Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2019, with quarterly information for the quarter ended December 31, 2019. The filing is for New Residential Investment Corp., the historical legal name of the company identified in the request as Rithm Capital Corp. The company is an externally managed REIT focused on mortgage servicing rights and related assets, residential securities and loans, consumer loans, mortgage origination, servicing and related operating businesses.
At year-end, the company reported $44.9 billion of total assets under management, $44.9 billion of consolidated assets and 3,387 employees, including 3,384 at Shellpoint-related operating entities. Its major segments were Origination, Servicing, MSR Related Investments, Residential Securities and Loans, Consumer Loans and Corporate.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Interest income | $1.766 billion | $1.664 billion | 6.1% increase |
| Interest expense | $933.8 million | $606.4 million | 54.0% increase |
| Net interest income | $832.4 million | $1.058 billion | 21.3% decrease |
| Servicing revenue, net | $385.2 million | $528.6 million | 27.1% decrease |
| Gain on originated mortgage loans | $475.5 million | $96.1 million | 394.5% increase |
| Operating expenses | $968.6 million | $609.4 million | 58.9% increase |
| Net income | $605.9 million | $1.005 billion | 39.7% decrease |
| Net income attributable to common stockholders | $550.0 million | $964.0 million | 41.6% decrease |
| Diluted EPS | $1.34 | $2.81 | Decrease |
| Core earnings | $886.8 million | $815.2 million | 8.8% increase |
| Core earnings per diluted share | $2.17 | $2.38 | Decrease |
| Common dividends declared per share | $2.00 | $2.00 | Unchanged |
Net income attributable to common stockholders was $550.0 million, or $1.35 basic and $1.34 diluted per share. Quarterly diluted EPS was $0.37 in the first quarter, $(0.08) in the second quarter, $0.54 in the third quarter and $0.51 in the fourth quarter.
- Total assets increased to $44.9 billion from $31.7 billion; total debt increased to $35.6 billion from $22.7 billion.
- New Residential stockholders’ equity increased to $7.16 billion from $6.00 billion; book value per common share declined slightly to $16.21 from $16.25.
- Cash and cash equivalents were $528.7 million; cash, cash equivalents and restricted cash totaled $690.9 million.
- Outstanding repurchase agreements were $27.9 billion, and total debt obligations were approximately $35.7 billion at face amount, with a weighted-average funding cost of 2.71%.
- Available financing capacity was $7.1 billion, subject to eligible collateral and other borrowing conditions. The company reported compliance with all debt covenants at year-end.
- Operating cash flow was negative $1.623 billion, compared with negative $1.229 billion in 2018. Investing cash flow was negative $10.949 billion and financing cash flow was positive $12.847 billion.
Material Changes Versus the Prior Comparable Period
- Origination expansion: NewRez originated $22.3 billion of loans in 2019 versus $7.2 billion in the prior-year comparison, helped by lower mortgage rates, refinancing activity, the Ditech platform integration and increased market share. The servicing and origination platform expanded to $219.4 billion of unpaid principal balance from $109.1 billion.
- Portfolio growth: Real estate and other securities increased to $19.5 billion from $11.6 billion. MSRs and MSR financing receivables increased to $5.69 billion of carrying value from $4.53 billion. Residential mortgage loans held at fair value increased to $4.61 billion from $2.81 billion.
- Higher leverage and financing costs: Debt rose by approximately $13.0 billion, while interest expense increased $327.3 million. The increase reflected greater financing of RMBS, residential mortgage loans and the expanded origination and servicing businesses.
- Servicing pressure from faster prepayments: Servicing revenue declined as amortization increased and MSR fair values were negatively affected by lower interest rates and higher prepayment speeds. The servicing-related mark-to-market impact shifted from positive $68.6 million in 2018 to negative $186.2 million in 2019.
- Origination gains increased: Gain on originated mortgage loans increased primarily because MSRs retained on loan transfers rose by $339.1 million and origination activity expanded.
- Expense growth: General and administrative expense increased $306.5 million, largely due to Shellpoint and Ditech operations, higher compensation, loan origination expenses, integration costs and increased securitization activity.
- Strategic transactions: The company acquired selected Ditech assets and liabilities for approximately $1.2 billion, acquired Guardian Asset Management and invested in Covius, obtaining a 24% interest. The Ditech transaction generated a $49.5 million bargain purchase gain and added approximately 1,100 employees.
- Capital raising: The company raised approximately $752.1 million through a common-stock offering and approximately $437.8 million through Series A and Series B preferred-stock offerings. No ATM shares were sold and no common-stock repurchases had been made as of the filing date.
Guidance, Outlook, Commentary and Risks
Management expected cash on hand, operating cash flow and the ability to roll repurchase agreements and servicer-advance financing to satisfy anticipated liquidity needs for the next 12 months. Management also stated that net recoveries of servicer advances were expected to exceed net fundings for the foreseeable future, while cautioning that an economic downturn could reverse that relationship.
The filing described a generally favorable 2019 operating environment for origination: the Federal Reserve reduced its target rate three times, the 10-year Treasury yield declined to 1.92% from 2.68%, and the 30-year mortgage current coupon declined to 3.80% from 4.42%. Management expected 2020 mortgage originations of approximately $1.9 trillion, with refinancing volume expected to decline from 2019 levels.
- Lower rates and higher prepayments can reduce the value and cash flows of MSRs, Excess MSRs, MSR financing receivables and servicing advance investments, despite recapture agreements.
- Approximately $27.9 billion of repurchase agreements were subject to margin exposure, creating liquidity risk if collateral values decline or counterparties do not renew financing.
- Servicer advance recoveries depend on borrower performance, foreclosure timelines, property values, servicing practices and the financial condition of servicers. The company has significant exposure to Mr. Cooper, PHH, LoanCare, OneMain and other servicing partners.
- Mortgage servicing and origination operations are subject to extensive federal and state regulation, licensing requirements, legal proceedings, regulatory inquiries and potential repurchase or indemnification claims.
- Substantial assets are valued using Level 3 models and unobservable assumptions, including discount rates, prepayment rates, delinquency rates, recapture rates, servicing costs, default rates and loss severities.
- The company relies on its continued qualification as a REIT and exclusion from registration under the Investment Company Act. Failure to maintain either status could materially disrupt operations, increase taxes or require asset sales.
- LIBOR-based debt, derivatives and servicing arrangements were exposed to benchmark transition risk as LIBOR was expected to be phased out or modified after 2021.
- The company disclosed litigation, regulatory inquiries and ordinary-course disputes but stated that it was not aware of any matter expected to have a material adverse effect. The ultimate exposure remains uncertain.
- Internal control over financial reporting was assessed as effective, and the independent auditor issued unqualified opinions on the financial statements and internal controls.
Most Important Facts for Investors to Verify
- Reconcile reported GAAP net income of $550.0 million attributable to common stockholders with core earnings of $886.8 million, including the substantial valuation, derivative, impairment and transaction-related adjustments.
- Review the maturity and renewal profile of the $35.7 billion debt obligations, particularly the approximately $29.7 billion scheduled in 2020 and the dependence on rolling short-term repurchase agreements.
- Assess sensitivity of MSR and Excess MSR valuations to prepayment speeds, discount rates, delinquencies and recapture rates, including the disclosed Level 3 valuation assumptions.
- Evaluate servicing-partner concentration, counterparty credit quality, servicer ratings, regulatory matters and the recoverability and timing of approximately $3.3 billion of servicer advances receivable.
- Verify the economic contribution and integration costs of the Ditech acquisition, including the $49.5 million bargain purchase gain and the $104.7 million of post-acquisition net income reported from Ditech operations.
- Review liquidity available at the parent and regulated servicing subsidiaries, including the $199.6 million described as available for deployment at NRM and NewRez.
- Consider dilution and priority effects from approximately 415.5 million common shares, preferred stock outstanding, and 12.8 million outstanding common-stock options at year-end.
- Confirm subsequent events, including the February 2020 issuance of $338.7 million of net proceeds from Series C preferred stock, and assess their effect on leverage, liquidity and distributions.