Rithm Capital Corp. quarterly report, Q1 FY2024

Business Context and Reporting Period

Rithm Capital Corp. filed an unaudited Form 10-Q for the quarter ended March 31, 2024. Rithm is an internally managed REIT and global asset manager focused on real estate, credit and financial services. Its reportable segments are Origination and Servicing, Investment Portfolio, Mortgage Loans Receivable, Asset Management and Corporate. Sculptor, acquired in November 2023, contributed the first full quarter of asset-management results.

At March 31, 2024, the Company reported approximately $42.1 billion of total assets, $32.3 billion of assets under management and 483.5 million common shares outstanding. The servicing portfolio totaled $577.5 billion of unpaid principal balance, including $526.7 billion underlying owned MSRs and MSR financing receivables.

Key Financial Metrics

Metric	Q1 2024	Q1 2023
Total revenues	$1.286 billion	$841.6 million
Net income	$287.5 million	$89.9 million
Net income attributable to common stockholders	$261.6 million	$68.9 million
Basic and diluted EPS	$0.54	$0.14
Dividends declared per common share	$0.25	$0.25
Net cash from operating activities	$(1.144) billion	$1.181 billion
Net cash from investing activities	$(4.053) billion	$(590.6) million
Net cash from financing activities	$5.056 billion	$(408.0) million

Revenue composition: Servicing revenue was $554.4 million, interest income was $448.2 million, gain on originated residential mortgage loans was $149.5 million and asset-management revenue was $75.9 million.
Profitability: Net income margin was approximately 22.3%; net income attributable to common stockholders represented approximately 20.3% of total revenue. These are not company-defined non-GAAP measures.
Expenses: Interest expense and warehouse line fees were $414.4 million, general and administrative expense was $195.1 million, and compensation and benefits expense was $235.8 million.
Balance sheet: Total equity was $7.243 billion, including $7.150 billion attributable to Rithm stockholders. Book value per common share was $12.19, compared with $11.90 at December 31, 2023 and $11.67 at March 31, 2023.
Cash and liquidity: Cash and cash equivalents were $1.136 billion; cash, cash equivalents and restricted cash totaled $1.531 billion. Management reported approximately $1.3 billion of available liquidity at NRM and Newrez, including $783.7 million above applicable regulatory liquidity requirements.
Debt: Secured financing agreements totaled $18.271 billion, secured notes and bonds payable totaled $10.045 billion, and unsecured notes totaled $1.205 billion. Total debt obligations presented in the debt schedule were approximately $28.535 billion, excluding certain balance-sheet liabilities and other items.
Borrowing capacity: Reported total borrowing capacity was $22.290 billion, with $12.324 billion outstanding and $9.966 billion of available financing. Availability was uncommitted and subject to eligible collateral and other conditions.
Common equity return: The quarterly common dividend remained $0.25 per share. Preferred-stock dividends totaled $22.4 million.

Material Changes Versus Comparable Periods

Total revenue increased approximately 53% year over year, primarily reflecting the positive change in MSR fair value, higher interest income, stronger mortgage origination gains and the addition of Sculptor.
Net income attributable to common stockholders increased approximately 280% year over year, from $68.9 million to $261.6 million.
Servicing revenue increased to $554.4 million from $327.5 million. The prior-year period included a $142.3 million decrease in MSR and MSR financing receivables fair value, whereas Q1 2024 included an $84.2 million increase.
Asset-management revenue was $75.9 million in Q1 2024; there was no comparable asset-management revenue in Q1 2023 because Sculptor had not yet been acquired.
Interest expense and warehouse fees increased approximately 34%, while general and administrative expense increased approximately 17% and compensation and benefits increased approximately 25%.
Operating cash flow declined to $(1.144) billion from $1.181 billion, largely because mortgage loan originations and purchases exceeded related sales proceeds during the quarter. Investing cash outflows increased substantially due to purchases of U.S. Treasuries, originations of mortgage loans receivable and other investments.
Total assets increased from $35.312 billion at December 31, 2023 to $42.121 billion at March 31, 2024. Secured financing agreements increased from $12.561 billion to $18.271 billion, primarily supporting the larger investment portfolio.
Sequentially, Q1 2024 net income attributable to common stockholders improved from a loss of $87.5 million in Q4 2023. The improvement was driven mainly by a $550.5 million quarter-over-quarter swing in MSR fair-value changes, partly offset by weaker securities marks and higher expenses.
Mortgage production increased to $10.8 billion from $8.9 billion in Q4 2023, while the gain-on-sale margin declined to 1.20% from 1.23%, primarily due to channel mix.

Guidance, Outlook, Risks and Unusual Items

Outlook: The filing provides no formal earnings or dividend guidance. Management expects cash on hand, operating cash flow and continued refinancing or rollover of secured financing and servicer-advance facilities to meet anticipated liquidity needs over the next 12 months, but emphasizes that this outlook depends on market conditions and financing availability.
Interest rates and valuation: The Federal Reserve maintained a 5.25%–5.50% target range during the quarter. Rising rates can reduce the value of fixed-rate securities and increase financing costs, while changes in prepayment and delinquency assumptions can materially affect MSR valuations.
Market sensitivity: A parallel 50-basis-point increase in rates was estimated to increase pre-tax book value by $178.5 million, while a 50-basis-point decrease was estimated to reduce it by $178.5 million. These sensitivities are hypothetical and do not constitute forecasts.
Margin and refinancing risk: The Company had approximately $18.3 billion of secured financing subject to margin exposure. Collateral declines could require additional cash or collateral, and substantial near-term debt maturities require continued refinancing access.
Credit and servicing risk: Risks include borrower delinquencies and defaults, unrecoverable or delayed servicer advances, repurchase obligations, counterparty and subservicer performance, regulatory compliance and cybersecurity or technology disruptions.
Repurchase exposure: Residential mortgage loans subject to repurchase and the related liability were approximately $1.8 billion. Estimated liability for representations and warranties was $52.6 million.
Asset management risks: Sculptor results are exposed to investment performance, redemptions, valuation, liquidity and personnel risks. Approximately 53.7% of Sculptor-related AUM associated with related parties was not charged management or incentive fees.
Computershare acquisition: On May 1, 2024, after quarter-end, Rithm completed the approximately $720 million acquisition of Computershare Mortgage Services and affiliated companies, including SLS. The transaction added approximately $45 billion of MSR UPB and $104 billion of third-party servicing UPB. Purchase-price allocation was not yet available in the filing.
Debt transactions: In March 2024, Rithm issued $775 million of 8.00% senior unsecured notes due 2029 and repurchased $275 million of its 2025 senior notes. The remaining principal amount of the 2025 notes was $275 million.
Legal matters: Litigation related to the Sculptor acquisition was subject to a proposed $6.5 million settlement, with a final hearing scheduled for May 20, 2024. Management stated that it was not aware of other government inquiries expected to have a material adverse effect.
REIT status: The Company intends to maintain REIT qualification and generally must distribute at least 90% of REIT taxable income. Taxable income, GAAP earnings and cash available for distributions may differ materially.
Controls: Management concluded that disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting.

Important Facts for Investors to Verify

Whether MSR fair-value gains and assumptions regarding discount rates, prepayments, delinquencies and servicing costs remain sustainable.
The availability and pricing of refinancing for the substantial secured-financing and near-term maturity schedule, including potential margin calls.
The post-quarter-end financial impact, purchase-price allocation and integration results of the Computershare and SLS acquisition.
Trends in mortgage production, gain-on-sale margins, servicing portfolio balances and borrower delinquencies.
Cash generation after accounting for loan originations, investment purchases, servicer advances, debt repayments and common and preferred dividends.
Credit performance of consumer loans, Non-Agency securities, residential mortgage loans and Genesis construction, bridge and renovation loans.
Potential changes to preferred-stock floating dividend rates following LIBOR cessation and the resulting effect on cash flows.
The status and ultimate cost of the Sculptor litigation settlement and any other regulatory, litigation, indemnification or guarantee exposures.