Rithm Capital Corp. quarterly report, Q2 FY2023

Business Context and Reporting Period

Rithm Capital Corp. is an internally managed REIT focused on mortgage servicing rights, mortgage origination and servicing, residential and consumer loans, residential securities, single-family rentals and commercial real estate-related investments. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared primarily with the same periods in 2022 and, for selected operating results, the quarter ended March 31, 2023.

Financial Performance and Position

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Total revenue	$1.038 billion	$1.321 billion	$1.822 billion	$3.049 billion
Net income	$386.7 million	$33.3 million	$476.6 million	$723.3 million
Net income attributable to common stockholders	$357.4 million	$(3.3) million	$426.3 million	$658.6 million
Basic EPS	$0.74	$(0.01)	$0.89	$1.41
Common dividend declared per share	$0.25	$0.25	$0.50	$0.50
Net cash from operating activities	Not separately provided	Not separately provided	$1.232 billion	$5.355 billion

Q2 net income attributable to common stockholders represented approximately 34.4% of revenue; six-month attributable earnings represented approximately 23.4% of revenue. These ratios are affected substantially by fair-value changes, derivative gains and losses, and other non-cash items and should not be viewed as recurring operating margins.

Servicing revenue, net was $487.6 million in Q2 and $815.1 million for the six months. The Q2 amount included a $22.0 million positive change in MSR and MSR financing receivable fair value; the six-month amount included a $120.3 million negative change.
Interest income was $398.8 million in Q2 and $745.4 million for the six months, up materially year over year due primarily to higher rates and increased custodial float income.
Gain on originated residential mortgage loans was $151.8 million in Q2 and $261.1 million for the six months.
Interest expense and warehouse fees were $329.2 million in Q2 and $638.2 million for the six months, reflecting higher average financing rates.
Realized and unrealized investment gains were $89.4 million in Q2 and $13.8 million for the six months, compared with losses in the 2022 comparable periods.
Total assets were $33.9 billion at June 30, 2023, including $8.7 billion of MSRs and MSR financing receivables, $9.7 billion of real estate and other securities, $1.6 billion of consumer loans and $1.9 billion of mortgage loans receivable.
Total equity was $7.2 billion, including $7.1 billion attributable to Rithm stockholders. Book value per common share was $12.16, compared with $12.00 at December 31, 2022 and $12.28 at June 30, 2022.

Material Changes Versus Comparable Periods

Six-month revenue declined 40.3% year over year, largely because 2022 included substantially larger positive MSR fair-value adjustments and higher mortgage origination volumes.
Six-month net income declined 34.1%, while common-stockholder earnings declined 35.3%. The comparison was affected by the absence of the $400.0 million termination fee paid to the former external manager in 2022 and by lower 2023 fair-value gains.
Mortgage origination volume fell to $16.9 billion for the six months from $45.9 billion, and the gain-on-sale margin declined to 1.39% from 1.68%. Q2 funded volume improved sequentially to $9.9 billion from $7.0 billion, but the Q2 gain-on-sale margin decreased to 1.25% from 1.61% in Q1.
The servicing portfolio increased to $506.0 billion of unpaid principal balance from $498.0 billion a year earlier. MSR and MSR financing receivable UPB declined to $532.4 billion from $548.1 billion.
Consumer loans increased to $1.6 billion from $363.8 million at year-end 2022, primarily from the June 2023 acquisition of approximately $1.3 billion of Marcus consumer loans from Goldman Sachs.
Debt increased to $23.1 billion of secured financing agreements and secured notes and bonds payable, compared with $21.4 billion at December 31, 2022. Including unsecured senior notes, total debt liabilities were approximately $23.6 billion.
General and administrative expense declined year over year by $122.8 million and compensation expense declined by $353.8 million, primarily reflecting lower origination activity and related staffing and commission costs.

Cash Flow, Debt and Liquidity

Cash, cash equivalents and restricted cash totaled $1.689 billion at June 30, 2023, including $1.369 billion of unrestricted cash. Total cash increased $71.2 million during the first six months.
Operating cash flow was $1.232 billion, investing cash flow was $(826.7) million and financing cash flow was $(334.4) million. Investing outflows included purchases of RMBS, $1.0 billion of Treasury bills and servicer advance investments.
Secured financing agreements totaled $12.8 billion, with a weighted-average funding cost of 5.9%. Secured notes and bonds payable totaled $10.3 billion, with a weighted-average funding cost of 6.2%. Unsecured senior notes had a carrying value of $545.9 million and mature in October 2025.
Contractual debt maturities totaled $12.3 billion from July through December 2023 and $5.3 billion in 2024. Management stated that cash, operating cash flow and the expected ability to roll financing should meet anticipated needs for the next 12 months, but this depends materially on continued access to short-term financing.
Reported borrowing capacity was $13.5 billion, although the filing states that this capacity is uncommitted and dependent on eligible collateral and other borrowing conditions.
The company had margin exposure on approximately $12.8 billion of secured financing agreements. It was in compliance with debt covenants at June 30, 2023.

Outlook, Commentary, Risks and Unusual Items

Management cited elevated interest rates, inflation, banking-sector volatility and uncertain mortgage-market conditions as important drivers of results. Higher rates increase financing costs and can reduce origination volumes, while also affecting MSR values, prepayments, collateral values and margin requirements.
No formal earnings guidance is provided. Management expects to meet near-term liquidity needs through cash, operating cash flow, refinancing or rolling secured borrowings, and available financing; failure to renew or replace short-term borrowings could require asset sales or reduced investment activity.
The company transitioned financing arrangements from LIBOR to alternative benchmarks, including SOFR, by June 30, 2023. Series A, B and C preferred stock retain existing LIBOR cessation fallback language, which could increase future dividend costs when those securities reset.
Servicer advance receivables totaled approximately $2.5 billion before reserves, with a $92.9 million reserve for expected non-recovery. The company remains exposed to increased advances, delayed recoveries, servicer performance and counterparty failures.
Capital commitments included $95.6 million for 371 single-family rental properties, up to $579.5 million of additional Genesis mortgage-loan advances, and $195.7 million of unfunded consumer-loan revolving commitments. The company also estimated $55.4 million of mortgage representation-and-warranty exposure and $1.3 billion related to Ginnie Mae repurchase rights.
On July 23, 2023, after quarter-end, Rithm entered into an agreement to acquire Sculptor Capital Management for approximately $639 million. Closing remains subject to stockholder, regulatory, client-consent and other conditions, and the filing identifies integration, litigation, transaction-cost and execution risks.
The company declared Q2 common dividends of $0.25 per share and preferred dividends totaling $22.4 million. Future distributions remain subject to board approval, taxable income, liquidity, debt-service requirements and market conditions.

Most Important Facts for Investors to Verify

Ability to refinance or roll the substantial near-term debt maturities, especially the $12.3 billion maturing in the second half of 2023 and the $5.3 billion maturing in 2024.
Actual margin calls, collateral haircuts and borrowing availability under uncommitted facilities if interest rates, credit spreads or asset values deteriorate.
Sustainability of MSR fair values and cash flows under higher prepayments, delinquencies, discount rates and servicing costs.
Credit performance and recovery rates for non-Agency RMBS, consumer loans, mortgage loans receivable and servicer advances.
Origination volumes and gain-on-sale margins as mortgage rates remain elevated.
Completion terms, financing, regulatory approvals, client consents and integration costs associated with the Sculptor acquisition.
Compliance with revised FHFA and Ginnie Mae capital and liquidity standards, including requirements expected to become effective beginning September 30, 2023.