Market Overview

New Residential Announces Second Quarter 2018 Results

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New Residential Investment Corp. (NYSE: NRZ; "New Residential" or the
"Company") today reported the following information for the quarter
ended June 30, 2018:

SECOND QUARTER FINANCIAL HIGHLIGHTS:

  • GAAP Net Income of $175 million, or $0.51 per diluted share
  • Core Earnings of $198 million, or $0.58 per diluted share*
  • Common dividend of $170 million, or $0.50 per share
         

 

2Q 2018 1Q 2018
Summary Operating Results:
GAAP Net Income per Diluted Share** $0.51 $1.81
GAAP Net Income $175 million $604 million
 
Non-GAAP Results:
Core Earnings per Diluted Share** $0.58 $0.58
Core Earnings* $198 million $195 million
 
NRZ Common Dividend:
Common Dividend per Share** $0.50 $0.50
Common Dividend $170 million $168 million
 

* Core Earnings is a non-GAAP measure. For a reconciliation of Core
Earnings to GAAP Net Income, as well as an explanation of this measure,
please refer to Non-GAAP Measures and Reconciliation to GAAP Net Income
below.

** Per share calculations of GAAP Net Income and Core Earnings are
based on 339,538,503 weighted average diluted shares during the quarter
ended June 30, 2018 and 333,380,436 weighted average diluted shares
during the quarter ended March 31, 2018. Per share calculations of
Common Dividend are based on 339,862,769 basic shares outstanding as of
June 30, 2018 and 336,135,391 basic shares outstanding as of March 31,
2018.

Second Quarter 2018 & Subsequent Highlights:

  • Mortgage Servicing Rights ("MSRs") -
    • During the quarter, New Residential acquired MSRs totaling
      approximately $20 billion UPB for an aggregate purchase price of
      approximately $245 million. In addition, to further enhance
      liquidity, NRZ priced two fixed rate MSR notes in May and July
      2018, totaling $1.2 billion, at a weighted average cost of funds
      of ~4.5%.
  • Non-Agency Securities & Call Rights -
    • During the second quarter 2018, New Residential continued its deal
      collapse strategy by executing clean-up calls on 32 seasoned,
      Non-Agency residential mortgage-backed securities ("RMBS") deals
      with an aggregate UPB of approximately $1.1 billion. In addition,
      during the quarter, New Residential completed a $435 million
      Non-Agency loan securitization.
    • In the second quarter, New Residential continued to strategically
      invest in Non-Agency securities that are expected to be accretive
      to the Company's call rights strategy. New Residential purchased
      $696 million face value of Non-Agency RMBS, bringing net equity to
      approximately $1.6 billion as of June 30, 2018.
  • Acquisition of Shellpoint Partners LLC ("Shellpoint") -
    • On July 3, 2018, New Residential closed the previously announced
      acquisition of Shellpoint, a vertically integrated mortgage
      platform with established origination and servicing capabilities.
      The acquisition comprises all outstanding equity interests of
      Shellpoint and all companies within the Shellpoint family,
      including New Penn Financial, Shellpoint Mortgage Servicing,
      Avenue 365, and eStreet Appraisal Management Company.

ADDITIONAL INFORMATION

For additional information that management believes to be useful for
investors, please refer to the latest presentation posted on the
Investor Relations section of the Company's website, www.newresi.com.
For consolidated investment portfolio information, please refer to the
Company's most recent Quarterly Report on Form 10-Q or Annual Report on
Form 10-K, which are available on the Company's website, www.newresi.com.

EARNINGS CONFERENCE CALL

New Residential's management will host a conference call on Thursday,
July 26, 2018 at 8:00 A.M. Eastern Time. A copy of the earnings release
will be posted to the Investor Relations section of New Residential's
website, www.newresi.com.

All interested parties are welcome to participate on the live call. The
conference call may be accessed by dialing 1-866-393-1506 (from within
the U.S.) or 1-281-456-4044 (from outside of the U.S.) ten minutes prior
to the scheduled start of the call; please reference "New Residential
Second Quarter 2018 Earnings Call."

A simultaneous webcast of the conference call will be available to the
public on a listen-only basis at www.newresi.com. Please allow extra
time prior to the call to visit the website and download any necessary
software required to listen to the internet broadcast.

A telephonic replay of the conference call will also be available two
hours following the call's completion through 11:59 P.M. Eastern Time on
Thursday, August 9, 2018 by dialing 1-855-859-2056 (from within the
U.S.) or 1-404-537-3406 (from outside of the U.S.); please reference
access code "6696752."

         

Condensed Consolidated Statements of Income

($ in thousands, except share and per share data)

 

 

Three Months Ended June 30, Six Months Ended June 30,
  2018         2017     2018         2017  
(unaudited) (unaudited) (unaudited) (unaudited)
 
Interest income $ 403,805 $ 471,952 $ 787,378 $ 764,490
Interest expense   133,916     115,157     258,303     213,386  
Net Interest Income   269,889     356,795     529,075     551,104  
 
Impairment
Other-than-temporary impairment (OTTI) on securities 12,631 5,115 19,301 7,227
Valuation and loss provision on loans and real estate owned   3,658     20,771     22,665     38,681  
  16,289     25,886     41,966     45,908  
 
Net interest income after impairment 253,600 330,909 487,109 505,196
Servicing revenue, net 146,193 170,851 363,429 211,453
Other Income
Change in fair value of investments in excess mortgage servicing
rights
(5,276 ) (19,180 ) (50,967 ) (18,359 )
Change in fair value of investments in excess mortgage servicing
rights, equity method investees
1,705 4,246 2,228 4,002
Change in fair value of investments in mortgage servicing rights
financing receivables
(119,103 ) 5,596 151,973 5,596
Change in fair value of servicer advance investments (1,752 ) 56,969 (81,228 ) 59,528
Gain (loss) on settlement of investments, net 14,655 13,371 117,957 (303 )
Earnings from investments in consumer loans, equity method investees 2,982 5,880 7,788 5,880
Other income (loss), net   9,977     (9,035 )   19,961     (2,191 )
  (96,812 )   57,847     167,712     54,153  
 
Operating Expenses
General and administrative expenses 20,575 16,042 40,582 27,869
Management fee to affiliate 15,453 14,186 30,563 27,260
Incentive compensation to affiliate 26,732 40,172 41,321 52,632
Loan servicing expense 11,035 13,002 22,549 26,378
Subservicing expense   45,958     55,958     92,555     73,662  
  119,753     139,360     227,570     207,801  
 
Income Before Income Taxes 183,228 420,247 790,680 563,001
Income tax expense (benefit)   (2,608 )   82,844     (9,520 )   88,440  
Net Income $ 185,836   $ 337,403   $ 800,200   $ 474,561  
Noncontrolling Interests in Income of Consolidated Subsidiaries $ 11,078   $ 15,671   $ 21,189   $ 31,451  
Net Income Attributable to Common Stockholders $ 174,758   $ 321,732   $ 779,011   $ 443,110  
 
Net Income Per Share of Common Stock
Basic $ 0.52   $ 1.05   $ 2.34   $ 1.49  
Diluted $ 0.51   $ 1.04   $ 2.32   $ 1.48  
 
Weighted Average Number of Shares of Common Stock Outstanding
Basic   336,311,253     307,344,874     333,364,426     297,029,904  
Diluted   339,538,503     309,392,512     336,476,481     298,875,279  
 
Dividends Declared per Share of Common Stock $ 0.50   $ 0.50   $ 1.00   $ 0.98  
 
         

Condensed Consolidated Balance Sheets

($ in thousands)

 

June 30, 2018

December 31, 2017

Assets (unaudited)
Investments in:
Excess mortgage servicing rights, at fair value $ 495,299 $ 1,173,713
Excess mortgage servicing rights, equity method investees, at fair
value
159,034 171,765
Mortgage servicing rights, at fair value 2,232,126 1,735,504
Mortgage servicing rights financing receivables, at fair value 1,904,919 598,728
Servicer advance investments, at fair value 843,438 4,027,379
Real estate and other securities, available-for-sale 8,084,927 8,071,140
Residential mortgage loans, held-for-investment 690,771 691,155
Residential mortgage loans, held-for-sale 2,021,319 1,725,534
Real estate owned 125,701 128,295
Consumer loans, held-for-investment 1,212,917 1,374,263
Consumer loans, equity method investees 57,820 51,412
Cash and cash equivalents 193,236 295,798
Restricted cash 161,441 150,252
Servicer advances receivable 3,215,361 675,593
Trades receivable 1,076,626 1,030,850
Other assets   468,796   312,181
$ 22,943,731 $ 22,213,562
 
Liabilities and Equity
 
Liabilities
Repurchase agreements $ 8,757,134 $ 8,662,139
Notes and bonds payable 6,707,776 7,084,391
Trades payable 1,168,865 1,169,896
Due to affiliates 48,648 88,961
Dividends payable 169,931 153,681
Deferred tax liability, net 8,403 19,218
Accrued expenses and other liabilities   284,050   239,114
  17,144,807   17,417,400
 
Commitments and Contingencies
 
Equity

Common Stock, $0.01 par value, 2,000,000,000 shares authorized,
339,862,769 and
307,361,309 issued and outstanding at June
30, 2018 and December 31, 2017, respectively

3,399 3,074
Additional paid-in capital 4,246,135 3,763,188
Retained earnings 1,000,488 559,476
Accumulated other comprehensive income (loss)   458,771   364,467
Total New Residential stockholders' equity 5,708,793 4,690,205
Noncontrolling interests in equity of consolidated subsidiaries   90,131   105,957
Total Equity   5,798,924   4,796,162
$ 22,943,731 $ 22,213,562
 

NON-GAAP MEASURES AND RECONCILIATION TO GAAP NET INCOME

New Residential has four primary variables that impact its operating
performance: (i) the current yield earned on the Company's investments,
(ii) the interest expense under the debt incurred to finance the
Company's investments, (iii) the Company's operating expenses and taxes
and (iv) the Company's realized and unrealized gains or losses,
including any impairment, on the Company's investments. "Core earnings"
is a non-GAAP measure of the Company's operating performance, excluding
the fourth variable above and adjusts the earnings from the consumer
loan investment to a level yield basis. Core earnings is used by
management to evaluate the Company's performance without taking into
account: (i) realized and unrealized gains and losses, which although
they represent a part of the Company's recurring operations, are subject
to significant variability and are generally limited to a potential
indicator of future economic performance; (ii) incentive compensation
paid to the Company's manager; (iii) non-capitalized transaction-related
expenses; and (iv) deferred taxes, which are not representative of
current operations.

The Company's definition of core earnings includes accretion on
held-for-sale loans as if they continued to be held-for-investment.
Although the Company intends to sell such loans, there is no guarantee
that such loans will be sold or that they will be sold within any
expected timeframe. During the period prior to sale, the Company
continues to receive cash flows from such loans and believes that it is
appropriate to record a yield thereon. In addition, the Company's
definition of core earnings excludes all deferred taxes, rather than
just deferred taxes related to unrealized gains or losses, because the
Company believes deferred taxes are not representative of current
operations. The Company's definition of core earnings also limits
accreted interest income on RMBS where the Company receives par upon the
exercise of associated call rights based on the estimated value of the
underlying collateral, net of related costs including advances. The
Company created this limit in order to be able to accrete to the lower
of par or the net value of the underlying collateral, in instances where
the net value of the underlying collateral is lower than par. The
Company believes this amount represents the amount of accretion the
Company would have expected to earn on such bonds had the call rights
not been exercised.

The Company's investments in consumer loans are accounted for under ASC
No. 310-20 and ASC No. 310-30, including certain non-performing consumer
loans with revolving privileges that are explicitly excluded from being
accounted for under ASC No. 310-30. Under ASC No. 310-20, the
recognition of expected losses on these non-performing consumer loans is
delayed in comparison to the level yield methodology under ASC No.
310-30, which recognizes income based on an expected cash flow model
reflecting an investment's lifetime expected losses. The purpose of the
core earnings adjustment to adjust consumer loans to a level yield is to
present income recognition across the consumer loan portfolio in the
manner in which it is economically earned, avoid potential delays in
loss recognition, and align it with the Company's overall portfolio of
mortgage-related assets which generally record income on a level yield
basis. With respect to consumer loans classified as held-for-sale, the
level yield is computed through the expected sale date. With respect to
the gains recorded under GAAP in 2014 and 2016 as a result of a
refinancing of the debt related to the Company's investments in consumer
loans, and the consolidation of entities that own the Company's
investments in consumer loans, respectively, the Company continues to
record a level yield on those assets based on their original purchase
price.

While incentive compensation paid to the Company's manager may be a
material operating expense, the Company excludes it from core earnings
because (i) from time to time, a component of the computation of this
expense will relate to items (such as gains or losses) that are excluded
from core earnings, and (ii) it is impractical to determine the portion
of the expense related to core earnings and non-core earnings, and the
type of earnings (loss) that created an excess (deficit) above or below,
as applicable, the incentive compensation threshold. To illustrate why
it is impractical to determine the portion of incentive compensation
expense that should be allocated to core earnings, the Company notes
that, as an example, in a given period, it may have core earnings in
excess of the incentive compensation threshold but incur losses (which
are excluded from core earnings) that reduce total earnings below the
incentive compensation threshold. In such case, the Company would either
need to (a) allocate zero incentive compensation expense to core
earnings, even though core earnings exceeded the incentive compensation
threshold, or (b) assign a "pro forma" amount of incentive compensation
expense to core earnings, even though no incentive compensation was
actually incurred. The Company believes that neither of these allocation
methodologies achieves a logical result. Accordingly, the exclusion of
incentive compensation facilitates comparability between periods and
avoids the distortion to the Company's non-GAAP operating measure that
would result from the inclusion of incentive compensation that relates
to non-core earnings.

With regard to non-capitalized transaction-related expenses, management
does not view these costs as part of the Company's core operations, as
they are considered by management to be similar to realized losses
incurred at acquisition. Non-capitalized transaction-related expenses
are generally legal and valuation service costs, as well as other
professional service fees, incurred when the Company acquires certain
investments, as well as costs associated with the acquisition and
integration of acquired businesses.

Management believes that the adjustments to compute "core earnings"
specified above allow investors and analysts to readily identify and
track the operating performance of the assets that form the core of the
Company's activity, assist in comparing the core operating results
between periods, and enable investors to evaluate the Company's current
core performance using the same measure that management uses to operate
the business. Management also utilizes core earnings as a measure in its
decision-making process relating to improvements to the underlying
fundamental operations of the Company's investments, as well as the
allocation of resources between those investments, and management also
relies on core earnings as an indicator of the results of such
decisions. Core earnings excludes certain recurring items, such as gains
and losses (including impairment as well as derivative activities) and
non-capitalized transaction-related expenses, because they are not
considered by management to be part of the Company's core operations for
the reasons described herein. As such, core earnings is not intended to
reflect all of the Company's activity and should be considered as only
one of the factors used by management in assessing the Company's
performance, along with GAAP net income which is inclusive of all of the
Company's activities.

The primary differences between core earnings and the measure the
Company uses to calculate incentive compensation relate to (i) realized
gains and losses (including impairments), (ii) non-capitalized
transaction-related expenses and (iii) deferred taxes (other than those
related to unrealized gains and losses). Each are excluded from core
earnings and included in the Company's incentive compensation measure
(either immediately or through amortization). In addition, the Company's
incentive compensation measure does not include accretion on
held-for-sale loans and the timing of recognition of income from
consumer loans is different. Unlike core earnings, the Company's
incentive compensation measure is intended to reflect all realized
results of operations. The Gain on Remeasurement of Consumer Loans
Investment was treated as an unrealized gain for the purposes of
calculating incentive compensation and was therefore excluded from such
calculation.

Core earnings does not represent and should not be considered as a
substitute for, or superior to, net income or as a substitute for, or
superior to, cash flows from operating activities, each as determined in
accordance with U.S. GAAP, and the Company's calculation of this measure
may not be comparable to similarly entitled measures reported by other
companies. Set forth below is a reconciliation of core earnings to the
most directly comparable GAAP financial measure (in thousands):

         
Three Months Ended June 30, Six Months Ended June 30,
  2018         2017     2018         2017  
Net income attributable to common stockholders $ 174,758 $ 321,732 $ 779,011 $ 443,110
Impairment 16,289 25,886 41,966 45,908
Other Income adjustments:
Other Income
Change in fair value of investments in excess mortgage servicing
rights
5,276 19,180 50,967 18,359

Change in fair value of investments in excess mortgage servicing
rights,
equity method investees

(1,705 ) (4,246 ) (2,228 ) (4,002 )

Change in fair value of investments in mortgage servicing rights
financing
receivables

62,263 (6,723 ) (257,516 ) (6,723 )
Change in fair value of servicer advance investments 1,752 (56,969 ) 81,228 (59,528 )
(Gain) loss on settlement of investments, net (14,655 ) (13,371 ) (117,957 ) 303
Unrealized (gain) loss on derivative instruments (1,240 ) 8,010 (3,686 ) 3,684
Unrealized (gain) loss on other ABS (5,117 ) 607 (4,804 ) (151 )
(Gain) loss on transfer of loans to REO (6,320 ) (4,978 ) (10,490 ) (11,612 )
(Gain) loss on transfer of loans to other assets 175 (81 ) 120 (293 )
(Gain) loss on Excess MSRs (1,365 ) (715 ) (4,270 ) (1,342 )
(Gain) loss on Ocwen common stock 972 - (4,800 ) -
Other (income) loss   2,918     6,192     7,969     11,905  
Total Other Income Adjustments   42,954     (53,094 )   (265,467 )   (49,400 )
 
Other Income and Impairment attributable to non-controlling interests (5,869 ) (7,848 ) (12,455 ) (18,101 )
Change in fair value of investments in mortgage servicing rights (52,632 ) (89,742 ) (182,425 ) (88,983 )
Non-capitalized transaction-related expenses 6,373 5,278 13,510 7,930
Incentive compensation to affiliate 26,732 40,172 41,321 52,632
Deferred taxes (1,759 ) 82,188 (10,815 ) 85,606
Interest income on residential mortgage loans, held-for sale 2,562 3,789 6,868 7,466
Limit on RMBS discount accretion related to called deals (5,920 ) (6,516 ) (10,194 ) (6,516 )
Adjust consumer loans to level yield (9,213 ) (8,566 ) (15,155 ) (13,586 )
Core earnings of equity method investees:
Excess mortgage servicing rights   3,432     4,456     6,046     6,534  
Core Earnings $ 197,707   $ 317,735   $ 392,211   $ 472,600  
 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain information in this press release constitutes as
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, including, but not limited to
the accretion from investing in Non-Agency securities. These statements
are not historical facts. They represent management's current
expectations regarding future events and are subject to a number of
trends and uncertainties, many of which are beyond our control, which
could cause actual results to differ materially from those described in
the forward-looking statements. Accordingly, you should not place undue
reliance on any forward-looking statements contained herein. For a
discussion of some of the risks and important factors that could affect
such forward-looking statements, see the sections entitled "Cautionary
Statements Regarding Forward Looking Statements," "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" in the Company's annual and quarterly reports and other
filings filed with the SEC, which are available on the Company's website
(www.newresi.com). New risks and uncertainties emerge from time to time,
and it is not possible for New Residential to predict or assess the
impact of every factor that may cause its actual results to differ from
those contained in any forward-looking statements. Forward-looking
statements contained herein speak only as of the date of this press
release, and New Residential expressly disclaims any obligation to
release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in New Residential's
expectations with regard thereto or change in events, conditions or
circumstances on which any statement is based.

ABOUT NEW RESIDENTIAL

New Residential focuses on opportunistically investing in, and
actively managing, investments related to residential real estate. The
Company primarily targets investments in mortgage servicing related
assets, non-Agency securities and other related opportunistic
investments. New Residential is organized and conducts its operations to
qualify as a real estate investment trust ("REIT") for federal income
tax purposes. The Company is managed by an affiliate of Fortress
Investment Group LLC, a global investment management firm.

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