New Residential Investment Corp. 2020 Form 10-K Summary
Business context and reporting period
The filing is an annual Form 10-K for the fiscal year ended December 31, 2020, filed February 16, 2021. The requested “2020 Q4” period is therefore covered as part of the full-year filing, not as a standalone quarterly report. New Residential Investment Corp. (NYSE: NRZ), now operating as Rithm Capital Corp., was an externally managed REIT focused on mortgage-related investments and vertically integrated origination and servicing businesses.
The principal segments were Origination, Servicing, MSR Related Investments, Residential Securities and Loans, Consumer Loans, and Corporate. The company’s strategy relied on mortgage servicing rights (MSRs), mortgage origination and servicing, Agency and Non-Agency RMBS, residential mortgage loans, consumer loans, leverage, and hedging.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $1.947 billion | $2.611 billion | Down 25.5% |
| Net income attributable to common stockholders | $(1.465) billion | $550.0 million | Down $2.015 billion |
| Diluted EPS | $(3.52) | $1.34 | Declined |
| Core earnings, non-GAAP | $607.2 million | $886.8 million | Down 31.5% |
| Core earnings per diluted share | $1.46 | $2.17 | Down 32.7% |
| Cash flow from operating activities | $1.856 billion | $(1.623) billion | Improved $3.478 billion |
| Cash and cash equivalents | $944.9 million | $528.7 million | Up $416.1 million |
| Total assets | $33.252 billion | $44.863 billion | Down 25.9% |
| Total debt liabilities | $25.733 billion | $35.636 billion | Down $9.903 billion |
| New Residential stockholders’ equity | $5.321 billion | $7.158 billion | Down 25.7% |
Interest income declined 37.6% to $1.103 billion, while interest expense declined 37.4% to $584.5 million. General and administrative expenses increased 43.2% to $1.120 billion, largely reflecting the expansion of origination and servicing operations. The company recorded a $930.1 million net loss on settlement of investments, including substantial Non-Agency RMBS sales losses, compared with a $228.0 million gain in 2019. Credit and valuation provisions increased to $123.6 million from $35.6 million.
Portfolio, operating performance, and liquidity
- NewRez funded $61.6 billion of mortgage originations, up from $22.3 billion in 2019. Refinance loans represented 71% of volume versus 55% in 2019.
- Gain-on-sale margin increased to 1.85% from 1.56%. Origination revenue was $1.399 billion, up 204.1%.
- The servicing portfolio increased 35.7% to $297.8 billion of unpaid principal balance and approximately 1.73 million customers.
- Total servicing fee revenue increased 98.8% to $417.4 million, but servicing revenue net of fair-value changes was a $(555.0) million loss because of MSR fair-value declines.
- MSRs and MSR financing receivables had a $4.586 billion carrying value at year-end. Full and Excess MSR exposure declined to $536 billion of unpaid principal balance from $627 billion, primarily because of elevated refinancing and prepayments.
- Agency RMBS carrying value increased to $13.064 billion from $11.520 billion and generated a reported 1.98% net interest spread at year-end. Non-Agency RMBS carrying value fell to $1.181 billion from $7.958 billion.
- Servicer advances were $3.5 billion at year-end, compared with $3.7 billion in 2019. Servicer Advance Investments had a carrying value of $538.1 million.
- Total debt obligations, including secured financing agreements and secured notes and bonds payable, were approximately $25.2 billion at carrying value. The company also had $541.5 million of unsecured senior notes outstanding.
- Borrowing capacity was reported at $20.078 billion, with $10.048 billion outstanding and $10.030 billion of available financing subject to eligible collateral and other conditions.
- Approximately $18.069 billion of debt obligations had contractual maturities in 2021, making refinancing and rollover capacity critical to liquidity.
Material changes versus the prior comparable period
- COVID-19 market dislocation led to margin calls, asset sales, sharply lower Non-Agency RMBS exposure, and a substantial reduction in total assets and debt.
- The company sold approximately $5.3 billion of Non-Agency RMBS during 2020 and recorded approximately $953.5 million of losses on those sales; it also sold approximately $65.5 billion of residential mortgage loans.
- Financing shifted toward longer-term, non-daily-mark-to-market structures. The company priced 17 securitizations totaling approximately $8.0 billion and increased the use of capital-markets financing.
- The company issued $402.5 million of Series C preferred stock and later issued $550.0 million of 6.25% senior unsecured notes due 2025. The notes refinanced and retired a $600.0 million senior secured term loan carrying an 11.0% fixed rate.
- Common dividends were reduced from $0.50 per share in the first quarter to $0.05, then increased to $0.10, $0.15, and $0.20 per share in the second through fourth quarters. Total 2020 common dividends declared were $0.50 per share versus $2.00 in 2019.
- Active COVID-19 forbearance declined to 3.4% of the servicing portfolio at year-end from 10.5% at the end of the second quarter. Active forbearance for the Full MSR portfolio was 5.5%.
- Adoption of CECL resulted in a $13.7 million positive cumulative adjustment to retained earnings, with the company electing fair value accounting for held-for-investment residential mortgage and consumer loans.
Guidance, outlook, management commentary, and risks
Management stated that cash on hand, operating cash flow, asset repayments and sales, and the expected rollover of secured financing and servicer-advance facilities should be sufficient for anticipated liquidity needs over the next 12 months. This outlook depends heavily on the continued availability and renewal of short-term financing and the absence of renewed market disruption.
Management expected mortgage origination volumes to remain elevated in 2021 and 2022, although refinance activity was expected to normalize. Non-QM production, paused at the onset of COVID-19, restarted in the first quarter of 2021. The company also expected continued opportunities in mortgage servicing, single-family rental housing, and other mortgage-related investments.
- COVID-19 remained the principal uncertainty, including borrower delinquencies, forbearance, foreclosure delays, servicing advances, asset valuations, employee availability, and financing access.
- Interest-rate declines and refinancing activity can reduce MSR and Excess MSR values through faster prepayments. Higher delinquencies can increase servicing costs and advance requirements.
- Counterparty, servicer, subservicer, and vendor concentration creates risks of performance deterioration, termination, bankruptcy, regulatory action, or loss of servicing rights.
- Repurchase agreements and other secured financing may require margin calls, higher haircuts, refinancing, or accelerated repayment. The company had substantial 2021 maturities and approximately $17.6 billion of financing subject to margin exposure.
- MSR, loan, and Non-Agency RMBS valuations depend significantly on Level 3 assumptions, including prepayment rates, delinquencies, defaults, loss severities, discount rates, servicing costs, and recapture rates.
- The company must maintain REIT qualification and its exclusion from registration under the Investment Company Act of 1940. Failure could materially restrict operations, increase taxes, force asset sales, and impair distributions.
- Mortgage origination and servicing activities are subject to extensive federal and state regulation, licensing requirements, litigation, examinations, cybersecurity obligations, and potential repurchase or indemnification claims.
- LIBOR reform and the transition to alternative reference rates could affect contracts, hedging, financing costs, and asset valuations.
- The company disclosed no current legal proceeding that it believed would have a material adverse effect, but noted that adverse outcomes from litigation, regulatory inquiries, and investigations could be material.
Important facts for investors to verify
- Whether the reported liquidity outlook remains credible given the concentration of 2021 debt maturities and reliance on refinancing and secured financing rollovers.
- Current MSR and Excess MSR fair values, prepayment speeds, delinquency assumptions, recapture rates, and the sensitivity of book value to these inputs.
- Actual COVID-19 forbearance resolution, delinquency migration, foreclosure timelines, and the resulting servicer advance funding and recovery requirements.
- Performance, financial condition, regulatory status, and servicing ratings of major counterparties and subservicers, including NewRez, PHH, LoanCare, Mr. Cooper, and SLS.
- Progress and economics of pending or conditional MSR transfers, including the remaining Ocwen-related transactions and required third-party consents.
- Debt covenants, collateral triggers, margin requirements, maturities, and available financing after considering eligible collateral constraints.
- The sustainability of common and preferred stock distributions given the 2020 GAAP loss, reduced common dividend, REIT distribution requirements, and cash-flow volatility.
- The dilution and overhang associated with approximately 43.4 million common-stock warrants issued with the 2020 term loan and approximately 14.4 million outstanding stock options.
- The effect of related-party transactions, including the external management agreement, Fortress-affiliated investments, and the company’s sale of Non-Agency RMBS to a Fortress-affiliated purchaser.