Business Overview and History
Rithm Capital Corp (RITM) has emerged as a formidable player in the real estate investment trust (REIT) landscape, boasting a diversified portfolio and a strategic vision that positions it for sustained success. With a strong foothold in mortgage origination, servicing, and asset management, Rithm Capital has demonstrated its ability to navigate the complexities of the financial markets and deliver consistent results for its shareholders.
Rithm Capital was formed in September 2011 as a limited liability company and commenced operations in December 2011. Initially, the company was externally managed by an affiliate of Fortress Investment Group LLC. In June 2022, Rithm Capital entered into an internalization agreement with the Former Manager, terminating the management agreement and transitioning to an internally managed REIT structure.
The company's primary focus has been on investing in real estate-related assets, including equity interests in operating companies such as mortgage origination and servicing platforms, as well as investments in single-family rental properties, title, appraisal, and property preservation businesses. Rithm Capital has built up its mortgage origination and servicing capabilities through wholly-owned subsidiaries Newrez LLC and New Residential Mortgage LLC.
Throughout its history, Rithm Capital has faced various challenges common to real estate and financial services firms. Notably, in 2020, the company reported a net loss of $1.41 billion as it grappled with the economic impacts of the COVID-19 pandemic. However, Rithm Capital demonstrated its resilience by navigating this challenging period and returning to profitability in 2021, reporting net income of $772 million.
The company's business segments include Origination and Servicing, Investment Portfolio, Mortgage Loans Receivable, Asset Management, and Corporate. The Origination and Servicing segment operates through Newrez LLC and New Residential Mortgage LLC, offering a multi-channel lending platform for purchase and refinance loan products, as well as servicing both Agency and non-Agency loans.
The Investment Portfolio segment encompasses investments in mortgage servicing rights (MSRs), excess mortgage servicing rights (Excess MSRs), government and government-backed securities, residential mortgage loans, consumer loans, and single-family rental properties. The Mortgage Loans Receivable segment focuses on originating and managing a portfolio of primarily short-term business purpose mortgage loans through its subsidiary, Genesis Capital LLC.
Financial Strength and Liquidity
As of September 30, 2024, Rithm Capital reported total assets of $42.28 billion and total liabilities of $34.52 billion, resulting in a strong balance sheet with $7.75 billion in total equity. The company's book value per common share stood at $12.31 as of the same date.
Rithm Capital's liquidity position remains robust, with $2 billion in cash and cash equivalents as of September 30, 2024. The company's disciplined approach to capital allocation and financing has allowed it to deploy $5.81 billion in investments since 2021 without raising significant amounts of equity.
For the third quarter of 2024, Rithm Capital reported revenue of -$254,164,000 and net income of $121,742,000. The company's operating cash flow (OCF) for the quarter was $768,097,000, while free cash flow (FCF) stood at $767,753,000. These figures demonstrate the company's ability to generate substantial cash flow despite challenging market conditions.
Rithm Capital has maintained a strong financial performance, with Q3 2024 marking the 20th consecutive quarter where earnings available for distribution exceeded common dividends paid. The company reported GAAP net income of $97 million ($0.20 per diluted share) and earnings available for distribution of $270 million ($0.54 per diluted share) for the quarter, representing an impressive return on equity of 18%.
Operational Highlights
Rithm Capital's Origination and Servicing segment has continued to deliver strong results, with Newrez maintaining its position as the second-largest non-bank servicer and the fifth-largest lender in the industry. In the third quarter of 2024, Newrez reported $15.9 billion in funded loan volume, an increase of 9% from the prior quarter, while improving its margins to 1.23%.
The company's servicing portfolio has grown significantly, with a total unpaid principal balance (UPB) of $754.66 billion as of September 30, 2024. This includes $510.25 billion UPB of loans serviced by the performing loan servicing division and $244.41 billion UPB of loans serviced by the special servicing division, Shellpoint Mortgage Servicing (SMS).
Rithm Capital's gain on originated residential mortgage loans held-for-sale, net, increased to $184.69 million in Q3 2024, up from $153.74 million in the prior quarter. This growth was primarily driven by an increase in pull-through adjusted lock volume due to higher refinance activity as interest rates moved lower during the quarter.
The company's Investment Portfolio segment has also performed well, with its MSR and Excess MSR investments generating significant cash flows. As of September 30, 2024, Rithm Capital's total investments stood at $26.72 billion, including $9.30 billion in MSRs and MSR financing receivables, $10.13 billion in government and government-backed securities, and $3.56 billion in residential mortgage loans.
Rithm Capital's consumer loan portfolio, which includes the Marcus loans acquired from Goldman Sachs Bank USA and the SpringCastle loans, has continued to demonstrate resilience, with a total unpaid principal balance of $882.78 million and a weighted average coupon of 12.70%.
The company's single-family rental (SFR) portfolio has grown to 4,080 properties with an aggregate carrying value of $1.04 billion as of September 30, 2024, further diversifying its real estate investments.
Rithm Capital's Asset Management segment, which includes Sculptor, has been a key driver of growth. The recent launch of a multi-billion-dollar real estate fund by Sculptor's real estate team is a testament to the strength of the platform and the team's ability to raise capital, even in challenging market conditions. As of September 30, 2024, Sculptor had approximately $34.30 billion in assets under management (AUM).
The Mortgage Loans Receivable segment, operated through Genesis Capital LLC, reported $1.87 billion in mortgage loans receivable as of September 30, 2024, with a total commitment of $2.59 billion. This portfolio consists of construction, bridge, and renovation loans, with a weighted average contractual interest rate of 10.30%.
Risks and Challenges
As with any investment, Rithm Capital is exposed to various risks, including interest rate risk, credit risk, and prepayment rate risk. The company's investments in MSRs, Excess MSRs, and residential mortgage loans are susceptible to changes in interest rates and prepayment speeds, which can impact their fair values and cash flows.
Additionally, the company's servicing and origination businesses are subject to regulatory oversight and changes in the regulatory environment, which could affect their operations and profitability.
The broader macroeconomic environment, including factors such as inflation, unemployment, and geopolitical tensions, also poses potential risks to Rithm Capital's performance.
Outlook and Conclusion
Rithm Capital's diversified business model, strong financial position, and strategic focus on growth have positioned the company for continued success. The company's robust origination platform, large servicing portfolio, and expanding asset management capabilities provide a solid foundation for future performance.
While specific forward-looking guidance was not provided, Rithm Capital's management has emphasized their focus on growing assets under management, expanding their direct lending business, and continuing to seek new investment opportunities and market expansion. The company's strong liquidity position, with $2 billion in cash on the balance sheet, provides ample resources for pursuing these growth initiatives.
Despite the challenges faced by the broader real estate and financial services industries, Rithm Capital has demonstrated its ability to navigate these conditions and deliver consistent results for its shareholders. With a focus on disciplined capital allocation, strategic acquisitions, and innovative financing solutions, Rithm Capital is poised to capitalize on the opportunities that lie ahead and drive long-term value for its investors.
The company's track record of maintaining a stable book value, which has increased by 8% since 2021, further underscores its resilience and ability to create shareholder value in various market conditions. As Rithm Capital continues to execute its strategy and leverage its diverse business segments, it remains well-positioned to capitalize on opportunities in the real estate and financial services sectors, driving growth and delivering strong returns for its investors in the years to come.