Rithm Capital floats separation of mortgage business

Rithm Capital said it is exploring the idea of splitting off its mortgage operation as it focuses on growing its alternative asset business.

Expressing frustration with what he said was undervaluation of Rithm's equity price, CEO Michael Nierenberg said the company was "evaluating alternatives for our mortgage company and will likely file an S-1 in the coming month." The form is typically filed when a company announces plans for a public listing. 

"This will allow us to create other pools of liquidity to the extent [that] we create a public entity and further diversify our business model," Nierenberg said in the company's first-quarter earnings call. 

The New York-based real estate investment trust and parent company to Newrez and Caliber Home Loans posted company-wide profits for the third straight quarter with net income coming in at $68.9 million in the first three months this year, or 14 cents per diluted share. The bottom line total was 15.8% lower from the fourth quarter's $81.3 million, while year-over-year, net income fell 89.6% from $661.9 million.

The current cloud hanging over the mortgage industry, after economic concerns mounted and interest rates increased steeply over the past year, has dragged the perceived value of his company down, Nierenberg suggested. 

Although Rithm has put up consistent earnings quarter after quarter, "where we trade relative to book is just simply too cheap," he said in explaining the potential separation of business lines. 

As it did in recent earnings periods, the servicing unit within its mortgage division helped propel Rithm to a profitable quarter, accounting for net income of $192.1 million, compared to $94.8 million in the final three months of last year. Total unpaid balance at the end of the quarter came in at $603 billion. 

But with the steep drop-off in lending across the mortgage industry, originations finished with another quarterly loss of $24.4 million, based on $7 billion in production. The loss narrowed from $43.4 million in the fourth quarter, when production came in at $7.9 billion.   

Gain on sale on originations was 161 basis points, shrinking from 181 three months earlier. 

Revenues across all Rithm divisions, including originations and servicing, residential securities, mortgage loans receivable and corporate, added up to $783.4 million, 2.8% higher from $762.4 in the fourth quarter, but down 54.7% from $1.73 billion a year earlier. 

The prolonged decline in mortgage borrowing, which has resulted in massive revenue losses at some companies and a wave of consolidation, led Rithm to consider turning its focus to other channels, including its business-purpose lending subsidiary and alternative assets. 

"When you look at where alternative asset managers trade versus REITs — that's another reason why we're pivoting to growing into an alternative asset manager," Nierenberg said. He also added that Rithm has "big aspirations to take us to the next level in the alternative asset space."

The company's efforts to shift gears and grow through various avenues won approval from outside analysts at BTIG

"We like how the company is adapting to the environment and being resourceful in raising third-party funds to grow and remain relevant in the market," wrote Eric Hagen, Ethan Saghi and Jake Katsikas wrote in a research note. 

"We still comp the stock to mortgage REITs and originator/servicers, but think it is (slowly) introducing new components of value which make it differentiated," they said.

At the same time as it pivots toward alternative asset management, though, Rithm sees recent regional bank troubles providing "a huge pipeline of opportunities" for growth across all of its lending businesses, including mortgage, business purpose and commercial real estate. Nierenberg also alluded to potential purchases of new assets and mergers on the horizon. 

"I can't remember a period of time when we were working on so many different deals," Nierenberg said.