Business Context and Reporting Period
Rithm Capital Corp. filed this unaudited Form 10-Q under its former name, New Residential Investment Corp., for the quarter ended March 31, 2022. The company is an externally managed REIT focused on residential mortgage-related assets and operating businesses, including mortgage origination, servicing, mortgage servicing rights (MSRs), servicer advances, residential securities and loans, consumer loans, single-family rentals and mortgage loans receivable. The company had approximately $38 billion of assets and 11,324 employees at quarter-end.
Key Financial Metrics
| Metric | Q1 2022 | Comparable period |
|---|---|---|
| Total revenue | $1.729 billion | $1.145 billion, Q1 2021 |
| Net income | $689.9 million | $301.3 million, Q1 2021 |
| Net income attributable to common stockholders | $661.9 million | $277.6 million, Q1 2021 |
| Basic/diluted EPS | $1.42/$1.37 | $0.67/$0.65, Q1 2021 |
| Common dividend declared per share | $0.25 | $0.20, Q1 2021 |
| Net cash from operating activities | $3.890 billion | $(495.3) million, Q1 2021 |
| Total assets | $37.869 billion | $39.742 billion at December 31, 2021 |
| Total equity | $7.185 billion | $6.669 billion at December 31, 2021 |
Net margin was approximately 39.9% based on reported net income and revenue. Results included substantial fair-value and derivative effects and therefore are not fully representative of recurring cash earnings.
- Servicing revenue, net was $1.032 billion, including a $575.4 million increase in the fair value of MSRs and MSR financing receivables. The valuation gain primarily reflected slower projected prepayments and higher float income as interest rates increased.
- Interest income was $225.4 million, and gain on originated residential mortgage loans held-for-sale was $472.0 million.
- Operating expenses were $802.9 million, including $392.6 million of compensation and benefits, $246.2 million of general and administrative expense, $138.8 million of interest expense and warehouse fees, and a $25.2 million management fee.
- Change in fair value of investments was a loss of $147.1 million, driven largely by a $605.3 million decline in real estate and other securities and a $106.9 million decline in residential mortgage loans, partly offset by a $574.7 million gain on derivatives.
- Cash, cash equivalents and restricted cash increased to $1.966 billion from $1.528 billion at December 31, 2021. Unrestricted cash and cash equivalents were $1.671 billion.
- Secured financing agreements totaled $17.282 billion, secured notes and bonds payable totaled $9.280 billion, and unsecured senior notes totaled $543.7 million. Total debt obligations excluding the residential mortgage repurchase liability were approximately $26.6 billion at carrying value.
- Total borrowing capacity was $31.860 billion, of which $15.796 billion was available financing. The filing states that availability was generally uncommitted and subject to eligible collateral and other borrowing conditions.
Material Changes Versus Prior Comparable Period
- Revenue increased approximately 51% from Q1 2021, while net income attributable to common stockholders increased approximately 138%.
- Servicing revenue, net nearly doubled from $540.6 million to $1.032 billion, primarily because the MSR portfolio benefited from changes in interest-rate and prepayment assumptions.
- Origination activity remained strong but was exposed to rising mortgage rates. Q1 2022 loan production was $26.9 billion, down from $38.1 billion in the immediately preceding quarter, and the gain-on-sale margin declined to 1.53% from 1.65%.
- Compared with December 31, 2021, MSRs and MSR financing receivables increased to $7.964 billion from $6.859 billion, while residential mortgage loans held-for-sale declined to $7.202 billion from $11.348 billion.
- Single-family rental properties increased to $814.9 million across approximately 3,285 properties from $579.6 million across approximately 2,551 properties. The company acquired approximately 734 properties during the quarter.
- The company completed the 2022-SFR1 securitization, generating gross proceeds of approximately $253.9 million after purchasing retained certificates; the proceeds were used primarily to repay credit-facility borrowings.
- Operating cash flow improved materially from the prior-year quarter, reflecting high loan-sale proceeds and operating cash flows associated with the mortgage origination business.
Guidance, Outlook, Risks and Unusual Items
- Management expects origination volumes to normalize during 2022 as mortgage rates rise and refinancing activity declines. The Mortgage Bankers Association estimate cited in the filing projected 2022 industry production of $2.6 trillion versus $4.0 trillion in 2021, with refinance volume representing 33% versus 57% in 2021.
- Management expects gain-on-sale margins to stabilize during 2022, particularly in third-party originated channels, as industry capacity adjusts to lower demand.
- Management stated that cash on hand, operating cash flow and the ability to roll secured financing and servicer-advance facilities should be sufficient for anticipated liquidity needs over the next 12 months, while acknowledging significant near-term debt maturities and refinancing risk.
- The company was in compliance with its debt covenants at March 31, 2022. Approximately $14.0 billion of debt maturities were scheduled for the remainder of 2022, including $13.3 billion of recourse obligations.
- Margin exposure existed on approximately $17.3 billion of secured financing agreements. Declines in collateral values could require additional margin or debt repayment and materially pressure liquidity.
- Interest-rate risk was significant. Management estimated that a parallel 50-basis-point increase in rates would increase book value by approximately $398.5 million, while a 50-basis-point decrease would reduce book value by approximately $402.4 million, assuming an unchanged mortgage basis.
- The company continued transitioning LIBOR-linked contracts and facilities toward SOFR. It stated that the transition was not expected to materially affect terms, credit access or financial condition, but acknowledged operational, valuation and hedging uncertainty.
- Major risks include COVID-19 and geopolitical uncertainty related to the war in Ukraine, market-value declines, margin calls, refinancing and counterparty risk, credit losses, prepayment volatility, servicer performance, regulatory scrutiny of mortgage origination and servicing, cybersecurity, REIT qualification, 1940 Act exclusion, and integration of Caliber and Genesis.
- Material commitments included an estimated $1.7 billion liability for Ginnie Mae loans subject to repurchase, $30.9 million of representation-and-warranty and repurchase reserves, $237.9 million of unfunded consumer-loan revolving commitments, and up to $672.3 million of additional Genesis mortgage-loan advances.
- The company declared a $0.25 common dividend per share for the quarter and indicated that future distributions remain subject to board approval, liquidity, taxable income, financing covenants and market conditions.
Investor Verification Items
- Verify how much of Q1 earnings came from recurring servicing and interest income versus fair-value gains, derivative gains and other non-cash items.
- Reconcile the $3.890 billion of operating cash flow with loan origination and sale volumes, including the sustainability of cash generation as mortgage production declines.
- Review near-term debt maturities, uncommitted borrowing capacity, margin requirements and the company’s ability to refinance or roll approximately $14.0 billion of remaining 2022 maturities.
- Assess sensitivity of MSR valuations and book value to interest rates, prepayments, delinquencies, recapture rates and credit spreads.
- Monitor Ginnie Mae repurchase loans, servicer advances, recovery timing and the adequacy of related reserves.
- Evaluate counterparty, servicer and regulatory exposure involving Newrez, Caliber, PHH, Mr. Cooper, LoanCare, Valon, Flagstar and other servicing partners.
- Review the integration and credit performance of the Caliber and Genesis businesses, including Genesis’s $672.3 million of potential additional funding commitments.
- Confirm continued REIT qualification, 1940 Act exclusion, regulatory liquidity compliance and the company’s ability to sustain common and preferred distributions.