevin Barker with Piper Sandler. Please go ahead.

Thank you. Just in relation to the S-1 that you filed, within the mortgage company, are you including all of the origination and servicing segments including the servicing segment and the MSR-related investments or would that be broken up as well whether it's in the mortgage REIT or in the mortgage company?

It's likely going to be most but not all assets or not all MSRs that will go in there because some are held at the what I would call the Rithm level and the sub there is NRM. But mostly, it's all the origination, it's most of the servicing stuff, some MSRs may stay back. But I get -- it's one of these TBD things as we continue to work through it.

And then you discussed having a mortgage REIT as well and possibly the asset manager, right, and obviously with Sculptor deal. Would the mortgage REIT basically have all the real estate securities and the property and residential mortgage segments that you have existing now or would there be other segments embedded within the mortgage REIT?

I think it's TBD. You look at what Blackstone, I used this analogy last week. They have BXMT, which is a commercial REIT. I think the way that we're thinking about it is likely in a similar vein but there's a lot of -- I mean, clearly, we just announced a deal last week. So we have a lot of work to do from a capital structure standpoint. But the one thing I want to emphasize on this call is, we are still going to have a mortgage REIT and a large mortgage REIT in that. The asset management business will grow. We'll likely have a C Corp and from a structure standpoint, we just want to figure out a way that we're going to increase; one is our shareholder price and then two, be able to grow AUM which will feed into that and hopefully drive that significantly higher.

Okay. And then this quarter, you were pretty -- you were selling MSRs, you obviously deemphasized those. I believe there was...

We didn't sell any MSRs. We just did an excess trade.

It was an excess trade, okay. Do you anticipate doing several more of those in order to...

Likely -- yes, there'll be more coming up, whether it's this quarter or next quarter, I just don't know, but there'll be more excess MSR deals done.

Okay, thank you.

Thank you.

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

Thanks for joining us this morning. Have a great rest of the summer. Appreciate the support. Super excited where we are as an organization and let's go.

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