Business Context and Reporting Period
New Residential Investment Corp. reported its fiscal year ended December 31, 2021. The company was a REIT and externally managed by an affiliate of Fortress Investment Group. Its vertically integrated mortgage platform included origination, servicing, mortgage servicing rights, residential securities and loans, consumer loans, single-family rentals, and mortgage loans receivable. The company subsequently became Rithm Capital Corp.; this filing uses the historical name New Residential Investment Corp.
Major 2021 strategic transactions included the August acquisition of Caliber Home Loans for approximately $1.318 billion and the December acquisition of Genesis Capital, together with a related loan portfolio, for approximately $1.63 billion.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenues | $3.622 billion | $1.667 billion | Up 117.2% |
| Net income | $805.6 million | $(1.358) billion | Improved $2.163 billion |
| Net income attributable to common stockholders | $705.5 million | $(1.465) billion | Improved $2.170 billion |
| Basic diluted EPS | $1.56 / $1.51 | $(3.52) / $(3.52) | Returned to profitability |
| Common dividends declared per share | $0.90 | $0.50 | Up $0.40 |
| Net cash provided by operating activities | $2.884 billion | $1.874 billion | Up $1.010 billion |
| Cash, cash equivalents and restricted cash | $1.528 billion | $1.080 billion | Up $448.0 million |
| Total assets | $39.742 billion | $33.252 billion | Up 19.5% |
| Total debt and secured financing | $29.238 billion carrying value | $25.192 billion | Up $4.046 billion |
| New Residential stockholders’ equity | $6.604 billion | $5.321 billion | Up $1.283 billion |
Reported pre-tax income was $963.8 million, compared with a $1.341 billion pre-tax loss in 2020. Income tax expense increased to $158.2 million, including substantial deferred tax expense associated with taxable REIT subsidiaries. The filing reports a $440.7 million net deferred tax liability at year-end.
Operating Performance
- Origination volume increased to $123.3 billion from $61.6 billion, supported by low mortgage rates and the Caliber acquisition. Refinance loans represented 58% of 2021 funded production.
- Gain-on-sale margin declined to 1.51% from 1.85% as industry capacity constraints eased and competition increased.
- Servicing revenue, net was $984.2 million, versus a $526.6 million loss in 2020. The improvement primarily reflected favorable MSR valuation changes from slower projected prepayments, lower delinquencies, and lower discount rates.
- Total serviced loan UPB increased 62.1% to $482.8 billion, serving more than 2.3 million customers. Active forbearance declined to less than 1% from 3.44% at year-end 2020.
- MSRs and MSR financing receivables increased to $6.859 billion of carrying value, with underlying UPB of $548.6 billion. Full and excess MSR UPB totaled approximately $629 billion.
- Agency RMBS decreased to $8.445 billion from $12.5 billion. The reported Agency RMBS net interest spread was 1.98%; the Non-Agency RMBS spread was 1.12%.
- The single-family rental portfolio expanded to approximately 2,551 units with a $579.6 million carrying value, compared with 257 units and $41.3 million in 2020.
- Genesis contributed $1.516 billion of mortgage loans receivable at year-end, primarily construction, renovation, and bridge loans. The portfolio had a weighted average yield of 8.1% and weighted average original term of 15.2 months.
Material Changes Versus the Prior Comparable Period
- The company moved from a significant 2020 loss to substantial 2021 profitability. The comparison was materially affected by the approximately $733 million of realized losses on Agency and Non-Agency RMBS sales during 2020, undertaken to raise liquidity and reduce risk during the COVID-19 market disruption.
- Servicing-related fair value adjustments improved by approximately $1.6 billion year over year, while MSR carrying value increased by approximately $2.3 billion, primarily from the Caliber acquisition and retained MSRs on new originations.
- Origination and servicing scale expanded substantially through Caliber. Headcount increased to 12,296 from 5,667, with more than 7,000 employees added through the acquisition.
- General and administrative expense increased 57.5% to $864.0 million and compensation expense increased 102.9% to $1.160 billion, largely reflecting Caliber and higher origination volumes.
- Debt increased alongside the larger operating and investment platform. Year-end secured financing agreements totaled $20.6 billion, and secured notes and bonds payable totaled $8.645 billion.
- The company raised approximately $512.0 million net through a common stock offering and approximately $449.5 million through Series D preferred stock. It authorized, but had not made, repurchases of up to $200 million of common stock and $100 million of preferred stock through December 31, 2022.
Guidance, Outlook, Risks and Unusual Items
Management expected mortgage origination volumes to normalize as the market shifted from refinancing toward purchase activity. The filing cites MBA forecasts of approximately $2.6 trillion and $2.5 trillion of U.S. origination volume for 2022 and 2023, respectively, with rising mortgage rates and a transition away from Federal Reserve asset purchases.
Management stated that cash on hand, operating cash flow, and the ability to renew secured financing and servicer-advance facilities were expected to meet anticipated liquidity needs over the next 12 months. This outlook depends heavily on refinancing or rolling short-term borrowings. Available financing capacity was approximately $16.5 billion, but it was uncommitted and subject to eligible collateral and other borrowing conditions. The company was in compliance with debt covenants at December 31, 2021.
- Leverage and refinancing: Approximately $18.5 billion of contractual debt maturities were scheduled for 2022, including $17.4 billion of recourse obligations. Failure to renew facilities, increased haircuts, margin calls, or asset-value declines could pressure liquidity.
- Interest rates and prepayments: Rising rates may reduce prepayments and support MSR values but can reduce the value of fixed-rate securities and increase financing costs. Falling rates may accelerate prepayments and impair MSR values.
- Servicer advances: Servicer advance balances were approximately $3.3 billion. Delinquencies, foreclosure delays, or nonrecoverable advances could increase funding needs and reduce returns.
- Counterparties and servicers: The company relies on Newrez, Caliber, Mr. Cooper, PHH, LoanCare, SLS, and other servicers. Termination, regulatory action, bankruptcy, rating downgrades, or poor performance could impair MSR and advance values.
- COVID-19 and housing markets: The pandemic, new variants, borrower hardship, government forbearance programs, unemployment, home prices, and mortgage-market volatility could affect servicing costs, delinquencies, asset values, and liquidity.
- Acquisition and integration risk: Caliber’s acquisition accounting remained subject to integration and operational risks. Genesis acquisition accounting was preliminary at year-end, with valuation of mortgage loans receivable and intangible assets still being finalized.
- Regulatory and tax status: The company must maintain REIT qualification and its exclusion from registration under the Investment Company Act of 1940. Mortgage origination and servicing businesses face extensive CFPB, GSE, Ginnie Mae, federal, state, and local oversight.
- Valuation risk: A substantial portion of assets were Level 3 fair-value assets dependent on assumptions regarding prepayments, delinquencies, discount rates, loss severity, servicing costs, and recapture rates.
- Unusual items: The company recorded a $6.0 million bargain-purchase gain from Caliber, a $55.7 million goodwill amount from Genesis, and $158.2 million of income tax expense, including $151.2 million of deferred tax expense.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor excluded Caliber and Genesis from the internal-control assessment for the first year after acquisition.
Most Important Facts for Investors to Verify
- Whether the company can refinance or roll its substantial short-term and 2022 debt maturities without materially higher funding costs or additional collateral requirements.
- The sensitivity of MSR fair values, earnings, and book value to mortgage rates, prepayment speeds, delinquencies, discount rates, and recapture performance.
- The recoverability and timing of approximately $3.3 billion of servicer advances and the effect of foreclosure timelines or servicer performance.
- The sustainability of the 1.51% gain-on-sale margin and origination volumes as refinancing activity declines.
- The integration, profitability, and final purchase-price accounting for Caliber and Genesis, including the valuation of acquired MSRs and mortgage loans receivable.
- The composition, maturity profile, and recourse exposure of the $29.2 billion debt carrying value, including margin-call and covenant provisions.
- The company’s ability to maintain REIT qualification, its Investment Company Act exclusion, required distributions, and adequate liquidity at regulated mortgage subsidiaries.
- Potential dilution from approximately 21.5 million outstanding options and 43.4 million common-stock warrants, as well as future equity issuance.
- Related-party transactions, including the external management agreement, management fees, Fortress-affiliated investments, and the company’s lending to an affiliate-managed entity.