Business context and reporting period
This Form 10-Q covers New Residential Investment Corp. (now Rithm Capital Corp.) for the quarter and six months ended June 30, 2020. The Company operated as an externally managed REIT focused on residential mortgage-related investments, mortgage servicing rights, servicing advances, mortgage origination and consumer loans. Its operating segments were Origination, Servicing, MSR Related Investments, Residential Securities and Loans, Consumer Loans and Corporate.
Results were materially affected by the COVID-19 pandemic, market dislocation, wider credit spreads, reduced interest rates, mortgage forbearance and elevated liquidity and margin-call requirements.
Financial metrics
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 |
|---|---|---|
| Total revenue | $451.8 million | $744.7 million |
| Net income (loss) | $44.1 million | $(1.563 billion) |
| Net income (loss) attributable to common stockholders | $(8.9 million) | $(1.611 billion) |
| GAAP EPS attributable to common stockholders | $(0.02) | $(3.88) |
| Core earnings | $140.2 million, or $0.34 per diluted share | $338.6 million, or $0.81 per diluted share |
| Net cash provided by operating activities | Not separately provided for the quarter | $2.766 billion |
| Total assets at June 30, 2020 | $23.752 billion | |
| Total liabilities at June 30, 2020 | $18.363 billion | |
| Total equity at June 30, 2020 | $5.389 billion | |
| Cash and cash equivalents at June 30, 2020 | $1.013 billion; $1.152 billion including restricted cash |
- Interest income was $232.2 million in the second quarter and $634.6 million for the first six months, down from $416.0 million and $854.9 million, respectively, primarily because the Company reduced its investment portfolio.
- Servicing revenue, net was negative $90.5 million in the quarter and negative $379.6 million year to date, reflecting MSR amortization and adverse valuation changes. The six-month valuation impact included $1.090 billion of non-cash servicing revenue adjustments.
- Gain on originated mortgage loans, held-for-sale, net increased to $310.0 million in the quarter and $489.7 million year to date, supported by significantly higher origination volume and gain-on-sale margins.
- Operating expenses were $436.5 million in the quarter and $956.3 million year to date. General and administrative expense increased to $217.4 million and $423.7 million, respectively, mainly due to higher origination and servicing volumes.
- Six-month other losses included a $463.5 million decrease in fair value of investments and an $874.5 million net loss on settlement of investments, primarily reflecting sales during the first quarter market dislocation.
- The Company recorded $19.0 million of credit impairment on securities and $103.9 million of valuation and credit-loss provisions on loans and REO during the first six months.
- Origination volume was $19.7 billion for the first six months, compared with $6.0 billion in the prior-year period. Gain-on-sale margin was 1.98%, compared with 1.73% in 2019.
- At June 30, the portfolio included $5.021 billion of MSRs and MSR financing receivables, $458.9 million of Excess MSRs, $559.0 million of servicer advance investments, $6.144 billion of real estate and other securities, $3.520 billion of residential mortgage loans held for sale, and $766.5 million of consumer loans held for investment.
Material changes versus the prior comparable period
- Second-quarter net income improved from a $25.0 million loss in 2019 to $44.1 million of income, but six-month net income declined from $130.9 million of income to a $1.563 billion loss. Common-stockholder results declined from $113.7 million of income to a $1.611 billion loss for the six months.
- Total assets fell from $44.863 billion at December 31, 2019 to $23.752 billion at June 30, 2020. Real estate and other securities declined from $19.478 billion to $6.144 billion, and repurchase agreements declined from $27.916 billion to $9.171 billion.
- Total equity declined from $7.236 billion at year-end 2019 to $5.389 billion. Accumulated other comprehensive income fell from $682.2 million to $30.7 million, while retained earnings moved from $549.7 million to an accumulated deficit of $1.110 billion.
- MSRs and MSR financing receivables declined from $5.686 billion at year-end to $5.021 billion, primarily due to amortization, prepayments and unfavorable valuation changes, partly offset by purchases and originations.
- The Company issued $389.5 million of Series C preferred stock in February 2020 and entered into a $600.0 million three-year senior secured term loan in May 2020. The term loan carries an 11.0% fixed interest rate and was issued with warrants to purchase up to 43.4 million common shares.
- Common dividends were reduced from $0.50 per share in the fourth quarter of 2019 to $0.05 per share for the first quarter of 2020, then increased to $0.10 per share for the second quarter. Preferred dividends totaled $14.4 million in the quarter and $25.6 million year to date.
- The Company adopted the CECL standard and elected fair value accounting for held-for-investment residential mortgage and consumer loans, producing a net positive $13.7 million opening retained-earnings adjustment.
Guidance, outlook, commentary, risks and unusual items
- Management expected cash on hand, operating cash flow and the ability to roll repurchase and servicer-advance financing to meet anticipated liquidity needs for the next 12 months, but emphasized that this outlook depends critically on refinancing short-term borrowings and maintaining access to financing.
- Available financing capacity was reported at approximately $9.340 billion, subject to eligible collateral and other borrowing conditions. The Company was in compliance with its debt covenants at June 30, 2020.
- Repurchase agreements totaled approximately $9.2 billion and were subject to margin exposure. Further declines in collateral values or renewed market volatility could require substantial additional cash or collateral and could force asset sales at unfavorable prices.
- The Company expanded committed servicer-advance facilities by $1.3 billion in April 2020. Management expected servicing advances to increase because of CARES Act forbearance and higher delinquencies, although it stated that net recoveries were expected to exceed net fundings for the foreseeable future.
- More than 187,000 forbearances were completed in the first half of 2020, 99% of which were related to COVID-19 or CARES Act programs. Higher forbearance and delinquency levels could reduce servicing revenue, increase servicing costs and increase advance requirements.
- NewRez shifted toward higher-quality Agency and government loans, stopped Non-QM production during the market disruption, and paused wholesale and correspondent originations before re-entering those channels in May 2020. Management expected origination demand to remain favorable for the balance of 2020 but expected gain-on-sale margins eventually to normalize.
- Management cited favorable housing-market conditions but stressed that the duration and economic effects of COVID-19, unemployment, interest rates, prepayments, credit spreads, defaults, regulatory responses and financing availability remained uncertain.
- Long-term financing and balance-sheet restructuring were emphasized to reduce reliance on daily mark-to-market repurchase funding. The Company continued to evaluate additional debt, equity and other financing, without assurance that such financing would be available on acceptable terms.
- Material contingencies included approximately $1.1 billion of residential mortgage loans subject to Ginnie Mae repurchase rights, an estimated $11.6 million liability for representations and warranties and Ginnie Mae repurchases, $460.9 million of mortgage loans in foreclosure, and $266.0 million of unfunded consumer-loan revolving commitments.
- The Company had significant counterparty and servicing-partner exposure, including Mr. Cooper, PHH, LoanCare, OneMain and other parties. Servicer failure, bankruptcy, regulatory action, termination or servicing deficiencies could impair MSR values, advance recoveries, financing and liquidity.
- The Company remained exposed to LIBOR transition risk, including potential effects on floating-rate assets, debt, derivatives, securitizations and hedging effectiveness.
- There were no material legal proceedings identified by management as expected to have a material adverse effect, but ordinary-course litigation, regulatory inquiries and investigations could have material outcomes.
Most important facts for an investor to verify
- Whether operating cash flow and liquidity remained sufficient after June 30, 2020 to fund margin calls, servicing advances, originations, debt maturities and dividends.
- The extent to which COVID-19 forbearances converted into delinquencies, defaults, higher servicing costs and additional advance obligations.
- Renewal terms, collateral requirements and counterparty concentration for the $9.2 billion of repurchase agreements and other short-term financing.
- The sustainability of MSR and Excess MSR valuations under higher prepayment, delinquency or discount-rate assumptions.
- The realized and unrealized performance of the residential securities and loan portfolios following the large first-quarter asset sales.
- The effect of the $600 million, 11.0% term loan, its covenants and the potential dilution from warrants for up to 43.4 million common shares.
- The basis for management’s core-earnings measure and its reconciliation to substantial GAAP losses, particularly the exclusion of fair-value losses, impairments and other non-core items.
- The ability to maintain REIT qualification, the Investment Company Act exclusion and required distributions while managing liquidity and asset sales.
- Developments involving MSR transfers, servicer consents, subservicer performance and regulatory or legal matters affecting key counterparties.