Business context and reporting period
This unaudited Form 10-Q covers New Residential Investment Corp. (the filing registrant associated with the requested Rithm Capital Corp. record) for the quarter and nine months ended September 30, 2021. The company was an externally managed REIT focused on mortgage servicing rights, servicing advances, residential securities and loans, mortgage origination and servicing operations, consumer loans, and single-family rentals.
The company completed its $1.318 billion cash acquisition of Caliber Home Loans on August 23, 2021. Caliber contributed $246.4 million of revenue and $29.1 million of net income from the acquisition date through September 30, 2021.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenues | $960.4 million | $693.6 million | $2.598 billion | $1.248 billion |
| Net income | $170.7 million | $103.9 million | $617.7 million | $(1.459) billion |
| Net income attributable to common stockholders | $146.1 million | $77.9 million | $545.0 million | $(1.533) billion |
| Basic EPS | $0.31 | $0.19 | $1.22 | $(3.69) |
| Diluted EPS | $0.30 | $0.19 | $1.18 | $(3.69) |
| Common dividend declared per share | $0.25 | $0.15 | $0.65 | $0.30 |
- Q3 revenue increased 38.5% year over year, while net income attributable to common stockholders increased 87.6%. The filing does not present a single companywide non-GAAP operating margin; based on reported figures, net income represented approximately 17.8% of revenue and common-stockholder income approximately 15.2%.
- Servicing revenue, net was $203.0 million in Q3 and $747.1 million for the first nine months, compared with $35.5 million and $(341.3) million, respectively, in the comparable 2020 periods. The improvement primarily reflected more favorable MSR valuation assumptions.
- Gain on originated mortgage loans, held-for-sale, net was $566.8 million in Q3 and $1.257 billion for the first nine months, up from $488.3 million and $966.8 million, respectively. Q3 origination volume was $34.5 billion, with a 1.61% gain-on-sale margin.
- Q3 operating expenses were $723.9 million, including $324.5 million of compensation and benefits and $245.1 million of general and administrative expenses. Caliber-related personnel, occupancy, origination, legal and marketing costs materially increased expenses.
- Net cash used in operating activities was $686.5 million for the first nine months of 2021, compared with $1.886 billion of operating cash flow in the first nine months of 2020. Net cash provided by investing activities was $2.807 billion, while financing activities used $1.640 billion.
- Cash, cash equivalents and restricted cash totaled $1.561 billion at September 30, 2021, including $1.367 billion of unrestricted cash and cash equivalents.
Balance sheet, debt and liquidity
| Balance-sheet item | September 30, 2021 | December 31, 2020 |
|---|---|---|
| Total assets | $41.604 billion | $33.252 billion |
| Total liabilities | $34.977 billion | $27.822 billion |
| Total equity | $6.627 billion | $5.430 billion |
| Secured financing agreements | $22.760 billion | $17.548 billion |
| Secured notes and bonds payable | $8.248 billion | $7.644 billion |
| Unsecured senior notes, net | $542.8 million | $541.5 million |
- Reported debt obligations, including secured financing agreements and secured notes and bonds payable, totaled approximately $31.008 billion at quarter-end, up from $25.192 billion at December 31, 2020.
- Available financing was reported at $14.663 billion against total borrowing capacity of $35.209 billion. This capacity was uncommitted and dependent on eligible collateral and other borrowing conditions.
- The company had $22.8 billion of secured financing subject to potential margin exposure. Debt maturities included $13.743 billion due from October 1 through December 31, 2021 and $7.771 billion during 2022.
- Management stated that cash on hand, operating cash flow and the expected rollover of secured financings should satisfy anticipated liquidity needs over the next 12 months, but emphasized that refinancing short-term borrowings is critical.
- The company reported compliance with all debt covenants at September 30, 2021. Approximately $971.0 million of cash held at regulated operating entities was reported as excess of regulatory liquidity requirements.
Material changes versus comparable periods
- The Caliber acquisition substantially expanded origination, servicing, assets, debt, employee count and operating expenses. Employees increased to 12,749 at September 30, 2021 from 5,105 a year earlier, including 7,039 employees added through Caliber.
- Total servicing portfolio unpaid principal balance increased to $475.8 billion from $305.9 billion at June 30, 2021 and $287.2 billion at September 30, 2020. Active forbearance declined to 1.94% from 2.46% in the preceding quarter.
- MSRs and MSR financing receivables increased to $6.565 billion of carrying value from $4.586 billion at December 31, 2020. Underlying UPB totaled $549.8 billion at quarter-end.
- Residential mortgage loans held for sale increased to $14.117 billion from $5.216 billion at December 31, 2020. Single-family rental properties increased to $403.7 million and approximately 1,882 units from $41.3 million and 257 units, respectively.
- Real estate and other securities declined to $9.974 billion from $14.245 billion at December 31, 2020, primarily reflecting portfolio sales used in part to fund the Caliber acquisition.
- In September 2021, the company issued Series D preferred stock for net proceeds of approximately $449.5 million. It also completed a $512.0 million common-stock offering in April 2021, with proceeds used partly to finance the Caliber acquisition.
Outlook, commentary, risks and unusual items
- Management expected gain-on-sale margins to stabilize as industry capacity adjusts, while noting tightening competition, potential Federal Reserve tapering and rising-rate expectations as headwinds.
- Management stated that the broader outlook remained uncertain and dependent on COVID-19 developments, inflation, supply constraints, interest rates, housing conditions and mortgage-market competition.
- The filing does not provide formal earnings or dividend guidance. Management stated an intention to distribute at least 90% of REIT taxable income, subject to liquidity, legal, financing and board approval considerations.
- Caliber acquisition accounting remained preliminary. The company recorded a $3.5 million bargain-purchase gain and $9.6 million of acquisition-related costs for the nine months. A $280.0 million deferred tax liability was recorded in the preliminary purchase-price allocation.
- Management identified significant exposure to interest rates, prepayments, credit spreads, delinquencies, defaults, servicer advance recoverability, counterparty performance, margin calls, short-term refinancing and the transition away from LIBOR.
- Representations and warranties and Ginnie Mae repurchase exposure were estimated at $36.8 million and $1.8 billion, respectively. The company also had $250.1 million of unfunded consumer-loan revolving commitments.
- Subsequent to quarter-end, the company announced an agreement to acquire Genesis Capital and a related loan portfolio. Closing was expected in the fourth quarter of 2021, subject to approvals and customary conditions.
- Management concluded that disclosure controls were effective. However, Caliber was excluded from the 2021 annual evaluation of internal control over financial reporting while integration work continued.
Important facts for investors to verify
- Confirm the legal name and corporate history of the issuer, since this 2021 filing is for New Residential Investment Corp., not a registrant labeled Rithm Capital Corp.
- Assess whether the Caliber acquisition generated expected synergies and earnings after a full quarter of consolidation, including integration costs, employee retention and control implementation.
- Monitor the $13.743 billion of debt maturities through year-end 2021, the $7.771 billion due in 2022 and the company’s ability to roll or replace short-term financing.
- Review sensitivity of MSR valuations, book value and liquidity to prepayment rates, interest rates, delinquencies, recapture rates and discount rates.
- Evaluate potential margin calls on $22.8 billion of secured financing and the quality and availability of the reported $14.663 billion of unused financing capacity.
- Track Ginnie Mae repurchase loans, servicer advances, recovery timing and related financing requirements, particularly if pandemic-related delinquencies or foreclosure timelines increase.
- Review the final purchase-price allocation for Caliber, related deferred taxes, acquisition liabilities and any subsequent accounting adjustments.
- Verify the expected closing terms, financing and strategic rationale for the announced Genesis Capital acquisition.