New Residential Investment Corp. (now Rithm Capital Corp.) — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017; filed August 3, 2017. The company was a Delaware REIT focused on mortgage servicing rights, excess MSRs, servicer advances, RMBS, residential mortgage loans and consumer loans. The filing reports 307.4 million common shares outstanding as of July 27, 2017.
Key Financial Metrics
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 | Comparable 2016 period |
|---|---|---|---|
| Interest income | $472.0 million | $764.5 million | $277.5 million / $467.5 million |
| Net interest income | $356.8 million | $551.1 million | $176.8 million / $285.6 million |
| Servicing revenue, net | $170.9 million | $211.5 million | None reported |
| Net income | $337.4 million | $474.6 million | $93.6 million / $209.6 million |
| Net income attributable to common stockholders | $321.7 million | $443.1 million | $68.7 million / $180.4 million |
| Diluted EPS | $1.04 | $1.48 | $0.30 / $0.78 |
| Dividends declared per share | $0.50 | $0.98 | $0.46 / $0.92 |
- Net interest income increased 102% year over year in the quarter and 93% for the six-month period.
- Net income attributable to common stockholders increased $253.1 million in the quarter and $262.7 million for the six-month period.
- Six-month operating expenses were $207.8 million, including $73.7 million of subservicing expense, $52.6 million of incentive compensation to the Manager and $27.3 million of management fees.
- Core earnings, a non-GAAP measure, were $317.7 million for the quarter and $472.6 million for the six months, compared with $119.6 million and $232.0 million, respectively, in 2016.
Financial Position, Debt and Liquidity
- Total assets were $23.0 billion at June 30, 2017, up from $18.4 billion at December 31, 2016. Total equity was $4.62 billion, including $4.42 billion attributable to New Residential stockholders.
- Major investments included $4.84 billion of servicer advances, $7.42 billion of real estate securities, $1.75 billion of MSRs, $1.49 billion of direct excess MSRs, $1.76 billion of residential mortgage loans and $1.57 billion of consumer loans.
- Total debt obligations were $16.05 billion, comprising $8.26 billion of repurchase agreements and $7.79 billion of notes and bonds payable. Weighted-average funding cost was 3.05%.
- Cash and cash equivalents were $560.0 million; cash, cash equivalents and restricted cash totaled $717.4 million at June 30, 2017.
- Reported borrowing capacity was $6.58 billion, of which $2.34 billion was available, subject to eligible collateral and other conditions. The company was in compliance with all debt covenants.
- Net cash used in operating activities was $343.5 million for the six months, compared with $341.6 million of cash provided in the prior-year period. Investing activities used $2.78 billion, while financing activities provided $3.38 billion.
- Management stated that cash on hand, operating cash flows and the ability to roll repurchase and servicer-advance financing were expected to cover anticipated liquidity needs for the next 12 months, while cautioning that refinancing and margin-call risks could create a rapid liquidity shortfall.
Material Changes Versus the Prior Comparable Period
- Growth was driven by portfolio expansion, including MSRs acquired by the licensed servicing subsidiary, increased real estate securities and residential mortgage loans, and the consumer-loan platform acquired through the 2016 SpringCastle transaction.
- MSR carrying value increased to $1.75 billion from $659.5 million at year-end 2016, primarily from $1.09 billion of purchases. Net servicing revenue benefited from valuation changes, including a $89.0 million positive change in valuation inputs and assumptions for the six months.
- Servicer advances generated a $59.5 million fair-value gain for the first six months versus a $17.3 million loss in 2016. A significant unusual item was a $193.8 million positive valuation impact from reducing the assumed post-contract subservicing cost for the HLSS portfolio; this was partly offset by a $154.8 million negative impact from a discount-rate change.
- The company issued 56.5 million common shares in February 2017 for net proceeds of approximately $834.5 million. Shares outstanding increased from 250.8 million at December 31, 2016 to 307.4 million at June 30, 2017.
- Repurchase agreements increased from $5.19 billion at year-end 2016 to $8.26 billion at June 30, 2017, increasing exposure to margin calls and short-term refinancing.
- Other comprehensive income attributable to common stockholders was $186.9 million for the six months, primarily reflecting $202.0 million of net unrealized securities gains, partially offset by $15.0 million of reclassifications into earnings.
Guidance, Outlook and Unusual Items
- Management expected continued opportunities to acquire MSRs and related assets because banks and non-bank servicers were selling servicing assets in response to capital constraints and regulatory requirements. It also noted increased competition and longer regulatory approval timelines for Agency MSR transactions.
- The PHH transaction covered approximately $61.1 billion of mortgage UPB for MSRs and related advances. Approximately $13.2 billion closed during the second quarter, and $39.7 billion closed on July 3, 2017; remaining closings were subject to approvals and other conditions.
- On July 23, 2017, the company entered the Ocwen Transaction concerning Ocwen’s remaining interests in MSRs related to approximately $110 billion of UPB. Aggregate payments could total up to approximately $400 million if all interests transferred. The transaction required third-party consents and involved material counterparty, servicing and financing risks.
- The company declared a $0.50-per-share second-quarter dividend, paid July 28, 2017. REIT status generally requires distribution of at least 90% of REIT taxable income, but future dividends were not guaranteed.
- Six-month impairment charges were $45.9 million, including $7.2 million of other-than-temporary impairment on securities and $38.7 million of valuation and loss provisions on loans and REO.
- A preliminary settlement of the HLSS-related Securities Action was approved for $6 million, subject to final court approval; insurance was expected to cover $5 million. The company had not accrued a loss because management did not believe a probable and reasonably estimable loss existed.
- Principal risks include interest-rate and credit-spread volatility, prepayment and delinquency assumptions, recoverability and timing of servicer advances, reliance on Nationstar, Ocwen, Ditech, PHH and OneMain, short-term financing and margin calls, illiquid Level 3 valuations, regulatory actions affecting servicers, REIT qualification and maintaining exclusion from the Investment Company Act.
Most Important Facts for Investors to Verify
- Whether the unusually large servicer-advance income and fair-value gains, particularly the $193.8 million valuation impact, are recurring or primarily assumption-driven.
- The sustainability of core earnings and the $0.50 quarterly dividend after excluding fair-value gains, impairments, deferred taxes and other non-GAAP adjustments.
- Exposure to $8.3 billion of repurchase agreements, short maturities, margin calls and the ability of financing counterparties to roll or refinance debt.
- Progress, approvals, funding requirements and final economics of the PHH and Ocwen MSR transactions, including the potential $400 million of Ocwen payments.
- Servicer performance, regulatory investigations, ratings and financial condition of Ocwen, Nationstar, Ditech and PHH, given the company’s concentration in those counterparties.
- Valuation sensitivity of MSRs, excess MSRs and servicer advances to prepayment rates, discount rates, delinquencies, recapture rates and subservicing costs.
- Potential losses or delays from HLSS-related liabilities, litigation, regulatory matters and assumed obligations.