Rithm Capital Corp. — Form 10-Q Summary
Business context and reporting period
Rithm Capital Corp., formerly New Residential Investment Corp., filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The company is an internally managed REIT focused on mortgage servicing rights, servicer advances, residential securities and loans, mortgage origination and servicing, consumer loans, single-family rentals, and mortgage loans receivable through Genesis. The company changed its name and NYSE ticker from NRZ to RITM in August 2022.
Effective June 17, 2022, Rithm terminated its external management agreement with Fortress affiliate FIG LLC and internalized management. Rithm agreed to pay a $400.0 million termination fee and entered into a transition services agreement that may continue through December 31, 2022.
Financial performance and key metrics
| Metric | Three months ended September 30, 2022 | Year-over-year comparison |
|---|---|---|
| Total revenues | $912.8 million | Down $39.8 million from Q3 2021 |
| Net income | $154.2 million | Down from $170.7 million |
| Net income attributable to common stockholders | $124.5 million | Down from $146.1 million |
| Basic/diluted EPS | $0.27/$0.26 | Down from $0.31/$0.30 |
| Approximate net margin | 16.9% | Based on net income divided by total revenues |
| Common dividend declared | $0.25 per share | Unchanged from Q3 2021 |
For the nine months ended September 30, 2022, total revenues were $4.0 billion, net income was $877.5 million, and net income attributable to common stockholders was $783.0 million. Basic and diluted EPS were $1.68 and $1.62, respectively, compared with $1.22 and $1.18 in the prior-year period. The approximate nine-month net margin was 22.1%.
- Servicing revenue, net was $436.0 million in Q3 and $2.274 billion for the nine months. Nine-month servicing revenue increased $1.600 billion year over year, primarily from MSR fair-value changes, slower projected prepayments, higher projected custodial earnings, and the inclusion of Caliber results.
- Interest income was $273.4 million in Q3 and $710.4 million for the nine months, benefiting from higher rates, custodial account float income, and the Caliber and Genesis acquisitions.
- Gain on originated residential mortgage loans was $203.5 million in Q3 and $980.3 million for the nine months, down from $566.8 million and $1.257 billion, respectively, in the prior-year periods.
- Interest expense and warehouse line fees increased to $218.1 million in Q3 and $507.8 million for the nine months, reflecting higher interest rates and the acquired businesses.
- Q3 change in fair value of investments was a gain of $968.3 million, primarily reflecting derivative gains and reclassification of unrealized losses on securities sold. This was partly offset by a $1.004 billion net loss on settlement of investments, including a $1.022 billion loss on sales of real estate securities.
Cash flow, balance sheet, debt, and liquidity
| Balance-sheet metric | September 30, 2022 | December 31, 2021 |
|---|---|---|
| Total assets | $35.335 billion | $39.742 billion |
| Total liabilities | $28.273 billion | $33.073 billion |
| Total equity | $7.062 billion | $6.669 billion |
| Equity attributable to common stock | $5.732 billion | $5.342 billion |
| Book value per common share | $12.10 | $11.44 |
| Cash and cash equivalents | $1.420 billion | $1.333 billion |
| Restricted cash | $529.6 million | $195.9 million |
Cash, cash equivalents, and restricted cash totaled $1.950 billion at September 30, 2022. For the nine months, operating activities provided $6.732 billion, investing activities used $854.6 million, and financing activities used $5.456 billion. Operating cash flow was materially affected by the high-volume origination and sale of mortgage loans and therefore is not directly comparable to net income.
Secured financing agreements totaled $13.655 billion, secured notes and bonds payable totaled $9.654 billion, and unsecured senior notes totaled $544.6 million, for approximately $23.9 billion of carrying-value debt. The company reported $17.893 billion of available financing capacity, although this capacity is uncommitted and subject to eligible collateral and other conditions. Rithm had approximately $13.7 billion of secured financing subject to margin exposure and reported compliance with all debt covenants.
Contractual debt maturities totaled approximately $9.615 billion from October 1 through December 31, 2022, and $6.810 billion during 2023. Management expects cash on hand, operating cash flow, and the ability to refinance or roll secured financing and servicer-advance facilities to satisfy anticipated needs over the next 12 months, but notes that failure to refinance short-term borrowings could create a rapid liquidity shortfall.
Material changes versus comparable periods
- Mortgage origination volume declined to $13.8 billion in Q3 from $19.1 billion in Q2 and $19.1 billion in the comparable Q2 period cited by management. The gain-on-sale margin declined to 1.71% from 1.95% in Q2, as rising mortgage rates reduced refinance activity and overall production.
- The servicing portfolio increased 4% from December 31, 2021 to $503.6 billion of unpaid principal balance, including $395.6 billion of performing servicing and $108.0 billion of special servicing.
- MSRs and MSR financing receivables increased to $8.895 billion from $6.859 billion at year-end 2021. The underlying unpaid principal balance was $544.2 billion.
- Single-family rental properties increased to $959.4 million and 3,698 properties from $579.6 million and 2,551 properties at year-end 2021.
- Mortgage loans receivable increased to $1.920 billion from $1.516 billion, while consumer loans declined to $393.6 million from $507.3 million.
- Residential mortgage loans held for sale declined to $4.037 billion from $11.348 billion, consistent with lower production and sales activity.
- The company incurred the $400.0 million internalization termination fee, of which $300.0 million had been paid by September 30, 2022 and $100.0 million remained payable on December 15, 2022, subject to stated adjustments.
- On September 16, 2022, a former-manager affiliate exercised warrants on a cashless basis, resulting in the issuance of 6.9 million common shares. Common shares outstanding increased to 473.7 million at September 30, 2022.
Guidance, outlook, commentary, and risks
Management expects mortgage origination volumes to continue moving toward historical levels because of elevated interest rates. It expects net recoveries of servicer advances to exceed net fundings for the foreseeable future, but acknowledges that this expectation depends on uncertain performance, recovery, and foreclosure assumptions.
Management identified rapidly rising interest rates, inflation, widening spreads, recession risk, declining housing activity, COVID-19-related uncertainty, and the Russia-Ukraine conflict as significant sources of uncertainty. A conventional 30-year mortgage rate of 6.1% at September 30, 2022 was up from 5.5% at June 30, 2022. Rising rates increase borrowing costs, reduce the value of fixed-rate securities and loans, may increase defaults, and can generate margin calls.
- MSR valuations depend heavily on interest rates, prepayment rates, delinquencies, recapture rates, discount rates, and servicer performance. A 20% increase in the discount rate would reduce the estimated fair value of Agency MSRs by approximately 6.4% under the filing’s sensitivity analysis.
- Servicer advances may be delayed or become unrecoverable, and the company relies on subservicers and counterparties including PHH, Mr. Cooper, LoanCare, Valon, Flagstar, and OneMain.
- Mortgage servicing and origination operations are subject to extensive CFPB, state, FHFA, Fannie Mae, Freddie Mac, and Ginnie Mae regulation. Loss of licenses, approvals, or servicer ratings could impair financing and asset values.
- Approximately $1.9 billion of residential mortgage loans were subject to Ginnie Mae repurchase rights, with a corresponding liability. The company also had a $43.3 million estimated liability for mortgage origination representations and warranties.
- Genesis had commitments to fund up to $798.7 million of additional mortgage-loan advances, and the consumer loan companies had $223.5 million of unfunded revolving credit availability.
- The company remains exposed to LIBOR cessation and the transition to SOFR. New and renewed facilities were beginning to adopt SOFR, but timing and economic effects across assets, liabilities, and hedges remained uncertain.
- The company must maintain its REIT qualification and its exclusion from registration under the Investment Company Act. Failure could materially increase taxes, restrict operations, require asset sales, or impair distributions.
Most important facts for investors to verify
- Whether the expected savings and operational benefits from internalizing management offset the $400.0 million termination fee and increased direct compensation, occupancy, and administrative costs.
- The company’s ability to refinance or roll approximately $9.6 billion of debt maturing in the fourth quarter of 2022 and approximately $6.8 billion maturing in 2023.
- Actual margin-call requirements and the availability of the reported $17.9 billion of uncommitted financing capacity under stressed collateral values.
- The sustainability of MSR fair values and cash flows if interest rates, prepayments, delinquencies, discount rates, or recapture rates differ materially from management assumptions.
- Trends in mortgage origination volume, gain-on-sale margins, servicing portfolio balances, and operating costs following the acquisition of Caliber and the internalization.
- Recovery rates and timing for the $2.5 billion of servicer advances receivable, including the adequacy of the $44.3 million reserve for expected non-recovery.
- Compliance with REIT, Ginnie Mae, FHFA, Fannie Mae, Freddie Mac, debt, and Investment Company Act requirements, including the effect of future regulatory capital and liquidity standards.
- Potential dilution from the remaining warrants, approximately 21.5 million outstanding options, the $500.0 million ATM program, and future equity issuance.