Business Context and Reporting Period
Historical filing for New Residential Investment Corp., now known as Rithm Capital Corp., covering the quarter and nine months ended September 30, 2017. The company was an externally managed REIT focused on mortgage servicing rights, excess MSRs, servicer advances, RMBS, residential mortgage loans and consumer loans. The filing was signed November 1, 2017.
At September 30, 2017, the company had 307.4 million common shares outstanding and total assets of $21.4 billion.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Interest income | $397.7 million | $282.4 million | $1.162 billion | $749.9 million |
| Interest expense | $125.3 million | $96.5 million | $338.7 million | $278.4 million |
| Net interest income | $272.4 million | $185.9 million | $823.5 million | $471.5 million |
| Net income attributable to common stockholders | $226.1 million | $98.9 million | $669.2 million | $279.3 million |
| Diluted EPS | $0.73 | $0.41 | $2.21 | $1.19 |
| Core earnings | $199.3 million | $123.9 million | $671.9 million | $355.9 million |
| Dividends declared per share | $0.50 | $0.46 | $1.48 | $1.38 |
Q3 net income attributable to common stockholders increased 129% year over year, while nine-month net income increased 140%. Net interest income increased 47% in the quarter and 75% for the nine-month period. Reported results included significant fair-value changes, accretion, retrospective valuation adjustments and transaction-related items.
- Net cash used in operating activities was $617.8 million for the nine months ended September 30, 2017, compared with $507.8 million of cash provided in the prior-year period.
- Net cash used in investing activities was $1.570 billion, while financing activities provided $2.166 billion.
- Cash, cash equivalents and restricted cash totaled $431.8 million at September 30, 2017.
- Total equity was $4.679 billion, including $4.572 billion attributable to New Residential stockholders.
- Repurchase agreements totaled $7.848 billion and notes and bonds payable totaled $7.237 billion. Total debt carrying value was $15.085 billion.
- Available financing capacity was $2.615 billion, subject to eligible collateral and other borrowing conditions. The company reported compliance with all debt covenants.
Portfolio and Margin Indicators
| Asset | Carrying Value at September 30, 2017 | Change from December 31, 2016 |
|---|---|---|
| Excess MSRs, direct | $1.178 billion | Down from $1.399 billion |
| Excess MSRs, equity-method investees | $175.6 million | Down from $194.8 million |
| MSRs | $1.703 billion | Up from $659.5 million |
| MSR financing receivable | $607.4 million | New in 2017 |
| Servicer advance investments | $4.045 billion | Down from $5.707 billion |
| Real estate securities | $6.715 billion | Up from $5.074 billion |
| Residential mortgage loans | $2.129 billion | Up from $887.4 million |
| Consumer loans | $1.468 billion | Down from $1.799 billion |
Agency RMBS had a 1.61% net interest spread and Non-Agency RMBS had a 3.01% net interest spread at quarter end. Q3 results reflected higher funding costs and lower yields on newly purchased securities.
Material Changes Versus the Prior Comparable Period
- Expansion of servicing operations: MSR and MSR financing receivable income was $58.0 million in Q3 and $269.5 million for nine months, compared with none in the prior-year periods, following acquisitions and servicing transfers.
- Ocwen transaction: In July 2017, the company agreed to acquire remaining interests in approximately $110 billion of Ocwen-related MSRs, subject to consents and other conditions. Approximately $15.5 billion of UPB had transferred by September 30, with approximately $92.3 billion remaining. Lump-sum payments of $54.6 million had been paid or accrued; total potential payments could reach approximately $400 million.
- PHH transaction: Approximately $40.8 billion of the planned $60.5 billion PHH portfolio closed in Q3; the remainder was expected to close in Q4 2017, subject to approvals and other conditions.
- Capital raising: The company issued 56.5 million common shares in February 2017, generating approximately $834.5 million of net proceeds.
- Buyer ownership: The company purchased an additional 27% interest in the servicer-advance Buyer for $65.9 million, increasing its ownership to approximately 72.8% at quarter end.
- Fair-value drivers: Direct Excess MSR fair value declined by approximately $16.4 million during Q3, mainly from higher projected prepayment rates. MSR and MSR financing receivable fair value increased by approximately $77.6 million, partly due to lower discount rates and contractual changes.
- Expense growth: Nine-month subservicing expense increased by $123.4 million, management fees by $10.9 million and incentive compensation by $58.9 million versus the prior year.
Guidance, Outlook, Commentary and Risks
Management expected elevated MSR transaction opportunities as banks reduced servicing exposure because of capital requirements and regulatory scrutiny. However, it cautioned that competition, higher MSR prices, lengthy GSE and regulatory approvals and uncertain transaction timing could reduce future returns.
Management expected cash on hand, operating cash flows and the ability to roll repurchase agreements and servicer-advance financing to satisfy anticipated needs over the next 12 months. This outlook depended materially on continued access to short-term financing and counterparties’ willingness to renew borrowings.
- Liquidity was exposed to approximately $7.9 billion of repurchase agreements and related margin calls. Most repurchase agreements were short term, with weighted average life of approximately 0.1 years.
- Servicer advances were subject to recovery timing, foreclosure delays, servicer performance and potential non-recoverability. Management expected net recoveries to exceed net fundings in the foreseeable future, but noted that a downturn could reverse this position.
- Nationstar, Ocwen, Ditech and PHH represented significant servicing and counterparty concentrations. Regulatory actions, ratings downgrades, operational failures or bankruptcy of a major servicer could impair asset values, financing and cash flows.
- Ocwen faced extensive federal and state regulatory actions and litigation. The filing noted potential effects on servicing rights, financing facilities and the value of Ocwen-related assets.
- Portfolio values were highly sensitive to prepayment rates, interest rates, credit spreads, delinquencies, defaults, discount rates and recapture rates. A 25-basis-point widening in credit spreads was estimated to reduce net book value by approximately $168.0 million.
- A 50-basis-point increase in short-term rates was estimated to increase next-12-month cash flows by approximately $12.3 million but increase net book value by approximately $258.1 million; a 50-basis-point decrease was estimated to reduce cash flows by $9.5 million and net book value by $352.4 million.
- The company intended to maintain REIT qualification and its exclusion from registration under the Investment Company Act, but failure to meet applicable tests could materially increase taxes or require changes to the business model.
- A preliminary $6 million settlement had been approved in the HLSS-related Securities Action, subject to final court approval; the company had not accrued a loss because management did not believe a loss was probable and reasonably estimable.
- New accounting standards effective in 2018 were generally not expected to have a material impact, while the company expected the 2020 credit-loss standard to increase allowances and negatively adjust retained earnings at adoption.
Most Important Facts for Investors to Verify
- Whether the remaining PHH and Ocwen MSR transfers closed as contemplated, including required regulatory, GSE, trustee and third-party consents.
- Actual recovery rates and timing for servicer advances, particularly portfolios serviced by Ocwen and Nationstar.
- Renewal terms, haircuts, margin requirements and counterparty concentration for repurchase agreements and servicer-advance financing.
- Recurring cash earnings after excluding fair-value gains, retrospective adjustments, accretion and other unusual items; core earnings is non-GAAP and excludes incentive compensation.
- Credit performance of Non-Agency RMBS, residential mortgage loans and consumer loans, including delinquency, default, charge-off and loss-severity trends.
- Valuation sensitivity of MSRs, Excess MSRs and servicing receivables to prepayment, discount-rate and recapture assumptions.
- Potential effects of Ocwen, Ditech, PHH or other servicer regulatory actions, ratings changes, restructurings or bankruptcy.
- Capacity to fund dividends while meeting debt maturities, margin calls, future servicer-advance obligations and REIT distribution requirements.