Business Overview and History
Rithm Capital Corp. (RITM) has emerged as a leading player in the dynamic mortgage industry, leveraging its diverse business model and strategic acquisitions to navigate the ever-changing market conditions. With a strong focus on origination, servicing, and asset management, Rithm Capital has established itself as a formidable force, delivering consistent financial performance and long-term value for its shareholders.
Rithm Capital, formerly known as New Residential Investment Corp., was founded in September 2011 as a limited liability company and commenced operations in December of that year. The company transitioned to a real estate investment trust (REIT) structure in 2013 and has since undergone a remarkable transformation, driven by a series of strategic acquisitions and organic growth initiatives.
Prior to June 2022, Rithm Capital operated under a management agreement with an affiliate of Fortress Investment Group LLC. In June 2022, the company entered into an internalization agreement, terminating the management agreement and internalizing its management functions. This move allowed Rithm Capital to gain greater control over its operations and strategic direction.
Rithm Capital’s business model is focused on generating long-term value for investors by leveraging its investment expertise to identify, manage, and invest in real estate-related and other financial assets. The company’s portfolio includes equity interests in operating companies, such as leading origination and servicing platforms held through wholly-owned subsidiaries, as well as investments in single-family rental properties, title, appraisal, and property preservation and maintenance businesses.
In 2022, Rithm Capital acquired Genesis Capital, a leading business purpose lender, further strengthening its presence in the private credit space. This acquisition complemented the company’s existing mortgage origination and servicing platform, Newrez, which it had built from scratch since the Fortress Investment Group days. Through Newrez, Rithm Capital has become one of the top three non-bank mortgage originators and servicers in the United States, boasting a servicing portfolio of over $875 billion in unpaid principal balance (UPB) as of September 30, 2024.
The company’s strategic move into the asset management business was marked by the transformative acquisition of Sculptor Capital Management in November 2023. Sculptor, a leading global alternative asset manager, has brought significant expertise and a diversified product suite to Rithm Capital, further enhancing its ability to deliver strong investment performance and generate stable fee-based income. Additionally, Rithm Capital’s asset management business operates through its affiliate RCM GA Manager LLC, which manages Great Ajax Corp., a publicly traded mortgage REIT.
Financial Performance and Ratios
Rithm Capital’s financial performance has been consistent and impressive, with the company reporting GAAP net income of $97.0 million, or $0.20 per diluted common share, for the third quarter of 2024. The company’s earnings available for distribution, a key metric, reached $270.3 million, or $0.54 per diluted common share, during the same period.
The company’s financial ratios paint a picture of a well-capitalized and efficiently managed entity. As of September 30, 2024, Rithm Capital reported a debt-to-equity ratio of 3.87, a current ratio of 7.34, and a quick ratio of 7.34, indicating a strong liquidity position. The company’s return on equity for the third quarter was a robust 18%.
Financials
Rithm Capital’s financial performance demonstrates its ability to generate consistent returns across various market conditions. The company’s diversified revenue streams, including income from origination, servicing, and asset management, contribute to its stable financial profile. In the third quarter of 2024, Rithm Capital reported total revenues of -$254.16 million, reflecting the impact of changes in the fair value of mortgage servicing rights. Despite this, the company achieved a net income of $121.74 million for the quarter.
The company’s operating cash flow (OCF) for the quarter was $768.10 million, while free cash flow (FCF) stood at $767.75 million, indicating strong cash generation capabilities. These figures highlight Rithm Capital’s ability to maintain profitability and generate substantial cash flow even in challenging market conditions.
Rithm Capital’s book value has shown resilience, increasing by 8% since 2021 and remaining stable quarter-over-quarter. As of the latest report, the book value stood at approximately $12.5 per common share. The company has maintained a consistent dividend policy, paying a $0.25 dividend in the third quarter of 2024.
It’s worth noting that Rithm Capital’s Earnings Available for Distribution (EAD) has exceeded the common dividends paid for 20 consecutive quarters, underscoring the company’s ability to generate sustainable returns for shareholders.
Liquidity
Rithm Capital maintains a strong liquidity position, which is crucial for navigating the dynamic mortgage industry. As of September 30, 2024, the company reported approximately $2 billion in cash and liquidity. This robust liquidity buffer enables Rithm Capital to pursue strategic growth opportunities, manage potential market volatility, and meet its ongoing financial obligations. The company’s prudent liquidity management strategy includes maintaining diverse funding sources and optimizing its capital structure to ensure financial flexibility.
Origination and Servicing Highlights
Rithm Capital’s Newrez origination platform continued to deliver strong performance in the third quarter of 2024, with $15.9 billion in funded loan volume, up 9% from the previous quarter. The company’s gain-on-sale margin improved by 17% quarter-over-quarter, reaching 1.23%, while maintaining a market share of 3.4%.
On the servicing side, Newrez solidified its position as the fifth-largest lender in the industry and the second-largest non-bank servicer, with a servicing portfolio of $755 billion in UPB as of September 30, 2024. The company’s operational efficiency is highlighted by an industry-leading cost per loan of $113, a testament to its technology investments and scalable platform.
The Origination and Servicing segment, operating through Newrez and New Residential Mortgage LLC (NRM), reported a funded loan origination volume of $15.89 billion for the three months ended September 30, 2024, up from $14.62 billion in the prior quarter. The gain on sale margin for the third quarter was 1.13%, 13 basis points higher than the 1.00% for the prior quarter, primarily due to higher margin Direct to Consumer originations and improvements in Correspondent and Wholesale margins.
Year-over-year, the segment’s funded loan origination volume increased to $41.33 billion for the nine months ended September 30, 2024, up from $27.98 billion in the prior year period. However, the gain on sale margin decreased by 24 basis points to 1.10% for the first nine months of 2024 compared to 1.34% in the prior year period, primarily due to an increase in the higher volume Correspondent production relative to total production.
The servicing portfolio totaled $754.66 billion in unpaid principal balance (UPB) as of September 30, 2024, up from $741.55 billion in the prior quarter and $563.09 billion a year ago. The increase was primarily attributable to new client acquisition and loan production, partially offset by scheduled and voluntary prepayment loan activity.
Servicing revenue, net decreased $685.24 million quarter-over-quarter and $547.11 million year-over-year, primarily driven by changes to the fair value of the mortgage servicing rights (MSR) portfolio from a change in the forward mortgage interest rate curve during the third quarter of 2024.
Asset Management Segment Expansion
The acquisition of Sculptor Capital Management in November 2023 has been a transformative event for Rithm Capital, significantly expanding its asset management capabilities. As of September 30, 2024, Sculptor managed approximately $34.3 billion in assets, delivering strong investment performance across its credit, real estate, and multi-strategy platforms.
Rithm Capital’s asset management segment has been a key driver of the company’s growth, with the Sculptor team successfully raising $1.3 billion for a new multi-billion-dollar real estate fund during the third quarter. The company’s focus on performance-driven asset management aligns with its overall strategy of generating consistent, long-term returns for its shareholders.
For the three months ended September 30, 2024, the Asset Management segment generated $81.04 million in revenues, a decrease of $28.39 million compared to the prior quarter. This was primarily due to higher second quarter incentive income driven by off-cycle crystallization related to certain funds managed by Sculptor.
On a year-over-year basis, the Asset Management segment’s revenues increased $266.33 million for the nine months ended September 30, 2024, compared to the prior year period, as a result of the Sculptor acquisition completed in the fourth quarter of 2023.
The segment’s operating expenses primarily consist of amortization of intangible assets, compensation and benefits, and office and professional expenses. These expenses increased in both the quarter and year-over-year periods due to the Sculptor acquisition.
Investment Portfolio and Mortgage Loans Receivable Segments
Rithm Capital’s Investment Portfolio segment includes a diverse range of assets, including MSRs and MSR financing receivables, government and government-backed securities, non-Agency residential mortgage-backed securities (RMBS), residential mortgage loans, consumer loans, single-family rental (SFR) properties, and mortgage loans receivable.
As of September 30, 2024, the company’s MSRs and MSR financing receivables had a total unpaid principal balance (UPB) of $588.87 billion, with a carrying value of $9.30 billion. The portfolio was weighted towards GSE loans, which made up $383.22 billion of the UPB and had a carrying value of $5.77 billion. Non-Agency loans accounted for $70.82 billion of UPB with a carrying value of $818.98 million, while Ginnie Mae loans made up $134.83 billion of UPB with a carrying value of $2.71 billion.
The company’s government and government-backed securities portfolio was $10.13 billion as of the end of the third quarter, up from $8.53 billion at the end of 2023. This portfolio is largely invested in Agency RMBS and Treasury securities and is used to hedge the company’s MSR portfolio. The weighted average asset yield on this portfolio was 4.80% for the third quarter, with a weighted average funding cost of 5.20%, resulting in a net interest spread of 0.40%.
Rithm Capital’s non-Agency RMBS portfolio totaled $579.72 million in carrying value as of September 30, 2024, up from $577.54 million at the end of 2023. The residential mortgage loan portfolio totaled $3.56 billion in carrying value as of September 30, 2024, up from $2.92 billion at the end of 2023.
The Mortgage Loans Receivable segment, operated through the wholly-owned subsidiary Genesis, specializes in originating and managing a portfolio of primarily short-term mortgage loans to fund the construction, development, investment, and renovation of residential properties. As of September 30, 2024, the segment’s mortgage loans receivable portfolio had an unpaid principal balance of $1.84 billion and a total commitment of $2.59 billion across 1,010 loans. During the nine months ended September 30, 2024, Genesis originated $2.43 billion in mortgage loans and received $1.10 billion in loan repayments.
Navigating Market Conditions and Risks
Rithm Capital operates in a dynamic and highly competitive mortgage industry, which is subject to various market and regulatory risks. The company has demonstrated its ability to navigate these challenges, leveraging its diversified business model and strategic foresight.
The company’s exposure to interest rate fluctuations is mitigated by its active hedging strategies and the resilience of its mortgage servicing rights (MSRs) portfolio. Rithm Capital also maintains a strong liquidity position, with approximately $2 billion in cash and liquidity as of September 30, 2024, allowing it to withstand potential market volatility.
One of the key risks facing Rithm Capital is the potential regulatory changes in the mortgage industry, particularly with respect to capital and liquidity requirements for non-bank lenders and servicers. The company has demonstrated its ability to adapt to these evolving regulations, as evidenced by its compliance with the latest FHFA and Ginnie Mae standards.
Over the years, Rithm Capital has faced various challenges common to mortgage and real estate investment companies, including market volatility, rising interest rates, and inflationary pressures. The company has addressed these challenges through prudent risk management, diversification of its investment portfolio, and strategic acquisitions and partnerships to enhance its origination, servicing, and asset management capabilities. Despite these market headwinds, Rithm Capital has maintained a strong financial position and continued to deliver consistent results for its shareholders.
Outlook and Conclusion
Rithm Capital’s diversified business model, strategic acquisitions, and strong operational performance position the company for continued success in the evolving mortgage landscape. The company’s robust origination platform, industry-leading servicing capabilities, and expanding asset management segment provide multiple avenues for growth and value creation.
As Rithm Capital navigates the market conditions and regulatory changes, the company’s focus on delivering consistent financial performance and shareholder value remains unwavering. With a seasoned management team, a well-capitalized balance sheet, and a proven track record of execution, Rithm Capital is poised to capitalize on the opportunities in the mortgage industry and generate long-term returns for its investors.
Looking ahead, Rithm Capital expects to see continued strong performance across its business lines, including its lending businesses (Newrez and Genesis), asset management business (Sculptor), and commercial real estate investments. The company is focused on growing its assets under management, expanding its direct lending activities, and exploring new investment verticals to drive further growth and value creation for shareholders.
With its strong liquidity position, stable book value, and consistent dividend policy, Rithm Capital is well-positioned to navigate future challenges and capitalize on emerging opportunities in the dynamic mortgage and real estate investment landscape.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.