Business Context and Reporting Period
This is New Residential Investment Corp.’s Form 10-K for the fiscal year ended December 31, 2017. The request identifies the company as Rithm Capital Corp.; the filing itself is under the former name New Residential Investment Corp. and trades as NRZ. The company is an externally managed REIT focused on residential real estate-related investments, including mortgage servicing rights, excess MSRs, servicer advances, RMBS, residential mortgage loans, REO and consumer loans.
New Residential’s manager was an affiliate of Fortress Investment Group. On December 27, 2017, SoftBank completed its acquisition of Fortress; management stated that Fortress would continue operating independently and that senior investment professionals were expected to remain in place.
Financial Performance and Key Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Interest income | $1.520 billion | $1.077 billion | +41.1% |
| Interest expense | $460.9 million | $373.4 million | +23.4% |
| Net interest income | $1.059 billion | $703.3 million | +50.5% |
| Impairment | $86.1 million | $88.0 million | -2.1% |
| Servicing revenue, net | $424.3 million | $118.2 million | +259.1% |
| Other income | $207.8 million | $62.3 million | +233.3% |
| Operating expenses | $422.6 million | $174.2 million | +142.6% |
| Net income attributable to common stockholders | $957.5 million | $504.5 million | +89.8% |
| Diluted EPS | $3.15 | $2.12 | +48.6% |
| Core earnings | $861.4 million | $510.8 million | +68.6% |
| Dividends declared per share | $1.98 | $1.84 | +7.6% |
Reported net income included substantial fair-value, settlement and other non-cash items. Management’s non-GAAP core earnings exclude, among other items, impairments, realized and unrealized gains and losses, incentive compensation, transaction expenses and deferred taxes; core earnings should not be viewed as a substitute for GAAP earnings or operating cash flow.
Balance Sheet, Portfolio and Liquidity
- Total assets were $22.214 billion, up from $18.400 billion at December 31, 2016.
- Total debt was $15.747 billion, up from $13.181 billion. Total equity was $4.796 billion, including $4.690 billion attributable to New Residential stockholders.
- Book value per common share was $15.26, compared with $13.00 at year-end 2016.
- Cash and restricted cash totaled $446.1 million; cash and cash equivalents were $295.8 million.
- Investment portfolio carrying value was $19.749 billion, led by non-Agency RMBS of $5.975 billion, servicer advance investments of $4.027 billion, residential mortgage loans of $2.417 billion, MSRs and MSR financing receivables totaling $2.334 billion, and consumer loans of $1.426 billion.
- Debt consisted primarily of $8.662 billion of repurchase agreements and $7.084 billion of notes and bonds payable. Weighted average funding cost was 3.21% and weighted average debt life was 1.2 years.
- Available financing capacity was reported at $1.741 billion, subject to eligible collateral and other borrowing conditions. The company was in compliance with its debt covenants at December 31, 2017.
- Approximately $10.181 billion of debt obligations were contractually due in 2018, creating significant refinancing and rollover exposure.
Cash Flow and Margins
- Net cash used in operating activities was $899.7 million, compared with $560.8 million of cash provided in 2016. The deficit primarily reflected substantial purchases of held-for-sale residential mortgage loans.
- Net cash used in investing activities was $1.778 billion, primarily reflecting acquisitions of servicer advances, MSRs, RMBS and loans.
- Net cash provided by financing activities was $2.670 billion, including borrowings and the February 2017 common stock offering.
- The Agency RMBS net interest spread was 1.41% at year-end, down from 1.61% at September 30, 2017. The Non-Agency RMBS net interest spread was 2.76%, down from 3.01%.
Material Changes Versus the Prior Comparable Period
- MSR activity expanded materially. MSR carrying value increased to $1.736 billion from $659.5 million, and MSR financing receivables reached $598.7 million from zero, following the Citi, United Shore, RCS, PHH and Ocwen-related transactions.
- Servicing revenue increased by $306.2 million, primarily from MSR acquisitions completed largely after year-end 2016. Subservicing expense increased by $158.2 million to $166.1 million.
- Real estate securities increased to $8.071 billion from $5.074 billion, while non-Agency RMBS carrying value increased to $5.975 billion from $3.544 billion.
- Servicer advance investments declined to $4.027 billion from $5.707 billion, mainly due to repayments and portfolio changes, although 2017 interest income benefited from a $204.1 million retrospective adjustment related primarily to revised HLSS cash-flow assumptions.
- Residential mortgage loans held-for-sale increased to $1.726 billion from $696.7 million, reflecting significantly higher purchases and call-related activity.
- Operating expenses increased sharply, including incentive compensation to the manager of $81.4 million versus $42.2 million and management fees of $55.6 million versus $41.6 million.
- The company issued 56.5 million common shares in February 2017 for net proceeds of approximately $834.5 million. Shares outstanding increased to 307.4 million from 250.8 million.
- Quarterly dividends increased from $0.46 per share in the fourth quarter of 2016 to $0.50 in the fourth quarter of 2017.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected cash on hand, operating cash flow and the ability to roll repurchase agreements and servicer advance financings to meet anticipated liquidity needs for the next 12 months, but emphasized that this outlook depends critically on continued access to short-term financing.
- Management viewed continued MSR sales and opportunities to provide capital to non-bank servicers as favorable market conditions, while acknowledging increased competition, higher MSR prices and lengthier regulatory approval processes.
- The pending Ocwen arrangements involved approximately $86.8 billion of MSRs remaining to be transferred at year-end after paydowns and other factors. Subsequent agreements in January 2018 included a $279.6 million fee restructuring payment to Ocwen and continued reliance on Ocwen for servicing.
- The PHH transaction had approximately $6.0 billion of private-label UPB, with a purchase price of approximately $35.5 million, unsettled at year-end. The Shellpoint MSR purchase for approximately $81.0 million closed on January 16, 2018; the broader Shellpoint acquisition remained subject to closing conditions.
- Key risks include interest-rate and credit-spread volatility, prepayment and delinquency assumptions, non-recoverability or delayed recovery of servicer advances, counterparty and servicer concentration, margin calls, refinancing risk, illiquid Level 3 valuations, regulatory actions involving servicers, and the potential loss of MSR value if a servicer is terminated.
- Nationstar, Ocwen and other servicing partners service or subservice substantial portions of the portfolio. A servicer default, bankruptcy, rating downgrade, regulatory action or servicing termination could materially reduce cash flows and impair asset values.
- Management recorded $86.1 million of impairment, including $10.3 million of other-than-temporary impairment on securities and $75.8 million of loan and REO valuation provisions.
- The company continued to rely on REIT qualification and exclusions from registration under the Investment Company Act. Failure to maintain either status could materially affect taxes, leverage, asset composition, distributions and operations.
- The company assumed HLSS contingent and other liabilities. A related securities class-action settlement was approved for $6.0 million in 2017, with $5.0 million covered by insurance. A separate appeal related to prior HLSS litigation remained pending.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded that disclosure controls and internal control over financial reporting were effective.
Most Important Facts an Investor Should Verify
- Verify the company’s current legal name, ticker and post-2017 corporate structure, since this filing is for New Residential Investment Corp., while the request references Rithm Capital Corp.
- Reconcile GAAP net income of $957.5 million attributable to common stockholders with core earnings of $861.4 million and identify the recurring versus valuation-driven components.
- Review the sustainability of $1.98 per-share annual dividends against cash flow, taxable income, financing requirements and the company’s large 2018 debt maturities.
- Test MSR and servicer advance valuations against changes in prepayment rates, discount rates, delinquencies, recapture rates and servicing costs.
- Assess the ability to refinance or roll approximately $10.2 billion of 2018 contractual debt maturities and meet potential margin calls on $8.7 billion of repurchase agreements.
- Monitor the completion, funding and economics of the Ocwen, PHH and Shellpoint transactions, including required consents and any obligations to Ocwen or other counterparties.
- Evaluate concentration and counterparty exposure to Nationstar, Ocwen, PHH, Ditech, OneMain and other servicing partners, including their regulatory, liquidity and bankruptcy risks.
- Review the quality and liquidity of the $5.975 billion non-Agency RMBS portfolio, including its CCC- weighted average rating, geographic concentration and Level 3 valuation assumptions.
- Confirm the effect of the Tax Cuts and Jobs Act on deferred taxes, taxable income, REIT distributions and taxable REIT subsidiaries.