Rithm Capital Corp. quarterly report, Q1 FY2020

Business Context and Reporting Period

New Residential Investment Corp., now identified in the request as Rithm Capital Corp., filed this unaudited Form 10-Q for the three months ended March 31, 2020. The company was an externally managed REIT focused on residential mortgage-related investments and operating businesses, including mortgage origination, servicing, mortgage servicing rights (MSRs), servicer advances, residential securities and loans, and consumer loans. The filing was signed May 8, 2020.

The quarter was materially affected by the COVID-19 pandemic, which caused severe volatility, widening credit spreads, lower interest rates, illiquidity in mortgage-backed securities markets, margin calls and financing stress.

Key Financial Metrics

Metric	Q1 2020	Q1 2019 or prior period
Total assets	$24.2 billion at March 31, 2020	$44.9 billion at December 31, 2019
Net interest income	$185.5 million	$226.0 million
Impairment and credit-loss provisions	$144.6 million	$12.8 million
Servicing revenue, net	$(289.1) million	$165.9 million
Gain on originated mortgage loans	$179.7 million	$67.2 million
Other income or loss	$(1.403) billion	$(64.0) million
Net income or loss	$(1.607) billion	$155.9 million
Net loss attributable to common stockholders	$(1.602) billion	$145.6 million
Diluted EPS	$(3.86)	$0.37
Core earnings	$198.4 million, or $0.48 per diluted share	$204.3 million, or $0.53 per diluted share
Net cash provided by operating activities	$1.311 billion	$(300.4) million
Net cash provided by investing activities	$16.661 billion	$(2.753) billion
Net cash used in financing activities	$(18.155) billion	$3.147 billion

The filing does not present a conventional operating margin because the company’s results are dominated by fair-value changes, investment gains and losses, impairment provisions, and financing activities.

Balance Sheet, Debt and Liquidity

• Cash and cash equivalents were $360.5 million, with restricted cash of $147.4 million; total cash, cash equivalents and restricted cash were $507.9 million at March 31, 2020.
• Total equity declined to $5.330 billion from $7.236 billion at December 31, 2019. New Residential stockholders’ equity was $5.264 billion.
• Repurchase agreements totaled $10.814 billion and notes and bonds payable totaled $7.015 billion, for total debt carrying value of $17.829 billion and a weighted-average funding cost of approximately 2.92%.
• Available financing was reported at $7.008 billion, subject to eligible collateral and other borrowing conditions.
• The company had $10.8 billion of repurchase-agreement margin exposure. Management stated that all debt covenants were satisfied at March 31, 2020.
• Debt maturities through December 31, 2020 totaled $11.774 billion, including $11.639 billion of recourse obligations.
• In April 2020, after quarter-end, the company amended servicing-advance facilities to add $1.3 billion of aggregate capacity, with interest based on one-month LIBOR plus 2.50% and maturities in April 2021.

Portfolio and Operating Developments

• MSRs and MSR financing receivables had a combined carrying value of $5.539 billion, backed by approximately $526.8 billion of mortgage unpaid principal balance.
• Servicer advances receivable totaled $3.073 billion, while servicer advance investments were carried at $515.6 million.
• Real estate and other securities declined to $2.480 billion from $19.478 billion at year-end, reflecting substantial asset sales during the quarter.
• The company sold substantially all of its Agency RMBS portfolio and a substantial portion of its Non-Agency RMBS portfolio to raise liquidity and reduce balance-sheet risk. It recorded a $754.5 million net loss on sales of real estate securities.
• NewRez originated approximately $11.4 billion of mortgage loans, compared with $2.2 billion in the prior-year quarter. The company shifted toward higher-quality GSE and government production, ceased Non-QM production, and paused wholesale and correspondent originations during March because of market disruption.
• The servicing portfolio grew to approximately $275.8 billion, compared with $141.5 billion at March 31, 2019. Annualized direct servicing cost declined to $130 per loan from $205.
• The common dividend was reduced to $0.05 per share from $0.50 per share. The company also issued $389.5 million of Series C preferred stock in February 2020.

Material Changes Versus the Prior Comparable Period

• Net income attributable to common stockholders changed from income of $145.6 million to a loss of $1.602 billion, primarily due to COVID-19-related fair-value declines, realized securities losses, impairment charges and higher operating expenses.
• Net interest income decreased by $40.5 million, while interest expense increased by $4.0 million.
• Servicing revenue moved from $165.9 million of income to a $289.1 million loss. The change included a $649.4 million negative change in fair value, driven by higher discount rates, higher delinquency assumptions, lower custodial earnings and other COVID-19-related valuation changes.
• Gain on originated mortgage loans increased by $112.5 million because of substantially higher origination volume and MSRs retained on loan sales, partly offset by unfavorable derivative results.
• Impairment and credit-loss provisions increased by $131.8 million, including $44.1 million for securities and $100.5 million for loans and REO.
• General and administrative expenses increased by $107.4 million, primarily because of higher origination and servicing volumes, personnel costs, legal and professional expenses, technology spending and property-related expenses.
• Core earnings declined modestly to $198.4 million from $204.3 million, or $0.48 per diluted share versus $0.53.
• The company adopted CECL accounting and elected the fair-value option for held-for-investment residential mortgage loans and consumer loans, resulting in a $13.7 million positive opening retained-earnings adjustment.

Guidance, Outlook, Risks and Unusual Items

• Management expected COVID-19 to increase borrower forbearances, delinquencies, servicing advances, financing needs and liquidity demands. The CARES Act allowed federally backed mortgage borrowers up to six months of forbearance, potentially extendable by another six months, while imposing a foreclosure moratorium.
• Management stated that cash, operating cash flow, asset sales and the ability to roll repurchase agreements and servicing-advance financing were expected to cover anticipated needs for the next 12 months, but emphasized that this outlook was subject to substantial uncertainty.
• Management expected to re-enter wholesale and correspondent origination channels in May 2020 and expected housing and origination markets to remain favorable through 2020 and 2021, although no earnings guidance was provided.
• Key risks include further margin calls, inability to renew or replace short-term financing, higher borrowing costs, forced asset sales, increased servicing advances, deterioration in mortgage and consumer loan performance, prepayment risk, fair-value model risk, counterparty concentration and servicer failures.
• Approximately 95% of staff had moved to work-from-home arrangements, creating operational and cybersecurity risks.
• The company had no material litigation or government inquiries identified as likely to have a material adverse effect, but ordinary-course litigation and regulatory matters remained possible.
• The company recorded no goodwill impairment as of March 31, 2020, but warned that future COVID-19-related market deterioration could result in impairment charges.
• A related-party transaction involved the sale of approximately $6.1 billion face amount of Non-Agency RMBS for approximately $3.3 billion of proceeds, including approximately $1.85 billion face amount sold to a Fortress-affiliated purchaser for approximately $1.0 billion. The company agreed to share certain future call-right profits or losses with that purchaser.

Important Facts for Investors to Verify

• Whether subsequent margin calls, financing renewals and asset sales materially changed liquidity after March 31, 2020.
• The pace and recoverability of servicing advances under CARES Act forbearances and foreclosure delays, including the adequacy of the additional $1.3 billion advance capacity.
• Actual post-quarter-end performance of MSRs, MSR financing receivables, Non-Agency RMBS, residential mortgage loans and consumer loans relative to the filing’s valuation assumptions.
• Whether the $0.05 common dividend was sustained, increased or suspended as market conditions evolved.
• The extent to which origination growth and servicing scale offset fair-value volatility, credit losses, financing costs and higher operating expenses.
• Counterparty, subservicer and regulatory developments involving Mr. Cooper, Ocwen, PHH, LoanCare, OneMain and other servicing partners.
• The company’s continued qualification as a REIT and continued exclusion from registration under the Investment Company Act.
• Any subsequent changes to the related-party RMBS sale, call-right arrangements or other transactions involving Fortress-managed funds.