Rithm Capital Corp. 10-Q Summary
Business Context and Reporting Period
Rithm Capital Corp. is an internally managed REIT focused on mortgage servicing rights and related financing receivables, residential securities and loans, mortgage origination and servicing platforms, consumer loans, single-family rentals, and business-purpose mortgage loans. The filing covers the unaudited three months ended March 31, 2023. The company reported approximately $31.8 billion of assets and approximately 5,400 employees at quarter-end.
Key Financial Metrics
| Metric | Q1 2023 | Comparable period |
|---|---|---|
| Total revenue | $783.4 million | $1.729 billion in Q1 2022 |
| Net income | $89.9 million | $689.9 million in Q1 2022 |
| Net income attributable to common stockholders | $68.9 million | $661.9 million in Q1 2022 |
| Basic/diluted EPS | $0.14/$0.14 | $1.42/$1.37 in Q1 2022 |
| Common dividend declared per share | $0.25 | $0.25 in Q1 2022 |
| Operating cash flow | $1.181 billion | $3.890 billion in Q1 2022 |
| Cash, cash equivalents and restricted cash | $1.800 billion | $1.618 billion at December 31, 2022 |
| Book value per common share | $11.67 | $12.00 at December 31, 2022 |
Revenue declined primarily because Q1 2022 included a $575.4 million positive change in the fair value of MSRs and MSR financing receivables, compared with a $142.3 million decline in Q1 2023. Q1 2023 revenue included $469.8 million of servicing fee revenue and MSR-related interest income, $346.6 million of interest income, and $109.3 million of gain on originated residential mortgage loans.
Interest expense and warehouse line fees were $309.1 million, compared with $138.8 million in Q1 2022. General and administrative expense was $167.2 million and compensation and benefits expense was $188.9 million. The company recorded a $16.8 million income tax benefit, compared with $202.8 million of tax expense in Q1 2022.
Total debt obligations consisted principally of $11.761 billion of secured financing agreements, $9.729 billion of secured notes and bonds payable, and $545.5 million of unsecured senior notes, net of issuance costs. The weighted average funding cost of secured debt was approximately 5.6%. The company reported $13.055 billion of available, but generally uncommitted, financing capacity, subject to eligible collateral and other borrowing conditions.
Material Changes Versus Prior Periods
- Compared with Q1 2022, total revenue fell 54.7% and net income attributable to common stockholders fell 89.6%, largely reflecting the prior-year MSR fair-value gain and stronger mortgage origination results in Q1 2022.
- Servicing revenue, net declined to $327.5 million from $1.032 billion in Q1 2022, but increased $36.6 million from Q4 2022 due to less negative MSR mark-to-market adjustments and higher servicing fees.
- Gain on originated residential mortgage loans decreased to $109.3 million from $472.0 million in Q1 2022. Funded originations were $7.0 billion, down from $7.9 billion in Q4 2022, and the gain-on-sale margin declined to 1.61% from 1.81%.
- MSRs and MSR financing receivables were $8.886 billion, broadly unchanged from year-end. The related underlying mortgage unpaid principal balance was $535.9 billion, down from $539.9 billion.
- Real estate and other securities increased to $8.988 billion from $8.289 billion at year-end, primarily reflecting purchases of Agency RMBS partially offset by sales.
- Total assets declined to $31.819 billion from $32.479 billion, while total equity declined to $6.955 billion from $7.010 billion. Book value per common share fell from $12.00 to $11.67.
- On February 23, 2023, warrant holders exercised all remaining warrants on a cashless basis, resulting in approximately 9.3 million new common shares. Common shares outstanding increased to 483.0 million at March 31, 2023 from 473.7 million at year-end.
- The company paid or declared common and preferred dividends totaling approximately $143.1 million for the quarter. No common or preferred share repurchases occurred.
Cash Flow, Liquidity and Outlook
Operating cash flow of $1.181 billion was driven largely by mortgage loan origination and sale activity, servicing receipts, interest income, and recoveries of servicer advances. Investing cash flow was negative $590.6 million, including $2.883 billion of RMBS purchases partially offset by $1.869 billion of RMBS sale proceeds. Financing cash flow was negative $408.0 million after substantial debt repayments, borrowings, margin activity, and dividends.
Management stated that cash on hand, operating cash flow, and the ability to roll secured financing and servicer advance facilities are expected to satisfy anticipated liquidity needs over the next 12 months, including potential margin calls, loan originations, operating expenses, and current financing obligations. This expectation depends materially on continued access to short-term financing and favorable refinancing conditions.
The company was in compliance with all debt covenants at March 31, 2023. Contractual debt maturities totaled $12.206 billion from April through December 2023 and $5.027 billion in 2024, making refinancing and rollover execution significant liquidity considerations. Management did not provide formal earnings guidance.
Management Commentary, Risks and Unusual Items
- Management characterized the mortgage and financial sectors as challenging because of elevated interest rates, inflation, market volatility, slower economic growth, and banking-sector instability.
- Higher interest rates increased financing costs and reduced mortgage origination demand. Further rate increases could pressure cash flow, asset values, credit performance, and distributions.
- The company has material exposure to interest-rate, spread, prepayment, credit, liquidity, counterparty, servicer, regulatory, cybersecurity, and fair-value-model risks. Approximately $11.8 billion of secured financing agreements were subject to margin exposure.
- MSR valuations depend heavily on discount rates, prepayment rates, delinquencies, recapture rates, servicing costs, and expected cash flows. A 10% increase in the modeled prepayment rate was estimated to reduce the fair value of Agency MSRs by approximately 2.1%, Non-Agency MSRs by 1.6%, and Ginnie Mae MSRs by 2.5%.
- The company recorded an $83.3 million reserve for expected non-recovery of servicer advances, equal to 3.2% of applicable advances, compared with $65.4 million, or 2.3%, at year-end.
- Rithm Capital recognized a $53.9 million estimated liability for mortgage origination representations and warranties and approximately $1.2 billion of residential mortgage loans subject to Ginnie Mae repurchase rights. The company held approximately $0.7 billion of repurchased residential mortgage loans.
- The company is transitioning LIBOR-linked contracts to alternative benchmarks, primarily SOFR, but does not currently intend to amend the LIBOR fallback language for Series A, B, and C preferred stock.
- Regulatory capital and liquidity standards for non-bank sellers and servicers are expected to increase requirements beginning September 30, 2023, potentially reducing returns on capital and restricting servicing or loan-sale activities if requirements are not met.
- The company stated that no material changes occurred to the risk factors disclosed in its 2022 Form 10-K. Ordinary-course litigation, regulatory inquiries, indemnification obligations, future servicer advance commitments, $204.9 million of unfunded consumer-loan commitments, and up to $682.4 million of additional Genesis mortgage-loan advances remain relevant contingencies.
Investor Verification Checklist
- Verify the sustainability of servicing revenue and MSR fair values under changing interest rates, prepayment speeds, delinquencies, and discount rates.
- Verify the company’s ability to refinance or roll approximately $12.2 billion of debt maturities through December 2023 and to satisfy margin requirements.
- Review the composition, recourse structure, collateral coverage, and maturity profile of the $21.5 billion of secured debt and the $545.5 million of unsecured senior notes.
- Assess the recoverability of the $2.594 billion servicer advances receivable and the adequacy of the $83.3 million reserve.
- Monitor Ginnie Mae repurchase activity, the $1.2 billion repurchase-related balance, and mortgage origination representations-and-warranties exposure.
- Evaluate the effect of LIBOR transition and updated FHFA and Ginnie Mae capital and liquidity standards on financing costs and distributions.
- Reconcile GAAP earnings, taxable REIT income, and the continuing $0.25 quarterly common dividend, since the filing notes that these measures may differ materially.