Rithm Capital Third Quarter 2026 Earnings Call - RITHM CAPITAL CORP

Explicit Guidance:

• Cost Savings: NewRes expects to drive $125 million in annualized savings from technology and AI investments, with earnings impacts projected to kick in during 2027 and continue through 2028.
• Asset Management AUM: Organic growth initiatives target AUM of $75–80 billion by the end of 2028.
• Genesis Originations: The business aims for production volumes between $6–6.5 billion, driven by significant growth in the multifamily lending segment.
• New Res Operating Efficiency: The company targets operating ROEs in the high teens to low 20s annually, leveraging AI and technology to enhance margins without chasing volume.

Business-Segment Outlook:

• New Res (Mortgage Servicing & Origination):
  • Servicing: The $880 billion MSR portfolio is positioned to perform strongly in a higher-rate environment with low prepayment speeds (expected to floor out), offsetting potential origination volume declines.
  • Origination: Focus remains on non-agency and non-QM loans (up 30% YoY); volumes may face pressure in Q4/Q1 due to rates, but the company will not chase volume at the expense of margins.
  • Technology: Partnership with Valen for servicing technology is on track, with phased migration to Valen OS scheduled for Q1 2027; co-development with HomeVision for straight-through processing expected in Q4.
• Genesis (Residential Transition Lending):
  • Product Mix: Significant growth anticipated in multifamily lending via funds and SMAs; RTL business volume may face headwinds if rates remain above 7.25–7.50%.
  • Performance: Pre-tax income growing at 14% YoY with ~13% annualized ROE, expected to increase further with AI integration.
• Elicor Properties (Real Estate):
  • New York: Leasing fundamentals remain strong; portfolio occupancy at 88.6% with $110/sq ft initial rents (36% higher than 2025).
  • San Francisco: Occupancy at 65% (up 590 bps since Q1); strong demand driven by AI companies (contributing 36.5% of leasing velocity) and historic VC fundraising ($270B YTD).
  • Future Drivers: Capital improvement plans at One Market Plaza and One Front Street expected to drive rent growth and occupancy gains in 2026 and beyond.
• Asset Management:
  • Scale: Growth focus on Credit, ABF (Asset-Backed Finance), Multi-Strat, and Real Estate sectors; planning to rebrand into a common platform.
  • New Funds: Strong demand for ABF and non-agency products; new ABF fund first close achieved with a large US pension fund.
  • Strategic Shift: Potential for the asset management business to be optimized as a standalone segment once Fee-Related Earnings (FRE) scale sufficiently.

Market and Competitive Outlook:

• Interest Rates: Management anticipates mortgage rates staying above 7%, which will suppress total origination volumes (projected ~25% decline in production Sept–Oct) but benefit MSR valuations and servicing income.
• Competition: No intention to chase market share in wholesale channels; pricing discipline will be maintained to maximize returns.
• Real Estate Market: San Francisco market expected to see positive absorption continuing, driven by AI innovation; New York midtown market experiencing the longest record of net absorption, reducing availability.
• Valuation: Management believes the company trades at a significant discount to book value (~5x earnings) compared to peers and aims to unlock value through product diversification and valuation re-rating.

Macro / Industry Outlook:

• Technology & AI: AI is viewed as a transformative force to modernize the "archaic" mortgage industry, specifically regarding underwriting, paperwork, and workflow efficiency.
• Regulatory Environment: Supportive of FHFA initiatives (e.g., VantageScore pilot) and housing policy changes; expects policy shifts to benefit homeowners and potentially drive savings.
• Credit Environment: Current delinquency levels remain low; however, management warns that credit markets may turn in the future, potentially leading to higher delinquencies, where the Special Servicing business is positioned to generate earnings.
• Capital Markets: Interest in infrastructure is growing; management views the TAM as massive and plans to enter the space via acquisitions.

Strategic Initiatives:

• Acquisitions & M&A:
  • Real Estate: Actively seeking office asset acquisitions at discounts (e.g., 75% below replacement value); no plans to acquire distressed CRE REITs without clear credit underwriting.
  • Asset Management: Willing to acquire scale capabilities (similar to Sculptor or Crestline plays) to enter infrastructure and expand the SMA and multi-strat offerings.
• Joint Ventures & Partnerships:
  • New Res: Executing a new JV with eXp Realty (2nd largest US platform) for due diligence and launch.
  • Elicor: Formed a JV for 1301 6th Avenue; expanded capital base for office assets.
• Organic Growth:
  • Launching new funds and products across Credit, ABF, and Real Estate.
  • Rolling out easy-click home equity and advanced score utilization products.
  • Expanding subservicing business (15 new clients, $80B new loan boardings YTD).

Risks and Headwinds to Outlook:

• Interest Rate Sensitivity: Sustained high rates (>7%) may dampen origination volumes and pressure gain-on-sale margins in wholesale channels.
• Market Conditions: Volatility in mortgage rates is expected to lower production volumes; potential for increased competition in wholesale margins.
• Credit Cycle Risk: Management acknowledges that delinquencies may trend higher in future credit cycles, impacting the portfolio.
• Execution Risk: The full realization of $125M cost savings depends on the successful migration to Valen OS by Q1 2027 and integration of AI initiatives.
• Commercial Real Estate: The office sector remains challenged; management is selective and cautious regarding commercial CRE REIT acquisitions.

Management Tone on the Future:

• Confidence: Highly optimistic ("never been more excited") regarding the AI transformation of the mortgage industry and the growth trajectory of the asset management and real estate platforms.
• Strategic Discipline: Emphasizes "performance first" and a "balance sheet" that supports strategic deployment rather than indiscriminate balance sheet growth.
• Valuation Focus: Expresses strong conviction that current equity valuation is "extremely cheap" and that the company has the tools to drive re-rating through product innovation and cost efficiencies.
• Collaboration: Highlights improved cross-platform collaboration across Rhythm, Sculptor, and Crestline brands to offer a unified story to LPs.

Miscellaneous:

• Liquidity: Ended Q3 2026 with $1.9 billion in cash and liquidity.
• Dividends: 28 consecutive quarters of Earnings Available for Distribution (EAD) exceeding dividends paid; total cumulative dividends ~$6.8 billion.
• Investment Portfolio: Focus on recycling capital and deploying into asset management funds to earn recurring management fees rather than holding loans on the balance sheet.