Rithm Capital (NYSE: RITM) currently offers investors a monster dividend. The real estate investment trust (REIT) pays them $1 per share in dividends each year. That gives it a yield approaching 10% at the recent share price.
Its low share price is a big factor driving the REIT's ultra-high yield. The stock has lost nearly 40% of its value over the past five years, and that's something Rithm Capital wants to change. Here's a look at the steps it's taking to increase its value.
Building a leading asset manager
Rithm Capital has been evolving over the past few years. The mortgage REIT rebranded in 2022, changing its name from New Residential to Rithm.
Meanwhile, last year saw a more pronounced shift in its business model. CEO Mike Nierenberg stated on the fourth-quarter conference call, "As we began 2023, we set out on a path to pivot our business to become more of an alternative asset manager while maintaining the very same discipline that got us here in asset classes and the operating companies that we own."
That pivot became more pronounced in the fourth quarter. Nierenberg said:
We did a couple of very strategic transactions, which put us in a position to, one, maintain earnings and, two, grow our alternative asset business. In the fourth quarter, we closed on Sculptor. We also announced the acquisition of a leading third-party servicer in SLS, which was acquired from Computershare.
The acquisition of Sculptor Capital Management was a significant milestone for the company's evolution and growth. Sculptor brought $33 billion in assets under management (AUM) across real estate, credit, and multi-strategy funds. Meanwhile, SLS will significantly enhance the company's third-party mortgage servicing platform.
Rithm also leaned in when banks pulled back last year due to the turbulence in the financial sector. It bought a portfolio of residential transitional loans originated by a division of the troubled PacWest. And it purchased a portfolio of consumer loans from Goldman Sachs after the investment bank pulled back on its consumer business.
These deals were all part of the company's value-enhancing strategy. Nierenberg said on the call, "As we look forward, the growth of our asset management business will be critical to the revaluing of our equity in our company and just the overall valuation of what we do here at Rithm."
Enhancing value through capital returns
Rithm Capital is evolving to become more of an asset manager to improve the overall stability of its earnings and grow them. That would enhance its ability to return cash to shareholders through dividends and repurchases.
Last year, Rithm Capital paid nearly $500 million in dividends. While that represented almost 90% of its taxable net income, it was only about half its earnings available for distribution. The company opted to retain the other 50% of its distributable earnings to fund its transition strategy.
However, the investments it made last year to grow its asset management business should enable it to grow its distributable earnings in the future, giving it more money to return to shareholders. That recently led the REIT to renew its stock repurchase program.
Its board of directors authorized the repurchase of up to $200 million worth of its common shares and up to $100 million of its preferred stock. With a current market cap of around $5 billion, Rithm could repurchase 4% of its beaten-down shares.
Meanwhile, the preferred-share repurchase would enable it to transfer value to common shareholders while reducing its preferred dividend payments. Those repurchases should enable the company to enhance value for shareholders.
A multipronged strategy to rebuild value
Rithm Capital hasn't grown shareholder value since it went public more than a decade ago (shares have since lost a quarter of their value). That's leading the REIT to evolve its strategy to become more of an asset manager, which should produce steadier and growing earnings. It made significant progress last year, which it hopes -- along with stock buybacks repurchases -- will help drive its share price higher in the future.
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