Rithm Capital Corp. quarterly report, Q3 FY2020

Business Context and Reporting Period

New Residential Investment Corp. (now Rithm Capital Corp.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company operated as a residential mortgage-focused REIT with six segments: Origination, Servicing, MSR Related Investments, Residential Securities and Loans, Consumer Loans, and Corporate. It was externally managed by FIG LLC, an affiliate of Fortress Investment Group.

Operations were materially affected by COVID-19, including market volatility, borrower forbearance, higher servicing obligations, financing-market disruption, and significant changes in asset values. The company had 5,105 employees and approximately $30.4 billion of total assets at quarter-end.

Financial Performance and Key Metrics

Metric	Q3 2020	Q3 2019	9M 2020	9M 2019
Total revenues	$685.0 million	$627.9 million	$1.394 billion	$1.731 billion
Net income (loss)	$103.9 million	$244.7 million	$(1.459) billion	$375.6 million
Net income (loss) attributable to common stockholders	$77.9 million	$224.6 million	$(1.533) billion	$338.2 million
Diluted EPS	$0.19	$0.54	$(3.69)	$0.83
Core earnings	$131.6 million	$186.3 million	$470.2 million	$610.4 million
Core earnings per diluted share	$0.31	$0.45	$1.13	$1.50
Common dividend declared per share	$0.15	$0.50	$0.30	$1.50
Net cash provided by operating activities	Not separately presented	Not separately presented	$1.886 billion	$(2.316) billion

Q3 revenue growth was driven primarily by mortgage origination gains, partially offset by lower interest income and negative net servicing revenue. Nine-month revenue declined because of a smaller investment portfolio, lower interest income, negative servicing fair-value adjustments, and losses on investment settlements.

Gain on originated mortgage loans increased to $495.1 million in Q3 and $984.8 million for the nine months, compared with $126.7 million and $294.9 million, respectively, in the prior-year periods.
Net servicing revenue was $(43.9) million in Q3 and $(459.3) million for the nine months, including negative fair-value effects of $395.1 million and $1.485 billion, respectively.
Interest expense declined to $130.5 million in Q3 and $463.8 million for the nine months, reflecting lower average financed assets and lower rates.
General and administrative expense increased to $316.6 million in Q3 and $859.6 million for the nine months, primarily from higher origination and servicing activity.
Nine-month loss on settlement of investments was $969.0 million, including approximately $753.6 million of losses on real estate securities sales and losses associated with debt extinguishment and derivatives.
Q3 income included a $100.8 million tax expense, while nine-month income taxes were a $48.6 million benefit, primarily reflecting deferred tax effects in taxable REIT subsidiaries.

Financial Position, Liquidity, Debt and Portfolio

Total assets were $30.406 billion at September 30, 2020, down from $44.863 billion at December 31, 2019.
Total liabilities were $24.978 billion and total equity was $5.429 billion at quarter-end. New Residential stockholders’ equity was $5.329 billion.
Cash and cash equivalents were $841.0 million; cash, cash equivalents and restricted cash totaled $1.022 billion.
Debt obligations included $14.667 billion of secured financing agreements, $7.734 billion of secured notes and bonds payable, and $541.8 million of unsecured senior notes, net of issuance costs.
Total debt obligations, including secured and unsecured categories, were approximately $22.942 billion on the balance sheet, excluding certain presentation differences in the debt schedule.
Borrowing capacity was $17.650 billion, with $8.239 billion outstanding and $9.412 billion of reported available financing, subject to eligible collateral and other conditions.
The company reported compliance with all debt covenants at September 30, 2020. Contractual debt maturities totaled $11.672 billion from October 1 through December 31, 2020 and $22.980 billion in total contractual maturities.
Mortgage servicing rights and MSR financing receivables had a combined carrying value of $4.782 billion and related to approximately $461.6 billion of underlying mortgage unpaid principal balance.
Real estate and other securities totaled $10.830 billion, including $9.421 billion of Agency RMBS and $1.409 billion of Non-Agency RMBS.
Residential mortgage loans held-for-sale totaled $4.937 billion, and residential mortgage loans subject to repurchase were $1.458 billion, with an equal repurchase liability.

Material Changes Versus the Prior Comparable Period

Origination volume rose to $37.7 billion for the first nine months of 2020 from $11.8 billion in the prior-year period. Gain-on-sale margin increased to 2.01% from 1.72%.
The servicing portfolio increased to $287.2 billion from $184.3 billion, supported in part by Ditech-related transfers and other portfolio growth.
MSR and MSR financing receivable fair values declined from $5.686 billion at December 31, 2019 to $4.782 billion at September 30, 2020, due primarily to amortization, valuation changes, and transfers between categories.
Real estate and other securities declined from $19.478 billion to $10.830 billion, reflecting substantial sales and balance-sheet de-risking during the COVID-19 market disruption.
Secured financing agreements declined from $27.916 billion to $14.667 billion.
Total equity declined from $7.236 billion to $5.429 billion, driven principally by the nine-month net loss and accumulated other comprehensive losses.
The company issued $550.0 million of 6.25% senior unsecured notes due 2025 and used the proceeds, together with cash, to retire the $600.0 million 2020 Term Loan. The refinancing generated a $61.1 million loss on extinguishment of debt.
The company issued $389.5 million of Series C preferred stock in February 2020. It also issued warrants exercisable for up to approximately 43.4 million common shares in connection with the 2020 Term Loan; the term loan was later retired, but the warrants remained outstanding.
Common dividends were reduced from $0.50 per share in late 2019 to $0.05 in Q1 2020, then increased to $0.10 in Q2 and $0.15 in Q3.

Guidance, Outlook, Commentary and Risks

Management expected market volatility to remain elevated through the balance of 2020 because of the uncertain duration and economic effects of COVID-19. Management stated that cash on hand, operating cash flow, and the ability to roll secured financing and servicer advance facilities were expected to meet anticipated liquidity needs for the next 12 months, while acknowledging significant refinancing and margin-call risk.

Approximately 208,400 homeowners serviced by Shellpoint indicated COVID-related hardship during the first nine months; approximately 176,800 were placed on forbearance plans and 75,300 plans remained active at September 30.
Forbearance can defer servicing revenue, increase servicing costs and advances, and delay cash recovery.
The company had $14.7 billion of repurchase-agreement exposure subject to margin requirements. Declines in collateral values could require substantial additional cash or asset sales.
Management pursued securitizations, term financing, longer-term financing, and additional equity or debt issuance to reduce reliance on daily mark-to-market funding, but stated that access and terms were not assured.
Key valuation sensitivities include interest rates, prepayment speeds, delinquencies, defaults, loss severities, discount rates and MSR recapture rates. A 50-basis-point parallel interest-rate increase was estimated to increase fair value by $148.6 million, while a 50-basis-point decrease was estimated to reduce fair value by $196.0 million at September 30, 2020.
The company remained exposed to counterparty and servicing-partner risks involving Mr. Cooper, LoanCare, PHH, OneMain and other parties, including servicing termination, bankruptcy, regulatory action, performance failures and delayed advance recoveries.
The company had $1.5 billion of estimated liability associated with Ginnie Mae repurchases and $9.6 million of estimated representations-and-warranties liability at September 30, 2020.
Management continued to monitor LIBOR transition risk, as significant debt, asset and derivative contracts were indexed to LIBOR.
The company intended to maintain REIT qualification and its exclusion from registration under the Investment Company Act, but changes in asset values, income composition, regulation or tax rules could jeopardize those objectives.
Legal proceedings and regulatory inquiries arose in the ordinary course. Management did not believe currently known inquiries would have a material adverse effect, but noted that future adverse outcomes could be material.

Important Facts for Investors to Verify

Reconcile the $1.533 billion nine-month loss attributable to common stockholders with the $470.2 million of reported core earnings and assess the sustainability of each measure.
Review the composition, maturity and refinancing terms of the $22.980 billion of contractual debt maturities, particularly the $11.672 billion due in the fourth quarter of 2020.
Evaluate liquidity after considering repurchase-agreement margin exposure, servicing advances, Ginnie Mae repurchase obligations and restrictions on cash held at regulated subsidiaries.
Assess sensitivity of MSR values and earnings to refinancing activity, prepayments, delinquencies, forbearance, discount rates and recapture performance.
Verify the economic impact and dilution potential of the approximately 43.4 million outstanding 2020 warrants and approximately 14.4 million outstanding options.
Review the terms, covenants and collateral protections of the 2025 Senior Notes and other secured financing arrangements.
Examine concentration and counterparty exposure to major servicers, subservicers and financing providers, including the status of required servicing transfers and consents.
Confirm the company’s ability to maintain REIT and Investment Company Act exclusions while operating through taxable REIT subsidiaries and holding mortgage-related and consumer-loan assets.