Rithm Capital Third Quarter 2026 Earnings Call - RITHM CAPITAL CORP

Financial Performance:

• Reported Q3 2026 Earnings Available for Distribution (EAD) of $0.55 per diluted share; GAAP net income of $217 million ($0.038 per diluted share).
• Cumulative dividends paid reached $6.8 billion over 28 consecutive quarters where EAD exceeded dividends paid.
• Declared a quarterly common stock dividend of $0.25 per diluted share, representing an 11.2% yield.
• Book value increased quarter-over-quarter, supported by effective hedging activities and strong Mortgage Servicing Rights (MSR) performance in a higher-rate environment.
• Cash and liquidity position ended the quarter at $1.9 billion.
• New Res delivered a 24% annualized operating ROE for the quarter, driven by origination strategy, subservicing growth, and higher servicing fees.

Guidance and Future Outlook:

• Management expects to generate approximately $125 million in annual savings through AI and technology investments, with earnings impact projected to kick in during 2027 and continue through 2028.
• Asset Management business targets organic growth to reach $75–$80 billion in AUM by the end of 2028.
• Long-term goal includes optimizing corporate structure to potentially spin off or separate the asset management business once fee-related earnings (FRE) scale sufficiently.
• Origination volume is not the primary driver; focus remains on high-margin non-agency products and leveraging the MSR book to sustain earnings despite rate fluctuations.
• Expectation of material decline in mortgage origination volumes (approx. 25%) entering Q4 due to rising interest rates, though non-agency volumes remain resilient.

Business Segments and Product Lines:

• New Res: Serves as the third-largest mortgage servicer in the U.S. with ~$880 billion of MSRs; originated $5.1 billion in non-agency loans YTD (a record for the company), with non-agency volumes up 30% year-over-year.
• Genesis: Number two residential transition lender in the U.S.; originated $1.5 billion in RTLs in Q3 ($5 billion YTD), exceeding full-year 2025 production; pre-tax income grew 14% YoY to $33 million with 13% ROE.
• Asset Management: Third-party AUM exceeds $60 billion with over 200 institutional partners; raised $569 million in new capital during Q3, with YTD gross inflows nearing $3 billion; secured first close on a new ABF fund with a large U.S. pension fund.
• Elicor Properties (Real Estate): Signed $320,000 sq ft of new leases YTD with weighted average initial rents 22% higher than 2025; 100% leased at 1301 Avenue of the Americas; SF portfolio occupancy rose 590 basis points YTD.
• New Product Launches: Launched "Easy-Click" home equity solution and advanced score utilization; established a joint venture with eXp Realty (2nd largest U.S. real estate platform).
• Technology Investments: Partnership with Valen (9.9% stake) for servicing technology; phased migration to Valen OS scheduled for Q1 2027; co-development with HomeVision for straight-through processing launching Q4 2026.

Market and Competitive Landscape:

• Operating in a challenging macro environment with wider market indices, rising interest rates, and geopolitical concerns; yet, the platform demonstrated resilience and growth.
• Real Estate: New York Midtown leasing activity has outpaced the 5-year average for 12 consecutive quarters; San Francisco market shows historic VC inflows ($270 billion) driven by AI companies, fueling positive absorption.
• Mortgage Banking: Focus on non-agency and non-QM products to differentiate from competitors; maintaining pricing discipline despite margin pressure in wholesale channels.
• Valuation: Management believes the stock trades at a significant discount to book value (approx. $12.50) and seeks to execute strategies to improve share price and multiples.

Risks and Challenges:

• Interest Rate Sensitivity: Rising rates have reduced overall origination volumes and are expected to pressure wholesale sale margins in Q4.
• Prepayment Speeds: While speeds are at a floor due to low refinancing activity, any future economic shifts could alter prepayment trends affecting MSR book value.
• Credit Quality: Potential for rising delinquencies in the broader credit market remains a long-term risk, though current portfolios show high credit quality (e.g., Genesis delinquencies at ~3%).
• Commercial RE: Management noted limited seller activity in the commercial RE sector and avoided acquiring distressed assets with credit issues.
• Regulatory Environment: Monitoring changes in housing policy (LLPs, insurance premiums) and potential impacts on mortgage insurance and underwriting guidelines.

Management Commentary and Tone:

• Tone is highly confident and optimistic, emphasizing "performance first" and the power of the integrated platform despite a "very challenging environment."
• CEO Michael Nirenberg highlighted the "archaic nature" of the mortgage industry and expressed strong belief that AI will transform operations.
• Emphasis on capital discipline: explicitly stated the company does not originate loans "for the sake of originating a loan" but rather to generate mid-teens returns.
• Management expressed excitement about the growth trajectory, collaboration across brands (Rhythm, Sculptor, Crestline), and potential future expansion into infrastructure.

Analyst Questions and Answers:

• AUM Growth Strategy: Management confirmed focus on "wire house" bank distribution for products like capital solutions and 401(a) funds; plans to consolidate branding to offer fewer managers with broader product suites to LPs.
• Infrastructure Expansion: Likely to pursue inorganic acquisitions similar to the Sculptor/Crestline playbook to achieve immediate scale, rather than building organically from scratch; no specific targets for digital infrastructure/data centers yet.
• MSR and Origination Balance: Servicing book (including interest on escrow deposits) is expected to offset origination volatility; prepayment speeds are expected to stabilize, and amortization provides a linear offset to originations.
• Investment Portfolio Deployment: Strategy involves recycling capital strategically; capital will be deployed into asset management (earning recurring fees) and selective balance sheet investments (non-QM, opportunistic RE) rather than indiscriminate balance sheet growth.
• Commercial RE Strategy: Open to acquiring commercial RE assets (including REITs) but only if they underwrite on a credit basis and offer a 75% discount to replacement value; avoiding distressed credits in the correspondent space.

Other Key Points:

• Realized significant returns on opportunistic investments: 30% IRR on a Boston/Virginia office building sale and 43% IRR across three transactions Q3.
• Asset management business has grown to include partnerships with large banks and multiple funds, including a first close on an ABF fund.
• Elicor Properties is executing capital improvement plans at One Market Plaza and One Front Street to drive rent growth and occupancy in San Francisco.
• Genesis plans to target $6–$6.5 billion in production annually, with growth focused on the multifamily lending side to feed third-party funds and SMAs.
• Management reiterated that the MSR book of $880 billion will perform extremely well in the current higher-rate environment.