Business Context and Reporting Period
This Form 8-K is a current report filed by New Residential Investment Corp. (the "Company") on January 30, 2017. The filing discloses estimated preliminary financial results for the fourth quarter and full year ended December 31, 2016, and details significant recent developments regarding the acquisition of mortgage servicing rights (MSRs) and refinancing activities.
Key Financial Metrics
The Company provided estimated ranges for its preliminary operating results, noting that final figures may vary upon completion of closing procedures.
| Metric | Q4 2016 (Estimated) | Full Year 2016 (Estimated) |
|---|---|---|
| Net Income per Diluted Share | $0.87 to $0.91 | $2.09 to $2.13 |
| Core Earnings (Non-GAAP) per Diluted Share | $0.59 to $0.63 | $2.12 to $2.16 |
| Net Income Attributable to Common Stockholders | $219.7M to $229.7M | $499.0M to $509.0M |
| Core Earnings Total | $149.2M to $159.2M | $505.0M to $515.1M |
Dividend Update: On January 26, 2017, the Board of Directors approved an increase in the quarterly dividend to $0.48 per common share for the first quarter of 2017.
Material Changes and Operational Drivers
The primary drivers of the estimated preliminary results for the fourth quarter included:
- Interest Rates and Prepayments: Marked increases in market interest rates during the quarter increased the value of the Company's MSRs by extending the duration of expected future cash flows due to lower prepayment rates.
- Call Rights Execution: The Company called non-agency residential mortgage-backed securities (RMBS) relating to 14 securitizations with an aggregate unpaid principal balance (UPB) of approximately $416.9 million. It subsequently securitized approximately $274.2 million UPB of performing loans acquired from these calls.
- MSR Acquisitions: The Company acquired MSRs on residential mortgage loans with a total UPB of approximately $82.1 billion for an aggregate purchase price of approximately $572.5 million.
Guidance, Outlook, and Recent Developments
Pending MSR Acquisitions:
- CitiMortgage Transaction: Agreed to purchase MSRs and related servicer advances on approximately $97.0 billion UPB of loans for approximately $950.0 million (plus $32.0 million in advances). Expected to close in Q1 2017, subject to regulatory approvals. Nationstar is selected as the subservicer.
- PHH Transaction: Agreed to purchase MSRs and advances on approximately $72.0 billion UPB of loans for approximately $612.0 million (plus $300.0 million in advances). Expected to settle in Q2 2017, subject to shareholder and regulatory approvals.
Financing Activities:
- Refinanced $1.4 billion of floating rate debt with fixed-rate term notes in October and November 2016.
- Refinanced $800 million of fixed-rate term notes in December 2016, reducing the weighted average cost of funds from 3.58% to 3.48% per annum.
- Completed a $1.7 billion refinancing of SpringCastle consumer-loan backed securitization in October 2016, reducing the weighted average cost of funds from 4.5% to 3.6% per annum.
Risks and Contingencies:
- Counterparty Concentration: Significant reliance on Citi, PHH, Ditech, and Nationstar for subservicing. A CFPB consent order against Citi announced on January 23, 2017, introduces uncertainty regarding the Citi Transaction.
- Bankruptcy Risk: Risks associated with the re-characterization of MSR sales as pledges in a counterparty bankruptcy, which could impact the Company's secured creditor status.
- Integration Risks: Challenges in integrating acquired assets into Nationstar's servicing platform could disrupt operations and affect returns.
Investor Verification Checklist
- Verify the final audited financial results for Q4 and FY 2016 against these preliminary estimates once the 10-K is filed.
- Monitor the status of regulatory and GSE approvals required for the pending $97.0 billion Citi and $72.0 billion PHH MSR acquisitions.
- Assess the impact of the CFPB consent order against Citi on the execution and valuation of the Citi Transaction.
- Review the Company's liquidity position given the increased quarterly dividend of $0.48 per share and the capital requirements for pending acquisitions.
- Confirm the successful integration of the Citi portfolio into Nationstar's servicing systems to mitigate operational risk.