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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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 we think about capital, we've been very patient, as I pointed out earlier. We ended the quarter with $1.8 billion of cash and liquidity, and that number stands at roughly $1.65 billion today, and that's after a $200 million payment made to Fortress during the quarter.
As we go forward, you'll continue to see the same discipline around investing, a terrific investment team, more diversification in our income stream and hopefully, higher earnings. I'll now refer to the supplement, which has been posted online.
I'm going to start on Page 3. I'm going to get through this pretty quick. And then what we'll do is we'll open up for Q&A because I think the important part of our presentation this morning is not what was, but where we're going on a forward basis. So when we look at our company, obviously, we rebranded to Rithm Capital, and I think that reflects our -- where we are today as a company and also the desire to diversify away from more on the single-family residential side. Our portfolio of operating companies and assets put us in a very unique position that I think differentiates us from some of our peers in the marketplace.
When we think about capital, we maintain higher levels of cash and liquidity on our balance sheet. That's done purposely as we look at the volatility in the markets, we think about funding and with the Fed obviously in play in the uncertainty, we think we'll have the opportunity to deploy capital at higher ROEs. When we look at the single-family rental business, that's something that we've spoken about on prior earnings calls. We're currently up to 3,700 properties. And when we look at the housing market, with mortgage rates higher and housing starting to really slow down, we think we're going to be able to deploy capital at much higher cap rates.
When we look at the landscape, we do think we're going to start seeing more pockets of opportunity, not only again in some of the traditional business lines that we've been in, but in other areas such as commercial real estate. Our track record, very, very strong. Since inception in 2013, our total economic return is 162% or 18% on an annual basis.
Page 4, our business overview. Just a little bit of the highlight reel. Since inception of $4.1 billion of dividends, at the time of 6/30, our dividend yield was 10.7%, $7 billion in net equity, $35 billion balance sheet, $600-plus billion of MSRs, a top 5 nonbank originator and servicer. With Genesis, we are an industry-leading business purpose lender, our growth in the single-family rental business. We have complementary operating businesses, which are all listed on the bottom side of right page, and again, our desire to enter other parts of the financial services business, which we'll talk about shortly.
Page 5, our highlights from a financial perspective. During the quarter, our GAAP net loss was $3.3 million. That reflects a onetime fee to the external matter to Fortress of $325 million. Earnings $145.8 million and core earnings were $0.31 per diluted share. Dividend $0.25. Cash and liquidity, as I pointed out earlier, $1.8 billion. Net equity, $7 billion. Our book value 12.28 but that reflects a $0.70 hit from the termination fee paid to Fortress.
Page 6, business highlights. June 17, Rithm announced the internalization of its management function. We all part of what we'll call NewCo Rithm Capital. We do think, as I pointed out earlier, should add about $0.12 to $0.15 of per diluted share in earnings for our shareholders. We'll see more synergies as we leverage the infrastructure across our entire ecosystem.
The rebranding today we -- I believe it's today we trade as RITM on the New York Stock Exchange. We'll actually be ringing the bell on August 10. We're very excited about that. And again, the rebrand to Rithm, we think, just distinguishes our company from just -- from one our mortgage company NewRez, but also it will reflect the diversified nature of our company as we go forward.
Our focus on profitability is always there. I pointed out earlier, our run rate expenses are down by about 50% in the mortgage company. We'll continue to focus there. When you look at the mortgage company, for the most part, all the integration has already happened, and we continue to focus on ways to drive additional cost savings as well as increased revenue as we go forward.
On the financial side, again, $1.8 billion, 99% of our portfolio is a non-daily mark-to-market. And then when we look at our business, we're totally focused on ROE and IRR and risk-adjusted returns, we reduced our equity in our mortgage -- in the origination side because, quite frankly, gain on sale is just not there. There's no reason to produce a unit that we don't think is going to make money for shareholders.
Page 7 is really our strategic evolution. As you can see from '13, we started as an excess MSR owner to where we are today. We think we've made great progress, great job by the team as we've gone from just being what I would call an asset owner into more operating business line.
Page 8, really just defines our ability or talks about our ability to manufacture assets. As I pointed out a minute ago, we're not just going to manufacture assets to do that because we're in the operating business, we're going to manufacture assets because we think the return on equity for shareholders is something -- is the reason why we want to manufacture assets. So again, pointing out that the capital in the origination business has shrunk. We could take excess capital there and deploy it to other areas where we think the return on equity is going to be greater than that as it relates to just originating a mortgage loan.
The macro environment, there is no -- there's nothing surprising here. Inflation continues to be a multiyear high. We're starting to see a little bit of softening in some of the economic numbers that are coming out. The Fed 75 basis points back-to-back. We're expecting 50 in September and probably at least another 50 going forward. Obviously, the economic data is something that we continue to monitor. So how do we think about that? I pointed out earlier that we've been positioned for higher rates to the extent that we believe the market will rally. We will start adding hedges to some of our portfolios. As it relates to our MSR portfolio, just to give you a sense, our gross WACC is 3.6%. So you're probably about 175 basis points out of the money at this point, and I'll talk a little bit about that in a bit.
As we look at the housing market, mortgage rates anywhere from 5.25% to give or take 5.75% right now. We do think we're going to continue to see the slowdown in the housing market. I think I am and I'll talk personally, I'm a little bit more bearish than I think some of the analysts out there. I think when you look at housing, everybody is banking on supply, the lack of supply to keep housing at kind of what I would call these elevated levels or pricing at these elevated levels. Could be wrong, but I do think higher interest rates will lead to lower home prices.
From a financing standpoint, great shape on our financing side. What I would say there, from a macro standpoint, all financing costs in the marketplace have increased. And when you look at the securitization markets, overall cost of funds have increased. When you look at some of our bank counterparties, some of that -- some of the cost of funds have increased there as well. And again, we'll talk to that in a little bit.
Second here preview, patient approach to investment strategy. We started to deploy some capital on what I would call wider spreads here. We'll continue to do so. If you take a step back and think about our capital, $1.65 billion of cash today. Let's assume that we deployed that $1 billion even at a 12% kind of return. That's $120 million of net income on the year. So while we've been very patient on capital, we're going to start to look to opportunities to deploy capital at what we think are some wider spreads here.
Continued focus on profitability, MSR valuations. Just to talk to that for a second. We have slowed down our origination in our mortgage company pretty dramatically. Again, because I think we don't see the merit of what I would call real gain on sale there unless we increase our MSR multiples. So when you think about it, we have $600-plus billion of MSRs on our balance sheet with a gross -- with a weighted average gross WACC of 3.6 or 3.7, 5-year season speeds about 11 CPR. When we take a step back, we say, okay, should we produce 6% coupon mortgage rates at kind of at a 5 multiple or should we just stay the course. And I think the general view is keep some extra capital, we can deploy capital at wider levels, slowdown origination until we get to a place where we think that the risk returns are warranted and we see gain on sale come back. So we've been very, very cautious there on the origination side.
And I think as we go forward and we expand into other product areas, you're going to see the diversification of earnings from our company really hit its stride. Page 12, a summary of our business segments, origination, servicing, MSR-related investments. We do have some real estate-related investments. The single-family business will grow. Again, we're very patient there. We've increased cap rates quite frankly, as a result of our increase in cap rates. Our ability to source at higher cap rates has really slowed down. So we'll continue to monitor that because the market hasn't adjusted. Our loans, remember, we still have $76 billion of call rates on the legacy mortgage market. They’re currently out of the money. Any market rally should kind of bring that back in and then other when we look at consumer loans in corporate.
Page 13, our MSR portfolio. I'm not going to spend a ton of time on the next number of pages, but I hit the highlights roughly 60-month season, 3.6, 3.7 gross WACC. As you look at Page 14, 11 CPR. Recapture rates are fine. Keep in mind, in the lower refi market, you're going to see less recapture because there's just less refinancing activity going on, and we still believe we're going to be in a purchase market, which lends credence to the Caliber purchase franchise that we have there on the retail side.
Page 15, single-family rental business, I pointed out 3,700 units. We're very thoughtful when we think about geographies where we're going with this. And obviously, we'd like to see this grow, but we're going to be patient and we're going to deploy capital at higher cap rates unless the markets tell us otherwise.
Page 16, Genesis. $1.3 billion of production in the first half, business is performing extremely well. Robert Wassman and his team have done a great job there. We'll continue to spend a lot of time on that business, think about other areas where we can invest capital to grow the business. The way the company is performing is on track for the way we've underwritten the initial investment.
Service Advance is not allowed to talk about there. Advanced capabilities there extremely high. And advanced balances are down and continue to remain lower as the consumer continues to perform.
Page 18, a mortgage company. Pretax income, $552 million. G&A expenses, I told you, we continue to bring those down dramatically. A couple of things to point out here. On the origination side, I think the way that we're trying to forecast this going forward is a flat pretax income number as we go forward. You look in the quarter, we have a pretax loss of $26 million, $23 million of that is due to the legacy clean-up around some scratch and dense stuff on the Caliber side, and then we're exiting some leases, and there's a little bit of severance there. But in general, if you take out these kind of onetime charges and we hope they're onetime charges, the origination business is going to be run breakeven as we go forward.
As we look at the overall company itself to give you some metrics, when we did the Caliber acquisition, the combined company had roughly 13,500 people. Currently, I think we said, would give or take, around 7,800 people today. So dramatic reduction in costs, trying to rightsize for the existing environment, origination business will run flat and the servicing portfolio will continue to generate what we think are very good earnings.
And then finally, on Page 19 and 20, the origination and servicing business, I think Baron will talk to this, but when we look at gain on sale, we're starting to see a little bit of what I would call openings for higher gain on sale margins. We continue to work on there. We're very, very disciplined that we're not going to originate a mortgage loan that doesn't make money just to kind of substantial revenue.
So with that, I'll turn it back over to the operator, who'll open up for Q&A. And again, I think the big thing for us is where we are today, we have a great business. We're sitting on a lot of cash. Earnings have been very, very good. But I think where we go is Rithm Capital is something that the team is extremely thrilled about. And we're thrilled about it as we strive to drive higher earnings for shareholders and continue to diversify around just the residential side of the mortgage market.
So with that, I'll turn it back to the operator.
[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.