UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2015
 
or
 
¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________to________________
 
Commission File Number: 001-35777
New Residential Investment Corp.
(Exact name of registrant as specified in its charter)
Delaware
 
45-3449660
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1345 Avenue of the Americas, New York, NY
 
10105
(Address of principal executive offices)
 
(Zip Code)
 
(212) 798-3150
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x  Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.
Common stock, $0.01 par value per share: 198,934,905 shares outstanding as of May 1, 2015.



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. Such forward-looking statements relate to, among other things, the operating performance of our investments, the stability of our earnings, our financing needs and the size and attractiveness of market opportunities. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations, cash flows or financial condition or state other forward-looking information. Our ability to predict results or the actual outcome of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:
 
•
reductions in cash flows received from our investments;
•
the quality and size of the investment pipeline and our ability to take advantage of investment opportunities at attractive risk-adjusted prices;
•
servicer advances may not be recoverable or may take longer to recover than we expect, which could cause us to fail to achieve our targeted return on our investment in servicer advances;
•
our ability to deploy capital accretively and the timing of such deployment;
•
our counterparty concentration and default risks in Nationstar, Springleaf and other third parties;
•
a lack of liquidity surrounding our investments, which could impede our ability to vary our portfolio in an appropriate manner;
•
the impact that risks associated with subprime mortgage loans and consumer loans, as well as deficiencies in servicing and foreclosure practices, may have on the value of our Excess MSRs, servicer advances, RMBS and consumer loan portfolios;
•
the risks that default and recovery rates on our Excess MSRs, servicer advances, real estate securities, residential mortgage loans and consumer loans deteriorate compared to our underwriting estimates;
•
changes in prepayment rates on the loans underlying certain of our assets, including, but not limited to, our Excess MSRs;
•
the risk that projected recapture rates on the portfolios underlying our Excess MSRs are not achieved;
•
the relationship between yields on assets which are paid off and yields on assets in which such monies can be reinvested;
•
the relative spreads between the yield on the assets we invest in and the cost of financing;
•
changes in economic conditions generally and the real estate and bond markets specifically;
•
adverse changes in the financing markets we access affecting our ability to finance our investments on attractive terms, or at all;
•
changing risk assessments by lenders that potentially lead to increased margin calls, not extending our repurchase agreements or other financings in accordance with their current terms or not entering into new financings with us;
•
changes in interest rates and/or credit spreads, as well as the success of any hedging strategy we may undertake in relation to such changes;
•
impairments in the value of the collateral underlying our investments and the relation of any such impairments to our judgments as to whether changes in the market value of our securities or loans are temporary or not and whether circumstances bearing on the value of such assets warrant changes in carrying values;
•
the availability and terms of capital for future investments;
•
competition within the finance and real estate industries;
•
the legislative/regulatory environment, including, but not limited to, the impact of the Dodd-Frank Act, U.S. government programs intended to stabilize the economy, the federal conservatorship of Fannie Mae and Freddie Mac and legislation that permits modification of the terms of loans;



•
our ability to maintain our qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes and the potentially onerous consequences that any failure to maintain such qualification would have on our business;
•
our ability to maintain our exclusion from registration under the 1940 Act and the fact that maintaining such exclusion imposes limits on our operations; and
•
the risks related to the Acquisition (as defined herein).

We also direct readers to other risks and uncertainties referenced in this report, including those set forth under “Risk Factors.” We caution that you should not place undue reliance on any of our forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. Except as required by law, we are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statement, whether written or oral, that we may make from time to time, whether as a result of new information, future events or otherwise.
 



SPECIAL NOTE REGARDING EXHIBITS
 
In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about New Residential Investment Corp. (the “Company,” “New Residential” or “we,” “our” and “us”) or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
 
•
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements provide to be inaccurate;
•
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
•
may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
•
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
 
The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading.
 



NEW RESIDENTIAL INVESTMENT CORP.
FORM 10-Q
 
INDEX
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    General
 
 
 
 
 
 
 
 
 
 



 
 
 
 
 
 
 
 
 
 
    Inflation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
 
March 31, 2015
 
December 31, 2014
 
(Unaudited)
 
Assets
 
 
 
Investments in:
 
 
 
Excess mortgage servicing rights, at fair value
$
526,662

 
$
417,733

Excess mortgage servicing rights, equity method investees, at fair value
225,111

 
330,876

Servicer advances, at fair value
3,245,457

 
3,270,839

Real estate securities, available-for-sale
2,324,915

 
2,463,163

Residential mortgage loans, held-for-investment
44,967

 
47,838

Residential mortgage loans, held-for-sale
500,174

 
1,126,439

Real estate owned
35,905

 
61,933

Consumer loans, equity method investees
—

 
—

Cash and cash equivalents
459,334

 
212,985

Restricted cash
28,325

 
29,418

Derivative assets
71

 
32,597

Other assets
76,701

 
99,869

 
$
7,467,622

 
$
8,093,690

 
 
 
 
Liabilities and Equity
 

 
 
 
 
 
 
Liabilities
 

 
 
Repurchase agreements
$
2,339,389

 
$
3,149,090

Notes payable
2,999,418

 
2,913,209

Trades payable
196,000

 
2,678

Due to affiliates
6,465

 
57,424

Dividends payable
53,745

 
53,745

Deferred tax liability
13,414

 
15,114

Accrued expenses and other liabilities
44,777

 
52,505

 
5,653,208

 
6,243,765

 
 
 
 
Commitments and Contingencies


 


 
 
 
 
Equity
 

 
 
Common Stock, $0.01 par value, 2,000,000,000 shares authorized, 141,434,905 and 141,434,905 issued and outstanding at March 31, 2015 and December 31, 2014, respectively
1,414

 
1,414

Additional paid-in capital
1,328,587

 
1,328,587

Retained earnings
217,689

 
237,769

Accumulated other comprehensive income, net of tax
19,825

 
28,319

Total New Residential stockholders’ equity
1,567,515

 
1,596,089

Noncontrolling interests in equity of consolidated subsidiaries
246,899

 
253,836

Total Equity
1,814,414

 
1,849,925

 
$
7,467,622

 
$
8,093,690

 
See notes to condensed consolidated financial statements.

1


NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share data)
 
 
Three Months Ended March 31,
 
2015
 
2014
 Interest income
$
84,373

 
$
71,490

 Interest expense
33,979

 
38,997

Net Interest Income
50,394

 
32,493

 
 
 
 
Impairment
 
 
 
 Other-than-temporary impairment (“OTTI”) on securities
1,071

 
328

 Valuation provision on loans and real estate owned
977

 
164

 
2,048

 
492

 
 
 
 
  Net interest income after impairment
48,346

 
32,001

 
 
 
 
Other Income
 
 
 
Change in fair value of investments in excess mortgage servicing rights
(1,761
)
 
6,602

Change in fair value of investments in excess mortgage servicing rights, equity method
    investees
4,921

 
6,374

Change in fair value of investments in servicer advances
(7,669
)
 
—

Earnings from investments in consumer loans, equity method investees
—

 
16,360

Gain on settlement of investments, net
14,767

 
4,357

Other income (loss), net
2,037

 
1,357

 
12,295

 
35,050

 
 
 
 
Operating Expenses
 
 
 
 General and administrative expenses
8,560

 
1,985

 Management fee to affiliate
5,126

 
4,486

              Incentive compensation to affiliate
3,693

 
3,338

 Loan servicing expense
4,891

 
90

 
22,270

 
9,899

 
 
 
 
Income Before Income Taxes
38,371

 
57,152

Income tax expense (benefit)
(3,427
)
 
287

Net Income
$
41,798

 
$
56,865

Noncontrolling Interests in Income of Consolidated Subsidiaries
$
5,823

 
$
8,093

Net Income Attributable to Common Stockholders
$
35,975

 
$
48,772

 
 
 
 
Net Income Per Share of Common Stock
 
 
 
  Basic
$
0.25

 
$
0.39

  Diluted
$
0.25

 
$
0.38

 
 
 
 
Weighted Average Number of Shares of Common Stock Outstanding
 
 
 
  Basic
141,434,905

 
126,604,510

  Diluted
144,911,309

 
129,919,967

 
 
 
 
Dividends Declared per Share of Common Stock
$
0.38

 
$
0.35

 
See notes to condensed consolidated financial statements.
 

2


NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands)
 
 
Three Months Ended March 31,
 
2015
 
2014
Comprehensive income (loss), net of tax
 
 
 
Net income
$
41,798

 
$
56,865

Other comprehensive income (loss)
 
 
 
Net unrealized gain on securities
15,132

 
10,878

Reclassification of net realized (gain) on securities into earnings
(23,626
)
 
(4,164
)
 
(8,494
)
 
6,714

Total comprehensive income
$
33,304

 
$
63,579

Comprehensive income attributable to noncontrolling interests
$
5,823

 
$
8,093

Comprehensive income attributable to common stockholders
$
27,481

 
$
55,486

 
See notes to condensed consolidated financial statements.


3


NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED) 
FOR THE THREE MONTHS ENDED March 31, 2015
(dollars in thousands, except share data)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Total New Residential Stockholders’ Equity
 
Noncontrolling
Interests in Equity of Consolidated Subsidiaries
 
Total Equity
Equity - December 31, 2014
141,434,905

 
$
1,414

 
$
1,328,587

 
$
237,769

 
$
28,319

 
$
1,596,089

 
$
253,836

 
$
1,849,925

Dividends declared
—

 
—

 
—

 
(53,745
)
 
—

 
(53,745
)
 
—

 
(53,745
)
Capital contributions
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Capital distributions
—

 
—

 
—

 
—

 
—

 
—

 
(12,760
)
 
(12,760
)
Modified retrospective adjustment for the adoption of ASU No. 2014-11
—

 
—

 
—

 
(2,310
)
 
—

 
(2,310
)
 
—

 
(2,310
)
Comprehensive income (loss) (net of tax)
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income (loss)
—

 
—

 
—

 
35,975

 
—

 
35,975

 
5,823

 
41,798

Net unrealized gain (loss) on securities
—

 
—

 
—

 
—

 
15,132

 
15,132

 
—

 
15,132

Reclassification of net realized (gain) loss on securities into earnings
—

 
—

 
—

 
—

 
(23,626
)
 
(23,626
)
 
—

 
(23,626
)
Total comprehensive income (loss)


 


 


 


 


 
27,481

 
5,823

 
33,304

Equity - March 31, 2015
141,434,905

 
$
1,414

 
$
1,328,587

 
$
217,689

 
$
19,825

 
$
1,567,515

 
$
246,899


$
1,814,414

 
See notes to condensed consolidated financial statements.


4


NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
 
 
Three Months Ended March 31,
 
2015
 
2014
Cash Flows From Operating Activities
 
 
 
Net income
$
41,798

 
$
56,865

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Change in fair value of investments in excess mortgage servicing rights
1,761

 
(6,602
)
Change in fair value of investments in excess mortgage servicer rights, equity method investees
(4,921
)
 
(6,374
)
            Change in fair value of investments in servicer advances
7,669

 
—

Earnings from consumer loan equity method investees
—

 
(16,360
)
Change in fair value of investments in derivative assets
7,030

 
(1,357
)
Accretion and other amortization
(61,345
)
 
(56,650
)
(Gain) / loss on settlement of investments (net)
(17,701
)
 
(4,357
)
(Gain) / loss on transfer of loans to REO
544

 
—

Loss on extinguishment of debt
2,934

 
—

(Gain) / loss on mortgage servicing rights recapture agreement
(730
)
 
—

Other-than-temporary impairment (“OTTI”)
1,071

 
328

Valuation provision on loans and real estate owned
977

 
164

Unrealized loss on other ABS
290

 
—

Non-cash directors’ compensation
—

 
78

       Deferred income tax expense
(3,007
)
 
—

 
 
 
 
Changes in:
 
 
 
Restricted cash
1,093

 
(1,269
)
Other assets
(1,849
)
 
5,531

Due to affiliates
(50,959
)
 
(11,172
)
Accrued expenses and other liabilities
618

 
1,179

Other operating cash flows:
 
 
 
Interest received from excess mortgage servicing rights
12,692

 
13,816

Interest received from servicer advance investments
23,168

 
16,304

Interest received from Non-Agency RMBS
8,050

 
—

Distributions of earnings from excess mortgage servicing rights, equity method investees
12,226

 
11,940

Net cash provided by (used in) operating activities
(18,591
)
 
2,064

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Acquisition of investments in excess mortgage servicing rights
(23,831
)
 
(19,132
)
Purchase of servicer advance investments
(1,765,294
)
 
(2,205,070
)
Purchase of Agency RMBS
(1,026,525
)
 
(37,922
)
Purchase of Non-Agency RMBS
(26,649
)
 
(1,038,721
)
Purchase of residential mortgage loans
(19,032
)
 
—

Purchase of derivative assets
—

 
(71,923
)
Payments for settlement of derivatives
(25,007
)
 
—

Return of investments in excess mortgage servicing rights
17,122

 
8,121

Return of investments in excess mortgage servicing rights, equity method investees
202

 
8,893

Principal repayments from servicer advance investments
1,802,188

 
1,442,648

Principal repayments from Agency RMBS
46,967

 
75,470

Principal repayments from Non-Agency RMBS
14,952

 
13,890

Principal repayments from non-performing loans
—

 
1,900

Principal repayments from residential mortgage loans, held-for-investment
9,022

 
—

Proceeds from sale of residential mortgage loans
627,719

 
—

Proceeds from sale of Agency RMBS
1,060,569

 
162,897

Proceeds from sale of Non-Agency RMBS
389,719

 
258,449

Proceeds from settlement of derivatives
2,417

 
—

Proceeds from sale of real estate owned
34,930

 
—

Net cash provided by (used in) investing activities
1,119,469

 
(1,400,500
)
 
Continued on next page.


5


NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
 
 
Three Months Ended March 31,
 
2015
 
2014
Cash Flows From Financing Activities
 
 
 
Repayments of repurchase agreements
(2,016,777
)
 
(1,080,197
)
Margin deposits under repurchase agreements and derivatives
(123,289
)
 
(43,270
)
Repayments of notes payable
(396,125
)
 
(3,117,213
)
Payment of deferred financing fees
(666
)
 
(5,660
)
Common stock dividends paid
(53,745
)
 
(63,297
)
Borrowings under repurchase agreements
1,121,121

 
1,618,664

Return of margin deposits under repurchase agreements and derivatives
145,378

 
66,899

Borrowings under notes payable
482,334

 
3,862,782

Noncontrolling interest in equity of consolidated subsidiaries - contributions
—

 
142,024

Noncontrolling interest in equity of consolidated subsidiaries - distributions
(12,760
)
 
(113,795
)
Net cash provided by (used in) financing activities
(854,529
)
 
1,266,937

 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
246,349

 
(131,499
)
 
 
 
 
Cash and Cash Equivalents, Beginning of Period
212,985

 
271,994

 
 
 
 
Cash and Cash Equivalents, End of Period
$
459,334

 
$
140,495

 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest
$
32,880

 
$
35,194

Cash paid during the period for income taxes
305

 
—

 
 
 
 
Supplemental Schedule of Non-Cash Investing and Financing Activities
Dividends declared but not paid
$
53,745

 
$
44,312

Application of ASU No. 2014-11 non-cash activity from investing to financing
85,955

 
—

Purchase of Non-Agency RMBS settled after quarter end
196,000

 
—

 
See notes to condensed consolidated financial statements.

6


NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2015
(dollars in tables in thousands, except share data) 
 
1. ORGANIZATION
 
New Residential Investment Corp. (together with its subsidiaries, “New Residential”) is a Delaware corporation that was formed as a limited liability company in September 2011 for the purpose of making real estate related investments and commenced operations on December 8, 2011. On December 20, 2012, New Residential was converted to a corporation. Newcastle Investment Corp. (“Newcastle”) was the sole stockholder of New Residential until the spin-off (Note 13), which was completed on May 15, 2013. Newcastle is listed on the New York Stock Exchange (“NYSE”) under the symbol “NCT.”
 
Following the spin-off, New Residential is an independent publicly traded real estate investment trust (“REIT”) primarily focused on investing in residential mortgage related assets. New Residential is listed on the NYSE under the symbol “NRZ.”
 
New Residential has elected and intends to qualify to be taxed as a REIT for U.S. federal income tax purposes. As such, New Residential will generally not be subject to U.S. federal corporate income tax on that portion of its net income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by prescribed dates and complies with various other requirements. See Note 17 regarding New Residential’s taxable REIT subsidiaries.
 
New Residential has entered into a management agreement (the “Management Agreement”) with FIG LLC (the “Manager”), an affiliate of Fortress Investment Group LLC (“Fortress”), pursuant to which the Manager provides for a management team and other professionals who are responsible for implementing New Residential’s business strategy, subject to the supervision of New Residential’s board of directors. For its services, the Manager is entitled to management fees and incentive compensation, both defined in, and in accordance with the terms of, the Management Agreement. The Manager also manages Newcastle and investment funds that own a majority of Nationstar Mortgage LLC (“Nationstar”), a leading residential mortgage servicer, and Springleaf Holdings, Inc. (“Springleaf”), managing member of the Consumer Loan Companies (Note 9).
 
As of March 31, 2015, New Residential conducted its business through the following segments: (i) investments in Excess MSRs, (ii) investments in servicer advances, (iii) investments in real estate securities, (iv) investments in real estate loans, (v) investments in consumer loans and (vi) corporate.
 
Approximately 2.4 million shares of New Residential’s common stock were held by Fortress, through its affiliates, and its principals as of March 31, 2015. In addition, Fortress, through its affiliates, held options to purchase approximately 8.5 million shares of New Residential’s common stock as of March 31, 2015.
 
The accompanying condensed consolidated financial statements and related notes of New Residential have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of New Residential’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These condensed consolidated financial statements should be read in conjunction with New Residential’s consolidated financial statements for the year ended December 31, 2014 and notes thereto included in New Residential’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. Capitalized terms used herein, and not otherwise defined, are defined in New Residential’s consolidated financial statements for the year ended December 31, 2014.
 
Certain prior period amounts have been reclassified to conform to the current period’s presentation. In addition, New Residential completed a one-for-two reverse stock split in October 2014 (Note 13). The impact of this reverse stock split has been retroactively applied to all periods presented.
Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenues from Contracts with Customers (Topic 606). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In effect, companies

7
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2015
(dollars in tables in thousands, except share data) 
 

will be required to exercise further judgment and make more estimates prospectively. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU No. 2014-09 is effective for New Residential in the first quarter of 2017. Early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance in ASU No. 2014-09. New Residential is currently evaluating the new guidance to determine the impact it may have on its condensed consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The standard changes the accounting for repurchase-to-maturity transactions and linked repurchase financing transactions to secured borrowing accounting. ASU No. 2014-11 also expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers accounted for as secured borrowings. ASU No. 2014-11 is effective for New Residential in the first quarter of 2015. Early adoption is not permitted. Disclosures are not required for comparative periods presented before the effective date. New Residential has determined that, as of January 1, 2015, its linked transactions (Note 10) are accounted for as secured borrowings.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The standard provides guidance on management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern by requiring management to assess an entity’s ability to continue as a going concern by incorporating and expanding on certain principles that are currently in U.S. auditing standards. ASU No. 2014-15 is effective for New Residential for the annual period ending on December 31, 2016. Early adoption is permitted. New Residential is currently evaluating the new guidance to determine the impact that it may have on its condensed consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The standard amends the consolidation considerations when evaluating certain limited partnerships, variable interest entities and investment funds. ASU No. 2015-02 is effective for New Residential in the first quarter of 2016.  Early adoption is permitted. New Residential does not expect the adoption of this new guidance to have an impact on its condensed consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest. The standard amends the balance sheet presentation requirements for debt issuance costs such that they are no longer recognized as deferred charges but are rather presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. ASU No. 2015-03 is effective for New Residential in the first quarter of 2016. Early adoption is permitted. New Residential has not yet adopted ASU No. 2015-03 but has determined that the adoption of ASU No. 2015-03 will result in an immaterial reclassification of its Deferred Financing Costs, Net (Note 2) to an offset of its Notes Payable (Note 11).

The FASB has recently issued or discussed a number of proposed standards on such topics as financial statement presentation, financial instruments and hedging. Some of the proposed changes are significant and could have a material impact on New Residential’s reporting. New Residential has not yet fully evaluated the potential impact of these proposals, but will make such an evaluation as the standards are finalized. 

2. OTHER INCOME, ASSETS AND LIABILITIES
 
Other income, net, is comprised of the following:
 
Three Months Ended March 31,
 
2015
 
2014
Unrealized gain (loss) on derivative instruments
$
(7,030
)
 
$
1,357

Gain (loss) on transfer of loans to REO
(544
)
 
—

Gain on consumer loans investment
10,447

 
—

Other income (loss)
(836
)
 
—

 
$
2,037

 
$
1,357

 

8
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2015
(dollars in tables in thousands, except share data) 
 

Gain on settlement of investments, net is comprised of the following:
 
Three Months Ended March 31,
 
2015
 
2014
Gain on sale of real estate securities, net
$
24,697

 
$
4,492

Gain (loss) on sale of residential mortgage loans, net
20,830

 
—

Gain (loss) on settlement of derivatives
(22,590
)
 
(135
)
Gain (loss) on liquidated residential mortgage loans, held-for-investment
400

 
—

Gain (loss) on sale of REO(A)
(5,636
)
 
—

Other gains (losses)
(2,934
)
 
—

 
$
14,767

 
$
4,357


(A)
Includes approximately $3.2 million loss on REO sold as a part of the residential mortgage loan sales described in Note 8.

Other assets and liabilities are comprised of the following:
 
Other Assets
 
 
 
Accrued Expenses and Other Liabilities
 
March 31, 2015
 
December 31, 2014
 
 
 
March 31, 2015
 
December 31, 2014
Margin receivable, net
$
36,934

 
$
59,021

 
Interest payable
 
$
7,516

 
$
7,857

Interest and other receivables
11,320

 
10,455

 
Accounts payable
 
16,068

 
28,059

Deferred financing costs, net(A)
2,817

 
4,446

 
Derivative liabilities
 
21,127

 
14,220

Principal paydown receivable
3,761

 
3,595

 
Current taxes payable
 
47

 
2,349

Receivable from government
    agency
9,380

 
9,108

 
Other liabilities
 
19

 
20

Call rights
3,828

 
3,728

 
 
 
$
44,777

 
$
52,505

Other assets
8,661

 
9,516

 
 
 
 
 
 
 
$
76,701

 
$
99,869

 
 
 
 
 
 

(A)
Deferred financing costs are net of accumulated amortization of $5.4 million and $8.8 million as of March 31, 2015 and December 31, 2014, respectively.

As reflected on the Condensed Consolidated Statements of Cash Flows, accretion and other amortization is comprised of the following:
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Accretion of servicer advance interest income
 
$
42,349

 
$
45,716

Accretion of excess mortgage servicing rights income
 
15,037

 
13,816

Accretion of net discount on securities and loans
 
5,399

 
356

Amortization of deferred financing costs
 
(1,440
)
 
(3,238
)
 
 
$
61,345

 
$
56,650




9
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2015
(dollars in tables in thousands, except share data) 
 

3. SEGMENT REPORTING
 
New Residential conducts its business through the following segments: (i) investments in Excess MSRs, (ii) investments in servicer advances, (iii) investments in real estate securities, (iv) investments in real estate loans, (v) investments in consumer loans, and (vi) corporate. The corporate segment consists primarily of (i) general and administrative expenses, (ii) the management fees and incentive compensation owed to the Manager by New Residential following the spin-off, (iii) corporate cash and related interest income, and (iv) the secured corporate loan and related interest expense during the period it was outstanding.
 
Summary financial data on New Residential’s segments is given below, together with a reconciliation to the same data for New Residential as a whole:
 
Servicing Related Assets
 
Residential Securities and Loans
 
 
 
 
 
 
 
Excess MSRs
 
Servicer Advances
 
Real Estate Securities
 
Real Estate Loans
 
Consumer Loans
 
Corporate
 
Total
Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
15,037

 
$
42,349

 
$
14,263

 
$
12,724

 
$
—

 
$
—

 
$
84,373

Interest expense
—

 
23,637

 
3,480

 
6,093

 
—

 
769

 
33,979

Net interest income (expense)
15,037

 
18,712

 
10,783

 
6,631

 
—

 
(769
)
 
50,394

Impairment
—

 
—

 
1,071

 
977

 
—

 
—

 
2,048

Other income
3,890

 
(10,727
)
 
(5,090
)
 
13,775

 
10,447

 
—

 
12,295

Operating expenses
88

 
575

 
(102
)
 
6,104

 
57

 
15,548

 
22,270

Income (Loss) Before Income Taxes
18,839

 
7,410

 
4,724

 
13,325

 
10,390

 
(16,317
)
 
38,371

Income tax expense (benefit)
—

 
(3,240
)
 
—

 
(187
)
 
—

 
—

 
(3,427
)
Net Income (Loss)
$
18,839

 
$
10,650

 
$
4,724

 
$
13,512

 
$
10,390

 
$
(16,317
)
 
$
41,798

Noncontrolling interests in income
   (loss) of consolidated subsidiaries
$
—

 
$
5,823

 
$
—

 
$
—

 
$
—

 
$
—

 
$
5,823

Net income (loss) attributable to
   common stockholders
$
18,839

 
$
4,827

 
$
4,724

 
$
13,512

 
$
10,390

 
$
(16,317
)
 
$
35,975



10
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2015
(dollars in tables in thousands, except share data) 
 

 
Servicing Related Assets
 
Residential Securities and Loans
 
 
 
 
 
 
 
Excess MSRs
 
Servicer Advances
 
Real Estate Securities
 
Real Estate Loans
 
Consumer Loans
 
Corporate
 
Total
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments
$
751,773

 
$
3,245,457

 
$
2,324,915

 
$
581,046

 
$
—

 
$
—

 
$
6,903,191

Cash and cash equivalents
267

 
69,180

 
5,288

 
5,895

 
—

 
378,704

 
459,334

Restricted cash
37

 
28,288

 
—

 
—

 
—

 
—

 
28,325

Derivative assets
—

 
71

 
—

 
—

 
—

 
—

 
71

Other assets
34

 
6,622

 
51,610

 
15,925

 
543

 
1,967

 
76,701

Total assets
$
752,111

 
$
3,349,618

 
$
2,381,813

 
$
602,866

 
$
543

 
$
380,671

 
$
7,467,622

Debt
$
—

 
$
2,875,412

 
$
1,928,891

 
$
434,504

 
$
—

 
$
100,000

 
$
5,338,807

Other liabilities
2,921

 
19,642

 
219,603

 
5,680

 
58

 
66,497

 
314,401

Total liabilities
2,921

 
2,895,054

 
2,148,494

 
440,184

 
58

 
166,497

 
5,653,208

Total equity
749,190

 
454,564

 
233,319

 
162,682

 
485

 
214,174

 
1,814,414

Noncontrolling interests in equity
    of consolidated subsidiaries
—

 
246,899

 
—

 
—

 
—

 
—

 
246,899

Total New Residential
    stockholders’ equity
$
749,190

 
$
207,665

 
$
233,319

 
$
162,682

 
$
485

 
$
214,174

 
$
1,567,515

Investments in equity method
    investees
$
225,111

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
225,111

 

Servicing Related Assets

Residential Securities and Loans







Excess MSRs

Servicer Advances

Real Estate Securities

Real Estate Loans

Consumer Loans

Corporate

Total
Three Months Ended March 31, 2014













Interest income
$
13,816


$
45,716


$
11,238


$
720


$
—


$
—


$
71,490

Interest expense
1,291


31,956


4,069


198


1,483


—


38,997

    Net interest income (expense)
12,525


13,760


7,169


522


(1,483
)

—


32,493

Impairment
—


—


328


164


—


—


492

Other income
12,976


—


5,042


671


16,360


1


35,050

Operating expenses
65


250


60


90


23


9,411


9,899

Income (Loss) Before Income Taxes
25,436


13,510


11,823


939


14,854


(9,410
)

57,152

Income tax expense (benefit)
—


287


—


—


—


—


287

Net Income (Loss)
$
25,436


$
13,223


$
11,823


$
939


$
14,854


$
(9,410
)

$
56,865

Noncontrolling interests in income
    (loss) of consolidated subsidiaries
$
—


$
8,093


$
—


$
—


$
—


$
—


$
8,093

Net income (loss) attributable to
    common stockholders
$
25,436


$
5,130


$
11,823


$
939


$
14,854


$
(9,410
)

$
48,772




11
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2015
(dollars in tables in thousands, except share data) 
 

4. INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
 
The following table presents activity related to the carrying value of New Residential’s investments in Excess MSRs:
 
 
Servicer
 
 
Nationstar
 
SLS(A)
 
Total
Balance as of December 31, 2014
 
$
409,076

 
$
8,657

 
$
417,733

Transfers from indirect ownership
 
98,258

 
—

 
98,258

Purchases
 
26,479

 
—

 
26,479

Interest income
 
14,856

 
181

 
15,037

Other income
 
730

 
—

 
730

Proceeds from repayments
 
(29,544
)
 
(270
)
 
(29,814
)
Change in fair value
 
(1,472
)
 
(289
)
 
(1,761
)
Balance as of March 31, 2015
 
$
518,383

 
$
8,279

 
$
526,662

(A)    Specialized Loan Servicing LLC (“SLS”). See Note 6 for a description of the SLS Transaction.
Nationstar or SLS, as applicable, as servicer, performs all servicing and advancing functions, and retains the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in the portfolio.

On January 16, 2015, New Residential invested approximately $23.8 million to acquire a 33.3% interest in the Excess MSR on a portfolio of Freddie Mac residential mortgage loans with an aggregate UPB of $8.4 billion. Fortress-managed funds and Nationstar each agreed to acquire a 33.3% interest in the Excess MSRs. Nationstar as servicer will perform all servicing and advancing functions, and retain the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in each of the portfolios. Under the terms of the investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential, the Fortress-managed funds and Nationstar, subject to certain limitations.
New Residential has entered into a “Recapture Agreement” in each of the Excess MSR investments through March 31, 2015, including those Excess MSR investments made through investments in joint ventures (Note 5). Under such Recapture Agreements, New Residential is generally entitled to a pro rata interest in the Excess MSRs on any initial or subsequent refinancing by Nationstar of a loan in the original portfolio. These Recapture Agreements do not apply to New Residential’s investments in servicer advances (Note 6).
New Residential elected to record its investments in Excess MSRs at fair value pursuant to the fair value option for financial instruments in order to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors on the Excess MSRs.
 

12
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2015
(dollars in tables in thousands, except share data) 
 

The following is a summary of New Residential’s direct investments in Excess MSRs:
 
March 31, 2015
 
December 31, 2014
 
Unpaid Principal Balance (“UPB”) of Underlying Mortgages
 
Interest in Excess MSR
 
Weighted Average Life Years(A)
 
Amortized Cost Basis(B)
 
Carrying Value(C)
 
Carrying Value(C)
 
 
 
New Residential
 
Fortress-managed funds
 
Nationstar
 
 
 
 
 
 
 
 
Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Original and Recaptured Pools
$
54,829,877

 
32.5%-66.7%
 
0.0%-33.3%
 
33.3%-35%
 
5.9
 
$
161,109

 
$
209,114

 
$
188,733

Recapture Agreements
—

 
32.5%-66.7%
 
0.0%-33.3%
 
33.3%-35%
 
12.9
 
9,927

 
29,865

 
28,786

 
54,829,877

 
 
 
 
 
 
 
6.3
 
171,036

 
238,979

 
217,519

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Agency(D)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Original and Recaptured Pools
$
108,742,559

 
33.3%-80.0%
 
0.0%-50.0%
 
0.0%-33.3%
 
4.9
 
$
231,228

 
$
270,365

 
$
189,812

Recapture Agreements
—

 
33.3%-80.0%
 
0.0%-50.0%
 
0.0%-33.3%
 
11.8
 
16,638

 
17,318

 
10,402

 
108,742,559

 
 
 
 
 
 
 
5.4
 
247,866

 
287,683

 
200,214

Total
$
163,572,436

 
 
 
 
 
 
 
5.8
 
$
418,902

 
$
526,662

 
$
417,733

 
(A)
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)
The amortized cost basis of the Recapture Agreements is determined based on the relative fair values of the Recapture Agreements and related Excess MSRs at the time they were acquired.
(C)
Carrying Value represents the fair value of the pools or Recapture Agreements, as applicable.
(D)
Excess MSR investments in which New Residential also invested in related servicer advances, including the basic fee component of the related MSR as of March 31, 2015 (Note 6).

Changes in fair value recorded in other income are comprised of the following:
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Original and Recaptured Pools

$
(1,976
)
 
$
7,088

Recapture Agreements

215

 
(486
)
 
 
$
(1,761
)
 
$
6,602


In the first quarter of 2015, a weighted average discount rate of 9.6% was used to value New Residential’s investments in Excess MSRs (directly and through equity method investees).


13
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2015
(dollars in tables in thousands, except share data) 
 

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the direct investments in Excess MSRs:
 
 
Percentage of Total Outstanding Unpaid Principal Amount as of
State Concentration
 
March 31, 2015
 
December 31, 2014
California
 
33.0
%
 
31.5
%
Florida
 
9.3
%
 
7.7
%
New York
 
4.9
%
 
4.3
%
Maryland
 
3.8
%
 
4.0
%
Texas
 
3.6
%
 
4.2
%
New Jersey
 
3.5
%
 
3.2
%
Virginia
 
3.2
%
 
3.3
%
Illinois
 
3.2
%
 
3.2
%
Washington
 
3.2
%
 
3.6
%
Arizona
 
2.7
%
 
3.2
%
Other U.S.
 
29.6
%
 
31.8
%
 
 
100.0
%
 
100.0
%

Geographic concentrations of investments expose New Residential to the risk of economic downturns within the relevant states. Any such downturn in a state where New Residential holds significant investments could affect the underlying borrower’s ability to make mortgage payments and therefore could have a meaningful, negative impact on the Excess MSRs.

5. INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS, EQUITY METHOD INVESTEES
 
New Residential entered into investments in joint ventures (“Excess MSR joint ventures”) jointly controlled by New Residential and Fortress-managed funds investing in Excess MSRs. New Residential elected to record these investments at fair value pursuant to the fair value option for financial instruments to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors.

During the first quarter of 2015, New Residential and the Fortress-managed funds restructured their investments in two of the Excess MSR joint ventures and now each directly owns its share of the underlying assets of the joint ventures.
 
The following tables summarize the financial results of the Excess MSR joint ventures, accounted for as equity method investees, held by New Residential:
 
 
March 31, 2015
 
December 31, 2014
Excess MSR assets
 
$
440,714

 
$
653,293

Other assets
 
9,508

 
8,472

Other liabilities
 
—

 
(13
)
Equity
 
$
450,222

 
$
661,752

New Residential’s investment
 
$
225,111

 
$
330,876

 
 
 
 
 
New Residential’s ownership
 
50.0
%
 
50.0
%

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Interest income
 
$
11,701

 
$
18,493

Other income (loss)
 
(1,835
)
 
(5,705
)
Expenses
 
(25
)
 
(40
)
Net income
 
$
9,841

 
$
12,748


14
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2015
(dollars in tables in thousands, except share data) 
 


New Residential’s investments in equity method investees changed during the three months ended March 31, 2015 as follows:
Balance at December 31, 2014
$
330,876

Contributions to equity method investees
—

Transfers to direct ownership
(98,258
)
Distributions of earnings from equity method investees
(12,226
)
Distributions of capital from equity method investees
(202
)
Change in fair value of investments in equity method investees
4,921

Balance at March 31, 2015
$
225,111


The following is a summary of New Residential’s Excess MSR investments made through equity method investees:
 
March 31, 2015
 
Unpaid Principal Balance
 
Investee Interest in Excess MSR(A)
 
New Residential Interest in Investees
 
Amortized Cost Basis(B)
 
Carrying Value(C)
 
Weighted Average Life (Years)(D)
Agency


 


 


 


 


 
 
Original and Recaptured Pools
$
84,000,746

 
66.7
%
 
50.0
%
 
$
289,745

 
$
358,909

 
5.5
Recapture Agreements
—

 
66.7
%
 
50.0
%
 
62,190

 
81,805

 
11.7
Total
$
84,000,746

 


 


 
$
351,935

 
$
440,714

 
6.6
 
(A)
The remaining interests are held by Nationstar.
(B)
Represents the amortized cost basis of the equity method investees in which New Residential holds a 50% interest. The amortized cost basis of the Recapture Agreements is determined based on the relative fair values of the Recapture Agreements and related Excess MSRs at the time they were acquired.
(C)
Represents the carrying value of the Excess MSRs held in equity method investees, in which New Residential holds a 50% interest. Carrying value represents the fair value of the pools or Recapture Agreements, as applicable.
(D)
The weighted average life represents the weighted average expected timing of the receipt of cash flows of each investment.

In the first quarter of 2015, a weighted average discount rate of 9.6% was used to value New Residential’s investments in Excess MSRs (directly and through equity method investees).

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the Excess MSR investments made through equity method investees:
 
 
Percentage of Total Outstanding Unpaid Principal Amount as of
State Concentration
 
March 31, 2015
 
December 31, 2014
California
 
13.1
%
 
23.5
%
Florida
 
7.4
%
 
8.9
%
Texas
 
6.1
%
 
4.8
%
Georgia
 
5.6
%
 
4.1
%
New York
 
5.5
%
 
5.6
%
New Jersey
 
4.1
%
 
3.9
%
Illinois
 
4.0
%
 
3.5
%
Virginia
 
3.2
%
 
3.2
%
Maryland
 
3.2
%
 
3.3
%
Pennsylvania
 
3.0
%
 
2.3
%
Other U.S.
 
44.8
%
 
36.9
%
 
 
100.0
%
 
100.0
%


15
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2015
(dollars in tables in thousands, except share data) 
 

Geographic concentrations of investments expose New Residential to the risk of economic downturns within the relevant states. Any such downturn in a state where New Residential holds significant investments could affect the underlying borrower’s ability to make mortgage payments and therefore could have a meaningful, negative impact on the Excess MSRs.

6. INVESTMENTS IN SERVICER ADVANCES
 
In December 2013, New Residential and third-party co-investors, through a joint venture entity (Advance Purchaser LLC, the “Buyer”) consolidated by New Residential, agreed to purchase the outstanding servicer advances on a portfolio of loans, which is a subset of the same portfolio of loans in which New Residential invests in a portion of the Excess MSRs (Notes 4 and 5), including the basic fee component of the related MSRs. As of March 31, 2015, New Residential and third-party co-investors had settled $2.9 billion of servicer advances, net of recoveries, financed with $2.7 billion of notes payables outstanding (Note 11). A taxable wholly owned subsidiary of New Residential is the managing member of the Buyer and owned an approximately 44.5% interest in the Buyer as of March 31, 2015. As of March 31, 2015, noncontrolling third-party investors, owning the remaining interest in the Buyer have funded capital commitments to the Buyer of $389.6 million and New Residential has funded capital commitments to the Buyer of $312.7 million. The Buyer may call capital up to the commitment amount on unfunded commitments and recall capital to the extent the Buyer makes a distribution to the co-investors, including New Residential. As of March 31, 2015, the third-party co-investors and New Residential have previously funded their commitments, however the Buyer may recall $238.4 million and $188.3 million of capital distributed to the third-party co-investors and New Residential, respectively.  Neither the third-party co-investors nor New Residential is obligated to fund amounts in excess of their respective capital commitments, regardless of the capital requirements of the Buyer that holds its investment in servicer advances.

The Buyer has purchased servicer advances from Nationstar, is required to purchase all future servicer advances made with respect to these pools from Nationstar, and receives cash flows from advance recoveries and the basic fee component of the related MSRs, net of compensation paid back to Nationstar in consideration of Nationstar’s servicing activities. The compensation paid to Nationstar as of March 31, 2015 was approximately 9.2% of the basic fee component of the related MSRs plus a performance fee that represents a portion (up to 100%) of the cash flows in excess of those required for the Buyer to obtain a specified return on its equity.

In December 2014, New Residential agreed to acquire (the “SLS Transaction”) 50% of the Excess MSRs, all of the servicer advances and related basic fee portion of the MSRs (the “Advance Fee”), and a portion of the call rights related to an underlying pool of residential mortgage loans with a UPB of approximately $3.0 billion which is serviced by SLS. Fortress-managed funds acquired the other 50% of the Excess MSRs. The aggregate purchase price was approximately $229.7 million. The par amount of the total advance commitments for the SLS Transaction was $219.2 million (with related financing of $195.5 million). As of December 31, 2014, the closed portion of the purchase of $93.8 million included $8.4 million for 50% of the Excess MSRs, $83.8 million for servicer advances and Advance Fee (of which $74.3 million was financed as of December 31, 2014), and $1.6 million to fund a portion of the call rights on 57 of the 99 underlying securitization trusts. The remaining portion of the purchase price of $135.9 million included servicer advances and Advance Fee unfunded commitments of approximately $133.8 million that were funded in January 2015 (with approximately $121.2 million of related financing) and $2.1 million to fund the remaining portion of the call rights on 57 of the 99 underlying securitization trusts. As of March 31, 2015, New Residential had settled $168.4 million of servicer advances, net of recoveries, financed with $150.1 million of notes payable outstanding (Note 11). SLS will continue to service the loans in exchange for a servicing fee of 10.75 bps and an incentive fee (the “Incentive Fee”) which is based on the ratio of the outstanding servicer advances to the UPB of the underlying loans.
New Residential elected to record its investments in servicer advances, including the right to the basic fee component of the related MSRs, at fair value pursuant to the fair value option for financial instruments to provide users of the financial statements with better information regarding the effects of market factors.
 

16
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2015
(dollars in tables in thousands, except share data) 
 

The following is a summary of the investments in servicer advances, including the right to the basic fee component of the related MSRs:
 
Amortized Cost Basis

Carrying Value(A)

Weighted Average Discount Rate

Weighted Average Life (Years)(B)
March 31, 2015
 
 
 
 
 
 
 
Servicer advances
$
3,168,909

 
$
3,245,457

 
5.4
%
 
3.9
As of December 31, 2014
 
 
 
 
 
 
 
Servicer advances
$
3,186,622

 
$
3,270,839

 
5.4
%
 
4.0
  
(A)
Carrying value represents the fair value of the investments in servicer advances, including the basic fee component of the related MSRs.
(B)
Weighted Average Life represents the weighted average expected timing of the receipt of expected net cash flows for this investment.
 
 
Three Months Ended March 31,
 
 
2015

2014
Changes in Fair Value Recorded in Other Income
 
$
(7,669
)
 
$
—


The following is additional information regarding the servicer advances and related financing:
 
 
 
 
 
 
 
 
 
 
Loan-to-Value
 
Cost of Funds(B)
 
 
UPB of Underlying Residential Mortgage Loans
 
Outstanding Servicer Advances
 
Servicer Advances to UPB of Underlying Residential Mortgage Loans
 
Carrying Value of Notes Payable
 
Gross
 
Net(A)
 
Gross
 
Net
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Servicer advances(C)
 
$
92,159,246

 
$
3,068,306

 
3.3
%
 
$
2,875,412

 
91.5
%
 
90.6
%
 
2.6
%
 
2.2
%
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Servicer advances(C)
 
$
96,547,773

 
$
3,102,492

 
3.2
%
 
$
2,890,230

 
91.4
%
 
90.4
%
 
3.0
%
 
2.3
%
 
(A)
Ratio of face amount of borrowings to par amount of servicer advance collateral, net of an interest reserve maintained by the Buyer.
(B)
Annualized measure of the cost associated with borrowings. Gross Cost of Funds primarily includes interest expense and facility fees. Net Cost of Funds excludes facility fees.
(C)
The following types of advances comprise the investments in servicer advances:
    


March 31, 2015

December 31, 2014
Principal and interest advances

$
737,845


$
729,713

Escrow advances (taxes and insurance advances)

1,514,848


1,600,713

Foreclosure advances

815,613


772,066

  Total

$
3,068,306


$
3,102,492

 

17
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2015
(dollars in tables in thousands, except share data) 
 

Interest income recognized by New Residential related to its investments in servicer advances was comprised of the following:


Three Months Ended March 31,


2015

2014
Interest income, gross of amounts attributable to servicer compensation

$
63,357


$
67,138

  Amounts attributable to base servicer compensation

(6,601
)

(6,280
)
  Amounts attributable to incentive servicer compensation

(14,407
)

(15,142
)
Interest income from investments in servicer advances

$
42,349


$
45,716


Others’ interests in the equity of the Buyer is computed as follows:
 
 
March 31, 2015
 
December 31, 2014
Total Advance Purchaser LLC equity
 
$
445,041

 
$
457,545

    Others’ ownership interest
 
55.5
%
 
55.5
%
Others’ interest in equity of consolidated subsidiary
 
$
246,899

 
$
253,836


Others’ interests in the Buyer’s net income is computed as follows:
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Net Advance Purchaser LLC income
 
$
10,496

 
$
13,511

    Others’ ownership interest as a percent of total(A)
 
55.5
%
 
59.9
%
Others’ interest in net income (loss) of consolidated subsidiaries
 
$
5,823

 
$
8,093


(A)
As a result, New Residential owned 44.5% and 40.1% of the Buyer, on average during the three months ended March 31, 2015 and 2014, respectively.

7. INVESTMENTS IN REAL ESTATE SECURITIES
 
During the three months ended March 31, 2015, New Residential acquired $257.8 million face amount of Non-Agency RMBS for approximately $222.1 million and $979.8 million face amount of Agency RMBS for approximately $1.0 billion. New Residential sold Non-Agency RMBS with a face amount of approximately $441.1 million and an amortized cost basis of approximately $385.9 million for approximately $389.7 million, recording a gain on sale of approximately $3.8 million. Furthermore, New Residential sold Agency RMBS with a face amount of $1.0 billion and an amortized cost basis of approximately $1.0 billion for approximately $1.1 billion, recording a gain on sale of approximately $20.9 million.
 
See Note 10 for a discussion of transactions formerly accounted for as linked transactions.
The following is a summary of New Residential’s real estate securities, all of which are classified as available-for-sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income, except for securities that are other-than-temporarily impaired and except for securities which New Residential elected to carry at fair value and record changes to valuation through the income statement.
 
 
 
 
 
 
Gross Unrealized
 
 
 
 
 
Weighted Average
 
December 31, 2014
Asset Type
 
Outstanding Face Amount
 
Amortized Cost Basis