Business Context and Reporting Period
Company: New Residential Investment Corp. (formerly NIC MSR LLC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2013
Business Overview: The Company is a Delaware corporation formed to invest in residential mortgage-related assets, primarily Excess Mortgage Servicing Rights (Excess MSRs), residential mortgage-backed securities (RMBS), and residential mortgage loans. As of the reporting date, the Company was a wholly-owned subsidiary of Newcastle Investment Corp. pending a spin-off completed on May 15, 2013. The Company intends to qualify as a Real Estate Investment Trust (REIT).
Segments: Operations are conducted through three segments: (i) Excess MSRs, (ii) Real Estate Securities and Loans, and (iii) Corporate.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2013 | Three Months Ended March 31, 2012 |
|---|---|---|
| Total Assets | $1,693,100 | $534,876 |
| Interest Income | $16,191 | $2,037 |
| Net Interest Income | $15,292 | $2,037 |
| Other Income (Fair Value Changes) | $2,827 | $1,216 |
| Total Expenses | $5,044 | $565 |
| Net Income | $13,075 | $2,688 |
| Comprehensive Income | $29,258 | $2,688 |
| Total Equity | $767,419 | $378,356 |
| Repurchase Agreements (Debt) | $915,058 | $150,922 |
Note: All figures in thousands of dollars.
Liquidity: The Company reported no cash or cash equivalents on the balance sheet as of March 31, 2013, as cash activity was managed through the parent company, Newcastle, prior to the spin-off. Subsequent to the period, the Company held a cash balance of $181.6 million as of May 15, 2013.
Material Changes vs. Prior Period
- Asset Growth: Total assets increased by approximately $1.16 billion (217%) compared to the prior year period, driven by significant capital contributions and acquisitions of real estate securities and Excess MSRs.
- Revenue Surge: Net income increased by $10.4 million (386%) to $13.1 million. Interest income rose by $14.2 million (695%) due to new investments in real estate securities and Excess MSRs.
- Expense Increase: Total expenses increased by $4.5 million (793%), primarily due to a $2.2 million increase in management fees allocated by Newcastle (reflecting higher equity) and a $2.3 million increase in general and administrative expenses (related to professional fees for consumer loan investments).
- Debt Expansion: Repurchase agreements increased by $764 million to $915 million to finance the expanded portfolio of Agency and Non-Agency RMBS.
- Portfolio Composition: The Company acquired $373.8 million face amount of Non-Agency RMBS and received $754.5 million face amount of Agency RMBS from Newcastle during the quarter. Additionally, the Company entered into a co-investment in reverse mortgage loans ($35 million) and committed to a consumer loan portfolio ($250 million investment).
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Spin-Off: The Company completed its spin-off from Newcastle on May 15, 2013, and began trading on the NYSE under the symbol "NRZ".
- Investment Strategy: Management continues to target Excess MSRs, RMBS, and residential mortgage loans, aiming to generate returns without excessive leverage. The Company expects to continue co-investing with Nationstar Mortgage LLC.
- Dividends: The Company declared a quarterly dividend of $0.07 per share for the quarter ended June 30, 2013.
Key Risks and Contingencies:
- Counterparty Concentration: Significant reliance on Nationstar Mortgage LLC for Excess MSRs and Springleaf Finance, Inc. for consumer loans. Default or termination of these servicers could severely impact returns.
- Valuation Sensitivity: Excess MSRs are valued using Level 3 inputs (unobservable). Fair value is highly sensitive to assumptions regarding prepayment speeds, delinquency rates, and recapture rates. A 10% increase in prepayment rates could decrease fair value by approximately 4.1%.
- Liquidity and Financing: Reliance on short-term repurchase agreements subject to margin calls. Counterparties are not obligated to roll financing, which could impair liquidity.
- Regulatory and REIT Status: Risks associated with maintaining REIT qualification and exemptions from the Investment Company Act of 1940. Changes in GSE policies or the Dodd-Frank Act could adversely affect the business.
Investor Verification Checklist
- Spin-Off Details: Verify the final share count (253,025,645) and the distribution ratio (1:1) from Newcastle Investment Corp.
- Excess MSR Valuation: Review the specific assumptions (prepayment, delinquency, recapture) used in the Level 3 valuation models for Excess MSRs, as these drive a significant portion of fair value changes.
- Financing Terms: Confirm the terms of repurchase agreements, specifically the "haircut" percentages (5% for Agency, 20-40% for Non-Agency) and margin call provisions.
- Consumer Loan Investment: Verify the status and performance of the $250 million consumer loan co-investment with Springleaf, a new asset class for the Company.
- REIT Compliance: Monitor the Company's ability to meet the 90% distribution requirement and asset tests to maintain tax-advantaged REIT status.