So far, 2022 has been a trying time for mortgage originators. After feasting on easy refinancing loans in 2020 and 2021, the industry is struggling to deal with declining volumes as rising rates eliminate almost all refinance activity. Since mortgage origination is so cyclical, the stocks of these companies generally trade with mid-single-digit multiples during good times. During the famine part of the cycle, mortgage originators take the opportunity to cut costs and often build ancillary businesses.
New Residential has done just that -- rebranding itself as Rithm Capital (RITM 1.60%) to emphasize its non-origination businesses.
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New Residential is now known as Rithm Capital
In June 2022, New Residential rebranded itself as Rithm Capital. The rebranding is meant to emphasize that the company is more than just a mortgage originator. As part of the rebranding, management of the real estate investment trust (REIT) was brought in-house, and the company paid a $400 million termination fee to Fortress Investment Group, which is owned by SoftBank. Bringing the management in-house will have several benefits. First, it will allow for additional cost savings, and it will help increase the investor base as some investors prefer to avoid externally managed REITs. The transaction is expected cut costs by about $0.12 to $0.13 per share annually.
Origination is still the big driver, but the company is diversifying
Rithm is mainly known for New Residential, which is the origination arm. The company recently closed its acquisition of Caliber Home Loans, which gave the company a strong source of standard conforming mortgage origination, although it still has a presence in mortgages that are ineligible for a government guarantee. The origination arm has been hampered by rising mortgage rates and low margins. The company is still in the origination business, but it said repeatedly on the conference call that it won't originate marginally profitable loans just to increase volumes and revenues.
Mortgage servicing is an unusual asset
Mortgage servicing has been carrying a lot of the load since the beginning of the year. The mortgage servicer performs the administrative duties of handling a mortgage, including processing payments, ensuring that property taxes are paid and dealing with the default process. The servicer is compensated 0.25% of the loan amount per year to perform these functions. The right to perform that duty is called a mortgage servicing right, and it is a tradeable asset. It also increases in value as rates rise, which is an unusual characteristic. Mortgage originators like to hold servicing rights because it acts as a natural hedge for the business.
In addition to New Residential and the servicing book, Rithm operates a business purpose loan originator called Genesis Capital. It makes loans for renovation and construction, which often carry high rates and short terms. Rithm is also building a single-family rental business via its adoor subsidiary. Finally, Rithm has a portfolio of businesses that perform services in title, property preservation, and appraisal management. These businesses will be much less interest rate sensitive than the mortgage origination and servicing businesses.
A double-digit dividend yield and a 19% discount to book value
The $400 million payout to Fortress cut $0.70 off of book value per share, but Rithm would have reported an increase in book value aside from that one-time charge. That's better than the other mortgage REITs out there, which are reporting double-digit decreases in book value per share. At current levels, Rithm is trading at a 19% discount to book value per share and has a double-digit dividend yield. Income and value investors might want to take a closer look at this company.
