New Residential Investment Corp. (now associated with Rithm Capital Corp.) — 2014 Form 10-K Summary
Business context and reporting period
The filing is for the fiscal year ended December 31, 2014, filed March 2, 2015. The registrant was New Residential Investment Corp. (NYSE: NRZ), a publicly traded, externally managed REIT focused on residential real estate-related investments. The requested company name, Rithm Capital Corp., does not match the registrant name in this filing.
Primary investments included excess mortgage servicing rights (MSRs), servicer advances, Agency and Non-Agency RMBS, residential mortgage loans, REO and, until its basis was reduced to zero, consumer loans. Fortress Investment Group affiliates provided external management, while Nationstar was the servicer for most of the mortgage-related assets.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Interest income | $346.9 million | $87.6 million | +296.1% |
| Interest expense | $140.7 million | $15.0 million | +836.6% |
| Net interest income | $206.1 million | $72.5 million | +184.2% |
| Other income | $375.1 million | $241.0 million | +55.6% |
| Net income | $442.1 million | $265.6 million | +66.4% |
| Net income attributable to common stockholders | $352.9 million | $265.9 million | +32.7% |
| Basic EPS | $2.59 | $2.10 | +23.3% |
| Core earnings, non-GAAP | $219.3 million | $130.0 million | +68.7% |
| Dividends declared per share | $1.58 | $0.99 | +59.6% |
Net income included significant fair-value gains and other nonrecurring or transaction-related items. These included $84.2 million of fair-value gains on servicer advances, $92.0 million of gains on the consumer-loan investment, $98.9 million of fair-value gains on excess MSRs, and $35.5 million of net gains on investment settlements. Operating expenses were $104.9 million, including $54.3 million of incentive compensation to the external manager.
For the fourth quarter of 2014, net income attributable to common stockholders was $54.2 million, or $0.38 diluted EPS. Net interest income was $53.2 million, other income was $40.1 million, operating expenses were $40.2 million and impairment was $8.7 million. The fourth-quarter dividend was $0.38 per share.
Balance sheet, portfolio, debt and liquidity
- Total assets were $8.09 billion, up from $5.96 billion at December 31, 2013.
- Total debt was $6.06 billion, up from $4.11 billion. Total equity was $1.85 billion, including $1.60 billion attributable to New Residential stockholders and $253.8 million of noncontrolling interests.
- Book value per common share was $11.28, compared with $10.00 at December 31, 2013.
- Cash and cash equivalents were $213.0 million, with an additional $29.4 million of restricted cash.
- Portfolio carrying value was $7.72 billion, consisting primarily of servicer advances of $3.27 billion, real estate securities of $2.46 billion, residential mortgage loans and REO of $1.30 billion, and excess MSRs of $748.6 million, including investments held through equity-method investees.
- Excess MSR investments referenced mortgage pools with approximately $248.7 billion of aggregate UPB. Servicer advances were supported by mortgage pools with approximately $96.5 billion of underlying UPB.
- Repurchase agreements totaled $3.15 billion and notes payable totaled $2.91 billion. Weighted-average funding cost was approximately 2.08% and weighted-average debt life was 0.9 years.
- Contractual debt maturities totaled $3.04 billion in 2015, $2.51 billion in 2016 and $509.4 million in 2017. Management reported $2.58 billion of available financing capacity against eligible collateral and compliance with all debt covenants at year-end.
- Net cash provided by operating activities was $155.4 million. Investing activities used $2.01 billion, while financing activities provided $1.80 billion. Year-end cash declined by $59.0 million.
Material changes versus the prior comparable period
- The portfolio expanded substantially, particularly through the acquisition and financing of servicer advances, mortgage loans and RMBS.
- Interest income increased primarily because of the servicer-advance investment acquired in late 2013 and additional real estate loan, MSR and securities investments. Related interest expense increased sharply as leverage expanded.
- Servicer advances became a major earnings contributor, generating $190.2 million of interest income and $84.2 million of fair-value gains in 2014, but 55.5% of the consolidated Buyer was held by third-party investors and $89.2 million of income was allocated to noncontrolling interests.
- The consumer-loan investment was refinanced in October 2014. New Residential received approximately $337.8 million, recognized an $80.1 million gain, and reduced the carrying value of the investment to zero. Future cash flows were expected, but subsequent equity-method earnings were generally no longer recorded until cumulative earnings exceeded cumulative distributions.
- The company completed a one-for-two reverse stock split in October 2014 and issued approximately 14.4 million shares, including a public offering that generated approximately $169.9 million before issuance costs.
- Impairment increased to $11.3 million from $5.5 million, primarily because of valuation provisions on mortgage loans and REO. Securities OTTI declined to $1.4 million from $5.0 million.
- Accumulated other comprehensive income increased to $28.3 million from $3.2 million, reflecting net unrealized gains on securities after realized gains were reclassified into earnings.
Guidance, outlook, commentary, risks and unusual items
Management expected cash on hand, operating cash flow and the ability to roll repurchase agreements to satisfy anticipated liquidity needs for the current portfolio over the following 12 months. The filing provided no formal earnings or dividend guidance and stated that future distributions would depend on earnings, liquidity, capital requirements, REIT requirements and board approval.
Management continued to see opportunities in MSRs, servicer advances, RMBS call rights and distressed residential loans, but noted increased competition, higher MSR pricing and more extensive regulatory and GSE approval processes. The portfolio’s fair values were highly dependent on Level 3 assumptions, including prepayment speeds, delinquencies, defaults, recapture rates, discount rates and loss severities.
- Servicer and counterparty concentration: Approximately 98.8% of the UPB underlying excess MSRs and 97.0% underlying servicer advances were serviced or master serviced by Nationstar. A servicer termination, bankruptcy, regulatory action or performance deterioration could materially reduce asset values and cash flows.
- Funding and refinancing risk: Much of the debt was short-term or subject to renewal, margin calls and collateral requirements. Certain servicer-advance facilities matured in March 2015, creating near-term refinancing risk.
- Interest-rate and spread risk: A 100-basis-point increase in short-term rates was estimated to reduce 2015 cash flow by approximately $14.8 million but increase net book value by approximately $138.3 million, based on the company’s static-portfolio assumptions. A 25-basis-point widening in credit spreads was estimated to reduce net book value by approximately $42.5 million.
- REIT and Investment Company Act compliance: Failure to maintain REIT qualification or applicable exclusions from Investment Company Act registration could result in significant tax, operational and valuation consequences.
- Management and affiliate conflicts: Fortress affiliates managed the company and held interests in or managed Nationstar, Springleaf and other investment vehicles. The company paid $74.5 million of management, incentive and expense-related amounts to affiliates in 2014.
- HLSS merger: On February 22, 2015, the company agreed to acquire Home Loan Servicing Solutions, Ltd. for $18.25 per share in cash, with aggregate consideration expected to be approximately $1.3 billion. Closing was subject to HLSS shareholder approval and other conditions, and the transaction was not conditioned on financing. Failure to close could result in transaction costs, litigation and share-price pressure.
- Accounting changes: Beginning January 1, 2015, linked transactions were to be accounted for as secured borrowings rather than derivatives, adding approximately $116.7 million of Non-Agency RMBS, $1.6 million of mortgage loans and $85.9 million of repurchase agreements to the balance sheet.
Most important facts an investor should verify
- Confirm the intended issuer and corporate identity: this filing is for New Residential Investment Corp., not a registrant named Rithm Capital Corp.
- Reconcile GAAP net income with core earnings and identify how much 2014 earnings came from fair-value gains, the consumer-loan refinancing and investment sales.
- Review the maturity, renewal and covenant terms of the $6.06 billion debt balance, particularly 2015 maturities and servicer-advance facilities.
- Assess Nationstar concentration, servicer performance, regulatory matters and the recoverability and timing of servicer advances.
- Test the sensitivity of excess MSR and servicer-advance valuations to prepayments, delinquencies, recapture rates, discount rates and defaults.
- Verify the sustainability of the $1.58 per-share 2014 dividend against recurring cash flows, taxable income, leverage and liquidity.
- Review the funding, conditions, termination provisions and potential dilution associated with the proposed approximately $1.3 billion HLSS acquisition.
- Confirm the effect of the 2015 secured-borrowing accounting change and subsequent asset sales, debt repayments and new financings on leverage and liquidity.