Rithm Capital (RITM) - 2021 Q1 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (Unaudited) Unaudited consolidated financial statements show a significant Q1 2021 turnaround, driven by improved servicing revenue and mortgage loan gains Consolidated Balance Sheets Balance sheets show total assets increased from $33.25 billion to $35.18 billion by March 31, 2021, driven by MSRs and real estate securities Consolidated Balance Sheet Metrics | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------------------------------- | :----------------------------- | :----------------------------- | | Total Assets | $35,184,129 | $33,252,114 | | Total Liabilities | $29,562,316 | $27,822,430 | | Total Equity | $5,621,813 | $5,429,684 | | Mortgage Servicing Rights (MSRs) | $4,023,559 | $3,489,675 | | Real Estate and Other Securities | $14,606,157 | $14,244,558 | | Secured Financing Agreements | $19,522,460 | $17,547,680 | Consolidated Statements of Income Income statements reflect a turnaround from $1.61 billion net loss in Q1 2020 to $301.34 million net income in Q1 2021, driven by servicing revenue and mortgage loan gains Consolidated Statements of Income Metrics | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Total Revenues | $1,170,717 | $286,835 | | Total Expenses | $503,572 | $513,675 | | Net Income (Loss) | $301,336 | $(1,607,255) | | Net Income (Loss) Attributable to Common Stockholders | $277,584 | $(1,602,315) | | Basic EPS | $0.67 | $(3.86) | | Diluted EPS | $0.65 | $(3.86) | | Dividends Declared per Share of Common Stock | $0.20 | $0.05 | - Servicing revenue, net, dramatically increased from a loss of $(289,115) thousand in Q1 2020 to a gain of $513,548 thousand in Q1 2021, a key driver of the net income turnaround[22] - Gain on originated mortgage loans, held-for-sale, net, more than doubled from $173,577 thousand in Q1 2020 to $403,434 thousand in Q1 2021[22] Consolidated Statements of Comprehensive Income Comprehensive income improved from a $2.28 billion loss in Q1 2020 to $308.02 million income in Q1 2021, mirroring net income turnaround Consolidated Statements of Comprehensive Income Metrics | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Net income (loss) | $301,336 | $(1,607,255) | | Other comprehensive income (loss), net of tax | $8,565 | $34,375 | | Reclassification of realized (gain) loss on available-for-sale securities, net into earnings | $(1,877) | $(710,391) | | Comprehensive income (loss) | $308,024 | $(2,283,271) | Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased from $5.43 billion to $5.62 billion by March 31, 2021, due to net income and comprehensive income, offset by dividends Consolidated Statements of Changes in Stockholders' Equity Metrics | Metric | Balance at March 31, 2021 (in thousands) | Balance at December 31, 2020 (in thousands) | | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Total New Residential stockholders' equity | $5,522,829 | $5,321,016 | | Preferred Stock Amount | $812,992 | $812,992 | | Common Stock Amount | $4,149 | $4,148 | | Additional Paid-in Capital | $5,547,607 | $5,547,108 | | Retained Earnings (Accumulated Deficit) | $(914,304) | $(1,108,929) | | Accumulated Other Comprehensive Income | $72,385 | $65,697 | - Net income attributable to common stockholders for the three months ended March 31, 2021, was $291,942 thousand, contributing positively to retained earnings[25] - Dividends declared on common stock were $0.20 per share, totaling $82,959 thousand for the quarter[25] Consolidated Statements of Cash Flows Cash flows show a $94.05 million net increase in Q1 2021, a turnaround from a $183.05 million decrease in Q1 2020, driven by financing activities Consolidated Statements of Cash Flows Metrics | Cash Flow Activity | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Net cash provided by (used in) operating activities | $(495,357) | $1,311,416 | | Net cash provided by (used in) investing activities | $(798,481) | $16,660,824 | | Net cash provided by (used in) financing activities | $1,387,883 | $(18,155,286) | | Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | $94,045 | $(183,046) | | Cash, Cash Equivalents, and Restricted Cash, End of Period | $1,174,518 | $507,888 | - Operating activities used $495.36 million in cash in Q1 2021, a reversal from providing $1.31 billion in Q1 2020, primarily due to changes in working capital and loan origination/sales activities[28] - Investing activities used $798.48 million in cash in Q1 2021, a significant shift from providing $16.66 billion in Q1 2020, reflecting changes in purchases and sales of various investments[29] - Financing activities provided $1.39 billion in cash in Q1 2021, a substantial improvement from using $18.16 billion in Q1 2020, driven by net borrowings under secured financing agreements[31] Notes to Consolidated Financial Statements Detailed notes disclose organization, accounting policies, segment performance, and financial instruments, covering MSRs, debt, equity, and related party transactions Note 1. Organization and Basis of Presentation New Residential is a REIT focused on residential mortgage investments, operating through six segments, and evaluating new accounting pronouncements - New Residential is a Delaware corporation, a publicly traded REIT, listed on NYSE under "NRZ," primarily investing in residential mortgage-related assets[33] - The company operates through six segments: Origination, Servicing, MSR Related Investments, Residential Securities and Loans, Consumer Loans, and Corporate[37] - The company is evaluating the impact of ASU 2020-04 (LIBOR reform) and ASU 2020-06 (convertible instruments) on its financial statements, with ASU 2020-06 effective in Q1 2022[45][46][47] Note 2. Other Assets and Liabilities, General and Administrative, and Other Items Details other assets and liabilities, including margin receivable and deferred tax liability, and breakdowns of expenses and fair value changes Other Assets and Liabilities Metrics | Item | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------------------------------- | :----------------------------- | :----------------------------- | | Other Assets: | | | | Margin receivable, net | $612,814 | $271,753 | | Derivative assets | $408,230 | $290,144 | | Total Other Assets | $1,826,109 | $1,358,422 | | Accrued Expenses and Other Liabilities: | | | | Deferred tax liability | $93,149 | $7,859 | | Derivative liabilities | $74,735 | $119,762 | | Total Accrued Expenses and Other Liabilities | $797,452 | $537,302 | General and Administrative Expenses | Expense Category | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Compensation and benefits expense | $65,426 | $51,341 | | Compensation and benefits expense, origination | $133,218 | $61,278 | | Loan origination expense | $40,245 | $16,929 | | Subservicing expense | $49,839 | $66,981 | | Total General and Administrative Expenses | $362,505 | $275,099 | - Change in fair value of investments shifted from a loss of $(566,276) thousand in Q1 2020 to a loss of $(265,566) thousand in Q1 2021, with derivative instruments showing a significant positive change[55] Note 3. Segment Reporting Reports financial data across six segments, detailing revenue, expense, and asset breakdowns, with Origination and MSR Related Investments as key contributors - The company's reportable segments are Origination, Servicing, MSR Related Investments, Residential Securities and Loans, Consumer Loans, and Corporate[58] Segment Performance (Q1 2021) | Segment (Q1 2021) | Total Revenues (in thousands) | Net Income (Loss) (in thousands) | Total Assets (in thousands) | | :------------------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Origination | $399,165 | $154,849 | $4,665,565 | | Servicing | $114,798 | $23,676 | $316,968 | | MSR Related Investments | $580,513 | $336,861 | $10,550,856 | | Residential Securities and Loans | $103,248 | $(234,910) | $15,494,578 | | Consumer Loans | $49,470 | $89,907 | $3,362,626 | | Corporate | $25,466 | $11,142 | $715,997 | | Total | $1,170,717 | $301,336 | $35,184,129 | Note 4. Excess Mortgage Servicing Rights Assets Excess MSRs totaled $402.45 million at March 31, 2021, valued using a 7.8% weighted average discount rate Excess MSRs Carrying Value | Excess MSRs Category | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------------------------------- | :----------------------------- | :----------------------------- | | Direct investments in Excess MSRs | $303,568 | $310,938 | | Excess MSR Joint Ventures | $98,886 | $99,917 | | Total Excess mortgage servicing rights assets, at fair value | $402,454 | $410,855 | - A weighted average discount rate of 7.8% was used to value Excess MSRs as of March 31, 2021[69] - The company has recapture agreements for direct Excess MSR investments, entitling it to a pro rata interest in Excess MSRs on refinancings by Mr. Cooper or SLS[66] Note 5. Mortgage Servicing Rights and MSR Financing Receivables MSRs and MSR Financing Receivables increased to $5.05 billion, driven by originations and fair value changes, with $1.5 billion in loans subject to repurchase MSRs and MSR Financing Receivables Carrying Value | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------------------------------- | :----------------------------- | :----------------------------- | | MSRs, at fair value | $4,023,559 | $3,489,675 | | MSR Financing Receivables, at fair value | $1,021,780 | $1,096,166 | | Total MSRs and MSR Financing Receivables | $5,045,339 | $4,585,841 | Servicing Revenue, Net Components | Servicing Revenue, Net Components | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Servicing fee revenue | $263,743 | $328,122 | | Ancillary and other fees | $31,894 | $32,138 | | Change in fair value due to realization of cash flows | $(317,716) | $(191,367) | | Change in valuation inputs and assumptions | $545,379 | $(463,711) | | Servicing revenue, net | $513,548 | $(289,115) | - As of March 31, 2021, New Residential holds approximately $1.5 billion in residential mortgage loans subject to repurchase and a corresponding repurchase liability due to Ginnie Mae's unilateral right to repurchase delinquent loans[87] Note 6. Servicer Advance Investments Servicer Advance Investments decreased to $517.56 million at March 31, 2021, primarily financed through non-recourse structures and valued at fair value Servicer Advance Investments Metrics | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------------------------------- | :----------------------------- | :----------------------------- | | Servicer advance investments, carrying value | $517,557 | $538,056 | | UPB of Underlying Residential Mortgage Loans | $24,439,045 | $26,061,499 | | Outstanding Servicer Advances | $440,306 | $449,150 | | Face Amount of Secured Notes and Bonds Payable | $403,570 | $423,144 | - The weighted average discount rate for Servicer Advance Investments was 5.2% and the weighted average yield was 5.7% as of March 31, 2021[104] - Interest income from servicer advance investments was $6.81 million for the three months ended March 31, 2021, a significant increase from a loss of $(18.09) million in the prior year[108] Note 7. Real Estate and Other Securities Real Estate and Other Securities portfolio grew to $14.61 billion, mainly Agency RMBS, with significant unrealized losses primarily from non-credit factors Real Estate and Other Securities Carrying Value | Asset Type | March 31, 2021 Carrying Value (in thousands) | December 31, 2020 Carrying Value (in thousands) | | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Agency RMBS | $13,558,231 | $13,063,634 | | Non-Agency RMBS | $1,047,926 | $1,180,924 | | Total Real Estate and Other Securities | $14,606,157 | $14,244,558 | Unrealized Loss Position (March 31, 2021) | Unrealized Loss Position (March 31, 2021) | Amortized Cost Basis After Credit Impairment (in thousands) | Gross Unrealized Losses (in thousands) | Carrying Value (in thousands) | | :------------------------------------- | :---------------------------------------------------- | :------------------------------------- | :------------------------------------- | | Less than 12 Months | $13,904,381 | $(417,210) | $13,487,171 | | 12 or More Months | $135,662 | $(24,604) | $111,058 | | Total | $14,040,043 | $(441,814) | $13,598,229 | - The majority of unrealized losses on debt securities are due to non-credit factors, totaling $(441,814) thousand as of March 31, 2021[117] Note 8. Residential Mortgage Loans Residential mortgage loans increased to $5.92 billion, including held-for-investment and held-for-sale, with $12.1 million gain on securitizations from trust calls Residential Mortgage Loans by Type (March 31, 2021) | Loan Type (March 31, 2021) | Outstanding Face Amount (in thousands) | Carrying Value (in thousands) | Loan Count | | :------------------------------------- | :------------------------------------- | :---------------------------- | :--------- | | Held-for-investment, at fair value | $708,746 | $656,752 | 11,806 | | Held-for-sale, at lower of cost or market | $379,186 | $323,079 | 4,719 | | Held-for-sale, at fair value | $5,582,608 | $5,600,476 | 23,813 | | Total | $5,961,794 | $5,923,555 | | Net Interest Income from Residential Mortgage Loans | Net Interest Income | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Total interest income | $59,174 | $76,656 | | Total interest expense | $39,339 | $44,200 | | Net interest income | $19,835 | $32,456 | - For the three months ended March 31, 2021, New Residential executed calls on 18 trusts, recognizing $2.2 million of interest income and $12.1 million of gain on securitizations[130] Note 9. Consumer Loans Consumer loan portfolio decreased to $638.99 million, comprising performing and PCD loans, with a 17.6% weighted average coupon Consumer Loan Portfolio (March 31, 2021) | Loan Type (March 31, 2021) | Unpaid Principal Balance (in thousands) | Carrying Value (in thousands) | Weighted Average Coupon | Weighted Average Expected Life (Years) | | :------------------------------------- | :-------------------------------------- | :---------------------------- | :---------------------- | :------------------------------------- | | Performing Loans | $456,572 | $516,597 | 18.5% | 3.5 | | Purchased Credit Deteriorated Loans | $118,758 | $120,731 | 14.3% | 3.5 | | Other - Performing Loans | $1,794 | $1,658 | 15.5% | 0.3 | | Total Consumer Loans | $577,124 | $638,986 | 17.6% | 3.4 | - The weighted average delinquency for consumer loans (30+ days past due) was 4.5% as of March 31, 2021[139] Note 10. Derivatives Derivatives, including swaps and TBAs, are used for hedging, with $408.23 million in assets and $74.74 million in liabilities as of March 31, 2021 Derivative Assets and Liabilities | Derivative Type | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------------------------------- | :----------------------------- | :----------------------------- | | Derivative assets | $408,230 | $290,144 | | Derivative liabilities | $74,735 | $119,762 | | Notional Amount of Interest Rate Swaps | $10,045,000 | $6,515,000 | | Notional Amount of IRLCs | $14,266,506 | $15,031,345 | | Notional Amount of TBAs, short position | $37,712,279 | $23,529,408 | Income (Loss) from Derivatives | Income (Loss) from Derivatives | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Servicing revenue, net (TBAs) | $(8,823) | $0 | | Gain on originated mortgage loans, held-for-sale, net (IRLCs, TBAs, Forward loan sale commitments) | $173,033 | $(48,075) | | Change in fair value of derivative investments (Interest rate swaps) | $206,205 | $(39,982) | | Gain (loss) on settlement of investments, net (Interest rate swaps, TBAs) | $(27,373) | $(84,712) | | Total income (loss) | $343,042 | $(172,769) | Note 11. Debt Obligations Total debt increased to $26.63 billion, including secured financing and notes, with $550 million in new senior unsecured notes issued Debt Obligations Carrying Value | Debt Category | March 31, 2021 Carrying Value (in thousands) | December 31, 2020 Carrying Value (in thousands) | | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Secured Financing Agreements | $19,522,460 | $17,547,680 | | Secured Notes and Bonds Payable | $7,107,875 | $7,644,195 | | Total Debt Obligations | $26,630,335 | $25,191,875 | - The company retired its $600 million 2020 Term Loan in September 2020, incurring a $61.1 million loss on extinguishment of debt[165][169] - Issued $550 million aggregate principal amount of 6.250% senior unsecured notes due 2025, with net proceeds of $544.5 million used to retire the 2020 Term Loan[167][169] Note 12. Fair Value Measurement Details fair value hierarchy, with significant assets valued using Level 3 inputs, and provides MSR sensitivity analyses to various rate changes Fair Value Hierarchy (March 31, 2021) | Asset/Liability Category (March 31, 2021) | Total Fair Value (in thousands) | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | | :------------------------------------- | :------------------------------ | :--------------------- | :--------------------- | :--------------------- | | Assets: | | | | | | Excess MSRs | $303,568 | $0 | $0 | $303,568 | | MSRs | $4,023,559 | $0 | $0 | $4,023,559 | | Servicer advance investments | $517,557 | $0 | $0 | $517,557 | | Real estate and other securities | $14,606,157 | $0 | $13,558,231 | $1,047,926 | | Residential mortgage loans, held-for-sale, at fair value | $5,600,476 | $0 | $3,855,552 | $1,744,924 | | Consumer loans | $638,986 | $0 | $0 | $638,986 | | Derivative assets | $408,230 | $0 | $315,716 | $92,514 | | Liabilities: | | | | | | Secured financing agreements | $19,524,439 | $0 | $19,524,439 | $0 | | Secured notes and bonds payable | $7,121,508 | $0 | $0 | $7,121,508 | | Derivative liabilities | $74,735 | $0 | $36,313 | $38,422 | - For Agency MSRs, a 10% decrease in prepayment rate would increase fair value by 3.0% ($97.54 million), while a 10% increase would decrease it by (2.8)% ($(88.58) million)[532] - For Non-Agency MSRs, a 10% decrease in prepayment rate would increase fair value by 1.9% ($19.88 million), while a 10% increase would decrease it by (1.8)% ($(18.25) million)[533] Note 13. Variable Interest Entities Consolidates several VIEs, with total assets of $2.19 billion and liabilities of $1.66 billion as of March 31, 2021 - New Residential consolidates VIEs where it has power to direct significant activities and the obligation to absorb losses or right to receive significant benefits[216][217] Consolidated VIEs (March 31, 2021) | VIE Category (March 31, 2021) | Total Assets (in thousands) | Total Liabilities (in thousands) | | :------------------------------------- | :---------------------------- | :------------------------------- | | The Buyer (Servicer Advance Investments) | $543,123 | $394,305 | | Shelter Joint Ventures | $42,200 | $7,195 | | Residential Mortgage Loans (NPL/RPL Securitizations, MDST Trusts) | $954,519 | $669,567 | | Consumer Loan SPVs | $653,652 | $591,729 | | Total Consolidated VIEs | $2,193,494 | $1,662,796 | - The creditors of the VIEs do not have recourse to the general credit of New Residential, and VIE assets are not directly available to satisfy New Residential's obligations[227] Note 14. Equity and Earnings Per Share Details preferred and common stock, including a $200 million repurchase authorization, and presents basic and diluted EPS calculations - On February 16, 2021, the board authorized the repurchase of up to $200.0 million of common stock through December 31, 2021. No repurchases have been made as of the report filing[232][287] Preferred Stock Series (March 31, 2021) | Preferred Stock Series (March 31, 2021) | Number of Shares (in thousands) | Liquidation Preference (in thousands) | Carrying Value (in thousands) | Dividends Declared per Share (Q1 2021) | | :------------------------------------- | :------------------------------ | :------------------------------------ | :---------------------------- | :------------------------------------- | | Series A, 7.50% | 6,210 | $155,250 | $150,026 | $0.47 | | Series B, 7.125% | 11,300 | $282,500 | $273,418 | $0.45 | | Series C, 6.375% | 16,100 | $402,500 | $389,548 | $0.40 | | Total | 33,610 | $840,250 | $812,992 | $1.32 | EPS Metrics | EPS Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Basic EPS | $0.67 | $(3.86) | | Diluted EPS | $0.65 | $(3.86) | | Weighted Average Shares Outstanding (Diluted) | 429,491,379 | 415,589,155 | Note 15. Commitments and Contingencies Involved in legal proceedings without expected material adverse effects, with commitments including $1.5 billion for Ginnie Mae repurchases and $256.8 million in unfunded consumer loan credit - The company is involved in various disputes, litigation, and regulatory inquiries, but does not currently believe any would result in a material adverse effect[247][248] - As of March 31, 2021, the estimated liability associated with representations and warranties and Ginnie Mae repurchases was $9.8 million and $1.5 billion, respectively[252] - Consumer Loan Companies have $256.8 million of unfunded and available revolving credit privileges, though draws may be denied at the company's discretion[254] Note 16. Transactions with Affiliates and Affiliated Entities Externally managed by FIG LLC, an affiliate of Fortress, with management fees (1.5% of gross equity) and incentive compensation, leading to potential conflicts of interest - New Residential is managed by FIG LLC, an affiliate of Fortress Investment Group LLC, under a Management Agreement[263] - The Manager receives a management fee of 1.5% per annum of gross equity and annual incentive compensation based on funds from operations[264][265] Affiliate Expenses and Fees | Affiliate Expenses and Fees | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Management fees | $22,162 | $21,721 | | Incentive compensation | $0 | $0 | | Expense reimbursements | $125 | $125 | | Total | $22,287 | $21,846 | Note 17. Income Taxes Intends to qualify as a REIT, but TRSs are subject to corporate taxes, resulting in a $93.1 million net deferred tax liability primarily from MSRs - New Residential intends to qualify as a REIT, requiring distribution of at least 90% of REIT taxable income to avoid federal corporate income tax[274] - Business segments like servicing, origination, and MSR related investments operate through TRSs, which are subject to corporate income taxes[275] - As of March 31, 2021, a net deferred tax liability of $93.1 million was recorded, primarily related to MSRs[276] Note 18. Subsequent Events Subsequent to Q1 2021, the company agreed to acquire Caliber Home Loans for $1.675 billion, financed by a $512.0 million common stock offering - On April 14, 2021, New Residential entered into an agreement to acquire Caliber Home Loans Inc. for $1.675 billion, with the transaction targeted to close in Q3 2021[278] - On April 14, 2021, the company priced a public offering of 45,000,000 common shares at $10.10 per share, raising approximately $512.0 million to finance the Caliber acquisition[279][280] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2021 financial condition, operations, and cash flows, highlighting the net income turnaround, market impacts, and Caliber acquisition General New Residential is a REIT investing in residential real estate, with $35 billion in total assets and 6,086 employees as of March 31, 2021 Company Metrics | Metric | As of March 31, 2021 | | :------------------------------------- | :------------------- | | Total Assets | $35 billion | | Employees within operating entities | 6,086 | - New Residential is a publicly traded REIT focused on opportunistically investing in and actively managing residential real estate market investments[284] Our Manager The company is externally managed by an affiliate of Fortress Investment Group LLC, leveraging its global investment management resources - The company is externally managed by an affiliate of Fortress Investment Group LLC[286] Capital Activities Board authorized a $200.0 million common stock repurchase program through December 31, 2021, with no repurchases made to date - On February 16, 2021, the board authorized a common stock repurchase program of up to $200.0 million through December 31, 2021[287] - No share repurchases have been made as of the filing of this report[287] Market Considerations Q1 2021 saw economic recovery with GDP expansion and falling unemployment, but COVID-19 uncertainties persist, impacting mortgage rates and yields - U.S. real GDP expanded by 6.4% in Q1 2021, accelerating from 4.3% in Q4 2020[298] - The unemployment rate fell to 6.0% at the end of March 2021, down from 6.7% in December 2020[298] - Conventional 30-year mortgage rates increased to 3.361% as of March 31, 2021, from 2.92% at December 31, 2020[292] - Industry forbearance rates declined to 4.9% in Q1 2021 from 5.3% at the end of 2020[292] Proposed Changes to LIBOR Company prepares for LIBOR phase-out by adopting SOFR for ARMs and amending debt, facing uncertainties in timing and hedging complexities - LIBOR is expected to phase out after 2021, with SOFR identified as the preferred alternative rate in the U.S[299] - The company has adopted the SOFR index for Freddie Mac and Fannie Mae adjustable-rate mortgages (ARMs) and is amending debt facilities to transition from LIBOR[300] Our Portfolio Portfolio totals $35.18 billion in assets, comprising servicing, origination, residential securities, and other investments, with detailed breakdowns provided Operating Investments Operating investments, including Origination and Servicing, showed strong Q1 2021 growth, driven by increased loan origination and expanded servicing portfolio Origination NewRez's loan origination volume reached $27.2 billion in Q1 2021, driven by refinance activity, with gain on sale margins at 1.43% Loan Origination Volume and Margins | Metric | Q1 2021 (in millions) | Q4 2020 (in millions) | Q1 2020 (in millions) | QoQ Change (in millions) | YoY Change (in millions) | | :------------------------------------- | :-------------------- | :-------------------- | :-------------------- | :----------------------- | :----------------------- | | Total Production by Channel | $27,212 | $23,856 | $11,414 | $3,356 | $15,798 | | Total Production by Product | $27,212 | $23,856 | $11,414 | $3,356 | $15,798 | | % Purchase | 27% | 29% | 33% | | | | % Refinance | 73% | 71% | 67% | | | | Gain on originated mortgage loans, as a percentage of pull through adjusted lock volume | 1.43% | 1.57% | 1.28% | | | - NewRez's quarterly market share grew to 2.49% in Q1 2021 from 1.89% in the prior quarter[303] Servicing Total servicing portfolio grew to $304.6 billion UPB in Q1 2021, with active forbearances stable at 3.5% of loans Servicing Portfolio Metrics | Metric | March 31, 2021 (in millions) | December 31, 2020 (in millions) | March 31, 2020 (in millions) | QoQ Change (in millions) | YoY Change (in millions) | | :------------------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------- | :----------------------- | | Total Servicing Portfolio (UPB) | $304,587 | $297,765 | $275,822 | $6,822 | $28,765 | | Total Servicing Fees | $113,515 | $122,391 | $87,246 | $(8,876) | $26,269 | - Active forbearances in the NewRez/SMS servicing portfolio were 3.5% of loans as of March 31, 2021, essentially flat from 3.4% in December 2020[312] - Annualized direct cost to service per current loan increased 1% quarter-over-quarter to $74[313] MSR Related Investments MSR Related Investments segment includes MSR and MSR Financing Receivables, financed by debt, and strategic minority investments in service providers MSRs and MSR Financing Receivables MSR and MSR Financing Receivables portfolio decreased to $514 billion UPB due to prepayments, financed primarily by recourse debt MSR Portfolio (March 31, 2021) | MSR Category (March 31, 2021) | Current UPB (billions) | Weighted Average MSR (bps) | Carrying Value (millions) | | :------------------------------------- | :--------------------- | :------------------------- | :------------------------ | | MSRs (GSE, Non-Agency, Ginnie Mae) | $354.1 | 34 | $4,023.5 | | MSR Financing Receivables (Non-Agency) | $64.4 | 48 | $1,021.8 | | Total | $418.5 | 34 | $5,045.3 | - The total MSR and MSR Financing Receivables portfolio decreased to $514 billion UPB from $536 billion UPB in Q4 2020, predominantly due to prepayments[318] - The company finances MSRs and MSR financing receivables with short- and medium-term bank and public capital markets notes, primarily recourse debt[319] MSR Related Ancillary Business Includes Guardian, a field services provider, and a 24.3% strategic minority investment in Covius, offering technology-enabled mortgage and real estate services - The MSR related investments segment includes Guardian, a national provider of field services and property management[345] - The company holds a 24.3% strategic minority investment in Covius, a provider of technology-enabled services to the mortgage and real estate industries[346] Residential Securities and Loans Segment includes Real Estate Securities and Residential Mortgage Loans, with increased carrying value, detailed net interest spreads, and cleanup call options Real Estate Securities Agency RMBS portfolio valued at $13.56 billion with 1.96% net interest spread, Non-Agency RMBS at $1.05 billion with 0.26% spread, both financed by repurchase agreements Real Estate Securities Portfolio (March 31, 2021) | Asset Type (March 31, 2021) | Carrying Value (in thousands) | 3-Month CPR | Net Interest Spread | | :------------------------------------- | :---------------------------- | :---------- | :------------------ | | Agency RMBS | $13,558,231 | 8.5% | 1.96% | | Non-Agency RMBS | $1,047,926 | 15.8% | 0.26% | - The company holds cleanup call options on securitization trusts serviced by Mr. Cooper, SLS, and Ocwen, with an aggregate UPB of approximately $80.0 billion[357] Residential Mortgage Loans Residential mortgage loan portfolio had $6.7 billion outstanding, financed by $5.1 billion in secured agreements and $0.7 billion in notes, including held-for-investment and held-for-sale loans Residential Mortgage Loan Portfolio (March 31, 2021) | Loan Type (March 31, 2021) | Outstanding Face Amount (in thousands) | Carrying Value (in thousands) | | :------------------------------------- | :------------------------------------- | :---------------------------- | | Held-for-investment, at fair value | $708,746 | $656,752 | | Held-for-sale, at lower of cost or market | $379,186 | $323,079 | | Held-for-sale, at fair value | $5,582,608 | $5,600,476 | | Total | $5,961,794 | $5,923,555 | - The residential mortgage loan portfolio is financed with approximately $5.1 billion in secured financing agreements and $0.7 billion in secured notes and bonds payable[363] Other Details the consumer loan portfolio, including composition, carrying value, and financing structure, primarily through securitized non-recourse long-term notes Consumer Loans Consumer loan portfolio had $577.12 million UPB and $638.99 million carrying value, financed by securitized non-recourse long-term notes Consumer Loan Portfolio (March 31, 2021) | Loan Type (March 31, 2021) | UPB (in thousands) | Carrying Value (in thousands) | Weighted Average Coupon | Weighted Average Expected Life (Years) | | :------------------------------------- | :----------------- | :---------------------------- | :---------------------- | :------------------------------------- | | Consumer loans | $577,124 | $638,986 | 17.7% | 3.4 | - Consumer loans are financed with securitized non-recourse long-term notes, which are non-mark-to-market and not subject to margin calls[370] Taxes Operates as a REIT, but TRSs are subject to corporate taxes, resulting in a $93.1 million net deferred tax liability primarily from MSRs - The company has elected REIT status, generally avoiding federal income tax on distributed income[371] - Certain assets (Servicer Advance Investments, MSRs) and operations (securitization, servicing, origination, ancillary businesses) are held in TRSs and are subject to federal, state, and local income tax[372] - A net deferred tax liability of $93.1 million was recorded as of March 31, 2021, primarily related to MSRs and fair value changes in taxable entities[374] Application of Critical Accounting Policies Financial statements rely on estimates and assumptions, with inherent uncertainty due to COVID-19, acknowledging potential material differences from actual results - The preparation of financial statements requires the use of estimates and assumptions, which are inherently less certain due to the ultimate impact of COVID-19[379] Results of Operations Net income shifted from a $1.61 billion loss in Q1 2020 to a $301.34 million gain in Q1 2021, driven by servicing revenue and mortgage loan gains Results of Operations Summary | Metric | Q1 2021 (in thousands) | Q4 2020 (in thousands) | Q1 2020 (in thousands) | QoQ Change (in thousands) | YoY Change (in thousands) | | :------------------------------------- | :--------------------- | :--------------------- | :--------------------- | :------------------------ | :------------------------ | | Total Revenues | $1,170,717 | $570,669 | $286,835 | $600,048 | $883,882 | | Total Expenses | $503,572 | $421,567 | $513,675 | $82,005 | $(10,103) | | Net Income (Loss) | $301,336 | $101,522 | $(1,607,255) | $199,814 | $1,908,591 | | Net Income (Loss) Attributable to Common Stockholders | $277,584 | $68,609 | $(1,602,315) | $208,975 | $1,879,899 | - Servicing revenue, net, increased by $609.3 million QoQ and $802.7 million YoY, primarily due to positive mark-to-market adjustments and slower prepayments[388][389] - Gain on originated mortgage loans, held-for-sale, net, increased $229.9 million YoY, driven by higher loan origination volume ($27.2 billion in Q1 2021 vs. $11.4 billion in Q1 2020)[392] Liquidity and Capital Resources Liquidity is driven by operations, sales, debt, and equity, with $1.04 billion cash, relying on $19.5 billion secured financing, and acknowledging market risks - Primary sources of funds include operating activities, sales/repayments from investments, debt financing, and equity issuance[442] - Total cash and cash equivalents were $1,038.5 million at March 31, 2021[443] - Approximately $744.0 million of cash and cash equivalents were held at NRM and NewRez, with $587.7 million in excess of regulatory liquidity requirements[444] Total Debt Obligations | Debt Category | March 31, 2021 Outstanding Face Amount (in thousands) | | :------------------------------------- | :-------------------------------------------- | | Secured Financing Agreements | $19,524,439 | | Secured Notes and Bonds Payable | $7,127,164 | | Total Debt Obligations | $26,651,603 | Debt Obligations and Collateral (March 31, 2021) | Debt Obligations/Collateral (March 31, 2021) | Borrowing Capacity (in thousands) | Balance Outstanding (in thousands) | Available Financing (in thousands) | | :------------------------------------- | :-------------------------------- | :--------------------------------- | :--------------------------------- | | Residential mortgage loans and REO | $4,553,745 | $1,503,861 | $3,049,884 | | New loan origination | $7,823,000 | $3,638,280 | $4,184,720 | | Excess MSRs | $286,380 | $265,899 | $20,481 | | MSRs | $3,667,277 | $2,696,137 | $971,140 | | Servicer advances | $4,315,000 | $2,898,333 | $1,416,667 | | Total | $20,645,402 | $11,002,510 | $9,642,892 | Off-Balance Sheet Arrangements Material off-balance sheet arrangements relate to non-consolidated securitizations, with $1.1 billion credit loss exposure and $13.0 billion UPB of underlying loans - Material off-balance sheet arrangements relate to non-consolidated securitizations of residential mortgage loans, with credit loss exposure limited to $1.1 billion[492] - As of March 31, 2021, $13.0 billion in total outstanding unpaid principal balance of residential mortgage loans underlay these off-balance sheet securitization trusts[492] Contractual Obligations Contractual obligations include future servicer advances, unfunded consumer loan credit privileges, and $30.67 million in non-cancelable operating lease payments - Commitments include future servicer advances, with expected net recoveries exceeding net fundings for the foreseeable future[494] - Consumer Loan Companies have $256.8 million of unfunded and available revolving credit privileges as of March 31, 2021[494] Undiscounted Lease Payments | Year Ending | Total Remaining Undiscounted Lease Payments (in thousands) | | :------------------------------------- | :--------------------------------------------------- | | April 1 through December 31, 2021 | $9,843 | | 2022 | $10,121 | | 2023 | $5,854 | | 2024 | $2,734 | | 2025 | $2,116 | | Total | $30,668 | Core Earnings Core earnings, a non-GAAP measure, were $144.77 million ($0.34 per diluted share) in Q1 2021, up from $136.97 million in Q4 2020 - "Core earnings" is a non-GAAP measure that excludes realized/unrealized gains/losses, incentive compensation, non-capitalized transaction-related expenses, and deferred taxes to focus on core operating performance[496][497] Core Earnings Summary | Metric | Q1 2021 (in thousands) | Q4 2020 (in thousands) | Q1 2020 (in thousands) | | :------------------------------------- | :--------------------- | :--------------------- | :--------------------- | | Net (loss) income attributable to common stockholders | $277,584 | $68,609 | $(1,602,315) | | Core earnings | $144,768 | $136,965 | $198,371 | | Core earnings per diluted share | $0.34 | $0.32 | $0.48 | Item 3. Quantitative and Qualitative Disclosures About Market Risk Details exposure to market risks including interest rate, mortgage basis spread, prepayment, and credit risks, with MSR sensitivity analyses and mitigation strategies Interest Rate Risk Interest rate changes impact investment fair values and net interest income, with derivatives used for hedging, though REIT rules impose limitations - Changes in interest rates affect the fair value of fixed-rate assets (decreasing with rising rates) and MSRs (increasing with rising rates)[510][512] - The company uses derivatives to hedge interest rate exposure, but REIT provisions limit this ability[512][518] Estimated Change in Fair Value from Interest Rate Changes | Interest Rate Change (bps) | Estimated Change in Fair Value (in millions) - March 31, 2021 | Estimated Change in Fair Value (in millions) - December 31, 2020 | | :------------------------------------- | :------------------------------------------------------------ | :------------------------------------------------------------ | | +50bps | +122.0 | +191.0 | | +25bps | +57.0 | +98.0 | | -25bps | -57.0 | -98.0 | | -50bps | -169.0 | -199.0 | Mortgage Basis Spread Risk Mortgage basis spread risk impacts mortgage portfolio fair value, with lower basis implying lower mortgage rates and increased prepayment speeds - A lower mortgage basis implies lower mortgage rates, increasing prepayment speeds and reducing the fair value of the mortgage portfolio[521] Estimated Change in Fair Value from Mortgage Basis Spread Changes | Interest Rate Change (bps) | Estimated Change in Fair Value (in millions) - March 31, 2021 | Estimated Change in Fair Value (in millions) - December 31, 2020 | | :------------------------------------- | :------------------------------------------------------------ | :------------------------------------------------------------ | | +20bps | -49.6 | -10.6 | | +10bps | -24.5 | -5.3 | | -10bps | +24.5 | +5.3 | | -20bps | +49.0 | +10.6 | Prepayment Rate Exposure Prepayment rates significantly impact MSR and RMBS values, with recapture agreements used to mitigate this risk for MSRs - Prepayment rates significantly affect the value of MSRs, MSR financing receivables, Excess MSRs, and the basic fee component of MSRs[523] - The company uses "recapture agreements" for MSR and Excess MSR investments to mitigate the impact of increasing prepayment rates[525] Credit Risk Credit risk arises from borrower payment defaults, increasing servicer advance obligations and potential losses, mitigated by prudent asset selection and monitoring - Credit risk arises from borrowers' inability to make payments on underlying loans for MSRs, Servicer Advance Investments, securities, and loans[527] - Increased delinquencies lead to higher servicer advance obligations and potential losses on RMBS and loans[527] - The company mitigates credit risk through prudent asset selection, active monitoring of credit quality, and repositioning investments[528] Liquidity Risk Many assets are illiquid due to lack of established markets and transfer restrictions, impeding portfolio adjustment or fair value realization upon disposition - Many investments are illiquid due to the absence of established markets and legal/contractual restrictions on resale[531] - Illiquidity could significantly impede the ability to vary the portfolio in response to market changes or realize fair value if forced to dispose of assets quickly[531] Investment Specific Sensitivity Analyses Provides hypothetical sensitivity analyses for MSRs to changes in discount, prepayment, delinquency, and recapture rates, assuming independent factor changes - Sensitivity analyses are hypothetical and assume independent changes in economic assumptions, which may not reflect real-world interactions between factors[534] Agency MSRs Sensitivity (March 31, 2021) | Agency MSRs Sensitivity (March 31, 2021) | -20% Shift (Change in Fair Value, in thousands) | -10% Shift (Change in Fair Value, in thousands) | 10% Shift (Change in Fair Value, in thousands) | 20% Shift (Change in Fair Value, in thousands) | | :------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Discount rate | $224,561 | $108,201 | $(102,278) | $(197,676) | | Prepayment rate | $207,544 | $97,539 | $(88,579) | $(168,237) | | Delinquency rate | $21,825 | $10,652 | $(11,693) | $(22,865) | | Recapture rate | $(68,382) | $(34,451) | $33,410 | $67,341 | Non-Agency MSRs Sensitivity (March 31, 2021) | Non-Agency MSRs Sensitivity (March 31, 2021) | -20% Shift (Change in Fair Value, in thousands) | -10% Shift (Change in Fair Value, in thousands) | 10% Shift (Change in Fair Value, in thousands) | 20% Shift (Change in Fair Value, in thousands) | | :------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Discount rate | $94,434 | $44,884 | $(42,217) | $(80,658) | | Prepayment rate | $42,813 | $19,878 | $(18,246) | $(32,573) | | Delinquency rate | $45,259 | $15,915 | $(42,794) | $(72,155) | | Recapture rate | $(12,846) | $(6,675) | $5,667 | $11,838 | Ginnie Mae MSRs Sensitivity (March 31, 2021) | Ginnie Mae MSRs Sensitivity (March 31, 2021) | -20% Shift (Change in Fair Value, in thousands) | -10% Shift (Change in Fair Value, in thousands) | 10% Shift (Change in Fair Value, in thousands) | 20% Shift (Change in Fair Value, in thousands) | | :------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Discount rate | $53,991 | $24,514 | $(28,549) | $(52,496) | | Prepayment rate | $79,841 | $36,001 | $(37,779) | $(69,137) | | Delinquency rate | $15,171 | $6,117 | $(11,991) | $(21,044) | | Recapture rate | $(35,461) | $(19,199) | $13,326 | $29,588 | Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2021, with no material changes in internal control over financial reporting - The company's disclosure controls and procedures were evaluated as effective as of March 31, 2021[535] - No material changes in internal control over financial reporting occurred during the fiscal quarter[536] Part II. Other Information Item 1. Legal Proceedings Involved in various legal proceedings and regulatory inquiries, but does not anticipate any material adverse effects on its business or financial position - The company is involved in various disputes, litigation, and regulatory inquiries that arise in the ordinary course of business[537] - The company does not currently believe any of these inquiries or proceedings would result in a material adverse effect on its business, financial position, or results of operations[537][538] Item 1A. Risk Factors Investing involves high risks, including business, manager, financial markets, REIT taxation, stock, and Caliber acquisition risks, with COVID-19 and illiquidity as key concerns Risks Related to Our Business Significant business risks include COVID-19 impacts, inaccurate investment assumptions, non-recoverable servicer advances, reliance on Servicing Partners, and illiquidity - The COVID-19 pandemic could adversely impact business operations, personnel availability, market value of loans/securities, financing covenants, and cash flows, potentially leading to reduced distributions[540][542] - The value of investments relies on assumptions (prepayment, interest rates, delinquencies, recapture rates) that could differ materially from actual results, negatively impacting financial performance[546][547] - Servicer advances may not be recoverable or may take longer than expected, potentially causing failure to achieve targeted returns on Servicer Advance Investments or MSRs[555][558] - Heavy reliance on Servicing Partners (e.g., Mr. Cooper, SLS, PHH) exposes the company to risks from their performance, compliance failures, downgrades, or bankruptcy, which could severely impact investment value[560][572] - Many investments are illiquid, making it difficult to adjust the portfolio or realize fair value upon disposition, especially for MSRs which have numerous transfer restrictions[621][622] Risks Related to Our Manager High dependence on external Manager, FIG LLC, creates conflicts of interest and potential for high-risk incentives, with difficult and costly agreement termination - The company is completely reliant on its external Manager, FIG LLC, for business conduct, and losing key Manager employees could adversely affect operations[740] - Inherent conflicts of interest exist due to the Manager and its affiliates investing in similar assets and having overlapping investment objectives[742] - The management compensation structure, including incentive compensation, may incentivize the Manager to prioritize earnings maximization and leverage, potentially at the expense of capital preservation[745] - Terminating the Management Agreement is difficult and costly, requiring a supermajority vote and payment of a substantial termination fee[746][747] Risks Related to the Financial Markets Exposed to significant financial market risks from legislative and regulatory changes, federal conservatorship of GSEs, and loan modifications, impacting costs and investment values - Legislative and regulatory changes, including the Dodd-Frank Act and its risk retention requirements, can increase compliance costs and impact securitization activities[756][757] - The federal conservatorship of Fannie Mae and Freddie Mac creates uncertainty regarding their long-term viability and market role, potentially affecting Agency RMBS values[761][766] - Legislation permitting loan modifications (e.g., CARES Act forbearances) can reduce the value of investments and increase servicer advance obligations[769][770] Risks Related to Our Taxation as a REIT Maintaining REIT qualification is complex, with failure leading to higher taxes and reduced distributions; risks include phantom income and hedging limitations - REIT qualification involves complex Internal Revenue Code provisions, and even technical violations could jeopardize status, leading to higher taxes and reduced distributions[771][773] - Failure to qualify as a REIT would result in corporate income tax, reduced cash for distributions, and delisting from the NYSE[773][775] - The company may be required to report taxable income (e.g., from Excess MSRs, consumer loans) in excess of actual cash received, potentially creating "phantom income" and distribution challenges[782][789] - REIT requirements limit the ability to hedge effectively, potentially increasing interest rate risks or costs, or requiring hedges through TRSs[795][796] Risks Related to Our Stock Stock price is subject to volatility and dilution from equity issuances; control failures or inconsistent distributions could negatively impact price, and anti-takeover provisions exist - The market price of common and preferred stock may fluctuate widely due to various factors, including earnings, market performance, and general economic conditions[804][805] - Future sales or issuances of common stock, including through equity awards or offerings, could dilute existing stockholders and adversely affect the market price[806][810][811] - Failure to maintain effective internal control over financial reporting could lead to adverse regulatory consequences, restatements, and a loss of investor confidence, impacting the stock price[807][809] - The company has not established a minimum distribution payment level for common stock, and its ability to pay distributions is subject to various factors and board discretion[812][813] Risks Related to the Caliber Acquisition Caliber acquisition faces closing conditions, regulatory approvals, and integration challenges, with failure potentially impacting business, financial condition, and operations - The Caliber Acquisition is subject to numerous conditions, including regulatory approvals, and may not be completed on time or at all, leading to potential adverse impacts on the business and stock price[822][823] - Integration of Caliber's business is complex and costly, with risks including diversion of management attention, maintaining employee morale, and unforeseen expenses, which could hinder anticipated benefits[830][831] - Caliber's business is highly dependent on Ginnie Mae, Fannie Mae, and Freddie Mac, and changes in their roles or guidelines could materially and adversely affect the combined company's mortgage lending operations[834][840] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - No unregistered sales of equity securities or use of proceeds were reported[849] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported for the period - No defaults upon senior securities were reported[850] Item 4. Mine Safety Disclosures Not Applicable - Not Applicable[851] Item 5. Other Information No other information was reported for the period - No other information was reported[852] Item 6. Exhibits Lists all exhibits filed with the 10-Q report, including agreements, corporate governance documents, and certifications - The exhibits include various agreements (e.g., Purchase Agreements, Management Agreement), corporate governance documents (e.g., Certificate of Incorporation, Bylaws), and certifications (e.g., CEO/CFO certifications)[854][856][857][859][860][861][862][863][864][865] Signatures Report signed by Michael Nierenberg (CEO) and Nicola Santoro, Jr. (CFO) on May 5, 2021 - The report was signed by Michael Nierenberg (CEO and President) and Nicola Santoro, Jr. (CFO and Treasurer) on May 5, 2021[868]