Rithm Capital Corp. quarterly report, Q1 FY2021

Business Context and Reporting Period

This Form 10-Q covers the three months ended March 31, 2021, for New Residential Investment Corp. (now Rithm Capital Corp.), a publicly traded REIT focused on residential mortgage-related investments, mortgage servicing rights, origination, servicing, residential securities and loans, and consumer loans. The company was externally managed by FIG LLC, an affiliate of Fortress Investment Group.

The company reported approximately $35.2 billion of total assets and 6,086 employees at March 31, 2021. Its principal operating segments were Origination, Servicing, MSR Related Investments, Residential Securities and Loans, Consumer Loans, and Corporate.

Key Financial Metrics

Metric	Q1 2021	Q1 2020
Total revenue	$1.171 billion	$286.8 million
Net income	$301.3 million	$(1.607) billion
Net income attributable to common stockholders	$277.6 million	$(1.602) billion
Diluted EPS	$0.65	$(3.86)
Core earnings	$144.8 million; $0.34 per diluted share	$198.4 million; $0.48 per diluted share
Common dividend declared per share	$0.20	$0.05
Net cash used in operating activities	$(495.4) million	$1.311 billion provided
Net increase in cash and restricted cash	$94.0 million	$(183.0) million

Net income attributable to common stockholders represented approximately a 23.7% margin on total revenue; total net income represented approximately a 25.7% margin. These margins were strongly affected by fair-value changes and other non-cash items and are not directly comparable to operating margins of non-financial companies.

• Interest income was $253.7 million, down $148.6 million year over year, primarily because the average bond, MSR, residential loan and consumer loan portfolios were smaller.
• Net servicing revenue was $513.5 million, compared with $(289.1) million in Q1 2020. The improvement was driven primarily by positive MSR valuation changes of $545.4 million, reflecting slower projected prepayments, lower delinquencies and lower discount rates.
• Gain on originated mortgage loans was $403.4 million, up from $173.6 million. NewRez originated $27.2 billion of loans, compared with $11.4 billion in the prior-year quarter.
• General and administrative expenses rose to $362.5 million from $275.1 million, mainly due to higher origination and servicing volumes, headcount, compensation and loan-origination costs.
• Change in fair value of investments was a loss of $265.6 million, including a $498.3 million loss on real estate and other securities, partially offset by a $206.2 million derivative gain and a $60.2 million residential mortgage loan fair-value gain.
• Income tax expense was $98.3 million, primarily deferred tax expense associated with fair-value changes and income in taxable REIT subsidiaries. Net deferred tax liability was $93.1 million at quarter-end.

Financial Position, Debt and Liquidity

• Total assets increased to $35.184 billion from $33.252 billion at December 31, 2020.
• Total equity increased to $5.622 billion from $5.430 billion; New Residential stockholders’ equity was $5.523 billion.
• Cash and cash equivalents were $1.038 billion, with total cash, cash equivalents and restricted cash of $1.175 billion.
• Secured financing agreements were $19.522 billion, secured notes and bonds payable were $7.108 billion, and unsecured senior notes were $542.0 million, for approximately $27.2 billion of debt excluding the mortgage-loan repurchase liability.
• The company reported approximately $9.643 billion of available financing capacity, subject to eligible collateral and other borrowing conditions.
• Approximately $19.5 billion of secured financing was exposed to margin calls. Contractual debt maturities totaled $27.2 billion, including $18.752 billion due from April 1 through December 31, 2021.
• Management stated that cash on hand, operating cash flow and the expected ability to roll secured financing should satisfy anticipated liquidity needs for the next 12 months, but emphasized that refinancing short-term borrowings is critical.
• The company was in compliance with its debt covenants at March 31, 2021.

Material Changes Versus Comparable Periods

• The company moved from a $1.607 billion net loss in Q1 2020 to $301.3 million of net income in Q1 2021, largely reflecting the absence of the severe COVID-19-related market losses recorded in Q1 2020.
• Revenue increased by $883.9 million year over year, driven by the reversal of negative servicing fair-value changes and substantially higher mortgage origination volume.
• Core earnings declined to $144.8 million from $198.4 million despite the GAAP earnings recovery, reflecting the non-recurring and non-cash nature of much of the Q1 2021 GAAP improvement.
• Net cash from operations deteriorated to a $495.4 million use, primarily because mortgage originations and purchases generated substantial operating cash outflows even though loan-sale proceeds were significant.
• NewRez’s servicing portfolio increased 10.4% year over year to $304.6 billion of unpaid principal balance, while active COVID-19 forbearances were 3.5% of serviced loans versus 10.5% at the Q2 2020 peak.
• The company’s Full and Excess MSR portfolio declined to $514 billion of unpaid principal balance from $536 billion at December 31, 2020, primarily due to prepayments.

Guidance, Outlook, Risks and Unusual Items

• Management expected gain-on-sale margins to revert toward historical levels as industry capacity adjusts. Q1 gain-on-sale margin was 1.43%, down from 1.57% in Q4 2020 but above 1.28% in Q1 2020.
• Management expected cash flow recoveries from servicer advances to exceed net fundings for the foreseeable future, but acknowledged substantial uncertainty.
• On April 14, 2021, the company agreed to acquire Caliber Home Loans for $1.675 billion, subject to adjustments, approvals and customary closing conditions, with a targeted Q3 2021 closing.
• To help finance the Caliber acquisition, the company completed an offering of 45.0 million common shares at $10.10 per share, with an additional 6.725 million shares purchased by underwriters. Net proceeds were approximately $512 million. The Manager also received options relating to 5.2 million shares.
• The board authorized up to $200 million of common-stock repurchases through December 31, 2021; no repurchases had been made as of the filing date.
• Key risks include COVID-19-related borrower delinquencies and forbearances, interest-rate and prepayment volatility, credit-spread widening, margin calls, short-term refinancing requirements, counterparty and servicer concentration, unrecoverable or delayed servicer advances, regulatory and litigation exposure, LIBOR transition, REIT qualification, maintenance of the Investment Company Act exclusion, and execution and integration risks related to Caliber.
• The filing states that fair-value measurements rely on assumptions regarding prepayments, delinquencies, defaults, discount rates, recapture rates and loss severities. Changes in these assumptions could materially affect reported earnings and book value.
• The company disclosed ordinary-course litigation, regulatory inquiries and contingent indemnification exposure, but did not identify a specific pending matter that management believed was both material and probable of loss.

Most Important Facts for Investors to Verify

• Whether the Caliber acquisition closed on the anticipated timetable, its final purchase price and financing structure, and the resulting effect on leverage and liquidity.
• Whether the large Q1 2021 MSR fair-value gain was sustained, particularly as interest rates, prepayment speeds and delinquencies changed.
• The ability to refinance or roll approximately $18.8 billion of debt maturing during the remainder of 2021 and the potential effect of margin calls.
• Trends in core earnings, servicing cash flows, loan-origination margins and the relationship between GAAP earnings and distributable taxable income.
• Changes in active forbearances, delinquencies, foreclosure timelines and required servicer advances.
• Exposure to major servicers and counterparties, including the consequences of any servicer downgrade, termination, bankruptcy or regulatory action.
• The effect of the April 2021 equity issuance, Manager options and outstanding warrants on common-stock dilution.
• The company’s continued compliance with REIT requirements, debt covenants, regulatory capital requirements and the Investment Company Act exclusion.