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Rithm delivers big profit in Q2, starts mortgage biz spin-off

Originations returned to profitability in the quarter, but gain-on-sale margins declined

New York-based Rithm Capital executives see surging rates and increasing capital requirements for banks as an opportunity to acquire diversified assets and operational platforms at a time when the parent company of New Rez and Caliber plans to spin off its mortgage business.  

“If you think about where we are in the cycle, interest rates are at some of the highest levels we’ve seen in 20+ years, capital requirements in the banking system are headed higher, we are in a period of time where unlevered returns on most of the assets we invest in are between 8% and 12% on an unlevered basis,” Michael Nierenberg, chairman, CEO and president of Rithm Capital, said in a call with analysts. 

“This period of time, from an investment perspective, is some of the best environments we have seen in years. The time is now. While we are a mortgage REIT, I like to think of us as an asset manager operating as a REIT.” 

Nierenberg spoke to analysts after Rithm announced Wednesday that it delivered a $357.4 million GAAP net income in the second quarter of 2023 — higher than the $68.9 million the prior quarter. Earnings available for distribution reached $297.9 million in the second quarter, compared to $171 million in the previous quarter.

In June, Rithm invested $145 million to purchase $1.4 billion of consumer loans from Goldman Sachs and purchased 371 newly built single-family rental properties from Lennar. In July, the company acquired 200 newly-built townhomes from Dream Finders Homes and announced the acquisition of Sculptor Capital Management for $639 million. 

Rithm had 1.8 billion of total cash and liquidity to support its acquisitions at the end of the second quarter. 

“Subsequent to quarter end, we announced the acquisition of Sculptor Capital Management. This acquisition helps accelerate our growth in the alternative asset management space, as Sculptor’s $34 billion of AUM complements Rithm’s $7bn of permanent equity capital and $30+ billion balance sheet,” Nierenberg said. “With the introduction of new capital rules being instituted on banks and the highest level of rates seen in 20+ years, the investing environment has not been this good in years.” 

Bank regulators last week released a proposal to increase capital requirements for banks under the Basel III regulation. 

Rithm executives, who said the market is at a transition point in tightening from monetary to regulatory, estimate that regulations open up over $1.5 trillion to $2 trillion in funding needs with $170 billion in additional capital requirements. Assets impacted include mortgages, funding to corporates, market-making and trading intermediations and fee-based businesses. 

Mortgage business 

Rithm’s mortgage business delivered a combined pre-tax income of $326.9 million in the second quarter of 2023, compared to $164 million in the previous quarter. 

Originations returned to profitability, with $8.7 million in pre-tax income from April to June. Volumes increased to $9.9 billion in the second quarter, higher than the $7 billion in the previous quarter. However, gain-on-sale margins decreased to 1.25% in Q2 2023, from 1.61% in Q1 2023, due to “channel mix and overall market conditions,” the company said. 

“We don’t need to originate a unit to do volume. We want to originate units that are core to our business, where we are doing something that is going to make money for LPs and shareholders. So, whether we do an extra billion dollars in origination in a channel, or a billion dollars less in a channel, we care about one thing, obviously servicing our customers and then driving profitability for our shareholders and LPs,” Nierenberg said. 

Rithm’s mortgage production is expected to be between $8 billion and $10 billion in Q3 2023. 

The company recently filed a confidential S-1 to spin off its mortgage business. Nierenberg said the separated business may include all the origination operations and most servicing assets, but some MSRs may stay back. He said Rithm does not plan “to turn around and just sell down the entire thing” but wants flexibility with a listed company. 

“With where mortgage companies are trading, I don’t know that anybody trades at a significant premium at this point. And quite frankly, we just think the timing is right now with the scale and what the team has done around with the New Rez brand and obviously the Caliber acquisition.” 

Servicing contributed $357.3 million in profits during the second quarter. The company’s mortgage servicing rights portfolio (MSRs) totaled $598 billion in unpaid principal balance (UPB) as of June 30, 2023, down from $603 billion as of March 31, 2023. 

According to Nierenberg, Rithm continues to move mortgage servicing rights from some of its subservicers back in-house. However, the executive anticipates “there’s limited upside for us” regarding MSR values, so while Rithm monitors where rates are, the company will start putting “more hedges on against that asset as we go forward.”

After the earnings release, analysts at BTIG said they “Continue to see value in the equity, which could offer the optionality to participate in a spin off of the originator/servicer while owning a growing and re-purposed asset manager at a potentially attractive valuation.”

The company’s stock was trading at $10.20 on Wednesday afternoon, up by 1.54% after the earnings report. 

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