New York-based Rithm Capital posted a profit in 2023, a year marked by several acquisitions that turned the company into a leading global asset manager. In the mortgage space, the parent of multichannel lender Newrez earned most of its profits from the servicing business.
Lower interest rates, however, reduced the value of mortgage servicing rights (MSR) in the final three quarters of the year and affected the company’s overall performance during the period.
On Wednesday, Rithm announced a $532.7 million GAAP net income in 2023 — lower than the figure of $864.8 million in the prior year, per Securities and Exchange Commission (SEC) filings. Earnings available for distribution reached $997 million last year, compared to $633 million in 2022.
In 2023, Rithm acquired $1.4 billion in consumer loans from Goldman Sachs and closed the acquisition of Sculptor Capital Management, bringing in $33 billion in assets under management.
The company also announced a deal to acquire Computershare Mortgage Services, including Specialized Loan Servicing (SLS), adding $136 billion in unpaid principal balance (UPB) of MSR. The deal is expected to close in first-quarter 2024.
“We are proud to have closed our acquisition of Sculptor Capital in the fourth quarter, a significant milestone for our firm and a critical next step in Rithm’s evolution into a global asset manager focused on real estate, credit and financial services,” Michael Nierenberg, chairman, CEO and president of Rithm Capital, said in a statement.
Rithm had $1.9 billion of total cash and liquidity to support its acquisitions at the end of 2023. During a conference call with analysts, executives said that after the acquisition of SLS, liquidity may be reduced to the range of $1.3 billion to $1.4 billion, and that 2024 will be a year of capital formation.
Liquidity brings relief amid losses. Overall, the company reported a GAAP net loss of $87.5 million from October to December, compared to a $194 million profit in the previous quarter.
“Our GAAP results reflect our write-down of our MSR book, which was significantly higher than the over $80 million we reported in GAAP losses,” Nierenberg told analysts.
Restructuring mortgages
Rithm saw its mortgage business deliver a total pretax income of $783.8 million in 2023. This was mainly due to the performance of the company’s servicing portfolio, which had $835 million in pretax income compared to only $13 million for the originations business.
In the fourth quarter, the mortgage business had a pretax loss of $121 million, compared to a gain of $412.5 million in the third quarter.
Originations delivered $7.7 million in profits from October to December, compared to $7 million from July to September. Servicing posted a $210.6 million gain in Q4, compared to $444.5 million in Q3. A $296 million mark-to-market in the MSR portfolio affected the company’s performance.
Ultimately, Rithm decided to restructure its origination business at the beginning of 2024, which resulted in cuts to regional and divisional managers at Caliber Home Loans along with reductions in compensation for loan officers.
Despite the changes, chief financial officer Nick Santoro said that Rithm is committed to the retail business, which has been “excellent at recapture” with customers. Executives noted that, at this point, almost all its customers have no incentive to refinance, but recapture rates are expected to be north of 50% when mortgage rates drop.
Mortgage volumes decreased to $8.9 billion in Q4 2023, lower than the $11.1 billion figure in the prior quarter but higher than the $7.9 billion in Q4 2022. Gain-on-sale margins were at 1.23% in Q4, down from 1.24% in Q3.
Looking ahead, Santoro said he expects more activity in the mortgage origination sector in 2024.
“I do think it’s going to be slower than maybe what certain people hope, but I do believe that 2024 is definitely going to be a better year for mortgage production,” Santoro said. “Overall, our focus is certainly ongoing from expense reduction across the board, certainly on the origination side, but also on the servicing side, to make sure that we run as efficiently as possible.”
Rithm’s servicing portfolio totaled $590 billion in UPB on Dec. 31, compared to $595 billion on Dec. 30. The prepayment rate was at 5% in the fourth quarter.
Regarding the macroeconomic landscape, Nierenberg said that the Federal Reserve has been clear about its desire to lower rates, which he thinks will happen once inflation comes closer to the Fed’s 2% target. He said that recent data should keep the Fed “on hold” for its March meeting.
“We won’t fight the Fed and we think, from a hedge standpoint, you’re going to see a lot more volatility in the markets this year than before. (…) So, we’re going to be close to home.”
The company’s stock traded at $10.11 on Wednesday morning, down 4.45% after the earnings report.
Analysts at BTIG wrote that Rithm “tracks the flows in other originator/servicers,” which is “encouraging from the standpoint that valuation strength reads positively for a potential spinout of New Rez, which management reiterated it still aims to complete sooner than later.”
BTIG also noted that the Rithm executives discussed having about “$400 million of liquidity to use strategically, where we expect it has appetite to bolt on another acquisition in asset management or direct lending, where valuations are deeply discounted.”
