Rithm Property Trust Inc (RPT) 2024 Q4 法說會逐字稿

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 Rhythm Property Trust.

Fourth quarter, 2024 earnings call, all lines have been placed on mute to prevent any background noise.

(Operator instructions)

I would like to hand the call over to Emma Bolla, Associate General Counsel of Rhythm Capital.

Thank you and good morning everyone.

I would like to thank you for joining us today for Rhythm Property Trust Fourth quarter, 2024 earnings call.

Joining me today are Michael Nierenberg, CEO of Rhythm Capital and of Rhythm Property Trust and Mary Doyle, CFO Rhythm Property Trust.

Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Rhythm 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 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 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, non performing loan business.

Not that we're out of it at as a firm, but in this vehicle and turning it into an opportunistic vehicle focused on commercial real estate.

So in doing that, we reposition the balance sheet, we short up all the financing around the assets.

We sold down legacy residential positions and we re reinvested the proceeds into high quality commercial real estate.

In doing all that, you could 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 the so called hole that was, part of this company for many years.

How we're 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 that 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 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 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 one, part two.

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 rhythm capital.

We, 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 a billion dollars 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 that.

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.

I'm going to begin on page 3.

Again, Rhythm 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 years in the in the commercial real estate sector as well as we'll look for other opportunistic ways to deploy capital, the pipeline today is roughly a billion dollars 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, E ad earnings available for it for distribution.

A penny, again, first positive result in three years while a penny is not much, we're optimistic on where we're going to go with this.

We kept our dividend the same at $0.06 per common share, cash and liquidity on balance sheet.

At the end of Q4 is $64 million and total shareholder equity is $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 then, 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 reposition the balance sheet.

What did that mean?

We sold down a little under $340 million from a gross 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 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 how we're thinking about it.

There's 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 comfortable at 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 be able to deploy capital at higher at higher returns as well.

So 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 prep 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 a billion of capital and new residential and include, that's 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 could have some Q&A.

(Operator instructions)

Our first question comes from the line of Tom Catherwood, BTIG.

Your line is open.

Everybody Michael first off, congratulations on, reaching profitability in four Q. It was great to see that and then 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 RBT for eight plus months, how is 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?

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 a rhythm, 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 a year and a half.

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 note or MES 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 rhythm 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 rhythm at the rhythm level where we've deployed capital.

And now in this vehicle where we repositioned, 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 and 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 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 banks taking more marks and then, obviously the banking sectors had a great run.

You look at bank earnings are fantastic.

I think you'll see them right 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 tens went from, the 10 years trading roughly 460 today.

And I think at the end of the year is 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 that, you had the fed meeting yesterday and the feds, 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, as things reset higher.

And debt service becomes a problem.

So I think you'll see more assets come out.

Yeah, appreciate, 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.

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 bucks.

We prefer not to issue stock down here if we don't have to.

That's why it's 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 to have more, more capital to deploy so we could grow earnings.

Understood.

Appreciate the comments, Michael.

Thank you.

Our next question comes from the line of Jason Stewart, Janney.

Hey Michael, good morning.

As you think about the strategy evolving and you're moving maybe some top of the 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 rhythm property trust level.

Keep in mind, Jason.

As a firm, at the rhythm 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 rhythm supporting being that this vehicle is externally managed and everybody here is a rhythm 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.

But there's plenty of financing available, whether that be in the, term financing on an asset or some straight, financing with an insurance company and other ways to finance our business.

That, that's helpful.

I guess I'm looking at 57, 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 ROE to cover, say the preferred and it spreads titan to get more opportunistic.

Where the sweet spot in the capital structure on the asset side would be, in conjunction within 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 I'll be really clear about that.

There's a ton of lending demand where it could be transitional lending.

It could be this is a ton of demand for lending and when you look even in our genesis business that's a wholly owned sub of rhythm.

That business on, residential transitional loans, they 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 not going to be the, again, the first loss piece provider on different deals just to do something to see, we want to make sure one is we first and foremost, credit, first, in underwriting and then we're going to, so for return and we're confident we'll get there, we did a loan out of at a rhythm going back in 24 at, so for plus 700 on a development project with Kushner and if you think about it's a 12 plus percent unlevered return.

So there's going to be plenty of opportunity to deploy capital.

That's, that's really helpful and then just going back real quick to the office market.

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 in the the opportunities in office.

We've seen a lot of office.

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 Soic Grounds 1,345 that traded to Blackstone.

There's a ton of things that we see in office, we want things that if we're going to be in office and you'r for example, if you're going to be on the equity side, it's got that equity investment in rhythm property trust has to be a multiple.

We have to get a multi of what we think that 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's bad quite frankly, and when I say bad, it's like, I don't know, a lot of this stuff has to be repurposed.

So you gotta be really selective there.

And 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.

Thanks for the call.

Appreciate it.

Our next question comes from the line of Stephen Laws, Raymond James.

Hi, good morning Michael.

I saw the deck about $48 million of equity capital is allocated to CRE assets about about 20%.

Can you, 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 that investments and legacy assets that are going to stay on the balance sheet?

It's a good question, Steven.

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 let's just use round numbers and I'm hopeful we can do this if we hit the market with a couple of $100 million of preferred equity over the course of the year.

Whether we do it in one swoop or not.

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 billion of equity going into, you'd have another $100 million going into the 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's floating rate.

And when you think about the advanced rates on this stuff and where we are, advanced rates could be anywhere from, call it 80% to 85%.

And, in that range, as we think about the no more 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, in my opening remarks, you just can't sell them because their legacy, the legacy residential, R&BS.

So if you think about 250 of kind of equity capital and, I'm looking at our position and the position, 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's really going to be in residential real estate right now.

I 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.

If you look at your current pipeline, can you talk about the relative attractiveness of additional CMBS investments versus the senior and mes 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 time going back to Jason's question, we're not going to be, I've been doing this a long time, credit matters first, underwriting matters first, particularly in commercial real estate.

You want to make sure that you're crossing your T's and dotting your I's so it's going to be a combination of call bonds, as well as putting money out.

Ipointed out M&A, we at rhythm, 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 to put out capital, that's going to be more creative than just, for example, buying a triple ac MBS bond.

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?

Do you think eventually you rotate out of and into CRE whole loans or do you think you, these are longer term holds and just part of the longer term targeted asset mix that you put together this portfolio.

When I look at forward, forward leverage yields on the remaining portfolio where we currently sit.

Our forward returns are on average, you know 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 creative.

And we spend a lot of time between, on the, on the side of our residential teams, our 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 bucks, stocks at 285.

So we think that the equity is dirt cheap.

But we gotta have a reason to actually just 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.

Great.

Oh any investment activity in January you can share with us today or yes.

Just a little bit more in the top part of the capital stack.

Around some of the, some new, newer CMBS deals, not a ton of capital out, I pointed out earlier, 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 there's something highly creative will 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 called equity value to something that's multiple billions, so it becomes extremely relevant.

Fantastic.

Appreciate the comments this morning, Michael.

Our next question comes from the line of Douglas Harter, UBS.

Hey Michael, can you talk about the relative attractiveness of using structural leverage, like a 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 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 the real scale, there's nothing that we're going to issue in the call 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 rhythm on some opportunities in commercial real estate.

We have a lot of capability between, some of our wholly owned subs at the on the rhythm balance sheet, the same team.

Again, we're externally managed.

So the rhythm employees, the same guys that guys and gals that work on a rhythm property trust are working on rhythm.

Obviously, rhythm 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.

There are no further questions at this time.

I would like to hand things back over to Michael Nierenberg for some closing remarks.

Thanks, appreciate you guys joining the call.

And asking the questions.

It's helpful to all of us here at Rhythm property trust and Rhythm capital.

What I would say again, just to close in my closing remarks.

This vehicle would be a lot more active.

We hope over the course as we go forward.

Our ability and track record to create value for shareholders, 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 rhythm capital, will be the same groups that are working on rhythm property trust.

Plus, some of our other options 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.

Thank you.

This concludes today's conference call.

You may now disconnect.