Rithm Capital Corp. quarterly report, Q2 FY2021

Business Context and Reporting Period

New Residential Investment Corp. (now identified in the request as Rithm Capital Corp.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The company operated as a publicly traded REIT focused on residential mortgage-related investments and businesses, including mortgage origination, servicing, mortgage servicing rights (MSRs), residential securities and loans, consumer loans, and single-family rentals. The company was externally managed by FIG LLC, an affiliate of Fortress Investment Group.

Total assets were $37.25 billion at June 30, 2021, compared with $33.25 billion at December 31, 2020. Common shares outstanding were 466.6 million as of July 30, 2021.

Financial Metrics

Metric	Three months ended June 30, 2021	Six months ended June 30, 2021
Total revenue	$454.1 million	$1.625 billion
Net income	$145.7 million	$447.1 million
Net income attributable to common stockholders	$121.3 million	$398.9 million
Basic/diluted EPS	$0.27/$0.26	$0.92/$0.88
Core earnings	$146.6 million; $0.31 per diluted share	$291.4 million; $0.65 per diluted share
Common dividend declared per share	$0.20	$0.40
Net cash from operating activities	Not separately provided for the quarter	$(1.007) billion

Six-month revenue included $507.4 million of interest income, $427.0 million of net servicing revenue, and $690.3 million of gain on originated mortgage loans held for sale.
Second-quarter net servicing revenue was negative $86.5 million, primarily due to a $106.4 million negative change in MSR valuation assumptions and cash-flow realization of $279.1 million.
General and administrative expense was $367.7 million in the second quarter and $730.2 million for the first half, up 25% year over year for the first half, largely reflecting higher origination compensation, headcount, and business expansion.
Core earnings exceeded GAAP net income attributable to common stockholders because core earnings excluded fair-value changes, realized investment gains and losses, impairments, deferred taxes, and other non-core items.

Balance Sheet, Debt, and Liquidity

Cash and cash equivalents were $956.2 million; cash, cash equivalents, and restricted cash totaled $1.195 billion.
Total debt, including secured financing agreements, secured notes and bonds payable, and unsecured senior notes, was approximately $29.14 billion on the balance sheet. Total equity was $6.17 billion, including $6.07 billion attributable to New Residential stockholders.
Secured financing agreements totaled $21.29 billion, with a weighted-average funding cost of 0.81% and average life of 0.2 years. Secured notes and bonds payable totaled $7.30 billion, with a weighted-average funding cost of 2.91%.
Available financing capacity was $7.94 billion, subject to eligible collateral and other borrowing conditions.
The company had $21.3 billion of margin exposure on secured financing agreements. Management stated that all debt covenants were satisfied at June 30, 2021.
Contractual debt maturities totaled $18.82 billion from July 1 through December 31, 2021, including $18.82 billion of recourse obligations, making refinancing and continued access to short-term funding significant liquidity considerations.
Operating cash flow was negative despite positive GAAP net income, primarily because mortgage loan originations and purchases were classified as operating cash outflows. Financing activities provided $3.49 billion, while investing activities used $2.37 billion.

Material Changes Versus Comparable Periods

Six-month net income improved to $447.1 million from a $1.563 billion net loss in the first half of 2020. Net income attributable to common stockholders improved to $398.9 million from a $1.611 billion loss.
Six-month revenue increased to $1.625 billion from $733.6 million, driven primarily by the recovery in MSR fair values and substantially higher mortgage origination activity.
Six-month servicing revenue improved by $806.6 million year over year, moving from negative $379.6 million to positive $427.0 million, largely because the prior-year period included significant negative MSR valuation adjustments.
Six-month gain on originated mortgage loans increased to $690.3 million from $478.6 million. Origination volume increased to $50.7 billion from $19.7 billion.
Second-quarter origination volume declined to $23.5 billion from $27.2 billion in the first quarter, and gain-on-sale margin fell to 1.31% from 1.43% because of lower volumes and increased competition.
Six-month interest expense declined to $225.4 million from $333.3 million, primarily due to a smaller bond and residential loan portfolio and lower MSR-related financing costs.
Real estate and other securities increased to $14.96 billion from $14.24 billion at year-end, while secured financing agreements increased to $21.29 billion from $17.55 billion.
MSRs and MSR financing receivables increased in carrying value to $4.79 billion from $4.59 billion, although the related full and excess MSR portfolio declined to $489 billion of unpaid principal balance from $536 billion at December 31, 2020, primarily because of prepayments.
Single-family rental properties expanded to $227.6 million and approximately 1,155 units from $41.3 million and 257 units at year-end.
The company raised approximately $512 million of net proceeds through a common stock offering in April 2021. It also established a $500 million at-the-market program, with no issuances during the second quarter.

Guidance, Outlook, Risks, and Unusual Items

Management expected 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 avoiding substantial margin calls.
The company agreed to acquire Caliber Home Loans for a purchase price of $1.675 billion, subject to adjustments, approvals, and customary closing conditions. Closing was targeted for the third quarter of 2021. The equity offering proceeds were intended primarily to fund the acquisition; if it did not close, proceeds were to be used for general corporate purposes.
Management reported improving economic conditions, strong housing demand, historically low mortgage rates, and declining active forbearance. The servicing portfolio totaled $305.9 billion of unpaid principal balance, with 2.3% in active forbearance at June 30, 2021.
COVID-19 remained a significant uncertainty, particularly regarding borrower delinquencies, servicer advances, asset valuations, employee availability, market liquidity, and financing access.
Material sensitivity exists to interest rates, prepayment speeds, delinquencies, defaults, credit spreads, recapture rates, and discount rates. The company reported that a 50-basis-point parallel increase in rates was estimated to increase book value by $223.9 million, while a 50-basis-point decrease was estimated to reduce book value by $193.9 million.
Key financing risks include short-term maturities, lender decisions not to renew facilities, margin calls, collateral value declines, higher haircuts, and potential covenant breaches.
The company relies heavily on mortgage servicers and subservicers, including Newrez, PHH, Mr. Cooper, LoanCare, and Flagstar. Servicer termination, bankruptcy, regulatory action, ratings downgrades, or servicing deficiencies could materially reduce MSR and advance values.
Newrez had a $1.3 billion liability associated with Ginnie Mae loans subject to repurchase and held approximately $922.6 million of repurchased mortgage loans. The estimated liability for mortgage origination representations and warranties was $10.2 million.
The company remained exposed to the transition from LIBOR to alternative reference rates, although it had implemented SOFR for certain Fannie Mae and Freddie Mac adjustable-rate mortgages and was amending affected debt facilities.
As a REIT, the company generally must distribute at least 90% of REIT taxable income, but the filing states that dividend levels are discretionary and not guaranteed. The company also must maintain its REIT qualification and exclusion from registration under the Investment Company Act.
The filing disclosed ordinary-course litigation, regulatory inquiries, indemnification obligations, future servicer-advance commitments, and $254.9 million of unfunded consumer-loan revolving commitments. Management did not believe currently known inquiries would have a material adverse effect.

Most Important Facts for Investors to Verify

Whether the Caliber acquisition closed as expected, its final purchase price and financing, and the resulting effect on leverage, liquidity, and operating results.
Renewal and terms of the large short-term secured financing facilities, particularly the $18.8 billion of maturities in the second half of 2021 and the $21.3 billion subject to margin exposure.
Trends in MSR valuations, prepayment speeds, delinquencies, recapture rates, and servicer advance recoveries.
Whether origination volumes and gain-on-sale margins stabilized after the second-quarter decline.
The sustainability of common dividends relative to taxable income, cash generation, debt-service needs, and REIT distribution requirements.
Progress on LIBOR transition, including the effect on floating-rate debt, asset yields, hedges, and valuation models.
Regulatory, litigation, and servicing-partner developments involving Newrez, PHH, Mr. Cooper, Ocwen/PHH, and other counterparties.
The extent to which GAAP earnings and core earnings are driven by recurring cash income versus fair-value marks, derivative results, deferred taxes, and other non-cash adjustments.