Rithm Capital posts profit as questions swirl around possible spinoff

After high-profile acquisitions and purchases over the past month, Rithm Capital emphasized its pivot toward business diversification but offered few details regarding a potential spinoff of its mortgage operations in an earnings call Wednesday. 

"While we are a mortgage REIT I like to think of us as an asset manager operating as a REIT," said Michael Nierenberg, CEO and president of the New York-based real estate investment trust, in its second-quarter earnings call.

The company's recent focus on new additions to the business is helping to fuel speculation about whether a separation of its home lending businesses into a new entity might be in the offing. Nierenberg's plans to grow Rithm as an alternative asset manager was underscored in July with a deal that brought Sculptor Capital Management as a fully owned subsidiary. 

In its previous earnings call, Nierenberg said Rithm had filed a confidential S-1 registration form, typically used by companies before an intended public listing, with the Securities and Exchange Commission. But Nierenberg gave no further clues on if, or when, a change might occur on Wednesday.  

In 2020, the company, which was previously known as New Residential Investment Corp., filed the same form as it considered a public offering of its Newrez home lending business. Plans ended following New Residential's acquisition of Caliber Home Loans. 

While saying that no mortgage lending company is trading at a significant premium currently, Nierenberg added that "the timing is right," based on the work done at Rithm to develop Newrez and Caliber "to bring this company out." Earlier this year, Nierenberg had also suggested that the mortgage business' headwinds were weighing down on its overall trading value. 

"I don't necessarily think that we're going to turn around and just sell down the entire thing. I think it's more to give us flexibility," he said on Wednesday's call.

In a post-earnings note, research analysts Eric Hagen and Jake Katsikas of BTIG noted that the timing of a spinoff "looks more optimal considering the run we've seen in other originator/servicers over the last three months."

While Rithm Capital focused on diversification outside of home lending and a possible company split, its mortgage origination and servicing operations still accounted for the majority of profits in the second quarter, particularly through loan servicing. 

The REIT posted company-wide net income of $357.4 million, equaling 74 cents per share, in the second quarter. The number represented a 418% increase from the $68.9 million bottom line number in the first quarter. One year ago, Rithm lost $3.3 million over the same three-month period. 

The servicing unit generated $285.8 million in net income offsetting an $8.9 million loss in originations, as the mortgage industry continued to face depressed volumes and interest rate challenges. But numbers improved from the first quarter's $192.1 million servicing gain and $24.4 originations loss. Between April and June of 2022, servicing income came in at $427.2 million, while the loss in originations settled at $21.1 million.  

Meanwhile, Rithm's mortgage-servicing rights related investments garnered it $52.5 million in profit in the most recent quarter, compared to a $29.7 million loss three months earlier. In the second quarter last year, net income from the MSR investments unit totaled $32.1 million. 

Nierenberg noted the performance of Rithm's MSR portfolios during the past quarter in helping the company grow its book value. A new mortgage spinoff would likely include a majority of that portfolio, in addition to originations and most of the servicing units, Nierenberg said.

"Some MSRs may stay back," he said. "It's one of these TBD things as we continue to work through it."

Overall revenue across all segments of the company grew 27.6% to just over $1 billion     from $783.4 quarter to quarter. But on an annual basis, revenue was off 21.5% from $1.3 billion.

Within its mortgage operations, funded originations grew 41% to $9.9 billion from $7 billion between first and second quarters. Rithm's correspondent lending channel accounted for close to 63% of the volume following recent disruption within the segment.

"We think it's likely benefited around the margins from Wells Fargo's exit from the correspondent channel this year," wrote BTIG's researchers. 

Gain-on-sale margins, though, shrank to 125 basis points compared to 161 bp in the first quarter and were down from 195 bp a year ago. 

Unpaid balance in the mortgage company's servicing portfolio inched up to $506 billion from $504 billion in the prior quarter.

While discussion revolves around Rithm's near-term business moves, Nierenberg made efforts to emphasize that mortgage would still have a large presence in the company's strategy.

"We're still going to have a mortgage REIT. If you look at some of the some of the best run and larger alternative asset managers, they have REITs," he said. "I think you should think of us in the same light."