Exploring Rithm Capital Corp: Pros and Cons
Rithm Capital Corp. (NYSE:RITM) may appeal to investors seeking income, with a current forward yield of 10.4%. The company’s unique business model sets it apart from other mortgage REITs, allowing for potential sustainable payouts.
Rithm Capital differentiates itself through vertical integration, a focus on non-agency mortgages, and single-family rentals. Vertical integration grants the company advantages in cost control, margins, and customer relationships. Non-agency mortgages, while riskier, often offer higher yields. Additionally, exposure to single-family rentals diversifies the company’s income and reduces overall risk.
Historical data supports Rithm Capital’s business model. While the company temporarily reduced dividends during the COVID-19 pandemic, it quickly recovered and stabilized. Meanwhile, other leading mREITs experienced chronic dividend declines and book value losses.
Considering Rithm Capital’s Yield in Context
When evaluating Rithm Capital’s yield, it is essential to consider historical benchmarks and risk-free rates. Over the past four years, Rithm Capital yielded an average of 11.2%, making its current forward yield of 10.4% slightly below average.
Furthermore, comparing Rithm Capital’s yield to risk-free rates shows a thinner gap than in previous years. The yield on 10-year Treasury bonds averaged 2.27% over the past five years and currently sits at 4.44%. This implies a narrower spread between Rithm Capital’s yield and risk-free rates, indicating a potential valuation premium.
Examining Rithm Capital’s Leverage Risks
Rithm Capital’s leverage is currently at a high level, with a debt-to-equity ratio of 4.07x, above its historical average. This high leverage exposes the company to potential headwinds caused by rising interest rates.
The company may face challenges with higher interest rates, which could reduce its net interest margin and profitability. Additionally, high inflation and interest rates might increase delinquencies and defaults, with Rithm Capital particularly susceptible due to its exposure to non-agency mortgages.
Additional Risks and Final Thoughts
While there are positives to Rithm Capital, such as its differentiated business model, it’s crucial to acknowledge the risks. The market’s valuation of the company appears to have factored in some of these risks, with Rithm Capital trading below its book value. However, when considering the dividend yield, a premium is evident. Therefore, a recommendation of a HOLD rating is advised.