New Residential Investment Corp. 2016 Form 10-K Summary
Filing identity: The supplied filing is for New Residential Investment Corp. (NYSE: NRZ), the predecessor name of Rithm Capital Corp., for the fiscal year ended December 31, 2016. It is an annual filing, not a standalone fourth-quarter filing; quarterly information is included in the filing.
Business context and reporting period
New Residential was an externally managed REIT focused on residential real estate-related investments, including Excess Mortgage Servicing Rights (Excess MSRs), mortgage servicing rights (MSRs), Servicer Advances, Agency and Non-Agency RMBS, residential mortgage loans, real estate owned assets and consumer loans. FIG LLC, an affiliate of Fortress Investment Group, served as manager.
In 2016, New Residential's subsidiary New Residential Mortgage LLC became a licensed mortgage servicer. The company also obtained control of the SpringCastle consumer-loan businesses in March 2016 and began consolidating them.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Interest income | $1.077 billion | $645.1 million | +66.9% |
| Interest expense | $373.4 million | $274.0 million | +36.3% |
| Net interest income | $703.3 million | $371.1 million | +89.5% |
| Impairment | $88.0 million | $24.4 million | +260.8% |
| Servicing revenue, net | $118.2 million | — | New in 2016 |
| Other income | $62.3 million | $42.0 million | +48.3% |
| Operating expenses | $174.2 million | $117.8 million | +47.9% |
| Net income | $582.7 million | $281.9 million | +106.7% |
| Net income attributable to common stockholders | $504.5 million | $268.6 million | +87.8% |
| Basic EPS | $2.12 | $1.34 | +58.2% |
| Core earnings | $510.8 million | $388.8 million | +31.4% |
The filing does not provide a consolidated revenue figure comparable to an operating company; interest income, servicing revenue and other income are the principal reported revenue components. Net income margin based on these reported components was approximately 47% in 2016, versus approximately 40% in 2015, although the comparison is affected by fair-value changes, investment gains and the SpringCastle consolidation.
- Cash and cash equivalents were $290.6 million, with total cash, cash equivalents and restricted cash of $453.7 million at year-end.
- Operating cash flow was $560.8 million, compared with $306.5 million in 2015.
- Investing cash flow was negative $182.6 million; financing cash flow was negative $269.2 million.
- Total assets increased to $18.365 billion from $15.193 billion.
- Total debt increased to $13.181 billion from $11.293 billion.
- Total New Residential stockholders' equity increased to $3.260 billion from $2.796 billion; book value per share increased to $13.00 from $12.13.
- Common dividends declared were $1.84 per share for 2016, or $0.46 per quarter.
Portfolio, margins and liquidity
| Investment category | Carrying value at December 31, 2016 | Share of investment portfolio |
|---|---|---|
| Servicer Advances | $5.707 billion | 37.0% |
| Non-Agency RMBS | $3.544 billion | 22.2% |
| Consumer loans | $1.799 billion | 11.7% |
| Agency RMBS | $1.530 billion | 10.0% |
| Excess MSRs | $1.594 billion | 9.1% |
| Residential mortgage loans | $887.4 million | 5.9% |
| MSRs | $659.5 million | 3.6% |
| REO | $59.6 million | 0.5% |
- Total debt had a weighted average funding cost of 2.91% and a weighted average life of 1.8 years.
- Repurchase agreements totaled $5.194 billion and notes and bonds payable totaled $7.991 billion.
- Available financing capacity was reported at $2.635 billion, subject to eligible collateral and other borrowing conditions.
- Agency RMBS net interest spread was 1.94%, down from 2.15% at December 31, 2015.
- Non-Agency RMBS net interest spread was 3.46%, up from 3.31% at December 31, 2015.
- The company reported compliance with all debt covenants at December 31, 2016.
- NRM held approximately $95.8 million of cash and cash equivalents, of which $57.3 million was above regulatory liquidity requirements and available for deployment.
Material changes versus the prior comparable period
- SpringCastle transaction: New Residential acquired an additional 23.5% interest in the Consumer Loan Companies, increasing ownership to 53.5% and resulting in consolidation. This added approximately $1.8 billion of consumer-loan debt and generated a $71.3 million remeasurement gain.
- MSR platform expansion: NRM acquired Agency MSRs and related Servicer Advances in transactions with Ditech/Walter, WCO and FirstKey. The resulting MSR carrying value was $659.5 million at year-end, compared with none at year-end 2015.
- Portfolio growth and repositioning: Real estate securities increased to $5.074 billion from $2.502 billion, while Servicer Advances declined to $5.707 billion from $7.427 billion.
- Credit and valuation charges: Total impairment rose to $88.0 million, primarily due to consumer-loan provisions, REO impairment and higher securities impairment.
- Capital raising: The company issued 20.0 million common shares in August 2016 for approximately $278.8 million of net proceeds.
- Operating leverage: Interest income and net interest income grew substantially, but incentive compensation, loan servicing expense and subservicing expense also increased.
- Market effects: Rising mortgage rates and slower prepayments in the fourth quarter supported MSR valuations. Direct and equity-method Excess MSR fair value increased by approximately $18.5 million during the quarter, while full MSR fair value increased by approximately $88.3 million from acquisition through year-end.
Guidance, outlook, commentary, risks and unusual items
Management expected cash on hand, operating cash flow and the ability to roll repurchase agreements and Servicer Advance financings to meet anticipated liquidity needs for the next twelve months. Management also expected net recoveries of Servicer Advances to exceed net fundings for the foreseeable future, but warned that an economic downturn could reverse that relationship.
Following year-end, the company announced or entered into several significant transactions: a planned acquisition of approximately $97.0 billion of MSRs and related Servicer Advances from CitiMortgage; a February 2017 common stock offering that raised approximately $834.6 million net; a financing facility of up to $300.0 million secured by Agency MSRs; and a $400.0 million Servicer Advance note issuance. These transactions were subject to regulatory approvals, closing conditions or other execution risks.
- Material exposure exists to Nationstar, Ocwen, Ditech, FirstKey, PHH and OneMain as servicers or counterparties. Servicer termination, bankruptcy, rating downgrades, regulatory actions or servicing failures could impair asset values, financing and cash flows.
- Servicer Advances are non-interest-bearing and may be delayed, reduced or become unrecoverable. Foreclosure delays can increase required advances and financing needs.
- MSR and Excess MSR valuations depend heavily on prepayment, delinquency, recapture, servicing-cost and discount-rate assumptions. Most of these assets are Level 3 fair-value measurements.
- The company is highly leveraged and exposed to margin calls and refinancing risk, particularly because approximately $5.2 billion of repurchase agreements were subject to margin exposure and generally had short maturities.
- Non-Agency RMBS, residential mortgage loans and consumer loans carry meaningful credit, delinquency, default and loss-severity risk. Total 2016 impairment included $53.8 million of consumer-loan provision expense.
- The company relies on maintaining REIT qualification and exclusions from registration under the Investment Company Act. Failure to satisfy these requirements could result in material tax, operational and financing consequences.
- The Management Agreement provides for a 1.5% annual management fee based on gross equity and performance-based incentive compensation. Affiliate conflicts and related-party transactions are significant considerations.
- The company assumed certain HLSS contingent and corporate liabilities. Management stated that losses were not probable and reasonably estimable, but adverse outcomes could still be material.
- Fortress announced in February 2017 a pending merger with an affiliate of SoftBank. Management expected key investment professionals to remain, but the filing identified potential uncertainty regarding the manager relationship.
Most important facts for an investor to verify
- Confirm the corporate-name continuity between New Residential Investment Corp. in this filing and the current Rithm Capital Corp. entity.
- Reconcile GAAP net income of $504.5 million attributable to common stockholders with core earnings of $510.8 million and identify the effect of fair-value changes, impairment and the $71.3 million SpringCastle remeasurement gain.
- Review debt maturities, repurchase-agreement rollover requirements, margin-call terms and the $2.635 billion of reported available financing capacity.
- Assess counterparty and servicer concentration, including the portions of MSR, Excess MSR and Servicer Advance portfolios dependent on Nationstar, Ocwen and Ditech.
- Test the sensitivity of MSR, Excess MSR, RMBS and loan valuations to prepayment rates, delinquency, credit spreads, discount rates and recapture assumptions.
- Determine whether the planned Citi and PHH MSR transactions closed as contemplated and evaluate their effect on leverage, liquidity, servicing concentration and earnings.
- Review the contingent liabilities, regulatory matters and litigation inherited from HLSS and involving Ocwen-related activities.
- Verify the sustainability of the $0.48 per-share quarterly dividend declared for the first quarter of 2017 against taxable income, operating cash flow, liquidity and financing covenants.