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- [00:11]
A
Join Willie Walker, Walker and Dunlop's Chairman and CEO as we bring you fresh perspectives about leadership, business, the economy and commercial real estate. Willie hosts a diverse network of leaders as they share wisdom that cuts across industry lines. His guests are experts in their fields, from leading economists and CEOs to Harvard and Yale professors and everything in between. Our one goal is simple, providing you with unique insights, unparalleled data and real time market analyses.
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B
Good afternoon and welcome to another Walker webcast. It is my great pleasure to have Michael Nirenberg join me today. Michael is Chief Executive Officer of Rhythm Capital. Mike, I'm going to do a quick background bio on you and then we're going to dive into our conversation if that's okay with you.
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C
Love it.
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B
Great. So prior to becoming Chief Executive Officer of Rhythm Capital, Mr. Nirenberg served as Managing Director and head of Global mortgages and Securitized Products at Bank of America Merrill Lynch. Prior to bank of America Merrill lynch, he was at JP Morgan where he was head of Global Securitized products and a member of the management committee of the investment bank. Mr. Nirenberg also held a range of senior leadership positions during 14 years with Bear Stearns including head of interest rate and foreign exchange trading operations, co head of structured products and co head of mortgage backed securities trading. Mr. Nirenberg spent nearly seven years at Lehman Brothers prior to joining Bear Stearns and was instrumental in building the company's adjustable rate mortgage business. Mike, quite the career. Quite the journey with rhythm. You know rhythm. As you recall when Newcastle was kind of spun out of Fortress to begin what you have created, CW was sold to Walker and Dunlop by Wes at the exact same moment Mr. Cooper was spun out at the same time. New Seniors was held onto by Fortress for a period of time and then spun out as a, as a public entity. Since that time where Newcastle became New Residential, then you purchased Home Loan Servicing Solutions. Then you purchased a big portfolio of MSRs from Citigroup. You purchased Ditech out of bankruptcy. Then you acquired Genesis from Goldman Sachs in 2021. Then you terminated the Fortress Management Agreement in 2022. You bought a billion four of Marcus loans from Goldman Sachs in 23. You bought Sculptor in 23 and then Paramount Group in 25. A lot in there. What if you add all that up? Mike, what is rhythm?
- [03:08]
C
It's a great question. Thanks for all that. I think when you go back in time and you look at all the stuff that we've done, it says one thing about me is that I'm freaking old. But um, it's it's been a, it's been a great journey for us. Rhythm, the way that I like to think about rhythm is. And to your point, you know, we started this thing at Fortress going back to 13. There's a great, a lot of great vision by Wes and some of the other folks actually to create some of these different permanent capital vehicles. And then we actually took the ball and ran with it, acquiring a number of different companies which over the years gave us the ability to create what I would call a scaled asset management business. And that, you know, quite frankly and a lot of that happened between, while acquiring a number of these different assets which enabled us to grow earnings at the REIT level. And then as you pointed out in 23 when we acquired Sculptor, in 25 when we acquired Crestline, and we did a number of other things in between. Um, today if you look at the company, we have roughly eight and a half billion of permanent capital. Not, not many folks can, you know, can talk about that, that size of permanent capital. The assets that we manage on behalf of third party and balance sheet now is 110 billion. So when I look at us, we're 110 billion of assets, eight and a half billion of permanent capital. We have a company that hopefully makes north of a billion dollars in pre tax earnings. And you know, like I like to say on every earnings call, we're not Blackstone, we'll never be Blackstone, but I think there's a lot of room for us as we continue to grow our asset management business. So really, you know, taking a step back when we bought the management contract back From Fortress in 22, the, the goal is actually to diversify our earnings and our income stream. So we weren't just, you know, we, we built a big residential business leading up to 22. But obviously we all have a lot of experience in doing this for you know, as I referred to myself as being old but for many, many years we thought it would be a great opportunity to diversify income streams and that's why we launched our so called ventures into both commercial real estate and asset management. So today I, I like to think of us as an asset management business that operates under the, you know, kind of the tax advantage nature of a, of a so called reit which you know, quite frankly from an equity perspective is not really helping us when you look at the way we're trading today.
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B
Yeah, I love the video of you ringing the bell when you guys went public three years ago and, and it was obviously a joyous day and I, and I think about that as it relates to all that you've created and kind of the culmination of that journey. I guess the question I'd have is asset management writ large makes a lot of sense. But they're single family lending and assets. There's commercial lending and assets, there's consumer credit card assets and lending. Given the breadth of it, Mike, what's the kind of like where do you really get the opportunity to differentiate? Because both of us operate in wildly different competitive markets. As it relates to why someone would come to you or come to me for capital. And given the breadth of your platform, I get it from a diversification standpoint and it's obviously great when Resi's sucking wind, commercial's doing well. When consumers doing well, Resi's, whatever the case, might be great from that standpoint. But as it relates to just sort of your value add and either the lending or capital deployment strategy.
- [06:54]
C
So it's a great question. If you look at the company and again, you know, we go back in time to 13. We started by taking advantage of a dislocation in mortgage servicing rights. And that's really how the company got started back in 13, Resi. Resi based. We acquired obviously hundreds and hundreds of billions of mortgage servicing rights along the way, did a structured deal with Ocwen, we bought hlss, which was a kind of an Ocwen spinoff. Um, when you look today in the different asset classes, think about so called ABF today, which has never been more popular, which is asset based finance. And when I, when I look at what we have here, we really have a world class asset based finance business that will be a little bit separate, different than what I would say on the commercial real estate side. But when you look at our expertise around the house, whether it be myself who's been doing this for 35 plus years, you look at a lot of us that have been together for 30 plus years. One of my partners here, Charles Sorrentino, that's how he cut his teeth growing up in the asset based finance world. And it is one of the most highly demanded products I would say from LPs today. And when you look at our track record in the public markets from an ROE perspective as well as both Sculptor and Crestline, I think we tend to punch above our weight when we think about returns. So when folks are thinking about deploying capital in that space, why not here? The commercial real estate space was a little bit more opportunistic in nature is what I would say doing the Paramount deal. When we got a call from our banking friends at B of A and you know, in towards the summer of last year, I think it was about a potential sale of, of this company, Paramount, we said, okay, let's take a hard look. Office has gotten crushed. A lot of folks have gotten hurt unfortunately, you know, being long office. And we said, okay, we're going to continue to try to grow our commercial real estate presence here at Rhythm, you know, and that's why we took a hard look at that. But we look at it as a different business line, I think more so than what I would say on that so called ABF space. Where we ultimately go with this is we're going to simplify our story. If the asset management business was large enough, quite frankly, we would turn around and we'd likely either list that separate from the overall reit. How do we think about de reading in light of how our equity trades? How do we think about bringing the mortgage company public? You know, on, on a company that makes a billion dollars a year and that we started from scratch? You know, there's a lot of those things that are going to come into play here I think over the course of the next 12 months.
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B
And as it relates to aggregating assets, Mike kind of, you know, given all the acquisitions that you've done and the very, you know, demonstrable success that you have had in raising capital to then go and purchase assets, how much is a sort of B2B business versus a B2C business?
- [09:57]
C
I think it's going to, I think it's a combination of both. Right. When you think about our mortgage company, for example, we touch north of. We service over 850 billion in mortgage loans. Almost 900 billion of mortgage loans have north of 4 million customers. We're making a big push around the marketing and branding of that company, which is known as nuurez. You know, you pointed out before we, you know, we built Mr. Cooper while at Fortress and then we sold that to, to KKR in 1819. We built one main, sold that to Apollo and again around the same time, all while building out this new vehicle or this new mortgage company called nuurez. So I think when you look at that, there's a huge consumer component of it. When you look at the Paramount deal, you know, Paramount is a effectively when you think about it, the tenants are the real businesses. You have some of the top law firms in the world, you have some of the top music companies in the world occupying different buildings, real estate companies, etc. So I think it's a little bit of a combination of both. You know, our goal overall is how do we create sustainable earnings in each one of our sectors. And this is going to lead into the asset management business. Take those cash flows that we create or take those earnings that we create and then somehow have the market think of us as an asset management business that trades in a much better multiple than where the so called REIT trades. You know today REIT is, you know we made over $400 million in the fourth quarter of when we announced earnings a week and a half ago. There was another, there was a couple of misses on one of the mortgage companies out there. But you know when I, when I look at what we built, it's really how do we create again sustainable earnings that valued like an asset management business. And this goes back to your question. We need to grow our asset management business or also known as our fee related earnings. As we do that I think we're going to see a much different valuation for the company.
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B
As you talked about investors really like asset backed lending today. You're clearly in a lot of different pockets. I'd love to get your thoughts as it relates to the strength of the consumer. You talked about commercial real estate and clearly the, the, you know, the downdraft that has been on office and feeling like you're stepping in probably at a good basis there on, on the office assets that you stepped into with, with Paramount. Talk for a moment about the consumer and you're, you know, you bought a big portfolio from Marcus and you've been in the consumer lending space. Just that a lot of people sit there and say the US consumer is you know, stretched out and credit card defaults are on the rise and it's a K shaped economy. Give me, give me Mike's view of the US consumer today as we begin 2026.
- [12:51]
C
Sure. So clearly we have a lot of data around the consumer. When we, when you look at our mortgage company, right. I pointed out we out, you know, we service, you know over 4 million customers there. I think what we, what we've seen is in general performance has been very, very good. A very, very healthy consumer. Clearly there's going to be blips as you go into year end in, in the mortgage business. You're going to see folks that may allocate, you know, instead of paying their mortgage, they may need that for gifts or something like that. You know the administration's come out with a couple different new programs particularly on the Ginnie Mae side where we saw a spike in Delinquencies where we're up, you know, call it one and a half to 2% over the course of the past couple of months. And what's happening there is the mortgage or needs to be current. You know, as you think about working with a mortgage or for three months in a row where going back over the course of the past year or even before that, they needed to be current for one month. So when you, when you think about it there's, there's a few changes into some of the government programs but in general I would say the consumer on the mortgage side from what we see is very, very healthy. I think there's been a lot of noise around that, around the, the market with First Brands and Tricolor and you know, most recently there was something called Perch that has brought a bunch of negativity to the so called, you know, the consumer side or the asset based finance space. I think those are, you know, I think they're more isolated while saying that you know, we all need to be extremely careful here on the lending side. But I think in general the consumer is fairly healthy. Obviously the subprime consumer, when you think about subprime autos and things like that, you know those, those areas are a little bit more isolated as, as we know. You know going back to our fortress days as we were building, one main, one of the things we did in 13 is we bought 4 billion of consumer loans which quite frankly have performed amazing and that goes back in time. So in general what I would say is the consumer seems to be in on very good fitting footing. You know, the late, the layperson as who we all are. You know, you go to Starbucks and get a cup of coffee at six bucks or whatever it costs. So clearly there's a bunch of inflation that's out there. And the question is at some point do you see that? Do you see tariffs weighing in on some of these companies which are going to see price increases which are going to affect the consumer negatively. And that's something that we are highly focused on on. When you, you brought up Marcus, you know when Goldman announced they were getting out of their so called consumer business, we bought half the portfolio of Marcus loans. What we saw on that is north of 700 FICO borrowers, it's paid down to next to nothing that was done a few years ago. What I would say our experience on that one is if there's not brand recognition or a servicer that a consumer can look to, your performance overall is not going to be great on that portfolio. I think we underwrote it to something between an 8 and 10% cum loss number. That's kind of the math that we saw in that. So what I would call fair performance at best. But there's other consumer businesses as we all know that we look at and work on and if the servicing practices are great, I think you're going to find your performance is going to be much better than some of the performance stuff that we saw on, on the Marcus portfolio because Goldman was getting out. And from a servicing standpoint, you know, if a borrower missed a payment, it's hard to get them back after you know, 30 or 60 days if it's not your servicing entity. And I think one of the things, one of the messages I would get out of this, this podcast is that you know, in the so called ABF space, if you can control your own destiny via servicing, it's a huge leg up then versus someone else who's just going to buy an asset in the marketplace.
- [16:53]
B
He spent a bunch of time both as a very senior executive as well as on the board of major investment banks buying the Marcus portfolio as Goldman was in wind down on that business. I'm interested in your perspective on when Goldman decided to enter the consumer business and Morgan Stanley went into the really kind of Gorman put the full speed on as it relates to private wealth management and their asset management business if you will, a decade after the GFC which drove those decisions, pretty clear that, that, that Morgan sort of won if you will versus Goldman. And yet at the same time the Goldman franchise has done extremely well from an overall valuation standpoint. Anything that you look at as it relates to that kind of moment where Morgan Stanley went one path and Goldman Sachs went the other path. And in hindsight obviously we can see how it all played out. But what was either risky on one or didn't work out on the other that you can, that you can look back on.
- [17:54]
C
Yeah, you know it's, it's, it's a really good question. I, you know you look at what Morgan Stanley's done and they've built a fantastic franchise around their, around their wealth business and it goes back many, many, many years. So really kudos to them. They stayed away from a lot of the so called consumer stuff that you referenced that, that Goldman did. You know the one thing I would say and you know Goldman is a, a very, the book close counterparties of ours and, and obviously some very senior relationships with the Goldman think they have done a fantastic job with that institution. One is their client franchise is second to none. Two is as you think about the consumer space that they entered, then they decided to pull back. You know, when you, when you look at real earnings and the vision around the firm today and, and, and where Goldman's going and, and growing their wealth management business, I think the leadership of that bank has done a great job pivoting from where they, you know, where they saw a potential opportunity to say, you know what, maybe we're not right here. Let's, let's you know, refocus our efforts. But I'm not sure that the consumer efforts were, were in lieu of, of the great job that I think they've done around their so called wealth business and working with clients. You know, and I grew up in the business, you know, you pointed out some of my Bear Stearns days, you know, we were all fierce competitors and whether Lehman Brothers and Bear Stearns and Morgan Stanley and Goldman and stuff, you know, I, I think you know, certain firms reviewed as more friendly to what I would say their customers. When you think about people borrowing money from the banks today, Goldman is a, just a top franchise in that, in most ass, most lobs in, in what we all do for a living and, and so is Morgan Stanley. So kudos to both of those folks for doing a great job. And I think in the case of Goldman they just pivoted, you know and said okay, this might not have been right. You know, they had Green sky, they sold Green sky, they had the Marcus loans, they got out of that. And then obviously Apple Card I think is now with, with jp.
- [19:58]
B
The Apple card is with JP now that's an interesting statement. Let me, let me, let me double click on that for a second. Just because of the breadth of the commercial bank along with the investment bank.
- [20:07]
C
Yeah, I, you know, I think it's probably more in the commercial bank. You know, I don't, you know, again I, I think you know the banks have done great and you know, I think the discipline around credit quality and working with their, their so called customer base and banks have done a great job. I think when you look at you know, JP Morgan and you walk around whether it's New York City or somewhere else and you see these great branches that they have and you think about the power of that franchise and you know, look at 270 park and you know and, and, and the, and the great job that Jamie and the team have done building that you know, kind of fortress style building, you know, the banks have done great I think as it relates to doing more with, with you know, high Quality customers. In the case of the Apple card, I think my guess is that's the way that, that, that they were viewing, viewing that.
- [21:02]
B
And so do you see increased consolidation there where the big commercial banks have to continue to, you know, sort of gobble up the investment banks and being a standalone investment bank sort of has a limited shelf life, if you will.
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C
Yeah, you know, I, I think you've seen that and you've seen the consolidation. Obviously Santander just announced the acquisition of Webster Bank. You know, Webster bank has been out there for as long as I've been in the business and you know, and now they're, now they're part of Santander. I think there's a, you know, there's a, there's a large movement to acquiring, you know, customer or customer type franchises and you know, in, in so called different geographies and I think with a, with a more friendly administration which you have today versus years past, I think you'll continue to see probably more consolidation in the banking industry.
- [21:54]
B
Thought it was interesting, I listened to an interview that Anna Botin, the, the executive chairman of Santander had after they'd done that acquisition and she said that the Webster bank footprint is as big as the UK market. But just every once in a while we kind of, you know, forget about the scale that we have in the US versus someone who's been in the European market and might have great market penetration in the UK and in France. But if you add it all up, it's actually not a whole lot in comparison what you can get being here.
- [22:20]
C
In the U.S. yeah, no, for sure. You know, you look at some of the business lines and we all look for different ways to drive earnings. And you know, you go over to Europe, I mean the markets are generally on the smaller side, you know, interesting, but on the more on the smaller side.
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B
Yeah, sfr, you've invested there, the president came out saying that he wanted to pull institutional capital out of single family rental, kind of. What, what's your take on that? And do you think that the carve out on bill for rent allows you to continue to lend in that space or is it kind of a pretty significant shift given the, where the administration is headed on sfr?
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C
So we, you know, we own a few thousand homes. You know, I think we own a total, give or take about 4,000 homes that we've acquired, you know, a few years back more on what I would say the scattered side. And then we, we have, you know, we, we own a couple what I would call developments in the, in the build to rent space. I think as it relates to us, it's, you know, we have a couple hundred million dollars of equity tied up in that business. It's, it's not a sustainable the way that it, from our perspective, and I'll point out from our perspective, I think it's a very, very hard business. You need to buy cheap assets. You know, this business got started in the way that I think about it going back. I think my guess is something towards just after the, the financial crisis when Blackstone started buying homes on the steps, the courthouse steps. And I remember having a lunch with John Gray was talking about cap rates on single family products at that time. And I think that's how it got started. Thinking that your, your baseline or your, your, your base rate or downside was give or take, let's just say a 6 cap rate. When you look at where we are today, we're give or take back at that 6 cap rate. There's been HPA going back today, just after the financial crisis, significant HPA today. You know, we got out of buying homes years, you know, three, probably three years ago because the, the math didn't work. Everything was upside down. Your cost of, of capital was higher than where capital. So we're, you know, we're not a large player there. We'll be selling, you know, we are selling down our, our exposure there. More, more through retail. But we, we just don't have a lot what I think from an administration standpoint and obviously there's a lot of tape bombs that go off coming for coming out of that administration. You know, when you think about the institutional buyers, if they're, you know, overall as it relates to the total share of single family transactions, it's give or take something around 1 to 3%. You know, so I do think it's an important business to keep, you know, the housing market functioning while saying that I think the government is going to focus more on scattered homes than they are going to be focusing on what I would call built to rent communities where you'd go out and buy 300 homes from Lennar, who's building something in the middle of Texas. So for us it's not that relevant. I do think that that business has this come to a grinding halt at this point. I think the math may work, you know, based on SOFR being 3 1/2% and cap rates in and around 6,6%. But it's a, it's a tough business. I think the newer home stuff with, with the big builders selling forward will be okay. At some point down the road. But right now that business is at a halt and for us it's just not that relevant. You know, my, my general view is owning scattered homes and collecting rent is just not that easy.
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B
And I, by the way, your, your lunch with John Gray reminds me of being at Sam Zell's conference back in probably 2013, where colony and Blackstone stood up and talked about buying single family homes. And Sam said anyone in the room ever washed a rental car? Like, nope, never done that. And he was like, these assets are going to be impossible to maintain and why would you ever go into them? And lo and behold, both Colony and Blackstone made a great business out of it. Yeah, it back broaden that out, Mike, for a second. As it relates to single family and multifamily and your view of housing, the Trump administration clearly has been trying to bring down the cost of housing in America. Multifamily rents have been basically flat for the past two years, even though the CPI seems to be getting an erroneous print that we've actually had significant rent growth in America, even though it hasn't actually been in the rents that at least at Walker Nullop we see. And you also have the administration putting pressure on the single family home builders to go and build more homes so that we can bring down the cost of entry level housing. You're making bets every day as it relates to lending on the single family side, lending on a multifamily loan. What's your take on just sort of housing across the various, if you will, asset classes?
- [27:21]
C
You know, there, there is, if you look at the single family space, there's a big shortage of housing that's been, that's been out there for many, many years. While saying that you're at a period of time when, you know, mortgage rates have definitely come down a little bit. When the government announced your, you know, when the, when the administrative, when the, effectively when the administration announced that Fannie and Freddie would be buying upwards of 200 billion in mortgages, we think they bought it. And, and I'm not 100% sure, but something in the, in the vicinity of 50 billion so far. They do have caps, I believe for 26 of about 150 billion that they could actually acquire. Since they announced that, mortgage rates have dropped probably 15 to 20 basis points, while on the other side the 10 year treasury is, give or take about 4.2%. So REITs really haven't moved. Mortgage rates have come in a little bit. We're seeing a little bit More refi activity. I think that's healthy for this so called consumer. I'm still of the opinion when you look at what things cost in our lives where I don't know, you know, I'm not the, I'm not the, the huge bull on home prices and home price appreciation to be totally honest and this is my own personal opinion but I do think that the housing market is in reasonable shape. I think people do want to own homes today. The government is going to continue to do all they can to drive the, you know, the cost of, of homes or the processing down. I do think there's ways they could do that. You know, when you think about for example title insurance, it's. Title insurance is a big nut on anybody that buys a home. There's gotta be a better way to do that. And you know, I know a lot of the, the recording of a mortgage sits with the county, you know, with the local counties. There's a different way to do that in my, in my opinion that could save homeowners a fair amount of money. So while the government wants to continue to drive affordability into the system which you know, I think we could all appreciate, I just think it's, it's, it's a heavy lift. It's, it's no different than being able to control the outcome. You know we talk about yield curve control from coming out of Treasury. These markets are massive. The housing market I think in general though is in good shape. I'm not the huge bull on prices but I do, I don't, I'm not, you know, I'm not hugely negative as a relate results relates to the multifamily space. One of the businesses we have and we, we make loans there is, we have a business called Genesis Capital, it's based out in California. Makes about 5 billion a year in loans. A lot of those are made to what I would call mid tier sponsors that are builders as well as we do a fair amount now in the multifamily space we do you know, some ground up construction. What we're seeing there is you know still very, very good performance. I think all of these businesses and this is where I get a little bit concerned with the growth of so called ABF and thinking about lending, just making sure lending standards are extremely, I'm not going to say tight but you know the underwriting process is extremely robust. So, so, so there aren't hiccups in the system. But in general I'm constructive on I think multifamily you're going to Continue to see more and more demand, obviously for around the multifamily space. I'm not hugely bullish on, on prices. Credit quality is really going to matter as we go forward and I think the administration's going to do all they can to, to actually lower the cost of housing while saying that, you know, obviously we know the rent stabilized stuff is a little bit more challenged these days, particularly in New York City with, with the new mayor.
- [30:59]
B
Jobs reports coming out on Wednesday, a lot of people tried to sort of figure out whether we're in a. We're sort of stagflation as it relates to job growth, even though GDP growth is, is cranking along. Any concerns on your part given the consumer businesses that you're lending in as it relates to jobs and the unemployment rate?
- [31:21]
C
You know, I think you're calling for 70,000 or something on Wednesday. There's some, I guess there was some B of a piece that came out where they're, they're a little bit more concerned with a, with a higher print, I think. Listen, there's so many cross currents and so much, you know, so much negativity. I think a lot of times in the news, even when we talk about AI and AI taking jobs and you know, I had a, I had a banker come in here for lunch today and we're talking about the, you know, the macro environment and how we think about office and how AI is going to take everybody's jobs and what's our gut feel on that? You watched the super bowl yesterday. You have AI, you know, all the different commercials around AI the one thing I would say around AI is you're seeing a huge movement of folks back to the office, including in the AI space. Anthropic just took over a whole building in San Francisco. So, you know, I think on the job front, I'm, I'm not negative. You know, we all want to get more efficient. I do think I will take, will take some jobs, but there's always going to be another industry created out of that and you do need people to do the work. So, you know, I think we're reasonably constructive.
- [32:37]
B
I would add. I thought that all of those AI ads were pretty lacking as it relates to any, any fun or. I mean, yesterday seemed like a flub as it relates to Madison Avenue on coming up with some creative concepts to sell products. I. That was my take. It was kind of a boring game and a boring ad day.
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C
But anyway, most, most of them were, most of them were really bad actually. You know, you go back in a number of years ago where everybody was so excited for the, for the ads and it just didn't do it.
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B
Yeah. So if, if, if you're not concerned about jobs, what about the amount of capital that's going into AI? And there's been, you know, obviously plenty of conversation that we're in sort of an AI bubble. You were around and very prevalent in the dot com bubble. You were very prevalent heading into the great financial crisis. You were running your current firm when we went into the pandemic. So you've clearly had your white knuckle days. Mike, you have incredible insights into both. When you're feeling like we might be a little over our skis, when you feel like we're properly balanced. To use that analogy, how you feeling about us as it relates to this sort of AI driving both the equity markets to all time highs and then the amount of capital that's going out to building this infrastructure that's going to drive this revolution that we're all expecting.
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C
Wow. Here's what I would say. I think a lot of the AI stuff that's going on today is around obviously is around the, you know, whether it's OpenAI or Meta or Oracle or Google. And you know, there's clearly going to be winners and there's going to be losers. I just, you know, in our careers, if we take a step back and think about $40 billion projects, I'm not sure how to process that. And it's not.
- [34:26]
B
Just as a quick aside to that we have a team that's in the, in the data center financing space and I'm meeting with one of the big data center companies and I said, you know, for us to go in and add value when someone's doing a three or four billion dollars deal is a little tough. They're going to go and syndicate and we can put that together. But you know, we're not really playing in that space. He goes, willy, we're doing a $31 billion project right now. What are you talking about? Three to four billion? I was like, okay, I shouldn't be at this luncheon.
- [34:52]
C
Yeah, no, it's, it's, it's the amount of capital that goes in. I think the one thing in the so called ABF that should give people a little bit of comfort as you're making loans there is, you know, you gotta believe in the counterparty or not. If you don't believe in the counterparty, you shouldn't, you shouldn't invest in this stuff. And you know, I was looking at, I think it was Meta's earnings that came out either last week or the week before and I think they did 90 billion of revenue in a quarter. You know, the numbers are staggering. You know that these, re these revenue numbers. While saying that, you know, I, I do think AI is here. I think it's real. I think, you know, you go on chat GBT and you know, type in an earnings report. You know, the good news is we don't need to, they don't need us to write our script anymore. I'm only kidding about that. But you know, in all seriousness, you could do that and have ChatGPT or one of these other AI companies write your script. So I do think they're real. I think the amount of capital going in is just astronomical. I think the counterparty risk really matters. I hope we don't have a hiccup. But you know, I think it's, somebody told me today, I think it's a $30 trillion market or something like that. And trillion is just a big number in our lives. So given you that a lot of.
- [36:10]
B
Them are doing it off balance sheet. I mean like if this was so important to them in the future of their companies, why are they doing it all off balance sheet with other partners?
- [36:19]
C
Yeah, I, I, I think they obviously they're going to need the capital. I, I don't, you know, I don't have what, what I, what I will say is on the credit side that's really where I get, I get concerned around, around some of this stuff and the sheer size. I also think the other thing is, you know, when you, and you brought this up like the amount of people that you need to build these projects or that or, or whether it be turbines to power a data center, you know, we, we've spent, we spent a little, little bit of time with some of our old, old fortress partners around that, around, you know, the building of some of the data centers, you know, going back to last year, like the amount of capital needed, the amount of, of, you know, they taught, they say picks and shovels or turbines, you know, are just, it's incredible whether it be capital, whether it be product or whether it be people to build these, these different facilities. And then somebody says they have a data center field or something like that, next thing you know it's worth billions and billions and billions of dollars to whoever owns that. So I don't know, I'm, I'm, you know, being, you know, being a bond guy, growing up as a bond guy, thinking about rate and macro and you know, long Short things. Can you, can you say it feels a little bit heavy? The answer is yes. Could I be wrong? The answer is absolutely yes. But I, you know, I just think for, for our firm here, we're very late in that game and it just doesn't feel early at all. So I'm a, you know, I hope it works for everybody, but it's something that we're definitely concerned about.
- [37:58]
B
And sort of talking for a moment, Mike, about in a previous world where you were running FX Trading and a bunch of other big platforms, one of the things that gold has seen to confound a lot of people recently where you're sort of a risk on bet on the markets and then gold being at all time highs. After I talked about that with Peter Linneman a couple weeks ago, a buddy of mine wrote me and said, well, the change to the capital rules to allow banks to hold gold and not have to put dollars against it has been a big driver of the run up in gold. And we obviously saw gold and silver back up quite a bit last week. I guess the question would be this, how do you make sense of that risk on play on the equity markets and what would appear to be a risk off play on gold and the appreciation in gold?
- [38:50]
C
Yeah, I guess the question I ask is, is gold at 5100? It's you know, 5098. Now is, is that a, is that really risk off silver at 83 bucks? Is that risk off? Copper's a little under 6 bucks. Bitcoin is, you know, bitcoin's giving it up a little bit. I would, I would expect at some point if bitcoin does continue to roll over and I don't know if it will, quite frankly. Does that lead into, into gold coming off? I think a lot of this stuff is pure speculation. When you think about, you know, some of the, some of the friends we may have in some of these markets that have just absolutely tunded by being long some of this stuff, you know, I am, I don't, I think, I think there's so much speculation in the marketplace. Even when you look at the Dow right at, at 50,000 and I think the S and P is trading what it's something close to 25 times earnings, which is not historically cheap. You look at credit which, you know, the high yield index in this crack, you know, everybody talks about whether this cracks are not in credit. High yield index trades at 300, you know, wides are probably close to a thousand, tights are probably close to 200. You look at the mortgage basis which trades in at around 100 now. There's not a lot of room for error and I think in any of this stuff. And then when we talk about, you know, some of the data center stuff and we, and we think about AI and these big spends, I'm not a, I'm not. Am I concerned? Yeah, I'm always concerned. Do I think we're in a bubble? I don't know. I really don't know. But it's one of these things that I am a little concerned about.
- [40:31]
B
What would make your concern meter go up? What would be the thing that you're tracking that sort of says well if I saw this happened, I mean you've been, I guess unfortunately for both of us, a we've been around and seen a lot of these things. Second of all, you've been very much in seats that in hindsight you can look back and say as we were looking at that if that had gone there, we'd seen that maybe we would have reacted a little bit differently. Is there anything that you're looking at right now that sort of says I'm relatively copacetic but if that were to move there, that would be something that would put my antenna up a little bit higher.
- [41:03]
C
Yeah, I think we got to monitor credit. You know one of the things that different, that we're different about today at Rhythm is you know we bought this company called Crestline and big direct lending business, we closed on that in December. We have Sculptor on the credit, on the credit side we have 40 billion of what I would call real credit in the house. You know that we manage for further folks. So really keeping a tight eye on credit. They're keeping a tight eye and yes, you asked the question earlier about the consumer making sure that in a, in a. Because we, we get a ton of data as do you and if we look at data around the consumer and, and we start to see that rollover that that's going to be a, a sign that's going to get us a little bit, you know, more defensive I think as we go, as we go forward. But the one thing, you know, and then the other thing that gets me a little concerned when we look at the so called ABF space and everybody in the world on the asset management side is now raising funds around abf that's going to drive spreads in, that's going to drive returns lower and at some point it becomes a self fulfilling prophecy where people are going to do what I think are going to be not wise decisions. Which will affect the markets negatively. So those are kind of the things that, that we're, that we're going to keep our eyes out for some of the, some of the, what I would call the momentum trades, whether it be gold, whether it be silver, whether it be bitcoin. You know, Bitcoin is trading 71,000 now, right? It was what, in the 120s, I think, you know, I, again, I, I don't really know how to think about it. I think I'm, I think it's here to stay. But it's something that, you know, we saw it, you know, I think back to some of the discussions I had with some of our old fortress partners where, you know, it was at 3,000 and you know, and then you look here it is at 125 and, and today it's at 71,000. So I think the momentum trades are a little bit different. But keeping our eyes on credit is something that's very, very important, not only just in the credit markets, but also in the underlying consumer.
- [43:07]
B
I had a question for you, Mike, as you and your partner sat around at the beginning of the year and talked about what you're going to see in 26 and kind of bets you think are going to materialize in the year. Sort of the, you know, kind of the theme conversation that you would have sitting around the table saying what's the theme for 26 and where should we either go, go long or where should we go short? Anything to share as it relates to what Rhythm thinks are the places to go from an asset back standpoint or anything else in the credit markets or on the lending markets.
- [43:37]
C
Yeah, I think on the, you know, on the, on the, listen, I mean obviously we made a large play in commercial real estate around, around office. I think that, you know, when, when I would say some of the longer term holders clean up some of their stuff, I think it's, you know, you're talking about cap rates. We entered that deal at 7%, so that's more of a strategic play. When I look at lending in the ABF space, I like the lending side a lot more than I dislike, you know, us getting long assets here because I think you can control your underwriting, you know, a, a little bit better. But like I pointed out in my earlier comments, with a lot of folks actually just marching towards EBF funds, you're going to see returns. Some folks are going to try to drive returns into the single digits. And yes, while that's a good place to be relative to what I would say some of the, some of the direct lending, we see where there's demand, where you starting to see reallocation from direct lending into ABF space because it's cash flow backed by real assets. We just have to be a little bit careful there. I'm going to tell you that I would rather be a little bit more cautious as we go through the year than probably we've been in a couple years past. We've seen credit spreads tighten everywhere, including in the mortgage market. Underwriting gets me a little concerned. The lending side we like a lot. Congrats, by the way. Forget about us. Congrats to what you guys have done. You've done a fantastic job in your business. And you know, I remember back in the day when portraits was part of your life. So we where you were for and where you are today is just a remarkable journey and kudos to you. But I think we'll be a little bit more defensive this year than we probably have been in, in the, in the past couple of years.
- [45:24]
B
Well, I know you will. I know you will continue to grow and aggregate assets and continue to make a great success of rhythm and everything else that you bring into it. Mike, thank you for taking the time. I love getting your perspectives on the markets. I'm really super appreciative of you spending the time to share your thoughts and I look forward to seeing you sometime soon in New York.
- [45:44]
C
Sounds good. Willie, thanks so much. Thanks everybody. Have a great day. It.