Annual report pursuant to Section 13 and 15(d)

BUSINESS ACQUISITIONS

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BUSINESS ACQUISITIONS
12 Months Ended
Dec. 31, 2019
Business Combinations [Abstract]  
BUSINESS ACQUISITIONS BUSINESS ACQUISITIONS

New Residential completed the Shellpoint acquisition in 2018 and the Guardian and Ditech acquisitions in 2019 as part of its strategy to expand its residential origination, servicing and asset management capabilities. New Residential accounted for these transactions using the acquisition method which requires, among other things, that the assets acquired and liabilities assumed be recognized at fair value as of the acquisition date. In a business combination, the initial allocation of the purchase price is considered preliminary and therefore subject to change until the end of the measurement period (up to one year from the acquisition date). Goodwill is calculated as the excess of the purchase price over the net assets recognized and represents synergies and benefits expected to result from combining operations and adding in-house servicing, asset origination and recapture capabilities.

Purchase Price Allocation

New Residential has performed an allocation of the total consideration paid to acquire the assets and liabilities of the companies acquired, as set forth below.
 
 
2019
 
2018
 
 
Ditech
 
Guardian
 
Total
 
Shellpoint
Total Consideration ($ in millions)
 
$
1,218.2

 
$
21.5

 
$
1,239.7

 
$
425.5

Assets
 
 
 
 
 
 
 
 
Mortgage servicing rights, at fair value(A)
 
$
387.2

 
$

 
$
387.2

 
$
286.6

Residential mortgage loans, held-for-investment, at fair value
 

 

 

 
125.3

Residential mortgage loans, held-for-sale, at fair value
 
627.4

 

 
627.4

 
488.2

Residential mortgage loans subject to repurchase
 

 

 

 
121.4

 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 

 
1.8

 
1.8

 
79.2

Restricted cash
 

 

 

 
9.9

Servicer Advance Receivable
 
238.0

 

 
238.0

 
22.4

Intangible assets(B) (C) (D)
 
10.5

 
11.7

 
22.2

 
18.4

Other assets(E)
 
64.8

 
6.6

 
71.4

 
59.1

Total Assets Acquired
 
$
1,327.9

 
$
20.1

 
$
1,348.0

 
$
1,210.5

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Repurchase agreements
 
$

 
$

 
$

 
$
439.6

Notes and bonds payable
 

 

 

 
20.7

Mortgage-backed securities issued, at fair value
 

 

 

 
120.7

Residential mortgage loans repurchase liability
 

 

 

 
121.4

Excess spread financing, at fair value
 

 

 

 
48.3

Accrued expenses and other liabilities
 
60.2

 
3.7

 
63.9

 
50.6

Total Liabilities Assumed
 
$
60.2

 
$
3.7

 
$
63.9

 
$
801.3

 
 
 
 
 
 
 
 
 
Noncontrolling Interest
 
$

 
$

 
$

 
$
8.3

 
 
 
 
 
 
 
 
 
Net Assets
 
$
1,267.7

 
$
16.4

 
$
1,284.1

 
$
400.9

 
 
 
 
 
 
 
 
 
Goodwill (Bargain Purchase Gain)
 
$
(49.5
)
 
$
5.1

 
$
(44.4
)
 
$
24.6


(A)
Includes $135.3 million of Ginnie Mae MSRs related to the Shellpoint acquisition where New Residential acquired the rights to the economic value of the servicing rights from Shellpoint prior to the acquisition date.
(B)
Includes intangible assets acquired as part of the Ditech acquisition in the form of correspondent customer relationships and servicing contracts tied to the recovery of defaulted loans. These intangibles will be amortized over a finite life of three years based on the expected useful life of these intangibles.
(C)
Includes intangible assets acquired as part of the Guardian acquisition in the form of customer relationships and a tradename. Customer relationships will be amortized over a finite life of seven years based on the expected useful life of these intangibles. New Residential has determined that the tradename has an indefinite useful life and will be evaluated for impairment given no legal, regulatory, contractual, competitive or economic factors that would limited useful life.
(D)
Includes intangible assets acquired as part of the Shellpoint acquisition in the form of mortgage origination and servicing licenses, internally developed software and a tradename. New Residential determined that mortgage origination and servicing licenses have an indefinite useful life and will be evaluated for impairment given no legal, regulatory, contractual, competitive or economic factors that would limit the useful life. Internally developed software will be amortized over a
finite useful life of five years and tradenames were fully amortized over six months, respectively, based on the expected software development timeline and New Residential’s determination of the time to change a tradename with limited value.
(E)
Includes post loan charge off deficiency balances acquired through the Ditech Acquisition.

Throughout the measurement period for the Ditech and Guardian acquisitions, the allocation of total consideration may differ from the amounts included herein to reflect new information obtained, primarily related to the valuation of intangible assets acquired as part of both acquisitions. Any measurement period adjustments that New Residential identifies and determines to be material will be applied retrospectively to the period of acquisition, as well as any applicable subsequent periods.

Acquisition of select Assets and Liabilities from Ditech Holding Corporation

On June 17, 2019, New Residential, entered into a “stalking-horse” Asset Purchase Agreement (the “APA”) with Ditech Holding Corporation, a Maryland corporation (“Holding”), and Ditech Financial LLC, a Delaware limited liability company (“Financial” and together with Holding, the “Sellers” or “Ditech”) to acquire certain assets and assume certain liabilities under the APA based on the value of the acquired assets and assumed liabilities as calculated in accordance with the terms of the APA, subject to certain adjustments. Ditech filed voluntary petitions for relief under Chapter 11 of the Bankruptcy code, in the United States Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”).

The proposed sale was conducted through a Bankruptcy Court-supervised process, subject to Bankruptcy Court-approved bidding procedures, with the potential receipt of higher or better offers from competing bidders at auction, the approval of the sale by the Bankruptcy Court, and the satisfaction of certain conditions. As the stalking horse bidder, the Company’s offer to acquire the assets and assume the liabilities, as set forth in the APA, set the standard by which any other qualifying bids would be evaluated. Upon conclusion of the competitive bidding process, Ditech decided to proceed with New Residential’s stalking horse bid, as amended and sought the Bankruptcy Court’s approval.

On October 1, 2019, New Residential Investment Corp (“Ditech Purchaser”) completed the acquisition (“Ditech Acquisition”) contemplated by the APA dated June 17, 2019, as amended, by and among the Ditech Purchaser and Ditech. Pursuant to the APA, Ditech sold, transferred, and assigned to the Ditech Purchaser (and its certain designated subsidiaries) the acquired assets, as defined in the APA, and the Ditech Purchaser (and its certain designated subsidiaries) assumed the liabilities, as defined in the APA, for cash consideration of $1.2 billion.

The acquisition included certain Fannie Mae, Ginnie Mae and non-agency MSRs, the servicer advance receivables relating to such MSRs and other assets core to certain origination and servicing businesses at Ditech. Additionally, New Residential assumed certain Ditech office spaces and added approximately 1,100 Ditech employees to support the increase in volume to its existing origination and servicing operations.

The acquisition of assets from the bankruptcy estate of Ditech along with the subsequent hiring of Ditech employees was accounted for as a business acquisition rather than an asset acquisition. Upon completing the Ditech Acquisition, the consideration transferred by the Ditech Purchaser for the acquired assets and assumed liabilities was determined to be less than the net assets acquired from Ditech resulting in an economic gain (“Bargain Purchase”). New Residential completed the required reassessment to validate that all assets acquired and liabilities assumed on the acquisition date had been identified and appropriately measured in accordance with ASC 805. Based on the reassessment, the transaction resulted in a Bargain Purchase gain of $49.5 million, which has been included in Other income (loss), net within the Consolidated Statements of Income for the year ended December 31, 2019. The Bargain Purchase gain resulted from certain transition, integration, relocation and training costs that were factored into the purchase price and identified as future liabilities, of which approximately $22.9 million were incurred during the year ended December 31, 2019. The results of Ditech’s operations have been included in New Residential’s Consolidated Statements of Income for the year ended December 31, 2019 from the date of acquisition and represent $134.5 million and $104.7 million of revenue and net income, respectively.

The acquisition date fair value of the consideration transferred includes $1.2 billion in cash consideration and $4.9 million in effective settlement of preexisting relationships. The total consideration is summarized as follows:
Total Consideration (in millions)
 
Amount
Cash Consideration
 
$
1,213.3

Effective Settlement of Preexisting Relationships(A)
 
4.9

Total Consideration
 
$
1,218.2


(A)
Represents the effective settlement of preexisting relationships between New Residential and Ditech related to operating accounts receivable and payable existing prior to the acquisition date. The effective settlement of these preexisting relationships had no impact to New Residential’s Consolidated Statements of Income. New Residential recognized the effective settlement of preexisting relationships separately from the acquisition of assets and assumption of liabilities in the business combination.

Unaudited Supplemental Pro Forma Financial Information — The following table presents unaudited pro forma combined Servicing and Origination Revenue, which is comprised of 1) servicing revenue, net and 2) gain on originated mortgage loans, held-for-sale, net, and Income Before Income Taxes for the years ended December 31, 2019 and 2018 prepared as if the Ditech Acquisition had been consummated on January 1, 2018.
 
 
Years Ended December 31,
 
 
2019
 
2018
Pro Forma (in millions)
 
 
 
 
Servicing and Origination Revenue
 
$
1,104.0

 
$
1,238.1

Income Before Income Taxes
 
552.8

 
923.3



The unaudited supplemental pro forma financial information has not been adjusted for transactions other than the Ditech Acquisition, or for the conforming of accounting policies. The unaudited supplemental pro forma financial information does not include any anticipated synergies or other anticipated benefits of the Ditech Acquisition and, accordingly, the unaudited supplemental pro forma financial information is not necessarily indicative of either future results of operations or results that might have been achieved had the Ditech Acquisition occurred on January 1, 2018.

Acquisition of Guardian Asset Management

On August 19, 2019, NRZ Guardian Purchaser LLC (“Guardian Purchaser”), entered into an agreement to acquire 100% of the shares of DDG RE Investments LLC d/b/a Guardian Asset Management (“Guardian”).

On September 3, 2019, the Guardian Purchaser acquired 100% of the outstanding interests of Guardian for cash consideration of $7.6 million (“Guardian Acquisition”). As additional consideration for the Guardian Acquisition, the Guardian Purchaser may make up to four cash earnout payments, which will be calculated as the amount of cumulative Guardian earnings on specified contracts in excess of certain thresholds up to a maximum of $17.5 million (the “Guardian Earnout Payments”). The Guardian Earnout Payments are classified as contingent consideration recorded at fair value at the acquisition date and included in the total consideration transferred for the Guardian Acquisition. The contingent consideration is subsequently measured at fair value on a quarterly basis with changes in fair value recorded in Other income (loss), net.

Guardian is a field services and asset management business and provides New Residential with in-house property management, inspection and repair service capabilities. The results of Guardian's operations have been included in New Residential's Consolidated Statements of Income for the year ended December 31, 2019 from the date of acquisition and represent $14.4 million and $2.9 million of revenue and net income, respectively.

The acquisition date fair value of the consideration transferred includes $7.6 million in cash consideration and $13.9 million in contingent consideration. The total consideration is summarized as follows:
Total Consideration (in millions)
 
Amount
Cash Consideration
 
$
7.6

Earnout Payment(A)
 
13.9

Total Consideration
 
$
21.5


(A)
The range of outcomes for this contingent consideration is from $0 to $17.5 million dependent on the performance of Guardian.

The goodwill of $5.1 million primarily includes the benefits expected to result from adding in-house property management and repair services has been allocated to the Servicing reporting segment. The full amount of goodwill of $5.1 million is expected to be deductible for tax purposes. New Residential will assess the goodwill annually on October 1 and in interim periods in case of events or circumstances make it more likely than not that an impairment may have occurred. Based on New Residential’s assessment performed, there were no indicators of impairment as of December 31, 2019.

Unaudited Supplemental Pro Forma Financial Information — The following table presents unaudited pro forma combined Income Before Income Taxes for the years ended December 31, 2019 and 2018 prepared as if the Guardian Acquisition had been consummated on January 1, 2018.
 
 
Years Ended December 31,
 
 
2019
 
2018
Pro Forma (in millions)
 
 
 
 
Income Before Income Taxes
 
$
651.5

 
$
932.2



The unaudited supplemental pro forma financial information has not been adjusted for transactions other than the Guardian Acquisition, or for the conforming of accounting policies. The unaudited supplemental pro forma financial information does not include any anticipated synergies or other anticipated benefits of the Guardian Acquisition and, accordingly, the unaudited supplemental pro forma financial information is not necessarily indicative of either future results of operations or results that might have been achieved had the Guardian Acquisition occurred on January 1, 2018.

Acquisition of Shellpoint Partners LLC

On November 29, 2017, NRM Acquisition LLC (the “Shellpoint Purchaser”), a Delaware limited liability company and a wholly owned subsidiary of New Residential, entered into a Securities Purchase Agreement (the “Shellpoint SPA”) to acquire Shellpoint Partners LLC, a Delaware limited liability company (“Shellpoint”). Shellpoint is a vertically integrated mortgage platform with established origination and servicing capabilities and provides New Residential with in-house servicing, asset origination and recapture capabilities.

On July 3, 2018, the Shellpoint Purchaser acquired 100% of the outstanding equity interests of Shellpoint for a cash purchase price of $212.3 million (the “Shellpoint Acquisition”). As additional consideration for the Shellpoint Acquisition, the Shellpoint Purchaser may make up to three cash earnout payments, which will be calculated following each of the first three anniversaries of the Shellpoint closing as a percentage of the amount by which the pre-tax income of certain of Shellpoint’s businesses exceeds certain specified thresholds, up to an aggregate maximum amount of $60.0 million (the “Shellpoint Earnout Payments”). The Shellpoint Earnout Payments are classified as contingent consideration recorded at fair value at the acquisition date and included in the total consideration transferred for the Shellpoint Acquisition. The contingent consideration is subsequently measured at fair value on a quarterly basis with changes in fair value recorded in Other income (loss), net. As of December 31, 2019, New Residential had paid out $10.0 million of the Shellpoint Earnout Payments and is expected to pay the remaining amounts by September 2021. Once a payment has been made the sellers have no requirement to refund the payment even if the business does not exceed the specified thresholds in subsequent periods.

The results of Shellpoint’s operations have been included in the Company’s Consolidated Statements of Income for the years ended December 31, 2019 and 2018 and represent $780.7 million and $177.4 million of revenue and $359.0 million and $26.8 million of net income, respectively.

The acquisition date fair value of the consideration transferred includes $212.3 million in cash consideration, $39.3 million in contingent consideration and $173.9 million in effective settlement of preexisting relationships. The total consideration is summarized as follows:
Total Consideration (in millions)
 
Amount
Cash Consideration
 
$
212.3

Earnout Payment(A)
 
39.3

Effective Settlement of Preexisting Relationships(B)
 
173.9

Total Consideration
 
$
425.5


(A)
The range of outcomes for this contingent consideration is from $0 to $60.0 million, dependent on the performance of Shellpoint. At acquisition date, New Residential derived a fair value of the remaining contingent consideration payment in three years of $39.3 million. This amount excludes contingent payments to the long-term employee incentive plans that require continuing employment and are recognized as compensation expense within General and Administrative expenses in the post-acquisition consolidated financial statements separate from New Residential’s acquisition of assets and assumption of liabilities in the business combination. As of December 31, 2019, the contingent consideration had a fair value of $40.9 million.
(B)
Represents the effective settlement of preexisting relationships between New Residential and Shellpoint. The effective settlement of these preexisting relationships had no impact to New Residential’s Consolidated Statements of Income.

The final amount and allocation of total consideration reflects certain measurement period adjustments identified during the fourth quarter of 2018, including the effect on earnings that would have been recorded during the third quarter of 2018 had the accounting been completed at the acquisition date. Such measurement period adjustments included 1) a decrease of $3.5 million in the amount of contingent consideration based upon finalization of the internal valuation, 2) a decrease of $6.4 million to consideration transferred for the effective settlement of existing relationships, 3) an increase of $14.1 million to the fair value of identifiable intangible assets based upon receipt of the final valuation report from a third-party valuation firm, and 4) an increase of $0.3 million to other assets due to a decrease in the fair value discount on certain servicing advance receivables. These measurement period adjustments resulted in a corresponding decrease to goodwill in the amount of $24.3 million.

The goodwill of $24.6 million primarily includes the synergies and benefits expected to result from combining operations with Shellpoint and adding in-house servicing, asset origination and recapture capabilities and has been allocated to the Servicing and Origination reporting segment. The full amount of goodwill for tax purposes of $24.6 million is expected to be deductible. New Residential will assess the goodwill annually on October 1 and in interim periods in case of events or circumstances make it more likely than not that an impairment may have occurred. Based on New Residential’s assessment performed, there were no indicators of impairment as of December 31, 2019.

Certain transactions were recognized separately from New Residential’s acquisition of assets and assumption of liabilities in the business combination. These separately recognized transactions include 1) contingent payments to Shellpoint’s employees and 2) effective settlement of preexisting relationships discussed above, including 1) MSR acquisitions, 2) a note payable and 3) operating accounts receivable and payable existing prior to the acquisition date.

Unaudited Supplemental Pro Forma Financial Information — The following table presents unaudited pro forma combined Servicing and Origination Revenue, which is comprised of 1) servicing revenue, net and 2) gain on originated mortgage loans, held-for-sale, net, and Income Before Income Taxes for the years ended December 31, 2018 and 2017 prepared as if the Shellpoint Acquisition had been consummated on January 1, 2017.
 
 
Years Ended December 31,
 
 
2018
 
2017
Pro Forma (in millions)
 
 
 
 
Servicing and Origination Revenue
 
$
767.0

 
$
749.0

Income Before Income Taxes
 
948.1

 
1,197.5



The unaudited supplemental pro forma financial information has not been adjusted for transactions other than the Shellpoint Acquisition, or for the conforming of accounting policies. The unaudited supplemental pro forma financial information does not include any anticipated synergies or other anticipated benefits of the Shellpoint Acquisition and, accordingly, the unaudited supplemental pro forma financial information is not necessarily indicative of either future results of operations or results that might have been achieved had the Shellpoint Acquisition occurred on January 1, 2017.

Strategic Investment in Covius Holdings Inc.

On May 1, 2019, New Residential made a strategic investment in Covius, a leading provider of technology-enabled services to the mortgage industry. Covius provides settlement and title, document and letter fulfillment, regulatory compliance, quality assurance, commercial and residential loan due diligence and business process automation services. New Residential invested $27.3 million in common stock for a non-controlling interest in Covius, with an option to increase its ownership position through specified future investments and $35.0 million in a four-year subordinated debt facility.

New Residential determined that the investment should be accounted for under the equity method of accounting since it has the ability to exercise significant influence over the investee’s operating and financial policies. As the consideration transferred for the investment was greater than the net equity of the investment (“basis differences”), the company allocated the basis difference in a manner consistent with business combination accounting resulting in goodwill of $11.8 million, and intangible assets primarily in the form of customer backlog and tradename of $3.6 million. Goodwill and intangibles are included as part of Equity investments within Other assets on the Consolidated Balance Sheets. The results of the investment have been included in New Residential's Consolidated Statements of Income for the year ended December 31, 2019 from the date of the Company’s investment.

The goodwill of $11.8 million primarily includes the benefits expected to result from having a significant investment in the service provider and has been allocated to the MSR Related Investments reporting segment. None of the goodwill is expected to be deductible for tax purposes. New Residential will assess the goodwill annually on October 1 and in interim periods in case of events or circumstances make it more likely than not that an impairment may have occurred. Based on New Residential’s assessment performed, there were no indicators of impairment as of December 31, 2019