ManpowerGroup Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 26, 2023

There are 6 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Rhythm Capital Corp. Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask Please note, this event is being recorded. I would like now to turn the conference over to Emma Bolla, Associate General Counsel, please go ahead.

Speaker 1

Thank you, and good morning, everyone. I would like to thank you for joining us today for Rhythm Capital's Q3 2023 Earnings Call. Joining me today are Michael Nierenberg, Chairman, CEO and President of Rhythm Capital And Nick Santoro, Chief Financial Officer of Rhythm Capital. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Rhythm Capital website, www.rhythmcap.com. If you've not already done so, I'd encourage you to download the presentation now.

Speaker 1

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 direct Fully comparable GAAP measures can be found in our earnings supplement.

Speaker 1

And with that, I will turn the call over to Michael.

Speaker 2

Thanks, Emma. Good morning, everyone. Thanks for joining us. Really exciting times for our company. From an earnings perspective and this overall operations in the quarter, a very, very solid quarter.

Speaker 2

Our core business lines continue to perform extremely well. The positioning we put in place over the course of the past couple of years continues to pay dividends It creates solid earnings, book value growth and high levels of liquidity. We expect this to continue into the future with the Fed signaling higher rates for a longer period of time. The global macro backdrop for investing puts our company in a great place to take advantage of where we believe the markets are headed. As you know, we have been very vocal about repositioning the company into more of an alternative asset manager.

Speaker 2

Before I go there, I want to be clear. The core business lines which have gotten us to this point are crucial to the future of our company. We believe Rhythm 1.0, which is our existing core business, plus Rhythm Private Capital will be a huge lift for our investors, Shareholders and our employees, with the Sculptor announcement, we had great investment talent to our already terrific team. This expands our capabilities globally into all areas of credit, real estate, consumer and other strategies That, I'm sure will launch at some point here in the near future. We're also working on another transaction that upon consummation grows our asset Management business to $50,000,000,000 of AUM.

Speaker 2

These transactions are transformational for us and continue our narrative towards being a leading global Asset Management Business. We are extremely excited by the prospect of growing our business in the private sector and most importantly, adding partners who want to win with us And grow with us as growing with our partners will increase revenue, earnings, benefit our shareholders and our LPs who invest with us. At year end, we estimate the following that our business will look like this. Now these are all projections, assuming that everything closes and the deals happen, We'll have $50,000,000,000 of AUM in the asset management business, dollars 7,200,000,000 of equity capital, A $35 ish billion balance sheet and plenty of liquidity with a bunch of new partners in the Private Capital business. Back to the core business.

Speaker 2

During the quarter, we announced the acquisition of SLS. SLS is a mortgage company With $135,000,000,000 of servicing, of which $85,000,000,000 or so is true third party servicing. Consistent with our rate view, this deal will bolster our servicing business, add capacity and clients in our 3rd party business, Grow our special servicing business and increase earnings. Our total servicing portfolio of investments from a notional perspective Gross to $840,000,000,000 upon the settlement of the SLS deal. This includes mortgages that we service, Investment in what we'll call excess MSRs and legacy MSRs, which are serviced by others.

Speaker 2

To be clear, this is not a race For us about size, we care about servicing our customers and making money for our shareholders and LPs. Regarding the mortgage company, we continue to be vigilant on expense reduction initiatives, particularly in the origination segments. We expect the origination business to remain under extreme pressure with mortgage rates at 8%. So how do we think about this? It's great for our servicing business.

Speaker 2

As I pointed out, we have $840,000,000,000 on a notional basis of mortgage servicing assets. Lower prepayments equals one thing for our servicing business, that's more earnings and more cash flow. On the commercial real estate side, That space remains a very big focus of ours going forward. With no legacy assets and very attractive valuations, You could expect us to allocate more capital to the sector going forward. If you recall, we acquired Greenbarn, which was formerly known as SENLAC normandypartners@theendoftlastyear.

Speaker 2

Since then, we've made some opportunistic investments and we'll continue to do so. Right now, we see the dead side extremely attractive. There's so much more I could talk about, and we're really excited for our company and the prospects ahead. So what I'll now do is I'll flip to Page 3 in our supplement and I'll take you through the deck and then we'll open it up for Q and A. Rhythm from an overall focus standpoint, dollars 35,000,000,000 of assets After our dividend payment tomorrow, dollars 4,900,000,000 of dividends paid in 10 years, dollars 7,200,000,000 of book equity And a 23% total year to date shareholder return.

Speaker 2

When we look at our expertise, I would think of us as an asset management business In all areas of mortgage, real estate, and as we add expertise around the house and credit, There is no business line that we will that we shouldn't be in, number 1. Number 2, there is no business line that we will be in unless we have the expertise The right side of the slide powered by partnership. We want to deploy opportunistic capital. We want to create more partners. Now this is a very different thing from where we grew the company in the public markets.

Speaker 2

As we go forward, Again, we're going to grow more in the private markets because our equity trades at a substantial discount to book and we think it's a better opportunity for us to deploy capital in Private Markets. Page 4, just talking about our financial highlights in the quarter. GAAP net income, dollars 193,900,000 Or $0.40 per diluted share. Earnings available for distribution, dollars 280,800,000 or 0.58 dollars per diluted share. This includes a realized gain of $0.15 related to the sale of excess MSRs during the quarter, Dividend $0.25 cash and liquidity at the end of the quarter $1,900,000,000 and again total equity of $7,200,000,000 I do want to point out to the right side of the page here, the book value growth from the end of Q4 20 20, which at that time it was 10.87 to where we are now, which is 12.32, in spite of The 10 year note rising from 91 basis points to the end of the quarter where it was 4.60 to where today it's almost 5%.

Speaker 2

The Evolution of Rhythm, Page 5, you can see the company was started while we were well at Fortress in 2013. It began with $1,000,000,000 of equity. Today, we have $7,200,000,000 of equity. And as you look at the timeline and you look at our acquisition pipeline, We've grown substantially over the years. Everything's been targeted around what I would call mortgage and real estate.

Speaker 2

The addition of the Sculptor Transaction and some of the other things we're working on will grow not only our real estate presence, but also our credit presence. And we look forward to continued growth as we go forward. Page 6 just talks about our private capital business. This is a slide you've seen before. The thing I want to point out on the right side of the page, private capital is going to help us generate recurring earnings and performance fees for Rhythm shareholders And also for the folks that we manage capital for on the at the LP level.

Speaker 2

We want to create partnerships with investors through specific SMAs, Co investment as well as the funds that we continue to work on and we'll continue to roll out. The other thing to point out is the business continues to benefit From all the work that's been done over the years as we've created our own in house origination and servicing platforms And those will continue to grow as we go forward. Page 7, the Sculptor transaction update, obviously, See a lot of press around that. We're super excited to bring this deal to a close and bring it in house. What I would say on this deal, there is very little to no overlap between Sculptor and our business, and We're super excited to get this thing wrapped up.

Speaker 2

The expertise that we bring in house is in my mind is going to be second to none. If you think about it, our existing investment team coupled with the Sculptor investment team is going to create an asset management business that is going to be Extremely formidable in the space. Page 8, this talks about the SLS deal. Really what it is, is a servicing deal. There's very little on the origination side.

Speaker 2

The idea here is, again, it's not about so called scale. This increases our 3rd party special servicing business to almost $200,000,000,000 So, it's a real fee for service business. The other thing, what it does for us is it increases our capacity in the special servicing space. So as we go forward and you think about The macro the global macro picture, if the economy in the U. S.

Speaker 2

Does slow down and there is a need for more special servicing, There's going to be nobody better than call it NewRez in our business to take to work With homeowners and consumers around that. Commercial Real Estate, Page 9, this really just talks about our expertise in house. Currently, we have 25 to 30 investment professionals. As many of you know, we don't have any We have not traditionally been a large player on the commercial real estate space as the company was built more around the residential space and consumer side With the opportunity set that we see right now in the marketplace extremely, what I would call robust And having no legacy assets, we're extremely excited to grow that business and put up what I would call great returns for our shareholders and LPs. On the loan side, the residential whole loan side, keep in mind, as I pointed out before, our manufacturing capability In our mortgage company, as well as in our Genesis business, which provides loans to builders, Gives us, I think, a very, very good competitive advantage over just a traditional asset manager as we're able to manufacture our own assets.

Speaker 2

When we look at, as we think about deploying opportunistic capital, the rate environment and the macro environment for what we do is probably it hasn't been this Good in probably 25 or 30 years. I'm going to take you through a slide in 2 pages, which talks to where yield levels are. And when you look at that and you think about unlevered returns of something between 8% 12% on senior cash flow, we think it's a great time To deploy capital, and we'll continue to be a great time to deploy capital in the very assets that we manage money for. Page 12 just talks about a number of different strategies. I'm not going to spend any time on this, but as we think about mortgage loans, servicing rights, Commercial real estate debt, etcetera, everything not everything, but most things look very attractive to us.

Speaker 2

Page 13, if you just have a look to the right side of the page, Over the course of the past couple of years, look at the yield profiles on the different asset classes that we invest capital in, everything that look not everything But most things look extremely attractive to us. And as we raise more and more capital around our funds business, We're hopeful that we're going to be able to generate what I would call real outsized returns in the asset classes that we have expertise in. And then finally, without I'm not going to take you through the segment performance. You could have a look at that. But I think the net of where we are as an organization is we're a very different company than where we were a couple of years ago.

Speaker 2

We will remain true to our core business, the roots that got us here, but overall performance has been very, very good. And with that, I'm going to turn it back to the operator and we'll open it up for Q and A.

Operator

Thank you. We'll now begin the question and answer session. At this time,

Speaker 2

Okay. We're ready. Are there any questions?

Operator

Okay. The first question comes with Tim Shung with BTIG, please go ahead.

Speaker 3

This is Eric Hagen From BTIG, good morning. How are we doing guys? All right. So I don't mean to be so short term focused, but how have MSR valuations maybe trended in October? Are there any bulk packages, maybe even some opportunities that you feel like could emerge between now and like year end or kind of early next year?

Speaker 3

How we're just looking at the MSR market right now? Thank you.

Speaker 2

Yes. Here's what I would say on MSRs. We were I think we were modest in how we thought about our gains in the quarter. As many of you know, we are biased short. MSRs have negative duration.

Speaker 2

At some point, what you're going to see is multiples Being capped on what I would say some of the legacy MSRs. So the short answer is Modest movement in marks. I think our weighted average MSR multiples of 5.1 at this point. There's still room to go. We are still biased short and we're going to remain that way until we think the we see things change.

Speaker 2

The Fed has signaled that higher for longer, the economic data has been reasonably, what I would say, okay to Probably not as soft as the Fed would like it to be. So we're going to stay the course. Regarding other packages, there's always going to be things that come up. As we all know, the banks from a capital perspective, there's a lot of regulation and rules running around right now. The banks Nobody is really happy about it from a banking perspective.

Speaker 2

I think this will create more opportunity as banks have to hold more capital against certain assets. That could create opportunities for us. But again, Eric, I just want to point out, as we think about capital deployment, we 2 things strategically where we think we're going to earn 15% to 20% returns on our capital. If we see a package MSRs that we think we could achieve those returns, we'll have a hard look at it. If not, we're likely not going to play in that sector because like I pointed out, we have 840,000,000,000 Notional amount of MSRs and we can manufacture our own.

Speaker 3

Yes, that's great color. So from a financing standpoint, like how much headroom did you have to borrow more on the secured MSR funding? And what's like your tolerance level Going forward, as you look to Sculptor and you look at closing Computershare, how much headroom do you guys have and all that? Thanks.

Speaker 2

Cash and liquidity at the end of the quarter was give or take about $2,000,000,000 I think that's increased a little bit as we go into Q4, candidly, I think the capital markets folks, my partner Charles and Sanjeev do a great job around Our balance sheet and working with our lenders around certain things. So there's plenty of room to go. We're not looking to over lever our balance sheet though right here. I think you'll see other sources of capital come in, including private capital from 3rd parties.

Speaker 3

Yes. Really helpful. Thank you, guys. Appreciate you.

Speaker 2

Thanks, Eric.

Operator

Thank you. The next question comes with Tels George with KBW. Please go ahead.

Speaker 4

Morning. Just wanted to follow-up on the performance quarter to date. Just can you get in terms of book value, can you just give us an idea where that is now?

Speaker 2

We reported book value at the end of Q3 at twelvethirty 2, which was up from twelveth.16. It's probably modestly higher with rates up a little bit. Kenny, like I said, we're bias short on our overall business. So depending upon what happens with rates here, part of this Calculus is as a REIT, we have to own agency mortgages. So you have a little bit of a basic thing from a whole pool Perspective, depending upon what happens with the basis, the basis today is as wide as it's been since the SVB crisis, And we expect that to remain under a little bit of pressure here with the deficit where it is and the government continuing to have to So a lot of debt.

Speaker 2

I think the refunding announcement will be a little bit of a catalyst where the mortgage market goes. As we know, obviously mortgages are There's a lot less supply that comes into play. The challenge is the banks are not really able to buy anything just based on where they are from a capital perspective. But over and over, I would say we're trending higher and it just depends on where we go with some of our marks around the MSR business.

Speaker 4

Okay, great. Thanks. And then actually on the sheet that we show the yields, so the on the conventional MSR you showed 9% to 10%. What's the leverage that you use on that? And like what are the funding costs?

Speaker 4

What's kind of the levered ROEs on that investment?

Speaker 2

It's typically something around 60 to 65 kind of advance rates, what I would say. And right now, funding costs in and around certain things depending on we have term funding and they're likely around sulfur plus 250 ish. So for 250 to 300. The other thing is we have a bunch of term financing that's already existing On our MSR business, that's been outstanding for a few years based on capital markets issuance that we've done, Which is lower obviously.

Speaker 4

Okay, great. Thank you.

Speaker 2

Thanks both.

Operator

The next question comes with Kevin Barker with Piper Sandler. Please go ahead.

Speaker 5

Great. Thanks for taking my questions. I just wanted to Follow-up on the plans for Sculptor and the Morris spin off. Obviously, there's a lot of moving parts there and There's different things that need to come into place, but ideally, how do you see this playing out as far as a timing perspective? And then how much capital you think will remain in the mortgage company?

Speaker 5

I know you addressed it previously, but just love to refresh there, as all that plays out. Thanks.

Speaker 2

So we have the S-one on file. We continue to evaluate alternatives. As we all Taking a mortgage company or quite frankly any company public right now is a little bit of a challenging task. The idea around the mortgage company is the way is the thought is to try to figure out a way to recycle capital. I think one of the things we're going When you think about MSRs, for example, we're working on different funds, not necessarily just Specific to MSRs, but really more specific to what I would call the mortgage company as a capital vehicle.

Speaker 2

And what I mean by that is You have the origination business and the MSR side. As rates do rally at some point in our careers going forward, You want the folks that are deploying capital in these funds to be able to realize the what I would call either Capture or not give up that MSR. So I would say the mortgage company and the recycling of the capital there is fluid. As it relates to the bigger picture, I've been pretty vocal. We are going to and I alluded to this in my opening comments, I truly believe by the end of Q4 that there is a possibility we'll $50,000,000,000 of AUM as an asset manager.

Speaker 2

You think of like the biggest and best alternative asset managers out there. They have their C Corp, they have a REIT, And then they have their private capital business. That's ultimately where I think we'll be. And then hopefully at some point down the road, we'll have an insurance sleeve. So we're working on all of these things.

Speaker 2

The capital formation around our business is going to be, as we know, our stock is $9 book value is 12:30, the capital formation side will likely be more in the private capital business than it will be in the public markets at this point, Just based on how poorly I think REIT stocks trade. But it's safe to say Based on our ambitions and where we're headed and I think the progress that we made that we will be a real global alternative asset manager by the end of the year.

Speaker 5

Okay. And so are there any specific points that we should look for To see that this is really has legs and you really we start to see like it really playing out. Is it the S-one on the mortgage company or the closing Sculptor, is there certain particular points that you're looking for, really say this is going to play out as expected?

Speaker 2

Sure. So I think Sculptor obviously is an important piece as we go into the grow our asset management business. I'd also say that we are an As a manager, we just operate under the wrapper of a REIT. Sculptor is very important in the asset management side. We're working on another, what I would call, sizable A transformational transaction that we expect to get done by the end of the year as well.

Speaker 2

And that gets you on the asset management business to where we want. On the mortgage company side, it's the cash flow that we get from that as a corporation or at the Rhythm level It's awesome. So if you think about it, you look at our earnings for the quarter where $0.42 or whatever it is, plus 0.4 $0.03 plus $0.15 for the excess. When I look at the mortgage company overall and I look at our ROE, When I look at where we were minus the one timers, I think actual return on equity For the quarter, it's something around net net 15%, is that right? On an annual basis, I think we're trending towards Annual ROE about 30%.

Speaker 2

So we're not looking to give up any of these assets because on a go forward basis in this rate environment, the mortgage Company will help as well as all the other things that we have going probably contribute to something between a $0.35 and $0.45 run rate on our core business. We don't want to give that up. We just want to figure out a way to manufacture more capital at the cheapest basis and then figure out how we can deploy that capital in What I would call today's great investing environment. But overall, it's we're not giving up on the mortgage company things that we're looking at our expenses. We're looking at retail clearly, Because that business really doesn't make any money right now when you think about true volumes and cost to run that business.

Speaker 2

But overall, We're really happy with the asset that we have. We just have to figure out a way to generate more capital because we think the investing environment is that good. That's why we're running around The Globe, quite frankly, on our private capital business.

Speaker 5

Great. Thanks for all the color, Michael.

Speaker 2

Thanks, Kevin.

Operator

Thank you all very much. And with that, we can and this concludes our question and answer session. I would like to turn the conference back over to Michael Nierenberg for any closing remarks, please go ahead.

Speaker 2

Great. So thanks for dialing in everybody. Stay well And we look forward to updating you on more developments and as things change in our company. Have a great day. Thank you.

Operator

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Have a good day.

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ManpowerGroup Q3 2023
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