Here’s why Rithm Capital leaps ahead of its peers:motley fool

Last year was a very difficult year for companies in the mortgage industry. Mortgage originators saw lower transaction volumes as higher interest rates and rising home prices made housing less affordable. Mortgage real estate investment trusts (REITs) have been hit as the Federal Reserve’s aggressive tightening policy increased bond market volatility and mortgage-backed securities underperformed Treasuries.

One hybrid mortgage REIT and mortgage originator outperforms its peers of mortgage REITs and mortgage originators.its name is rhythm capital (RITM -0.12%)What is the secret?

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Rithm Capital: Diverse Mortgage REIT

Rithm Capital is a diverse Mortgage REIT It focuses on mortgage servicing, mortgage origination and investments in mortgage-backed securities. We have a portfolio of companies that provide ancillary services to the mortgage industry. The firm has constructed this portfolio to perform well in all interest rate environments. So if there is a problem structuring mortgages, another business will fill the slack. With interest rates rising this year, mortgage servicing has become a huge strain on profitability.

Mortgage service is a unique asset

Mortgage services are a very rare asset and one of the few to benefit from rising interest rates. Mortgage servicers perform the administrative tasks of managing loans on behalf of investors. They collect payments from borrowers, send principal and interest payments to investors, make sure property taxes and insurance premiums are paid, and deal with when borrowers get into trouble and start falling behind on payments. To do.

Servicers are typically reimbursed 0.25% of the outstanding mortgage balance annually. So if the mortgage balance is $400,000, the servicer will be paid $1,000. The right to fulfill this obligation has some value, and mortgage servicers buy and sell these rights.

Services revenue accounted for nearly half of Rithm’s revenue last quarter

Rithm’s mortgage servicing portfolio has a par value of approximately $615 billion. It also performs sub-service obligations on behalf of other lenders and earns commissions for that as well. Service revenue accounted for nearly half of his Rithm’s revenue in Q3 2022.

Year-to-date, Rith’s stock is down about 20%. However, this is a much better performance than mortgage REITs and the like. AGNC Investment (AGNC 1.42%) When Annalee Capital (NLY 2.26%)It is also much better than the big mortgage originators. rocket (RKT 3.30%) When UWM Holdings (UWMC -0.51%)Most of these companies do mortgage servicing, but it’s not as big a factor as Rithm.

The big question for Rithm concerns life after the Fed has steadily hiked rates. When the U.S. goes into recession, service costs rise as more borrowers find themselves in financial trouble. Interest rates tend to fall during a recession, reducing the value of Rithm’s servicing portfolio, but it will certainly help the mortgage origination business. Rithm shows that its model excels in rising interest rate environments, but that could change once interest rates stabilize.

At current levels, Rithm is trading at 6.3 times its expected 2023 earnings per share. At first glance, it may look like a very attractive multiple. Unfortunately, the revenue streams for mortgage companies are so volatile that they never really earn premium multiples. During good economic times, stocks may trade at a price/earnings ratio (P/E) of less than 5. dividend $0.25 per quarter, which gives the stock a dividend yield of almost 12%.

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