Rithm Capital Corp. 2023 Form 10-K Summary
Business context and reporting period
Rithm Capital is an internally managed U.S. REIT and global asset manager focused on real estate, credit and financial services. The filing covers the fiscal year ended December 31, 2023, with comparisons primarily to 2022. Operations are organized into Origination and Servicing, Investment Portfolio, Mortgage Loans Receivable, Asset Management and Corporate.
Rithm completed the approximately $630.3 million acquisition of Sculptor Capital Management on November 17, 2023, adding approximately $32.8 billion of assets under management. Caliber operations were integrated into Newrez during the fourth quarter of 2023.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenues | $3.798 billion | $4.952 billion | Down 23.3% |
| Net income | $630.7 million | $983.3 million | Down 35.9% |
| Net income attributable to common stockholders | $532.7 million | $864.8 million | Down 38.4% |
| Basic / diluted EPS | $1.11 / $1.10 | $1.84 / $1.80 | Down |
| Common dividends declared per share | $1.00 | $1.00 | Unchanged |
| Net cash provided by operating activities | $1.102 billion | $6.874 billion | Down $5.773 billion |
| Total assets | $35.312 billion | $32.479 billion | Up 8.7% |
| Total equity | $7.101 billion | $7.010 billion | Up 1.3% |
| Book value per common share | $11.90 | $12.00 | Down $0.10 |
Interest expense and warehouse line fees increased 79.7% to $1.421 billion, primarily because of higher interest rates, the Marcus consumer-loan acquisition and additional Agency RMBS. General and administrative expense declined 16.5% to $730.8 million, while compensation and benefits declined 36.1% to $787.1 million following workforce and operating-cost reductions.
Cash and cash equivalents were $1.287 billion at year-end; cash, cash equivalents and restricted cash totaled $1.673 billion. Total debt on the balance sheet was $23.959 billion, including $12.561 billion of secured financing agreements, $10.679 billion of secured notes and bonds payable and $719.0 million of unsecured notes, net of issuance costs. Contractual debt maturities totaled $15.777 billion in 2024 and $4.012 billion in 2025. Management reported compliance with all debt covenants at December 31, 2023.
Operating performance and material changes
- Origination: Funded mortgage production declined 45.4% to $36.9 billion from $67.6 billion. Refinance volume represented 13% of production versus 30% in 2022, while purchase volume increased to 87%. Gain-on-sale margin declined to 1.31% from 1.70%, and gain on originated residential mortgage loans declined 53.2% to $508.4 million.
- Servicing: The servicing portfolio increased 12.8% to $568.0 billion of unpaid principal balance, including $445.8 billion of performing servicing and $122.2 billion of special servicing. Servicing fee revenue and interest income from MSRs increased 1.5% to $1.860 billion, but servicing revenue, net, fell 49.4% to $1.295 billion because the prior year included a significant positive MSR valuation adjustment.
- MSRs: MSRs and MSR financing receivables declined to $8.406 billion from $8.889 billion. The 2023 change in fair value was a $565.7 million reduction, including a $519.0 million reduction from realized cash flows and a $46.7 million negative change in valuation inputs and assumptions. Rithm sold excess servicing cash flows on Agency loans with approximately $91.4 billion of UPB.
- Asset Management: Sculptor contributed $82.7 million of revenue and approximately $1.0 million of net income from November 17 through December 31, 2023. The acquisition also added $275.0 million of management-contract intangibles and $46.7 million of goodwill. Acquisition-related costs were $32.9 million.
- Investment portfolio: Consumer loans increased substantially after the June 2023 purchase of the Marcus portfolio; consumer-loan carrying value rose to $1.274 billion from $363.8 million. Agency RMBS carrying value increased to approximately $8.533 billion, while the Agency RMBS net interest spread was negative 0.38% and the Non-Agency RMBS spread was negative 1.83% for 2023.
- Real estate and lending: The SFR portfolio grew to 3,888 units with a carrying value of $1.002 billion. Genesis originated 1,088 business-purpose loans with $2.1 billion of UPB, and mortgage loans receivable increased to $2.233 billion.
- Cash flow: Operating cash flow decreased primarily because 2022 benefited from substantially higher loan-sale and repayment activity. Financing cash outflows were $1.299 billion, including $570.9 million of common and preferred dividends paid.
Guidance, outlook and management commentary
Management expects cash on hand, operating cash flow and the ability to roll secured financing and servicer-advance facilities to meet anticipated liquidity needs over the next 12 months, including margin requirements, originations, operating expenses and current portfolio financing. This outlook depends materially on continued access to short-term financing and favorable refinancing terms.
Management expects to use existing liquidity and additional MSR and servicer-advance financing to fund the approximately $720 million Computershare Mortgage Services acquisition, which was targeted to close in the first quarter of 2024. The transaction remained subject to customary closing conditions and approvals in the filing.
The company expects the legacy mortgage, servicing and investment businesses to remain important while continuing to expand global asset management. Management cited a potential 2024 recovery in mortgage originations and refinance activity, but emphasized uncertainty from interest rates, credit spreads, housing conditions and regulatory developments. The company completed its transition from LIBOR to alternative benchmarks, primarily SOFR, in June 2023; Series A, B and C preferred-stock fallback language was not amended.
Risks, contingencies and unusual items
- Liquidity is exposed to short-term financing rollovers, margin calls and collateral-value declines. Of $12.6 billion of secured financing agreements, the company had margin exposure on the full amount.
- MSR and other Level 3 valuations depend on subjective assumptions, including discount rates, prepayment speeds, delinquencies, recapture rates and servicing costs. A 10% increase in the MSR discount-rate assumption would reduce estimated Agency MSR fair value by approximately 3.6%, Non-Agency MSR fair value by 4.5% and Ginnie Mae MSR fair value by 3.5%.
- Servicer advances receivable totaled approximately $2.8 billion before reserves, with $93.7 million reserved for expected non-recovery. Delayed foreclosures, higher delinquencies or servicer-partner failures could increase funding needs and reduce recoveries.
- Rithm recognized approximately $1.8 billion of residential mortgage loans subject to repurchase and a corresponding liability, primarily related to delinquent Ginnie Mae loans. The estimated liability for representations and warranties was $51.7 million.
- The company is subject to extensive mortgage, servicing, consumer-protection, cybersecurity, investment-adviser and international regulation. Regulatory actions, license issues or servicer-rating downgrades could impair servicing operations, financing access and asset values.
- The company must maintain REIT qualification and its exclusion from registration under the Investment Company Act of 1940. Failure could result in corporate-level taxes, forced asset sales, operating restrictions or loss of NYSE listing.
- The Sculptor acquisition created an estimated $267.9 million of undiscounted future tax-receivable-agreement payments, with a $172.2 million carrying value at year-end. Use of Sculptor tax attributes is limited by Section 382.
- Rithm and Sculptor face redemption, performance, valuation, liquidity, key-personnel and competitive risks in asset management. The maximum exposure to loss from unconsolidated asset-management VIEs was $821.3 million.
- Stockholder litigation related to the Sculptor acquisition was agreed in principle to settle for a total payment of $6.5 million to eligible Sculptor stockholders; final court approval was scheduled for May 20, 2024.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Sculptor was excluded from management’s year-end internal-control assessment because it was acquired during 2023.
Most important facts for an investor to verify
- Whether the Computershare acquisition closed as planned, its final purchase price, financing structure and incremental servicing economics.
- Actual refinancing and rollover outcomes for the large 2024 and 2025 debt maturities, including changes in haircuts, advance rates, spreads and margin requirements.
- Quarterly MSR fair-value changes and the sensitivity of earnings and book value to prepayment, delinquency, discount-rate and recapture assumptions.
- Performance and recoverability of approximately $2.8 billion of servicer advances and the $1.8 billion Ginnie Mae repurchase portfolio.
- Trends in mortgage production, gain-on-sale margins, servicing UPB, delinquencies and operating costs after the Caliber integration.
- Sculptor’s fee-paying AUM, redemptions, investment performance, incentive-income sustainability and integration costs.
- Compliance with REIT, Investment Company Act, FHFA and Ginnie Mae requirements, including the expected impact of evolving capital and liquidity standards.
- Future common and preferred dividends, the renewed $200 million common-stock and $100 million preferred-stock repurchase authorization, and available cash after required distributions.