Rithm's latest buy could drive mortgage company spinout

Rithm Capital's proposed $639 million purchase of Sculptor Capital Management increases the likelihood for a near-term offering of its mortgage banking business, a report from BTIG said.

The deal to acquire the alternative asset manager for $11.15 per share follows on the heels of Rithm's purchase of a $1.4 billion Marcus consumer loan portfolio from Goldman Sachs.

"We think buying Sculptor strongly supports the likelihood for Rithm to further maneuver by exploring a spinout of its mortgage originator/servicer in the near to medium-term," said Eric Hagen, an analyst at BTIG, in a report. "Short of relying heavily on a 'sum of the parts' to guide valuation right now, we generally believe the benefits of having scale in the servicer could be more valuable to shareholders given better flexibility and control around liquidity and leverage, versus being constrained to retain capital under its current structure."

The transaction did not change anything as far as Rithm's view of the possible spinout of the mortgage unit, Chairman, CEO and President Michael Nierenberg said during a conference call on the deal in response to a question by Hagen.

"As we all know we've had a very good run in that business. We have quite a bit of capital there," Nierenberg said. "So if we could create a separate entity around that business, whether it be public or private, we think that's going to unlock value for shareholders."

During the call, Nierenberg went through the laundry list of acquisitions, either individually or with other entities, that Rithm  — once called New Residential Investment Corp. — has conducted since its 2013 formation.

Those included Home Loan Servicing Solutions, Shellpoint Partners (whose business now operates as NewRez), the forward lending business from bankrupt Ditech and, most recently, Caliber Home Loans.

Rithm has filed a confidential S-1 registration form with the Securities and Exchange Commission but does not have a timeframe to make it publicly available, management said later on the call. It previously explored a spinoff of the NewRez mortgage business, but the purchase of Caliber — which had filed for its own initial public offering — put that on hold.

Sculptor has $34.2 billion of assets under management, including $4.2 billion of real estate credit and equity investments. Rithm has $32 billion of assets on its balance sheet.

While referring to the new deal and the Marcus portfolio buy, Hagen said that "while the scope of these two deals differs, we think they align with Rithm's objective of broadening its investment stance with the flexibility to put assets either on its own balance sheet as a direct investor, or leverage its asset management capabilities with third-party capital, particularly in real estate credit and servicing."

Also looking on the Sculptor deal favorably is Wedbush Securities, with analyst Jay McCanless calling it "a natural progression of the company's diversification efforts towards becoming a leading alternative asset management company."

When asked on the call whether he sees Rithm as a single business or several entities in 2024 or 2025, Nierenberg demurred. "I don't know that any of us have a crystal ball," he said before adding "everything's led by performance."

After the deal is completed, Sculptor will become a subsidiary of Rithm. "We have long sought a partner with the stable capital structure, culture and vision to help unlock the potential for our platform to deliver more and greater value to our fund investors," said Jimmy Levin, who will remain as chief investment officer of Sculptor, in a press release.

Rithm said future growth at Sculptor will be both organic and inorganic.

The deal represents a significant expansion for Rithm into asset management, "giving the company instant scale and broadening Rithm's reach and investment capabilities," said Bose George of Keefe, Bruyette & Woods, in a flash note.

Rithm, which is scheduled to announce second quarter earnings on Aug. 2, provided preliminary results during the call. The real estate investment trust is expected to have GAAP net income of between 71 cents and 77 cents per share, and distributable income of between 59 cents and 65 cents per share.

In the first quarter, Rithm reported $68.9 million of income or 14 cents per share.

The distributable income includes 20 cents per share for the sale of excess mortgage servicing rights during the period.

In addition, Rithm pulled some of the capital from the MSR deal to help fund the Marcus transaction, added Nick Santoro, chief financial officer, during the call. That was approximately $150 million; in addition, the company had some term financing used to purchase the portfolio, management said.