RPT - NYSE

Thank you for standing by. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rithm Property Trust Fourth Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [Operator Instructions] Thank you. I would like to hand the call over to Emma Bolla, Associate General Counsel of Rithm Capital. You may begin your conference.

Thank you, and good morning, everyone. I would like to thank you for joining us today for Rithm Property Trust’s fourth quarter 2024 earnings call. Joining me today are Michael Nierenberg, CEO of Rithm Capital and of Rithm Property Trust and Mary Doyle, CFO of Rithm Property Trust. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Rithm Property Trust website, www.rithmpropertytrust.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. I have some short comments and then we'll just we'll go to the supplement and then we'll do a little bit of Q&A. As we think about this vehicle, we took over the management contract of what was formerly known as Great Ajax in June of 2024. For the first time in three years, we're happy to report the company had a positive economic result in Q4. While $0.06 a share in is a start, we look forward to our ability to continue growing earnings and our capital base. As we when we took over the company, the thought was with the commercial real estate market extremely dislocated, we were going to turn this vehicle into getting out of the so called legacy resi non-performing loan business, not that we're out of it as a firm, but in this vehicle and turning it into an opportunistic vehicle focused on commercial real estate. So in doing that, we repositioned the balance sheet, we shored up all the financing around the assets. We sold down legacy residential positions and we reinvested the proceeds into high quality commercial real estate. In doing all that, you're going to see you can see the economic result, which for the quarter, again, we made $0.06 per diluted share from a GAAP perspective. And we're still maintaining the dividend of $0.06 with the belief that we're going to continue to grow out of this so called whole that was part of this company for many, many years. How are we going to get there? How are we thinking about this vehicle on a go forward basis? Because right now, it's got roughly $250 million call it of equity. It trades at give or take 50% of book. So how are we going to get there? One is we're going to need more capital. So when we think about the stock price, we think the equity is extremely undervalued. So we'll likely be in the market in Q1 with a preferred equity deal. This will do a couple of things. One, it's going to help us shore up our capital base. Two, it's just going to give us more capital to invest, which therefore which therefore is going to hopefully create more earnings for our shareholders. We'll continue to sell down legacy assets that don't meet our current thresholds, return thresholds. I will say the balance sheet is, for the most part very, very clean. There's a bunch of retained interest that sit on the balance sheet that we can't sell that are part of older securitizations. Those will be there for quite some time. That's Part 1. Part 2, however, on that is the liability structure they were issued with very low rates. So we feel good about that. And again, there's not much we could do there. And then finally, what we're going to do is we're going to seek M&A opportunities to truly grow the company. As you know, at Rithm Capital, our pipeline of M&A across the firm is extremely broad, and we are optimistic, and we do feel like we're going to be able to do something here. The playbook is very similar to new residential. When we started that vehicle at Fortress, it was externally managed and that was in 2013. We started roughly $1 billion of capital. Today, it has $7.8 billion. And along the way, we did a bunch of M&A and we bought a bunch of assets. And quite frankly, I think we're going to be able to do I'm hopeful we'll be able to do the same thing here. So with that, I'm going to turn to the supplement. I'll begin on Page 3. Again, Rithm Property Trust was formerly known as Great Ajax. I gave you the comments that we set this thing up or reposition the company to take advantage of what we think is one of the better investing opportunities we've seen in many, many years in the commercial real estate sector as well as we'll look for other opportunistic ways to deploy capital. The pipeline today is roughly $1 billion of things we're looking at. And we all know not everything fits in one box. So we're extremely selective. When we look at the amount of capital in commercial real estate right now, there's $50 million in commercial real estate that's going to continue to grow. When we look at new investments, we're targeting something in the low double digits. When you look at the team and you think about the folks that work on this business, again, this vehicle is externally managed. There's not whether it's $200 million quite frankly or $20 billion the amount of effort and the team is still the same, and we take great pride in trying to create value for shareholders. Page 4, financial results, $2.9 million in GAAP income for the quarter, $0.06 per diluted share. EAD earnings available for distribution, $0.01. Again, first positive result in three years while $0.01 is not much. We're optimistic on where we're going to go with this. We kept our dividend the same as $0.06 per common share. Cash and liquidity on balance sheet at the end of Q4 is $64 million and total shareholder equity of $247 million. Looking at book value, $5.44 essentially unchanged from Q3. The one thing I want to point out there is rates. When you look at rates across the curve, they're up approximately 60 basis points. So if you think about the result, rates up 60 basis points, book value essentially unchanged. And a lot of that is due quite frankly to the investing that we did in the quarter and in prior quarters where we put on floating rate assets at low double digit returns, and that enabled us to get to this positive result. If you look at Page 5, just a couple of points here. As I mentioned, we repositioned the balance sheet. What did that mean? We sold down a little under $340 million from a gross standpoint of legacy residential mortgage assets we deployed as I pointed out $50 million into commercial real estate. GAAP net income grew from a loss in Q2 of $13 million to a positive result of $2.9 million and then earnings available for distribution grew from a loss of a little under $10 million to a little bit -- so call it kind of flat. And then we also improved all of the financing arrangements we had in the company. As we look ahead, I think this is pretty straightforward commercial real estate debt. We're targeting what I would say, low double-digit returns. There'll be some opportunities to deploy capital at higher returns, but that's -- for now, that's how we're thinking about it. There is no legacy issues that we see right now that are going to cause any problems for the company. You think about the commercial real estate sector. Anybody that's been investing in office over the past number of years has had -- is going to have many issues. Right now where we stand, we feel very, very comfortable about the opportunity ahead of us. Page 7, just talked about opportunities and yields. Again, we're going to target something in the low double digits. We'll look for some opportunistic situations where we're going to deploy capital at higher returns as well. So really to summarize for me and then we'll turn it over to Q&A. One is, the company is on the right path, team is working hard. We are going to need more capital. The capital, what we're going to try to do is raise money in the pref market in Q1. And then from there, we'll continue to deploy capital. We'll hunt for some M&A opportunities. And again, the playbook is very similar to what we did when at Fortress, where we had started with $1 billion of capital in new residential and grew that to where it has a little bit under $8 billion today. So with that, I'm going to turn it back to the operator, and then we can have some Q&A.

Thank you. [Operator Instructions] Our first question comes from the line of Tom Catherwood with BTIG. Your line is open.

Thank you, and good morning everybody. Michael, first off, congratulations on reaching profitability in 4Q. It was great to see that. And then I appreciate your comments as far as the opportunities and the strategy for growth going forward. But now that you've been under the hood at RPT for eight plus months, how has your view on commercial real estate evolved? And are the opportunities that you're pursuing the same as they initially were or have they shifted over time?

Good question, Tom. Here's what I would say, and there's been all this talk about opportunities in commercial real estate. Quite frankly, if you roll back the clock and even at Rithm, like we have deployed hundreds of millions of dollars into different commercial real estate opportunities. While saying that, we're not -- there are opportunities to do so. We've seen a lot of office over the course of the past year, year and half years. Not everything works, quite frankly. We are starting to see more opportunities. We're seeing, for example, working with some of the large money center banks where we could provide a B note or mezz note on some underlying loan that they're making helps from a capital standpoint at the bank. And for us, it creates that double-digit yield that we're targeting. The net of it is, quite frankly, that we think on a go-forward basis, you're going to see more opportunities. There's plenty of capital out there chasing. I think the key for us is when you look at Rithm as an organization between Sculptor, which does their own thing has raised a lot of money around the real estate funds and has great track record, Rithm -- at the Rithm level where we've deployed capital. And now in this vehicle where we repositioned. There's -- we see everything. But again, not everything fits. We're looking for debt. We're going to look for some more opportunistic situations and it's going to continue to come our way. We don't need to be office everything. We have the expertise here to do that, but it's going to be more around the loan side, I think, in working with some of the larger banks and some distressed opportunities.

I appreciate those thoughts. And that's kind of where I wanted to go next was were you somewhat surprised in '24 that we saw a slower pace of loan sales out of banks? And could that accelerate in '25.

I do think it will accelerate in '25. When you think about -- and I worked at a large bank for five years. When you think about the banks, unless you're forced to take that mark, typically, you're going to hold on to that asset as you see banking, more marks -- and obviously, the banking sectors had a great, great run. You look at bank earnings, they're fantastic. I think you'll see them write down more of their kind of problem real estate. The other thing what you're going to see is our belief is that rates are going to stay higher for longer. Everybody was betting on, for example, the 10-year note, I pointed out, rates are up 60 basis points, right? So if you look, I think 10s went from -- the 10 year's trading roughly 460 today. And I think at the end of the year as you're up 60, now you're up even a little bit more. When you look at the general belief was that rates are going to come back down because the Fed is cutting rates, you had the Fed meeting yesterday, and the Fed's basically saying we're on hold for now because the economy is strong. Rates are not going to come down that quick. And as a result, I think you're going to see more problems in commercial real estate as people -- things reset higher and debt service becomes a problem. So I think you'll see more assets come out.

Got it. Appreciate your color on that. And then last one for me. On the preferred -- maybe kind of two questions. First, do you have a magnitude in mind as of this point? And the second part is, would this be growth capital? Or would some of it be used to address the higher coupon unsecured notes that you have on the balance sheet?

It's going to be a combination of both. It's a good question. I mean, ideally, if there was a transaction that was highly accretive, we're going to continue to try to do those. We have the stocks trading. I didn't -- this morning, roughly 285 or something like that, and book value of, call it, $5.5. We prefer not to issue stock down here if we don't have to. That's why tapping into the preferred market, even if it's higher coupon. I will point out that if you go back in time, there's covenants around the unsecured, and there is a need to buffer the capital base around some of that unsecured as you think about covenants. Now we've deployed capital. We have cash and liquidity on balance sheet, but the net of it is we want to do both. One, take care of some of the high-yield notes, and two, have more capital to deploy, so we could grow earnings.

Understood. Appreciate the comments Michael. Thank you.

Thank you.

Our next question comes from the line of Jason Stewart with Janney. Your line is open.

Hi, Michael, good morning. As you think about the strategy evolving and you're moving maybe some top of the capital structure down to the middle part of the capital structure on the asset side. Have you thought about how the financing needs to evolve and where that would meet your needs in terms of hitting ROE and the term financing of those assets?

The answer is yes. When we do something, if we're going to partner with, call it, one of our large money center banks, Typically, we'll try to do something in conjunction with financing unless the returns where we could justify an unlevered return without putting any leverage on that asset. There's plenty of financing available to us at the Rithm Property Trust level. Keep in mind, Jason, as a firm at the Rithm level, the balance sheet, we financed the mortgage company and everything else, the balance sheet is $40 billion. So when you think about the power of Rithm supporting -- being that this vehicle is externally managed and everybody here is a Rithm employee. The power of our franchise, I think, is pretty broad. We have a lot of access to financing. So we're not going to do something unless it meets obviously, the return hurdles. So the short answer is going back, yes. But there's plenty of financing available, whether that be in term financing on an asset or some straight financing with an insurance company and/or other ways to finance our business.

Okay. That's helpful. I guess I'm looking at Slide 7. I'm just thinking about ROE on a go-forward basis. And if you move from senior down to sub to juice the top line gross ROEs to cover, say, the preferred and spreads tightened to get more opportunistic, where the sweet spot in the capital structure on the asset side would be in conjunction with financing. How far down you're thinking about going in the future down the asset side of the capital structure?

We're not going to set up this vehicle to be a so-called first loss vehicle just to seek yield. I'll be really clear about that. There's a ton of lending demand where it could be transitional lending, it could be -- there is a ton of demand for lending. And when you look even in our Genesis business, that's a wholly owned sub of Rithm, that business on residential transitional loans did almost $4 billion of production last year. You look at the underlying -- the underlying unlevered return and it's anywhere from, give or take, 10% to 11%. So we're going to see plenty of opportunity. We're not going to be the -- again, the first loss piece provider on different deals just to do something to seek yield. We want to make sure, one is we're, first and foremost, credit first in underwriting and then we're going to solve for return. And we're confident we'll get there. We did a loan out of Rithm going back in '24 at SOFR plus 700 on a development project with Kushner and that was if you think about it, it's a 12%-plus unlevered return. So there's going to be plenty of opportunity to deploy capital.

Got it. Okay. That's really helpful. And then just going back real quick to the office market. I mean it does seem like on the margin, the conversation has shifted a little bit more positively. Do you think that unlocks more opportunity? Or do you think -- how do you think about that conversation evolving, I guess, and the opportunities in office?

They're there. We've seen a lot of office. I mean if you look at the pipeline, even from some of the larger brokers, there's a ton of office. There was a building that traded, I think today, my old Fortress stomping ground, 1345, that traded to Blackstone. I mean there's a ton of things that are -- that we see in office. One of the things that if we're going to be in office and for example, if you're going to be on the equity side, it's guy -- that equity investment in Rithm Property Trust has to be a multiple. We have to get a multiple of what we think the building is worth if we're going to go in on that. While saying that, again, we prefer to be in debt rather than equity because we think it's a better place to be right now based on where we could put money out, but there's tons and tons of office that continue to come out. A lot of it is bad, quite frankly. And when I say bad, it's like I don't know, a lot of the stuff has to be repurposed. So you got to be really, really selective there. And this is -- again, there's a ton of need for capital. I do think people are going to go back into the office, there's a ton of need for money for CapEx in a lot of these buildings because everybody wants to be in a new building. But we see plenty, but a lot of it doesn't work.

Okay, thanks for time. Appreciate it.

Thanks, Jason.

Our next question comes from the line of Stephen Laws with Raymond James. Your line is open.

Hi, good morning, Michael. Just on the deck, about $48 million of equity capital is allocated to CRE assets, about 20%. Can you talk about the ramp and on the current equity base, how high that can get? Or maybe asked another way, how much equity supports some of the investments in legacy assets that are going to stay on the balance sheet?

It's a good question, Stephen. So let me address the second part. It's everything we do -- not everything, but I think everything we do on a go-forward basis is going to be around commercial real estate. So for example, if we hit the market with -- let's just use round numbers, and I'm hopeful we can do this. So we hit the market with a couple of hundred million of preferred equity over the course of the year. Whether we do it in one swoop or not, I don't know. We prefer to do it now. Let's just call it roughly 50% of that. If we wanted to retire the outstanding debt, we would do that, then you'd have another $100 million of equity going into -- you'd have another $100 million going into commercial real estate. When you look at the money that we've deployed in commercial real estate so far, it's roughly -- we've added about $270 million from a gross standpoint. Again, most -- if not all of it is floating rate. And when you think about the advance rates and this stuff and where we are, advance rates could be anywhere from, call it, 80% to 85%, in that range as we think about the no mark-to-market or facilities. The rest of the stuff, quite frankly, you have a bunch of stuff that's consolidated on balance sheet, and I pointed that out earlier in my opening remarks. You just can't sell them because they're legacy -- they're legacy residential RMBS. So if you think about $250 million of kind of equity capital and I'm looking at our position -- and the balance sheet is in really good shape. There's not that much that's left to sell down that's going to release a ton of equity. So the rest of it is really going to be in residential real estate right now.

Great. Appreciate the comments there. And touching base on the investments. I guess can you update us on any investment activity in the month of January? And then kind of bigger picture, as you look at your current pipeline, can you talk about the relative attractiveness of additional CMBS investments versus the senior and mezz loan opportunities you're seeing in your pipeline?

We're looking at both. We look at every deal that comes out. We see every deal. It's going to be a combination is what I would say. Same comment going back to Jason's question. We're not going to be -- I've been doing this a long time. Credit matters for us, underwriting matters for us, particularly in commercial real estate. You want to make sure that you're crossing your Ts and dotting your Is. So it's going to be a combination of, call it, bonds as well as putting money out. I also think -- and I pointed out M&A, we at Rithm, we see a ton of M&A. We look at hundreds of deals a year. If you look at our track record around the stuff that we've done, it's been pretty impressive, quite frankly, but that doesn't mean -- last year, we did -- we took over the management contract of this, and we did another mortgage company deal. So it's not like we're going to do a ton, but there'll be some opportunities, I think, on the M&A side to, one, grow the capital base and then, two, put out capital that's going to be more accretive than just, for example, buying a AAA CMBS bond.

Great. And then lastly, over the course of the year, I know most of the securities on the balance sheet is available for sale. I mean are those investments you think eventually you rotate out of into CRE whole loans? Or do you think you these are longer-term holds and as part of the longer-term targeted asset mix as you put together this portfolio?

When I look at forward levered yields on the remaining portfolio, where we currently sit, our forward returns are on average, what I would say, anywhere from 12% to 18%. So there's really no rush to sell them unless you have the ability to redeploy that capital into something that's more accretive. And we spent a lot of time between -- on the resi side of -- our residential teams or commercial teams, we spend a lot of time looking at all kinds of different assets. The book I pointed out is book value stable at $5.5, stocks at $2.85. So we think the equity is dirt cheap. But we got to have a reason to actually sell something, we don't give anything away. That's not who we are. But we need to make sure that we look at what's the opportunity on the other side of something that we're going to sell is what I would say.

Any investment activity in January, you can share with us today or...

Yeah. Just a little bit more in the top part of the capital stack around some of the -- some newer CMBS deals, not a ton of capital. I pointed out earlier, I think we're sitting on, give or take, $65 million of cash and liquidity. We want to raise a bunch here in the first quarter just to bolster the balance sheet, have a hard look at some of the debt and then get ready to deploy more capital. And then if there's something highly accretive, we'll come back to the marketplace and figure out a way to take -- our track record is good in doing the stuff to take this company from where it has, $250 million of, call it, equity value to something that's multiple billions, so it becomes extremely relevant.

Fantastic, appreciate the time this morning, Michael. Thank you.

Our next question comes from the line of Doug Harter with UBS. Your line is open.

Hey, Michael, can you talk about the relative attractiveness of using structural leverage like a B note versus kind of financing through warehouse lines and which kind of offer better return opportunities today?

Again, going back to my earlier comments, we're going to look -- we look at everything. There's going to be a combination of both. When you think about B notes and you think about issuing loans, obviously, you got to underwrite first. Structural leverage, when you hit the securitization markets, that is attractive. While saying that, the balance sheet that we have here is small. The equity capital base is small. And until we get to real scale, there's no -- there's nothing that we're going to issue in the securitization markets because we don't -- we're not underwriting or creating conduit loans per se, we'll be working more with partners on the origination side. I think you could see, you may even see at some point where we partner with some of the other businesses that we have here at Rithm on some opportunities in commercial real estate. We have a lot of capability between some of our wholly owned subs on the Rithm balance sheet. The same team, again, we're externally managed. So the Rithm employees, the same guys in Gallup have worked on Rithm Property Trust are working on Rithm. Obviously, Rithm has plenty of capital. So you're going to see situations, I think, where we, as a firm, no different than I think what Blackstone does on some of their stuff, where we as a firm are going to partner with some of our other subs and operating companies.

Great. Appreciate it, thank you, Michael.

Thanks, Doug.

There are no further questions at this time. I would like to hand things back over to Michael Nierenberg for some closing remarks.

Appreciate you guys joining the call and asking the questions. It's helpful to all of us here are Rithm Property Trust and Rithm Capital. What I would say, again, just to close, in my closing remarks, this vehicle will be a lot more active, we hope, over the course as we go forward. Our ability and track record to create value for shareholders, I think is -- you don't have to look further to some of the other things that we, as a group, have done. It's the same group that's created Rithm Capital, will be the same groups that are working on Rithm Properties, plus some of our other OpCos and we're excited about where we think we could take the company. We'll be in the capital markets, hopefully, here in the near future, and stay tuned. The desire to grow earnings and make this thing great, and grow the share price is something that's extremely important to us. So look forward to updating you soon. Have a great day. And thank you.