Rithm Capital hints at another acquisition

As other acquisitions are pending, Rithm Capital hinted at a new deal to come by year's end as it aims toward becoming an asset management leader.

While media publicity as well as competing offers currently surround its efforts to purchase hedge fund firm Sculptor Capital Management, New York-based Rithm also agreed to buy servicing assets from Australian firm Computershare in the third quarter, a move more in line with its original roots in home lending. But a spree of recent deals also underscore a strategy shift, which could eventually help lead to a spinoff of its mortgage unit.  

"In the asset management side, we're working on another — what I would call sizable — transformational transaction that we expect to get done by the end of the year," said CEO Michael Nierenberg in Rithm Capital's third quarter earnings call. 

Nierenberg emphasized the company's acquisitions would "continue our narrative towards being a leading global asset management business." 

While Rithm still faces pushback in its attempt to acquire Sculptor — a deal Nierenberg said the company was excited to wrap up — he also stressed its real estate-related segments would remain essential to the success of the company, which is the parent of home lender Newrez. 

"I want to be clear — the core business lines which have gotten us to this point are crucial to the future of our company," he said.

"We're not giving up on the mortgage company," but he added that Rithm was looking for ways to cut expenses, particularly in its retail channel, "because that business really doesn't make any money right now."

The acquisition of Computershare's Specialized Loan Servicing unit is an example of how mortgage might fit into corporate strategy, with $136 billion to be added to its portfolio. The total includes $85 billion of third-party servicing to help it weather current lending industry headwinds. The deal is expected to close next year.

"If the economy in the U.S. does slow down, and they need more special servicing, there's going to be nobody better than Newrez and our businesses to work with homeowners and consumers around that," Nierenberg said. 

Rithm reported another profitable quarter, largely thanks to servicing, which benefits from elevated interest rates. Company-wide adjusted net income came in at $193.9 million in the third quarter or 40 cents per diluted share, a decrease of 45.8% from $357.4 million three months earlier. But the latest profit represented an upswing of 55.7%, from $124.5 million, earned a year ago.

Revenues, meanwhile, clocked in at $1.1 billion, rising from $1 billion in the second quarter and $912.8 million year over year.

Within Newrez, servicing operations accounted for $365.5 million of net income, representing an increase from $285.8 million three months earlier and $215.9 million in third quarter 2022. Unpaid principal balance in Rithm's mortgage-servicing rights portfolio stood at $595 billion falling from $598 billion at second-quarter end and $615 billion a year ago. 

Servicing carried Newrez during the quarter with new purchases and refinances still languishing across the lending industry due to the acceleration of mortgage rates this year. Its originations business posted a third-quarter net loss of $9.4 million, falling further from $8.1 million in the second. But the latest number was a year-over-year improvement from the $43 million deficit 12 months ago. Funded production volume increased to $11.1 billion, compared to $9.9 billion at the end of the second quarter, but falling from $13.8 billion a year ago. 

Gain on sale margins improved to 128 basis points from 123 basis points in the second quarter. The latest margin was still well off the 172 basis points reported in third quarter 2022.

"We expect the originator business to remain under extreme pressure with mortgage rates at 8%," Nierenberg said. 

Analysts previously said the purchase of Computershare assets would likely bolster the prospects of a Newrez spinoff into a new publicly traded company. 

Whether a separation goes through will hinge on the relationship it would have with its current parent after a potential Rithm-Sculptor merger, according to Eric Hagen and Jake Katsikas of research and strategy group BTIG.

"Newrez has $4.5 billion of total equity, which looks scaled enough to us to exist as its own entity," they wrote in a research note. 

While Rithm has filed papers with the Securities and Exchange Commission for a potential new listing, company officials held back on offering any timeline.

"We continue to evaluate alternatives," Nierenberg said. "As we all know, taking a mortgage company or quite frankly, any company public right now is a little bit of a challenging task. The idea around the mortgage company — the thought is to try to figure out a way to recycle capital."