Rithm Capital Corp. — Form 10-Q Summary
Business context and reporting period
Rithm Capital Corp., formerly New Residential Investment Corp., filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company is a publicly traded REIT focused on mortgage servicing rights, servicing advances, residential mortgage origination and servicing, residential securities and loans, consumer loans, single-family rentals, and mortgage loans receivable. The company operated through Origination, Servicing, MSR Related Investments, Residential Securities, Properties and Loans, Consumer Loans, Mortgage Loans Receivable, and Corporate segments.
On June 17, 2022, the company internalized management, terminated its external management agreement with FIG LLC, and agreed to pay a $400.0 million termination fee. The name change to Rithm Capital and ticker change to RITM became effective August 1 and August 2, 2022, respectively.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Six months ended June 30, 2022 |
|---|---|---|
| Total revenues | $1.322 billion | $3.052 billion |
| Net income | $33.3 million | $723.3 million |
| Net income attributable to common stockholders | $(3.3) million | $658.6 million |
| Basic earnings per common share | $(0.01) | $1.41 |
| Common dividend declared per share | $0.25 | $0.50 |
| Net cash provided by operating activities | Not separately provided for the quarter | $5.355 billion |
- Servicing revenue, net was $806.0 million in the second quarter and $1.838 billion for the first six months. The six-month result included $1.360 billion of favorable MSR valuation changes, primarily from slower prepayment assumptions and higher custodial earnings.
- Gain on originated residential mortgage loans, held-for-sale, net was $304.8 million in the second quarter and $776.8 million year to date. Second-quarter origination volume was $19.1 billion, with a 1.95% gain-on-sale margin.
- Interest expense and warehouse line fees were $150.8 million in the second quarter and $289.7 million year to date. General and administrative expense was $225.3 million in the quarter and $471.5 million year to date; compensation and benefits were $339.7 million and $732.3 million, respectively.
- Second-quarter results included a $400.0 million affiliate termination fee. Excluding this unusual charge, reported net income attributable to common stockholders would have been materially higher, although the filing does not present a formal adjusted figure in the supplied text.
- Total assets were $34.554 billion at June 30, 2022, down from $39.742 billion at December 31, 2021. Total equity was $7.063 billion, including $6.994 billion attributable to Rithm Capital stockholders.
- Book value per common share was $12.28 at June 30, down from $12.56 at March 31 and up from $11.44 at December 31, 2021. Management attributed the sequential decline primarily to the $400.0 million termination fee.
- Cash and cash equivalents were $1.511 billion; cash, cash equivalents, and restricted cash totaled $1.945 billion.
- Secured financing agreements totaled $13.967 billion, secured notes and bonds payable totaled $9.322 billion, and unsecured senior notes totaled $544.2 million, for approximately $23.3 billion of debt obligations excluding other liabilities.
- Available, uncommitted financing capacity was reported at approximately $19.360 billion against $34.040 billion of borrowing capacity. The company reported compliance with all debt covenants at June 30, 2022.
Portfolio and operating changes
- MSRs and MSR financing receivables increased to $8.626 billion from $6.859 billion at December 31, 2021. The related mortgage portfolio had $548.1 billion of unpaid principal balance.
- The total servicing portfolio reached $498.0 billion of unpaid principal balance, up 3% from December 31, 2021 and 63% from June 30, 2021.
- Real estate and other securities declined to $7.989 billion from $9.397 billion at year-end, with a $985.0 million unfavorable fair-value change for the first six months, primarily due to higher interest rates and weaker Agency securities valuations.
- Residential mortgage loans held-for-sale declined to $5.411 billion from $11.348 billion at year-end, reflecting lower origination and loan-sale balances as mortgage rates rose.
- Single-family rental properties increased to $927.2 million, representing approximately 3,608 properties versus 2,551 at year-end.
- Mortgage loans receivable increased to $1.756 billion from $1.516 billion at year-end, primarily reflecting new advances partly offset by paydowns and payoffs.
- Operating cash flow shifted from $(1.014) billion in the first half of 2021 to $5.355 billion in the first half of 2022, while financing cash flow shifted from $3.503 billion provided to $5.404 billion used, primarily because of substantial debt repayments and reduced borrowings.
- The Caliber Home Loans and Genesis acquisitions completed in the second half of 2021 increased year-over-year revenue, expenses, and headcount, limiting direct comparability with the prior-year period.
Outlook, management commentary, risks and unusual items
- Management expects cash on hand, operating cash flow, and the ability to roll secured financing and servicer-advance facilities to satisfy anticipated liquidity needs over the next 12 months. This outlook depends materially on refinancing short-term borrowings and maintaining access to financing.
- The company had $9.806 billion of contractual debt maturities from July through December 2022 and $6.829 billion in 2023, creating significant refinancing exposure.
- Management expects internalization to produce operating-cost savings over time, but the filing cautions that transition complexity, reliance on FIG LLC transition services through no later than December 31, 2022, and higher direct compensation and administrative costs could delay or reduce those benefits.
- Mortgage origination volumes declined as mortgage rates rose. Management expects production to move toward more normal historical levels in the elevated-rate environment.
- The Federal Reserve’s rate increases, inflation, widening spreads, and lower housing and refinancing activity pressured securities and loan valuations. Higher rates increase the cost of variable-rate debt but may support MSR values through slower prepayments.
- The company is exposed to margin calls on approximately $14.0 billion of secured financing agreements. Declines in collateral values or lenders’ refusal to renew facilities could force additional collateral postings, asset sales, or reduced originations.
- Material commitments included an estimated $1.8 billion liability associated with Ginnie Mae repurchase rights, $715.1 million of potential additional Genesis mortgage-loan advances, and $231.3 million of unfunded consumer-loan revolving credit availability. The company also had $200.0 million of the internalization fee payable on September 15 and December 15, 2022.
- Key risks include MSR valuation sensitivity to prepayments, discount rates, delinquencies and recapture rates; servicer and subservicer performance; regulatory or litigation exposure; counterparty defaults; cybersecurity and operational disruptions; COVID-19 and macroeconomic deterioration; LIBOR-to-SOFR transition; REIT qualification; and maintaining the exclusion from registration under the Investment Company Act.
- Management stated that disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the company can refinance or roll its substantial near-term debt maturities without materially higher costs, additional collateral, or asset sales.
- The recurring earnings impact of internalization after removing the one-time $400.0 million termination fee and adding direct employee and corporate costs.
- The assumptions supporting the $8.626 billion MSR valuation, particularly prepayment speeds, discount rates, delinquencies, recapture rates, and servicer-advance recoveries.
- The sustainability of cash available for common and preferred dividends given REIT distribution requirements, variable-rate debt, margin exposure, and taxable-income versus cash-flow differences.
- The performance and integration of the Caliber and Genesis businesses, including origination volumes, gain-on-sale margins, staffing reductions, loan quality, and construction-loan commitments.
- Regulatory, litigation, licensing, and counterparty developments involving Newrez, Caliber, Genesis, and third-party servicers and subservicers.
- The effects of the LIBOR transition, interest-rate volatility, credit-spread movements, and potential changes in Fannie Mae, Freddie Mac, Ginnie Mae, CFPB, FHFA, and REIT regulations.