Rithm Capital Corp. annual report, FY2015

New Residential Investment Corp. (now Rithm Capital Corp.) — FY 2015 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2015. The filing was issued February 25, 2016 and reports the company under its former name, New Residential Investment Corp. The company was an externally managed REIT focused on residential mortgage-related assets, including excess mortgage servicing rights (Excess MSRs), servicer advances, residential mortgage-backed securities (RMBS), residential loans and related opportunistic investments.

Key Financial Metrics

Metric	2015	2014	Change
Interest income	$645.1 million	$346.9 million	+86.0%
Interest expense	$274.0 million	$140.7 million	+94.7%
Net interest income	$371.1 million	$206.1 million	+80.0%
Impairment	$24.4 million	$11.3 million	+116.1%
Other income	$42.0 million	$375.1 million	-88.8%
Operating expenses	$117.8 million	$104.9 million	+12.3%
Net income attributable to common stockholders	$268.6 million	$352.9 million	-23.9%
Basic / diluted EPS	$1.34 / $1.32	$2.59 / $2.53	Declined
Core earnings	$388.8 million	$219.3 million	+77.3%
Dividends declared per share	$1.75	$1.58	+10.8%

Core earnings is a non-GAAP measure that excludes or adjusts for fair-value changes, impairments, certain transaction costs, incentive compensation and other items. It is not a substitute for GAAP net income or operating cash flow.

Balance Sheet, Liquidity and Leverage

Total assets were $15.2 billion, compared with $8.1 billion at December 31, 2014.
Total debt was $11.3 billion, compared with $6.1 billion at year-end 2014. Weighted-average funding cost was 2.77%, with a weighted-average debt life of approximately one year.
Total equity was $3.0 billion, including $2.8 billion attributable to New Residential stockholders. Book value per share was $12.13, compared with $11.28 in 2014.
Cash and cash equivalents were $249.9 million, and restricted cash was $94.7 million.
Available financing under specified residential-loan and servicer-advance facilities was approximately $3.0 billion, subject to eligible collateral and other borrowing conditions.
Net cash provided by operating activities was $320.8 million, compared with cash used of $168.1 million in 2014. Cash used in investing activities was $312.7 million, while financing activities provided $28.9 million.
Debt maturities totaled approximately $6.5 billion in 2016, $4.5 billion in 2017 and $368.4 million in 2018. The company stated that debt obligations maturing in January or February 2016 had been refinanced, extended or repaid.

Portfolio and Business Changes

Excess MSRs had a carrying value of approximately $1.8 billion and were linked to mortgage pools with approximately $402.4 billion of unpaid principal balance.
Servicer advances had a carrying value of approximately $7.4 billion and represented the largest portfolio exposure. Related advances had a face amount of $7.6 billion and were financed with approximately $7.1 billion of notes.
Real estate securities had a carrying value of $2.5 billion, including $917.6 million of Agency RMBS and $1.6 billion of Non-Agency RMBS.
Residential mortgage loans and REO had carrying values of approximately $1.1 billion and $50.6 million, respectively. A substantial portion of the loan portfolio was held for sale or consisted of credit-deteriorated loans.
The company completed the HLSS acquisition on April 6, 2015, acquiring substantially all of Home Loan Servicing Solutions’ assets and assuming substantially all of its liabilities. Total consideration was approximately $1.5 billion, including $1.0 billion in cash, 28.3 million shares of common stock and other consideration. The acquisition added substantial Excess MSRs, servicer advances, Ginnie Mae early-buyout loans and related financing.
HLSS contributed $282.3 million of interest income and $131.5 million of income before taxes after the acquisition date. The acquisition materially increased both the company’s assets and leverage.
The company issued approximately $882.2 million of common stock during 2015, including public offerings and shares issued in connection with the HLSS acquisition. Shares outstanding increased to 230.5 million from 141.4 million.
The consumer-loan investment had a $0 carrying value on New Residential’s balance sheet after prior refinancing distributions exceeded the company’s basis, although the company retained an economic interest in future cash flows.

Material Changes Versus 2014

Net interest income rose substantially because of portfolio growth, particularly from HLSS-related servicer advances and Excess MSRs.
Interest expense grew faster than interest income, reflecting increased leverage and financing associated with servicer advances, corporate borrowings, RMBS and residential loans.
GAAP net income declined because 2014 included significantly higher other income, including consumer-loan earnings, a large refinancing-related gain and stronger fair-value gains on servicer advances.
Servicer-advance fair-value results shifted from an $84.2 million gain in 2014 to a $57.5 million loss in 2015, primarily due to higher discount-rate assumptions and the acquired HLSS portfolio.
Impairments increased to $24.4 million, including $5.8 million of other-than-temporary impairment on securities and $18.6 million of valuation provisions on loans and REO.
Net interest spreads improved to 2.15% for Agency RMBS from 1.87% and to 3.31% for Non-Agency RMBS from 1.85%, primarily reflecting higher yields on newer purchases, partly offset by higher funding costs.
2015 quarterly dividends increased from $0.38 per share in the first quarter to $0.46 per share in the third and fourth quarters.

Guidance, Outlook, Risks and Unusual Items

Management expected continuing opportunities in MSRs and related assets as banks reduce servicing exposure and nonbank servicers seek capital. It estimated that up to $2 trillion of MSRs could become available over the following several years, but cautioned that competition and pricing could reduce future returns.
Management expected cash on hand, operating cash flow and the ability to roll repurchase agreements and servicer-advance financings to satisfy anticipated liquidity needs for the next twelve months. This outlook depended on continued financing access and collateral performance.
The business is highly sensitive to prepayment rates, delinquencies, defaults, interest rates, credit spreads, foreclosure timelines and servicer performance. Most Excess MSR and servicer-advance valuations were Level 3 fair values based on internal discounted-cash-flow models.
Nationstar, Ocwen and OneMain represented significant counterparty and servicing concentrations. Servicer termination, bankruptcy, regulatory action, rating downgrades or servicing deficiencies could materially reduce asset cash flows or values.
Ocwen rating downgrades triggered a specified default under the HSART financing in October 2015 and caused $2.5 billion of term notes to become immediately due. The notes were repaid using variable funding notes. A court later ruled that no event of default had occurred under HSART, releasing $92.7 million of restricted cash. The company also paid $9.1 million under a settlement with certain HSART bondholders.
The company assumed HLSS-related litigation, regulatory matters and contingent liabilities. It did not accrue losses for the disclosed legal contingencies because management did not believe losses were probable and reasonably estimable, but stated that ultimate outcomes could materially affect results.
The company remained dependent on maintaining REIT qualification and its exclusion from registration under the Investment Company Act. Failure to satisfy these requirements could result in significant taxes, operational restrictions, forced asset sales or loss of the NYSE listing.
The company paid $244.2 million of interest and $303.0 million of common dividends during 2015. It declared a fourth-quarter dividend of $0.46 per share, paid January 29, 2016.
Management and Ernst & Young reported effective internal control over financial reporting as of December 31, 2015. The company stated that additional controls over asset-acquisition valuation models remediated a material weakness identified in prior quarters.

Most Important Facts for Investors to Verify

Whether current servicer performance, ratings and regulatory status at Nationstar and Ocwen support the carrying values of Excess MSRs and servicer advances.
The maturity, refinancing and margin-call profile of the approximately $11.3 billion debt stack, particularly the large 2016 maturities and servicer-advance facilities.
The reasonableness of Level 3 valuation assumptions, including discount rates, prepayment speeds, delinquency rates, recoveries and recapture rates.
The sustainability of core earnings and dividends after separating recurring cash earnings from fair-value gains, acquisition-related items, impairments and other non-recurring items.
The ultimate exposure from HLSS-related litigation, regulatory inquiries, assumed liabilities and contingent claims, for which the filing provides no clear loss estimate.
The effects of the HLSS acquisition on leverage, financing costs, noncontrolling interests, operating expenses and future cash flows.
Continued compliance with REIT requirements and the Investment Company Act exclusion, including the treatment of Excess MSRs, servicer advances, TBAs and taxable REIT subsidiaries.