Rithm Capital Corp. quarterly report, Q3 FY2023

Rithm Capital Corp. — 3Q23 Form 10-Q Summary

Business context and reporting period

Rithm Capital is an internally managed REIT focused on mortgage servicing rights, servicer advances, residential securities and loans, consumer loans, single-family rentals, commercial real estate and mortgage origination and servicing businesses. The filing covers the unaudited quarter and nine months ended September 30, 2023. Rithm reported approximately $34.7 billion of assets and 6,098 employees at quarter-end.

Key financial metrics

Metric	3Q23	3Q22	9M23	9M22
Total revenue	$1.089 billion	$0.911 billion	$2.911 billion	$3.960 billion
Net income	$221.2 million	$154.2 million	$697.8 million	$877.5 million
Net income attributable to common stockholders	$193.9 million	$124.5 million	$620.2 million	$783.0 million
Basic/diluted EPS	$0.40/$0.40	$0.27/$0.26	$1.29/$1.28	$1.68/$1.62
Dividends declared per common share	$0.25	$0.25	$0.75	$0.75
Net cash from operating activities	Not separately presented for the quarter	Not separately presented for the quarter	$1.667 billion	$6.732 billion

Servicing revenue, net was $463.6 million in 3Q23, up from $434.0 million in 3Q22, but $1.279 billion for 9M23, down from $2.269 billion in 9M22. The year-to-date decline primarily reflected substantially lower positive MSR fair-value adjustments.
Interest income increased to $476.6 million in 3Q23 and $1.222 billion for 9M23, compared with $273.4 million and $710.4 million, respectively, in the comparable periods, driven by higher rates, Agency securities, Treasury bills, custodial balances and the Marcus consumer loan portfolio.
Gain on originated mortgage loans was $149.2 million in 3Q23 and $410.3 million for 9M23, down from $203.5 million and $980.3 million, respectively. Funded originations were $11.1 billion in 3Q23 and $28.0 billion for 9M23, versus $59.7 billion for 9M22.
Interest expense and warehouse fees rose to $382.6 million in 3Q23 and $1.021 billion for 9M23, compared with $218.1 million and $507.8 million, reflecting higher rates, increased financing and Marcus-related debt.
General and administrative expense declined year over year to $539.1 million for 9M23 from $686.1 million, and compensation expense declined to $564.6 million from $1.023 billion. The prior-year period included a $400 million termination fee to the former external manager and $46.2 million of management fees.
Book value per common share was $12.32 at September 30, 2023, compared with $12.00 at December 31, 2022 and $12.16 at June 30, 2023.

Balance sheet, debt and liquidity

Total assets were $34.746 billion at September 30, 2023, up from $32.479 billion at December 31, 2022. Total equity was $7.268 billion, including $7.208 billion attributable to Rithm stockholders.
Cash and cash equivalents were $1.217 billion; cash, cash equivalents and restricted cash totaled $1.586 billion.
Secured financing agreements totaled $13.605 billion and secured notes and bonds payable totaled $9.965 billion. Unsecured senior notes were $546.4 million, consisting primarily of $550 million of 6.25% notes due October 2025.
Total debt obligations, including secured financing agreements and secured notes and bonds payable, had a carrying value of approximately $23.570 billion and a weighted-average funding cost of 6.4%.
Available financing was reported at $13.629 billion, although the capacity is uncommitted and subject to eligible collateral and other borrowing conditions. The Company had $13.6 billion of secured financing subject to margin exposure and was in compliance with debt covenants at quarter-end.
Approximately $8.9 billion of contractual debt maturities were scheduled for the remainder of 2023, including approximately $9.7 billion of secured financing collateralized by Agency RMBS or Treasury bills before December 31, 2023.
Management stated that cash on hand, operating cash flow and the expected ability to roll secured financing and servicer-advance facilities should meet anticipated needs over the next 12 months, but emphasized that refinancing short-term borrowings is critical.

Material changes versus comparable periods

Rithm purchased the Marcus consumer loan portfolio from Goldman Sachs on June 20, 2023. The portfolio had $1.132 billion of carrying value at September 30, 2023 and contributed to higher interest income and debt.
MSRs and MSR financing receivables were $8.695 billion at quarter-end, down from $8.889 billion at year-end. The underlying serviced UPB was $530.9 billion, down from $544.2 billion at September 30, 2022.
The total servicing portfolio increased to $563.1 billion of UPB from $503.6 billion a year earlier, primarily due to servicing transfers and loan production.
Real estate and other securities increased to $10.194 billion from $8.289 billion at year-end, including $8.300 billion of Agency RMBS and $992.1 million of Treasury bills. The Agency RMBS portfolio had a negative 0.28% net interest spread in 3Q23, while the Non-Agency RMBS portfolio had a negative 1.70% spread.
Consumer loans increased from $363.8 million at year-end to $1.436 billion at quarter-end, primarily because of the Marcus acquisition.
Common shares outstanding increased to 483.2 million from 473.7 million at year-end, primarily reflecting the cashless exercise of approximately 25.6 million warrants that resulted in approximately 9.3 million new common shares.
Cash flow from operations fell substantially year over year because of lower loan-sale activity and non-cash working-capital and fair-value effects. Investing cash outflow increased to $1.454 billion, while financing cash outflow was $245.5 million.

Guidance, outlook, risks and unusual items

Management expects to use cash and available liquidity to fund the approximately $719.8 million Sculptor acquisition, targeted for 4Q23, and expects to finance the approximately $720 million Computershare Mortgage Services and SLS acquisition, targeted for 1Q24, through cash, available liquidity and additional MSR and servicer-advance financing.
The Sculptor transaction remained subject to stockholder approval, customary closing conditions and litigation. The transaction value was increased to approximately $719.8 million, or $12.70 per Sculptor Class A share, under the October 26, 2023 amendment. The termination fee payable by Sculptor in specified circumstances was increased to approximately $22.4 million.
Rising interest rates increase variable-rate financing costs, pressure fixed-rate securities and can reduce mortgage origination volumes. The 10-year Treasury rate was 4.6% and the 30-year mortgage rate was 7.3% at September 30, 2023.
MSR and other fair values depend on discount rates, prepayments, delinquencies, defaults, recapture rates and home prices. The Company recorded a $113.7 million net realized and unrealized investment loss for 9M23 and a $127.5 million loss in 3Q23.
Servicer advances receivable were $2.434 billion on the balance sheet; reserves for expected non-recovery of advances increased to $108.8 million, or 4.3% of the related advances, from $65.4 million at year-end.
Rithm recognized a $1.4 billion residential mortgage loan repurchase asset and corresponding liability related to delinquent Ginnie Mae loans. The estimated liability for representations and warranties was $56.9 million.
Other commitments included $185.7 million of unfunded consumer-loan revolving availability, up to $616.6 million of additional Genesis mortgage-loan advances and $5.1 million of Rithm commitments, and a $95.6 million agreement to purchase 371 single-family rental properties.
The Company completed its transition from LIBOR to an alternative benchmark in June 2023, but Series A, B and C preferred stock retain existing LIBOR fallback language. Higher reset rates could increase preferred dividends and reduce cash flow.
Rithm intends to maintain REIT status and generally distribute at least 90% of REIT taxable income, but dividend payments remain subject to board approval, available cash, operating needs and debt service.

Investor verification priorities

Verify the ability to refinance or roll the approximately $8.9 billion of debt maturing during the remainder of 2023 and the effect of margin calls on liquidity.
Assess the sensitivity of MSR fair values, book value and earnings to higher discount rates, prepayments, delinquencies and credit losses.
Monitor mortgage origination volumes, gain-on-sale margins and the effect of sustained high mortgage rates on the Origination segment.
Review the Marcus portfolio’s delinquency, default, prepayment and funding performance, including the terms and maturity of its associated debt.
Track closing conditions, financing, litigation and integration risks for the Sculptor and Computershare acquisitions, including their effect on leverage and liquidity.
Evaluate servicer-advance recoverability, subservicer performance, Ginnie Mae repurchase exposure and the $56.9 million representations-and-warranties reserve.
Confirm REIT qualification, taxable income, deferred tax liabilities and the sustainability of the $0.25 quarterly common dividend.