It is no secret that things are tough in the mortgage market. The mortgage business is extremely cyclical, and right now mortgage originators are struggling as rising interest rates have choked off home purchase activity and refinancing transactions have all but disappeared. Rithm Capital (RITM -0.64%) is a mortgage company that is outperforming its competitors due to a diversified business model. It recently agreed to buy an asset manager, which could help lesson its dependence on the volatile mortgage sector.
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Rithm Capital is a real estate investment trust (REIT) that owns several operating companies, largely in the mortgage industry. Rithm used to be known as New Residential but it changed its name to reflect is broadening focus. Rithm has been known primarily for its mortgage origination business. The company is also big in the mortgage-servicing business, both as an owner of servicing and as a sub-servicer. A servicer collect loan payments, sends funds to investors and issues mortgage statements to borrowers. Rithm also operates a business-purpose lender, a residential rental business, and other real estate related services.
The investment management arm of Rithm focuses primarily on mortgage-related assets including mortgage-backed securities, mortgage servicing rights, commercial mortgage-backed securities, and whole loans. Rithm recently said that it is purchasing Sculptor Capital Management (SCU), which will help bolster its investment management business. Sculptor is an alternative asset and hedge fund manager with $34 billion in assets under management. It operates in corporate credit, real estate, and multistrategy, which contains some of the classic market-neutral hedge fund strategies like merger arbitrage and convertible bonds. The companies expect to close the transaction next year, saying the deal will be neutral to earnings in 2024 and accretive in 2025.
The purchase of Sculptor helps Rithm diversify its exposure from the residential mortgage industry, which is going through a tough time at the moment. Asset management is one of those evergreen businesses that can throw off cash regardless of where interest rates are currently trading.
On the conference call discussing the transaction, the company said that it filed a confidential S-1 (used when a company plans to sell shares in an initial public offering) with the Securities and Exchange Commission concerning its mortgage business. Rithm has long felt that the company has traded at a discount to the sum of its parts, and doing an IPO of the mortgage company might be a way to unlock value. The company couldn't say too much about the potential share sale , but it does support the idea that Rithm is diversifying its mortgage exposure.
Rithm also gave an update for the second quarter, estimating earnings of between $0.71 and $0.77 per share. Earnings available for distribution were forecast to be between $0.59 and $0.65. Book value is forecast to come in between $12.13 and $12.19 per share, which is about a 4% increase from the first quarter. Rithm did book a gain from a securitization which bumped up the numbers, but the earnings available for distribution more than amply cover the quarterly dividend of $0.25. Rithm is one of the few mortgage REITs that hasn't cut its dividend in the past year.
The stock market reaction to the deal was positive, with Rithm trading up 5.5% for the day. Rithm trades at a 16% discount to book value per share, which is part of the rationale for the potential mortgage company transaction. Rithm also has an attractive dividend yield of 10%. The dividend is well covered and the business has remained relatively stable. Rithm could be a good investment for an income investor while providing potential upside from the anticipated mortgage transaction.
