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Rithm Capital May Spin Off Mortgage Business

David Krechevsky
May 05, 2023
Rithm Capital

CEO says stock is undervalued, sees opportunity to 'further diversify our business model.'

Rithm Capital rebranded last year, and now the CEO says the company is considering another big change — spinning off its mortgage operation.

The New York-based parent of Newrez LLC and Caliber Home Loans rebranded itself in 2022 from New Residential Investment Corp. 

The real estate investment trust (REIT) reported its first-quarter earnings on Thursday, posting net income of $69 million, or 14 cents per diluted share, down 15.8% from $81.8 million, or 17 cents per diluted share, in the fourth quarter of last year. 

During a conference call with analysts, Michael Nierenberg, Rithm’s chairman, CEO & president, expressed his frustration over the company’s stock price — it was trading at $7.84 on Friday and has traded in a range of $6.86-$11.52 over the past 52 weeks — saying he believes it is undervalued. He then said changes may be coming.

“When we look at the space today, and we look at the opportunities around potential M&A or potential assets, there's plenty of activity going on,” he said. “So I think the look of the company today won't be the look of the company as we go forward down the road.”

In particular, Nierenberg said, Rithm continues to transition to “growing our business as an alternative asset manager. With that in mind, we are evaluating alternatives for our mortgage company, and will likely file an S-1 in the coming months.”

An S-1, also known as a registration statement, is a form used by the Securities and Exchange Commission. Under the Securities Act of 1933, publicly traded companies must file an S-1 before shares can be listed on a national exchange. It is often filed before an initial public offering.

Filing the S-1, he said, “will allow us to create other pools of liquidity to the extent we create a public entity and further diversify our business model. On the capital-raising side, we believe that we will raise significant pools of capital here over the course of the next three to nine months, which will allow us to grow earnings even more in the near future.”

As for the stock price, Nierenberg said he believes Rithm is “extremely undervalued. There are not many investment managers that can point to a 10-year track record with core earnings approximately 13% to 15% after paying out $4.5 billion of dividends. It's time to see our share price reflect our performance.”

Its performance in the first quarter was primarily driven by mortgage servicing fee revenue, which totaled $469.8 million, up 3.7% from $452.9 million in the fourth quarter of last year. Net revenue from servicing also grew, totaling $327.5 million, up 12.6% from $290.9 million in the previous quarter.

Rithm said its total mortgage servicing rights (MSR) portfolio totaled $603 billion in unpaid principal balance (UPB), and that during the first quarter it funded $7 billion in originated loans.

“When I look at the mortgage company and the business that's been created there, … there's no guarantee which way we're going to take this thing, but we're likely going to file an S-1,” Neirenberg said. “We'll look at the possibility of creating a public entity out of it, which over time could allow us to really further diversify our business model.”

He added that, “regarding the mortgage company, I think everything is on the table. I mean, quite frankly, it's a little bit frustrating when we put up very consistent earnings quarter after quarter. Book value has grown … by 12% or so over the course of the past two years, yet … where we trade relative to book is just simply too cheap. So we'll look at any and all opportunities to actually grow our share price.”

May 05, 2023
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