Business Overview and Storied History
Rithm Capital Corp (RITM) is a global asset manager with a diverse portfolio spanning real estate, credit, and financial services. Over the years, the company has meticulously crafted a comprehensive platform that sets it apart in the industry, solidifying its position as a multifaceted powerhouse.
Rithm Capital's origins can be traced back to September 2011, when it was formed as a limited liability company and commenced operations in December of that year. Initially known as New Residential Investment Corp., the company was organized as a real estate investment trust (REIT) focused on investing in and managing residential mortgage-related assets. In May 2013, Rithm Capital became a publicly-traded entity following its initial public offering, marking a significant milestone in its growth trajectory.
Prior to June 2022, Rithm Capital operated under a management agreement with an affiliate of Fortress Investment Group LLC. A pivotal moment in the company's evolution occurred in June 2022 when it internalized its management functions through the Internalization transaction, agreeing to pay $400 million to terminate the management agreement. This transition to an internally managed REIT structure further enhanced Rithm Capital's operational efficiency and strategic flexibility.
Throughout its history, Rithm Capital has pursued a growth strategy centered on strategic acquisitions and investments. In 2017, the company acquired Shellpoint Partners LLC, a residential mortgage origination and servicing platform, expanding its capabilities in these crucial areas. The acquisition of Genesis Capital LLC in 2022 further broadened Rithm Capital's reach into the lending space for residential real estate investors and developers. Most recently, in 2023, the company acquired Computershare Mortgage Services Inc. and Specialized Loan Servicing LLC, significantly enhancing its servicing capabilities and market presence.
Rithm Capital's journey has not been without challenges. In 2020, like many others in the industry, the company faced the impacts of the COVID-19 pandemic, which affected its operations and financial performance. Additionally, Rithm Capital had to navigate the transition from LIBOR to alternative reference rates, such as SOFR, for its financing agreements, demonstrating its ability to adapt to changing market conditions and regulatory requirements.
Rithm Capital's investment expertise has enabled it to identify, manage, and invest in a wide array of real estate-related and other financial assets, providing investors with attractive risk-adjusted returns. The company's real estate-related strategy involves opportunistic acquisitions and strategic partnerships, allowing it to maximize the value of its investments by offering products and services throughout the lifecycle of transactions affecting each mortgage loan and underlying residential property or collateral.
Rithm Capital's asset management business, operated primarily through its wholly-owned subsidiary, Sculptor Capital Management, Inc. (Sculptor), is a leading global alternative asset manager. Sculptor provides asset management services and investment products across credit, real estate, and multi-strategy platforms through commingled funds, separate accounts, and other alternative investment vehicles.
Diversified and Resilient Business Model
Rithm Capital's business model is characterized by its diversification across multiple segments, including Origination and Servicing, Investment Portfolio, Mortgage Loans Receivable, Asset Management, and Corporate. This diversification has been a key driver of the company's resilience and consistent performance, even in the face of challenging market conditions.
The Origination and Servicing segment, anchored by the company's Newrez and Genesis subsidiaries, has consistently delivered strong results. Newrez, a top-tier non-bank mortgage originator and servicer, boasts a servicing portfolio of over $755 billion in unpaid principal balance (UPB) and maintains a leading 3.4% market share in the industry. Meanwhile, Genesis Capital, a specialty lender for residential real estate developers, has experienced remarkable growth, with its EBITDA expected to reach around $90 million this year, up from roughly $50 million when Rithm Capital acquired the company in 2022.
Rithm Capital's Investment Portfolio segment, which includes its holdings in mortgage servicing rights (MSRs), government and government-backed securities, residential mortgage loans, consumer loans, and single-family rental properties, has also been a reliable contributor to the company's overall performance. The strategic allocation of capital across these diverse asset classes has enabled Rithm Capital to weather market fluctuations and capitalize on opportunities.
The Asset Management segment, led by Sculptor, has demonstrated strong momentum in the aftermath of Rithm Capital's acquisition of the firm in November 2023. Sculptor's real estate fund recently announced a $1.3 billion first close, a testament to the team's investment acumen and the market's confidence in their capabilities. The broader Sculptor platform, with its expertise across credit, real estate, and multi-strategy, is poised to drive significant growth and contributions to Rithm Capital's bottom line.
Robust Financial Performance and Capital Allocation
Rithm Capital's financial performance has been consistently strong, with earnings available for distribution (EAD) exceeding common dividends paid for 20 consecutive quarters. The company's book value has increased by 8% since 2021, underscoring the effectiveness of its capital deployment strategies.
Since 2021, Rithm Capital has deployed $5.8 billion of capital, including the acquisition of several operating platforms such as Sculptor, a $1.4 billion consumer loan portfolio from Goldman Sachs, Genesis Capital, and Caliber Home Loans. Remarkably, the company has achieved this growth while maintaining a disciplined approach, avoiding the need for significant equity raises. Rithm Capital's earnings growth of approximately 60% and a compound annual growth rate (CAGR) of 14% in EAD further exemplify the company's ability to generate value for its shareholders.
Looking ahead, Rithm Capital is well-positioned to continue its growth trajectory, with plans to scale its private capital business, expand its direct lending capabilities, and explore new investment verticals that align with its core competencies. The company's ample liquidity, with approximately $2 billion in cash and cash equivalents as of the latest quarter, provides the financial flexibility to capitalize on strategic opportunities.
Financials
Rithm Capital's financial performance has been consistently strong, with earnings available for distribution (EAD) exceeding common dividends paid for 20 consecutive quarters. The company's book value has increased by 8% since 2021, underscoring the effectiveness of its capital deployment strategies.
In the most recent quarter (Q2 2024), Rithm Capital reported revenue of -$254,164,000, net income of $97,024,000, operating cash flow of -$72,699,000, and free cash flow of -$197,990,000. The company's GAAP net income was $97 million, or $0.20 per diluted share, while earnings available for distribution (EAD) were $270 million, or $0.54 per diluted share. The return on equity stood at an impressive 18%.
Since 2021, Rithm Capital has deployed $5.8 billion of capital, including the acquisition of several operating platforms such as Sculptor, a $1.4 billion consumer loan portfolio from Goldman Sachs, Genesis Capital, and Caliber Home Loans. Remarkably, the company has achieved this growth while maintaining a disciplined approach, avoiding the need for significant equity raises. Rithm Capital's earnings growth of approximately 60% and a compound annual growth rate (CAGR) of 14% in EAD further exemplify the company's ability to generate value for its shareholders.
The company's book value as of Q3 2024 was $6.4 billion, or $12.31 per common share, with the current book value around $12.5 per share. Rithm Capital paid a $0.25 dividend per share in the most recent quarter.
Liquidity
Rithm Capital maintains a strong liquidity position, with approximately $2 billion in cash and cash equivalents as of the latest quarter. This robust liquidity provides the company with the financial flexibility to capitalize on strategic opportunities and navigate potential market uncertainties.
Navigating Challenges and Uncertainties
Rithm Capital's management team has demonstrated its ability to navigate through various market environments and potential headwinds. The company's portfolio is well-positioned to withstand interest rate volatility, with a focus on maintaining a close-to-home duration profile and a fully hedged balance sheet to mitigate book value fluctuations.
The upcoming U.S. presidential election and its potential implications for the economy and policy landscape have been on Rithm Capital's radar. The company's management team has expressed a cautious yet vigilant approach, recognizing the uncertainties surrounding the election outcome and its potential impact on factors such as trade policies, immigration, and government spending. Rithm Capital's ample liquidity and disciplined capital allocation strategies position the company to weather any potential market turbulence stemming from the election.
Rithm Capital has also taken steps to address potential risks associated with the evolving regulatory environment. The company's subsidiaries, Sculptor and RCM Manager, are registered as investment advisers under the Investment Advisers Act of 1940, subjecting them to extensive regulation and oversight. Rithm Capital has implemented policies and procedures to mitigate potential conflicts of interest and ensure compliance with the applicable rules and regulations.
Segment Performance and Portfolio Composition
Origination and Servicing Segment: Rithm Capital's origination and servicing segment, operated through its wholly-owned subsidiaries Newrez LLC and Genesis Capital LLC, has shown strong performance. In the three months ended June 30, 2024, Newrez originated $14.62 billion in total unpaid principal balance (UPB) of residential mortgage loans, up from $10.82 billion in the prior quarter. This increase was primarily driven by enhanced production in the Correspondent channel, although the gain on sale margin decreased to 1.00% from 1.20% due to lower margins in this channel.
The servicing portfolio has also seen significant growth, with Newrez and NRM servicing a total portfolio of $741.55 billion UPB as of June 30, 2024, up from $577.49 billion in the prior quarter. This growth was largely attributable to the acquisition of Computershare Mortgage Services Inc. and the addition of third-party servicing. The portfolio comprises $486.38 billion UPB in performing servicing and $255.17 billion UPB in special servicing.
Investment Portfolio Segment: Rithm Capital's investment portfolio segment is diverse and robust, including holdings in mortgage servicing rights (MSRs), excess mortgage servicing rights (Excess MSRs), servicer advance investments, residential mortgage-backed securities (RMBS), residential mortgage loans, consumer loans, and single-family rental (SFR) properties.
As of June 30, 2024, the company held $9.69 billion in MSRs and MSR financing receivables, with a weighted average mortgage servicing fee of 34 basis points. The RMBS portfolio included $9.30 billion in Agency RMBS and $548.05 million in non-Agency RMBS. The residential mortgage loan portfolio totaled $4.28 billion, while the consumer loan portfolio, including the SpringCastle and Marcus loan portfolios, stood at $946.37 million.
Mortgage Loans Receivable Segment: Operated through Genesis Capital LLC, this segment focuses on originating and managing short-term business purpose mortgage loans for real estate developers. As of June 30, 2024, Rithm Capital had $2.05 billion in mortgage loans receivable, with an average total commitment of $2.85 million per loan. The portfolio consisted of 43.2% construction loans, 42.1% bridge loans, and 29.7% renovation loans, with a weighted average committed loan-to-value ratio of 70.2%.
Asset Management Segment: Rithm Capital's asset management segment, operated through Sculptor Capital Management, Inc., had approximately $32.1 billion in assets under management (AUM) as of June 30, 2024. For the six months ended June 30, 2024, this segment generated $185.29 million in revenues, primarily from management fees and incentive income.
Conclusion
Rithm Capital's multifaceted business model, diversified portfolio, and consistent financial performance have positioned the company as a formidable player in the global asset management and real estate investment landscape. The company's strategic acquisitions, disciplined capital allocation, and the momentum in its Origination and Servicing, Investment Portfolio, and Asset Management segments suggest a promising outlook for Rithm Capital's continued growth and value creation for its shareholders.
As Rithm Capital navigates the evolving market conditions and potential challenges, its experienced management team, robust risk management practices, and adaptable business strategy instill confidence in the company's ability to capitalize on future opportunities and deliver sustainable long-term returns. The company's strong performance across its business segments, particularly in origination, servicing, and investment portfolio, coupled with its robust liquidity position of around $2 billion, provides a solid foundation for future growth and resilience in the face of market uncertainties.