Completing that deal is key for Rithm to spin out its mortgage banking business; company management stated
Sculptor was formerly known as Och-Ziff, and company founder Dan Och was the headline name
Och — whose separation from the company was contentious, published reports stated — controls 12.5% of the voting equity of Sculptor according to Bose George of Keefe, Bruyette & Woods. If Och gets the deal canceled, Sculptor would be liable for a $16.6 million breakup fee.
"We continue to expect the transaction to be consummated, but it is possible that there could be an adjustment to the purchase price," George said. "However, with Rithm trading at 84% of second quarter tangible book [value], we see limited potential downside to the shares."
Furthermore, Rithm's book value likely increased since June 30 as
BTIG recently hosted a webcast with Rithm management, prior to the letter being sent.
But noting Och's pushback in his report, BTIG analyst Eric Hagen commented, "If deal terms remain unchanged, we think the letter helps validate the attractive valuation we think is being picked up here."
That is driving his opinion of Rithm's stock.
"Rithm is our top pick right now in part because we see a spinout of the mortgage company and potential growth of the asset manager being sources of upside which look largely independent of movements in interest rates and spreads," Hagen said.
Creating a separately traded mortgage company is likely not going to immediately enhance Rithm's earnings.
"Instead, we think value accretion comes from a risk management angle, starting simply with the mortgage company's flexibility to retain capital, versus sitting in the current REIT structure which leaves it more constrained to grow," Hagen said. "We similarly see the liquidity demands of a mortgage REIT not always matching very well with an operationally intensive mortgage lending and servicing platform."
If the mortgage company has $4 billion of equity, it would be equal in size to Mr. Cooper or PennyMac Financial Services.
"Right now on a near-term basis we're pressed to believe Rithm's mortgage company can trade better than PennyMac, particularly if the ownership structure of Rithm's vehicle leaves less room or opportunity to repurchase stock, which contributes meaningfully to the value we've historically seen in PennyMac," Hagen wrote.
It is also quite likely certain mortgage servicing rights could remain at Rithm rather than be contributed to the spinout.
"We expect certain assets still subserviced by third parties including Ocwen could remain left behind in the REIT, along with Rithm's legacy excess MSR strips and investments in servicer advances, which could help diversify, and potentially fortify the earnings stream in the REIT," he said.
Rithm is Ocwen's largest subservicing client at $47 billion of unpaid principal balance as of June 30, even
Rithm is capitalized with $7.1 billion of net equity as of June 39, with its mortgage business consuming $4 billion of that. Most of the tangible capital supports $400 billion of MSRs that Rithm services in-house, Hagen noted.
The deal was announced before the stock market opened on July 24. Rithm opened that morning at $9.75 per share. It closed that day at $10.26 per share.
Its stock stayed above $10 per share until Aug. 14, with exceptions during the trading day on Aug. 1 and Aug. 3. That blip was likely related to Rithm announcing earnings on Aug. 2, posting net income of $357.4 million.
Rithm opened at $9.95 per share on Aug. 15, falling the next day to Aug. 16 at $9.80. On Aug. 17, after the Och letter became public, it opened at $9.74 per share.
