Rithm Capital Preferreds Stock Update: D, Now Rated A Buy (NYSE:RITM)

For sale sign in front of house — Martin Barraud

Entry

It’s been nine months since I last looked at the preferred stocks issued by Rithm Capital Corporation (NYSE:RITM).Andit’s time to see if it’s still the best of the four remaining three beings:

Rithm Capital Corp. 7.50% PFD SER A (NYSE:RITM.PR.A)
Rithm Capital Corp. 7.125 SR B PFD (NYSE:RITM.PR.B)
Rithm Capital Corp. 6.375 PFD SER C (NYSE:RITM.PR.C)
Rithm Capital Corp. 7% RT REST PFD D (NYSE:RITM.PR.D)

After briefly discussing Rithm Capital itself, I will discuss all four preferred funds and give my opinion on how to invest in them. Since D provides the best YOC and the longest call protection, for investors who believe interest rates have already peaked, this is a good time to lock in this YOC.

Rithm Capital Corporation has reviewed

Seeking Alpha covers this mREIT How:

Rithm Capital Corp. provides capital and services to the real estate and financial services industries in the United States. Its investment portfolio includes mortgage-related assets, residential mortgage securities and loans, and consumer loans. It qualifies as a real estate investment trust for federal income tax purposes. The company would generally not be subject to federal corporate income tax if it distributes at least 90% of its taxable income to its shareholders. The company was formerly known as New Residential Investment Corp. and changed its name to Rithm Capital Corp. in August 2022. Rithm Capital Corp. was founded in 2011.

Source: seekingalpha.com RITM

These include the following asset classes.

Residential mortgage loans:Residential mortgage loans including agency, non-agency, non-QM and Scratch & Dent loans.
Consumer loans:Unsecured consumer loans and loans secured by household debt (e.g. car loans, credit cards, personal installment loans).
Mortgage loan servicing rights:MSR was formed organically from Rithm operating companies and through opportunistic acquisitions from third parties.
Single Family Rental:Sourcing, acquiring, renovating and leasing real estate in various markets in the USA
Business loans:Obtaining and obtaining construction, bridging, renovation and resale loans.
Commercial property: We focus on opportunistic and distressed lending across a variety of real estate asset classes, as well as strategic equity investments in growth or repositioning assets.
Secured loans and structured products:Loans and securities backed by residential and commercial real estate, single-family rentals, transitional loans, and asset-backed securities.

While others look at various metrics to analyze default risk, I like to compare lines on the balance sheet. I compare the number of preferred shares to the value listed as Total Shareholders’ Equity. At 5.75X and holding constant, this metric is better than most I’ve seen.

Stock symbol RITM — seekingalpha.com RITM Balance Sheet

Overview of Preference Shares

RITM Preferred Shares — seekingalpha.com charts

The above chart starts from the time of issue of PFD D, i.e. from autumn 2021. I also included an issuer that outperformed all senior bonds during this period of rising interest rates.

Factor	AND	B	C	D
Released	25.06.19	8/8/19	2/11/20	09/13/21
Size	5.4 million	10m	14m	17 million
Coupon	7.50%	7.125%	6.375%	7.000%
Price	25.11 PLN	25.00 PLN	$23.81	23.14 PLN
Give	7.45%	7.125%	6.69%	7.52%
Date of connection	15.08.24	15.08.24	15.02.25	15.11.26
YTC	*	*	16.0%	10.7%
Formula	3 months SOFR +2616% +5.802%	3 months SOFR+.2616% +5.640%	3 months SOFR+.2616% +4.969%	5 years UST +6.223%

* Since both of these metrics can be calculated within a few weeks of this article being written, the YTC calculator I use (which I did not write) likely does not take into account that the price should reflect the interest accrued since the last payment: it shows negative YTC for both A and B.

None of the preferred shares are assessed or eligible for dividends at a lower tax rate. After the stated call date, the issue can be called at any time. Unlike some preferred shares, all are cumulative, meaning that the dividend payment can be delayed but not completely canceled.

Analysis

In terms of best YOC, D is ahead of A at current prices on that day.
For investors wanting the most Call protection, D is also their choice. Soon, only C and D will have any Call protection.
Because A and B mature on the same day, the floating formula indicates that RITM will redeem A’s bonds before B’s bonds, assuming the company is willing and able to afford to redeem either issue.
Once D becomes Callable, its variable formula would historically generate the highest costs for RITM.
When all are floating, the AC would reset quarterly, while the D would reset only once every five years. If rates start falling later this year and continue to fall through the end of 2026, that would increase the likelihood that the D would be called before the others.
Of A and C, A would be called first since it has the largest variable component among the three.

Application

In my last article on RITM Preferred Stock (link to article) I maintained a hold rating on D and made a similar comparison across all four issues. With rates near the top, I will raise D to Buy to lock in today’s best YOC with the longest protection from Called. That said, after callable, it moves to being the most likely to pull back.

Risks

In addition to the default risk associated with preferred stocks, it is important to understand interest rate risk, especially with stocks that have a variable coupon. Variable rates help when rates rise because the higher coupon would offset some of the price declines that accompany that event. Of course, this benefit disappears when rates fall.

One reason investors prefer preferred stocks over bonds, even with the greater risk of default that comes with being below any bond in the capital structure, is that most of them have no maturity date, meaning their YOC can last forever. If you bought when interest rates were high, that’s a good thing! Understanding the call risk is important to evaluate then. Choose the one with the lowest cost to the issuer to minimize this risk.

Portfolio Strategy

After years of near-zero interest rates, the FOMC’s fight over inflation has provided a great opportunity to lock in 8n YOC values not seen since the 2008-09 GFC. Buying low-coupon preferred stocks that are less exposed to Called is one strategy if YOC meets the investor’s needs. Another strategy is to buy low-cost fixed income funds with long durations, which should see the best price growth when rates fall.

Final Thought

I first discussed these preferred shares when the company was called New Residential Investment Corporation (article link), in early 2022.