Rithm delivers $194M profit in Q3 amid M&A deals

Mortgage volume increased to $11 billion while origination profits declined to $7 million in the quarter

New York-based Rithm Capital’s profits declined in the third quarter of 2023, when the real estate investment trust got involved in a dispute for Sculptor Capital Management and announced the acquisition of Specialized Loan Servicing.

The deals are part of the firm’s plan to become a leading global asset manager, executives said.

Rithm announced Thursday that it delivered a $194 million GAAP net income in the third quarter of 2023 — lower than the $357.4 million the prior quarter, per Securities and Exchange Commission filings. Earnings available for distribution reached $280.8 million in the third quarter, compared to $298 million in the previous quarter.

“We expect to close the Sculptor transaction in the fourth quarter,” Michael Nierenberg, chairman, CEO and president of Rithm Capital, said in a statement. In a call with analysts, he added that there’s “a lot of press around” the deal, but Rithm is “excited to get this thing wrapped up.” 

Regarding acquiring Specialized Loan Servicing for a purchase price of approximately $720 million, Nierenberg added that it “helps grow our third-party servicing business and reinforces our position as one of the leading nonbank mortgage servicers in the country.”

The company expects to close the deal in the first quarter of 2024. 

To support its acquisitions, Rithm had $1.9 billion of total cash and liquidity at the end of the third quarter.

Challenging origination landscape

Rithm is working on a spin-off in the mortgage business, which includes origination and servicing. Nierenberg said the company “is not giving up on the mortgage company,” but is trying to figure out a cheap way to manufacture more capital. 

Rithm, the parent company of Newrez, saw its mortgage business deliver a combined pre-tax income of $412.5 million in the third quarter, compared to $327 million the previous quarter. 

Originations delivered only $7 million in profits, compared to $8.7 million in Q2. Mortgage volumes increased to $11 billion in Q3, higher than the $9.9 billion the previous quarter. Gain-on-sale margins improved to 1.28% in Q3, up from 1.23% in Q2.

Analysts at BTIG said the company’s volume in Q3 is comparable to the production at JP Morgan in the period and around half of what they expect from market leader United Wholesale Mortgage (UWM). 

We continue to think it’s likely benefited on the margins from Wells Fargo‘s exit from the correspondent channel this year, although it may be easier to see that appear in earnings if/when mortgage rates fall,” the analysts wrote in a report.

Rithm’s mortgage production is expected to be between $7 billion and $9 billion in Q4. According to the company, market conditions will remain challenging through 2024, and Rithm will continue to evaluate all operational processes to improve efficiencies and cost. 

“We’re looking at our expenses; we’re looking at retail, clearly because that business doesn’t make any money right now when you think about volumes and cost to run that business,” Nierenberg said. “But overall, we’re happy with the asset that we have; we just have to figure out a way to generate more capital.” 

Expectations for servicing 

Loan servicing contributed $444.5 million in profits during Q3, compared to $357.3 million in Q2. 

The company’s mortgage servicing rights portfolio (MSRs) totaled $595 billion in unpaid principal balance (UPB) as of Sept. 30, down from $598 billion as of June 30. 

The acquisition of Specialized Loan Servicing adds approximately $136 billion in UPB, including $85 billion in third-party servicing.  

Nierenberg said that amid the expectation of new rules, banks have to hold more capital against certain assets, which “could create opportunities for us” in the mortgage-servicing rights space. 

“I just want to point out, as we think about capital deployment, we do things strategically, where we think we’re gonna have 15% to 20% returns on our capital. If we see a package of MSRs that we think we could achieve those returns, we’ll have a hard look at it.”

The company’s stock traded at $9.35 on Thursday morning, up 4.41% after the earnings report. 

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