Hello, and welcome to the Rithm Capital First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to hand the call 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 First 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.co. 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 you look at our business, it is another very solid quarter for Rithm and quite frankly, all of our operating companies. All of our business lines performed extremely well. With the recent backup in rates, the market should provide us with great opportunities to deploy capital and generate and continue to generate outsize returns. Regarding risk, we are much closer to home from a duration perspective. With Fed's peak early in the quarter and, quite frankly, late last year, targeting lower rates, we -- throughout the first quarter, we hedged most of our MSR risk or MSR positions. What this should do for the company is continue to create stability in earnings as well as book value on a go-forward basis. As everyone knows, we set out on a mission to grow our alternatives business. To be clear, this is not just in size, but more importantly, excellent risk-adjusted returns for our shareholders and LPs. Sculptor during the quarter continued to deliver strong results across the platform. What we are seeing in terms of risk reward in credit markets are some of the most attractive levels we have seen in years outside of financial crisis levels. The multi-strat fund continues to generate strong returns, while maintaining conservative risk posturing. The real estate group, which focuses on nontraditional niche asset classes continues to generate excellent returns. Their track record when you look at the numbers, is unparalleled relative to others in the marketplace. In the first quarter, we announced the launch of Sculptor loan financing partners. The firm's first captive CLO equity investment platform. This was anchored by a commitment from Rithm. In the quarter, we [ produced ] 2 CLOs, 1 in Europe and 1 in the U.S. As…

Good morning, and thanks, Michael. As Michael mentioned, just another good quarter for us. As we continue to grow on the foundation that we've built over the last few years, and our core focus is on strategic growth and continued cost leadership, right? We've executed on synergies across all of our platforms. We've internalized most of the Rithm third-party servicers. We unified our brand strategy, and we're now focused on growing our business, growing our platform and then modernizing our customer and employee experience through digital and AI initiatives. On Slide 16, on our Servicing business. Our Servicing business does continue to perform well. As Michael mentioned, we're expecting to close the SLS acquisition in the second quarter and it's going to add an additional $149 billion of owned and subservice MSRs, while adding co-issue MSR acquisition capabilities. Away from SLS, we continue to see additional opportunities to gain market share, including picking up wallet share with our existing third-party customer base, and we continue to evaluate MSR bulk packages, but there's also other strategic acquisitions that we look at as well. Overall, the consumer also performs well with muted prepayment speeds and historically low delinquencies. Across it all, we remain focused on maintaining operational excellence and cost management, even after adding $1 million loans on to the platform last year and an expected additional $700,000 loans with the SLS transaction. Going to Slide 17 on the Origination side. And similar to servicing, our origination business was able to take advantage of market opportunities while remaining disciplined on strategic growth. While the market remains historically muted in terms of origination volume, we grew originations overall 21% quarter-over-quarter, while also increasing margins, both of which were driven by our correspondent channel. We have strong momentum in our non-agency products originating over…

Thanks, Baron. Good work. Just a couple of last slides for me, and then we're going to open it up for Q&A. On the GreenBarn side, just so everybody knows, David Welch and David Schonbraun and that team, there's 25 investment professionals at this time, when we do investments off the GreenBarn shelf. Typically, it's done on the Rithm balance sheet. So I would think of it as a Rithm related investment strategy right now on commercial real estate, we do not have any legacy commercial real estate in the house. So things there are -- as we see opportunities and want to deploy capital on the Rithm balance sheet, we will do so. Adoor, just to touch on our single-family rental strategy, 4,200 units. The name of the game there is scale. I think that the growth in the -- I know that the growth in the Adoor business will come in a so-called co-investment fund alongside our public company where we have about $200 million of equity capital committed to that business. But you need significant scale there, and we continue to be, what I would say, thoughtful as far as cap rates, where we think cap rates are going and where we think we can deploy capital overall in that business. And then finally, on the portfolio side, on the consumer loan business, we do opportunistic investing in consumer loans, everybody knows in June or July of '23, we bought $1.4 billion of consumer loans from Goldman. That $1.4 billion, just to give you a sense, is now down to $800 million, it amortizes extremely quick. I think the average life of that cash flow will probably be over the next 1.5 to 2 years. So overall, things from a portfolio standpoint, extremely stable, extremely good. Business is performing well quite frankly, everywhere. And with that, we'll turn it back to the operator for Q&A.

[Operator Instructions] And our first question comes from Bose George of KBW.

Could I get an update on book value quarter-to-date? You noted that the hedges had taken the balance sheet up. So yes, just an update would be great?

We're in and around [ $12.30 to $12.40 ] right now, Bose -- during the -- we still have a little bit of a short bias. But overall, I would say as the market continues to sell off, if it does, what you're going to start to see is obviously, MSR values will be capped. I've said this for a long time. I think last quarter, we had a very conservative mark on our MSRs as well as, I think, where we are today. But what you're going to see is a backup in rates will, at some point, the duration flips from negative duration and positive duration. So we have to all be pretty thoughtful of that. But right now, it's all $12.30 to $12.40.

Okay. Great. That's helpful. And then I wanted to switch and get any updated thoughts on the timing of any potential spin. And also, does the remaining company need to be any larger in terms of scale? Or is it more just the right market conditions for you to do something?

Well, I think when you look at the mortgage company, when you look at a couple of our peers out there, they're trading above book. So clearly, we look at where we are, and we trade below book overall. So what we're trying to do is, obviously, we need to assess capital the amount of capital that's seen in each segment of our business. But as we evaluate whether to take this company public, whether it would be a spin or just -- or take it public, it's still what I would say is work in progress. What we're really trying to do, if you think about the power of our franchise, the earnings from our overall investment business, including the mortgage company, create significant advantages for us to be able to make investments and other things that we may want to do that are non-mortgage-related. So to give that up today, we're not sure that, that's the right thing, but we continue to evaluate that and work with our advisers on which way we're going to go with it.

The next question comes from Eric Hagen of BTIG.

Just looking at the results from the Sculptor, I mean when do you expect that might improve and turn positive? And do you have a target rate of return for the investment in the CLO equity that you made in Sculptor?

Eric, there's a couple of ways to think about this. One is the enterprise value that we're creating by making investments in the Sculptor franchise should lead to a higher overall equity valuation for Rithm at the parent level. So in other words, as we grow our CLO business and we create management fees for Sculptor or we make investments in other things, whether it would be alongside Sculptor or actually in Sculptor. What that's going to do is increase the value of Sculptor. So that's part one. Part two is when you look at the earnings, the earnings are going to be lumpy for now. Typically, when you look at whether it would be the multi-strat fund or you look at some of the other funds that Sculptor has, you'll see earnings when you have realizations. Most of the earnings, I think, you're going to see, at least for '24 are going to be geared towards fourth quarter. And then obviously, with more -- with the results as good as they are and as we think about the business, that will continue to hopefully bring more AUM back to the platform. And then you're going to start to see the real lift in not only enterprise value at the Rithm level, but also at the platform level at Sculptor.

Yes, that's really helpful, really helpful. Do you feel like the equity in the investment portfolio is relatively stable at this point? And what could get you to maybe direct more capital there even ahead of a spin-off and how would you maybe allocate the preferred equity in the capital structure among the different segments of the portfolio at this point?

So on the preferred equity, we -- you're referring to the 4 series that we have outstanding.

Yes, exactly. Yes.

We have 2 that are going to reset this year. We'll likely -- those are being addressed. When we look at capital, we ended the quarter with $2 billion of cash and liquidity. Today, it's a tad lower. We're going to fund SLS here, hopefully, extremely short in the near future. We'll deploy capital when we think that we have the right risk-adjusted return. I pointed out earlier in my opening remarks, the credit markets today look as good as they've looked in years. The high-yield indexes, I think, is in and around 360. And when you look at absolute yield levels and what we're able to achieve, it's a pretty ripe environment for us to deploy capital, whether it would be in the mortgage market or just other things. So we'll continue to be opportunistic. We -- obviously, we have a lot of things that I think are bigger from a corporate perspective, not necessarily a short term, but more in the long term, how we create a true global asset management business. And that's really, where we're focused alongside with operational excellence in our mortgage company and Genesis and the other things that we have in the company. On the preferreds, again, getting back to that, we'll address the series that are coming up here in the near future.

The next question comes from Doug Harter of UBS.

Michael, as you think about the transition to kind of more of an asset management model. How should we think about the timing and/or which of the business lines will see third-party capital raised first?

The -- I mean the Sculptor franchise is obviously, there's $32 billion of AUM at the franchise. When you look at the leadership team there between Jimmy and Brett Klein on the credit side and Steve Orbuck and Nick Hecker at the real estate side, it's a great team. I mean it hasn't been easy, obviously, to raise money going back the past couple of years because of the noise around the platform. That's why we are -- that's why we have the platform quite frankly. But when you look at where the actual performance and what that's going to lead to over the next couple of years, we're super excited as far as bringing more money into the credit strategies, the real estate strategies and as well as the multi-strat funds. So the returns are good. I think returns are going to bring in more capital, and that's going to be from both existing LPs and hopefully, from a bunch of new LPs. There's a lot of marketing that continues to go on around the platform. So it's -- money is going to flow. It's going to take a little bit of time here. But performance is going to bring in new pools of capital, for sure.

And I guess just on Sculptor, can you just talk about how retention has gone, since the deal closed relative to your expectations?

Great. We've lost a couple of bodies, but that's to be expected in any kind of acquisition. We've added new talent. There's a lot of, what I would call, incoming resumes that want to join the platform, whether it would be at the Sculptor level and/or at the Rithm level, people are excited where we are and what we're doing. So I don't -- there's no lack of anything. The investment team is solid and the results are solid as well. So no issues whatsoever on the retention side.

The next question comes from Stephen Laws of Raymond James.

I guess to start, can you talk about with mortgage rates moving back towards highs, what you're seeing in the pipeline there, sensitivity of borrowers to rates moving where they are? And kind of outlook for volumes near term and how you see that progressing through the year?

Baron, do you want to hit on the mortgage rates, higher that...

I mean the market remains predominantly a purchase market, right? So for us, it's about delivering excellent service to our customers and then making sure they understand who we are as a company and what we can otherwise deliver either through products or quality service. And we think we have a lot of upside in our customer retention from an origination perspective. And as I mentioned in our talking points, we'll remain opportunistic through all of our different channels for either ongoing growth. And we're not going to basically look at the market and Michael's used this term [ fight the Fed ], but the market interest rates being higher, we're going to remain nimble and very, very cost efficient in our origination business and cost efficient on our servicing business and that way we can perform in every market.

Great. And then changing gears a little bit. Can you touch on the announcement with great Ajax and what's your envision there and how you think about the fees benefiting Rithm with that relationship?

Yes. Great question. As we look at -- Great Ajax, it's a platform that's going to be externally managed, assuming that shareholder vote is affirmative for us. And the idea there is to grow that into a commercial -- publicly traded commercial real estate REIT that has no legacy commercial real estate exposure with the management fees that will flow into NewCo, which will be a management company. So I think that is the start when you think about Sculptor and fees that are going to be generated over the years, that will flow into a management company. You think about -- Great Ajax, some of the other things that we have on our plate today, that's really the goal. But it's really going to be a clean platform probably something between, call it, $250 million of equity that we'll be investing in commercial real estate with the team's type mandate, and it will be a clean platform relative to the -- some of the other folks. A lot of work to on that one, but that's the intention.

[Operator Instructions] And our next question will come from Jason Weaver of Jones Trading.

Michael, you mentioned in your prepared remarks, you were anticipating it, but can you talk about what you're seeing about incremental returns on the MSRs out there right now? As well as if you're looking at anything closer to the current production coupon?

So here's how we evaluate the MSR business. We don't -- as I pointed out, we've been doing this a long time. We see a lot of bulk packages. A lot of them are small when I say bulk, there was a couple of large from wells that went back over the course of the past year. When we look at where we could produce an asset versus where we could buy an asset, if we think we could produce the asset at a cheaper level. We're obviously always going to do that because you're creating -- we should be creating enterprise value around our mortgage company versus just going out and buying an asset. So our whole theme is as we create more enterprise value that goes to Sculptor, that goes to the mortgage company and other things that we're going to do around some of our other subs or business lines. As we evaluate whether it be lower coupon MSRs or it's all just a total return for us. If we could buy an MSR at an unlevered 10 and with a little bit of leverage, it's a [ 12 ] versus buying a distressed commercial real estate asset out of [ 15 ]. Obviously, we're going to opt for that thing at [ 15 ]. But everything is when we look at where we are today and the capabilities we have between credit and real estate and origination, we have it all, we don't have insurance. But everything is going to be total return-oriented how we think about investing in MSRs or some other asset class. We generically obviously, organically, I should say, manufacture MSRs with every loan that we create. And then we'll just evaluate that versus where we can buy that in the secondary market. Yes. Just keep in mind, MSR values, overall, weighted average mark, give or take [ 5 ] for the industry right now, if rates did sell off another 50 or 100 basis points, at some point, that duration becomes capped or you get longer. So it's just something to think about in that asset class.

Understood. And then on the Genesis business, I was wondering if you could provide a little bit more context around the greater sponsor demand you noted. Given a little relief on the rate front thus far this year, is this really just a function of banks really getting out of that business?

I think it's both, actually. I think -- listen, banks are always a little bit hesitant around the construction angle. When you look at our overall business lines, think about it this way. Somebody comes to us with a development of multi or, call it, single-family rental. Genesis will go out and make that loan on the single-family rental side or -- I'm sorry, they'll make that loan to the sponsor, who are then going to construct single-family rental homes. Adoor our single-family rental business will then buy those homes and then we'll get them leased up. So we're seeing a lot more of what I would say crust platform origination today than what we've done in years past. And as you look at Genesis, when I say the 66 different sponsors, the banks are pulling back a little bit, but the team itself is doing a great job in kind of broadening the sponsorship. When we first bought this business, the amount of concentration with 1 large sponsor was, I think, around 25% -- 25% or 30%. Today, it's so spread out. And when you think about where you are from a risk-adjusted basis, you were in a much, much better place today than we -- than I think we were when we actually acquired the platform from Goldman.

The next question comes from Trevor Cranston of JMP Securities.

You guys talked a lot about growth opportunities across the entire platform, some of which are non-reach investment portfolio opportunities. I guess when you think about the overall capital deployment that you guys have and the return opportunity out there, can you sort of give us an update on how you think about the dividend level for the overall company in light of all that?

So the dividend, obviously, we outperform our dividend, and hopefully, we'll continue to do that quarter-after-quarter. The calculation for us, is if we can deploy capital at a 12%, 13%, 14%, 20% return, use 15% on average. If we could deploy capital at 15% rate of return versus a dividend yield of 9% or something around that, everything we do from an investment standpoint is going to be highly accretive versus giving money back. So that's how we think about it.

The next question comes from Crispin Love of Piper Sandler.

Just when you're thinking about acquisitions in the alternative asset management space, what do you believe makes the most sense for you kind of over the intermediate term? What types of firms and investments would you be looking at and most interested in? And do you expect there to be opportunities in this area in 2024?

There's plenty of firms that are always out there for sale. What I would say is we have a business today in Sculptor. We really don't need anything than performance. And again, performance will bring more AUM back to the platform. So we don't need to buy anything. We are going to try to grow our credit business and our real estate business. The 3 pillars of Sculptor are real estate, credit and the multi-strat fund. We are going to grow those 3 different verticals. We're going to grow them by performance. Performance has been great. That will bring in more AUM. The firm is extremely stable, great partner in Rithm, and we're off to the races. And I don't think we need anything more than that. If there is a platform that comes up that we think is highly accretive to the overall alt space in the way that we think about the world, of course, we'll look at it. It's no different than Baron running the mortgage company and there's another mortgage company asset that's for sale that we think is extremely attractive, of course, we'll make a play on that. But right now, we have all the pieces in place to continue growing and putting up great returns for LPs. So unless something is extremely attractive, we'll stay the course.

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

Thanks for everyone's questions. Thanks for joining us this morning. As I said before, super excited where we are overall as a firm and look forward to continuing to hopefully put up great results for our LPs and shareholders going forward and look forward to updating you along the way. Have a great day. Thank you.

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