Have you ever come across a stock that seems too good to be true? That's exactly the case with Rithm Capital (NYSE:RITM), a mortgage REIT that flies under the radar but offers a remarkable 10% yield. Despite its impressive numbers, Rithm Capital remains undervalued and underappreciated. Let's delve into the details and uncover the potential of this hidden gem.
Rithm Capital: Diversified and Profitable
At first glance, Rithm Capital may seem similar to other mortgage REITs. However, a closer look reveals a diversified investment portfolio that sets it apart. Unlike many of its peers, Rithm Capital ventures beyond agency-focused mortgage REITs, expanding its investments into residential mortgage loans, mortgage servicing rights, rentals, consumer finance, commercial real estate, and servicer advances.
The originations and servicing segment is the largest revenue generator for Rithm Capital, earning a substantial $330.6M in the third quarter alone. This segment's growth is primarily attributed to the increasing value of mortgage servicing rights. While other segments contribute to the REIT's income, origination, servicing, and MSR-related income remain vital pillars of their revenue streams.
Rithm Capital's business portfolio is ever-evolving, constantly acquiring new assets and broadening its positioning in the mortgage market. This strategic approach ensures the REIT's continued growth and diversification of revenue streams.
Solid Dividend Coverage
Rithm Capital's dividend coverage metrics speak volumes about its stability and potential. Despite a slight decline in earnings available for distribution (EAD) in Q3'23, the REIT's quarterly dividend of $0.25 per share remained well-supported. The EAD/dividend ratio stood at an impressive 232% in Q3'23, indicating robust coverage and financial strength.
While Rithm Capital has the capacity to increase its dividend, the company's focus on pursuing new acquisitions has influenced its decision to maintain the current payout. As a result, investors can enjoy a consistent dividend while the REIT strengthens its business portfolio.
The Bargain Priced Gem
Why is Rithm Capital trading at an 18% discount to book value? The answer lies in the unconventional nature of its investment portfolio. Unlike more straightforward mortgage REITs, Rithm Capital's diversified investments may seem complex to some investors, resulting in a larger-than-usual discount.
However, considering the REIT's outstanding dividend coverage, this discount appears unwarranted. Over the past year, Rithm Capital has traded at an average discount of 25% to book value, currently just above that average. In comparison, its peers like Annaly Capital and PennyMac Mortgage Investment trade at smaller discounts or closer to book value.
While it may take time for the market to fully recognize Rithm Capital's value, the potential for a revaluation towards book value is promising. With the REIT's book value steadily growing, it's only a matter of time before the market catches up.
Looking Ahead with Caution
Investing always comes with risks, and Rithm Capital is no exception. The large discount to book value may persist due to the complexities of its investment portfolio. However, for those primarily interested in its 10% dividend yield, this concern becomes less significant. As long as the EAD/dividend ratio remains strong and the dividend is well-covered, the potential for capital appreciation is an added bonus.
Final Thoughts: A Hidden Gem with Upside Potential
In conclusion, Rithm Capital represents a hidden gem in the mortgage REIT sector. With a well-supported 10% dividend yield, a diversified investment portfolio, and solid dividend coverage, this REIT has tremendous potential. While the market may initially overlook its value, patient investors can enjoy the attractive yield and anticipate potential capital appreciation in the future.
So, if you're searching for a magnificent, bargain-priced investment opportunity with a reliable yield, Rithm Capital deserves a closer look. Don't miss out on the chance to uncover this hidden gem in the world of mortgage REITs.
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