TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES

6 Months Ended

Jun. 30, 2022

Transactions With Affiliates And Affiliated Entities

TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES

TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES

On June 17, 2022, the Company entered into definitive agreements with the Former Manager to internalize the Company’s management function. As part of the termination of the existing Management Agreement, the Company agreed to pay $400.0 million (subject to certain adjustments) to the Former Manager. Following the Internalization, the Company no longer pays a management or incentive fee to the Former Manager.

In connection with the termination of the Management Agreement, the Company entered into the Transition Services Agreement with the Former Manager in order to facilitate the transition of the Company’s management functions and its operations through the earliest to occur of (i) the date on which no remaining service is to be provided under the Transition Services Agreement or (ii) December 31, 2022 (or earlier if the Transition Services Agreement is terminated earlier). Under the Transition Services Agreement, the Former Manager provides (or causes to be provided), at cost, all of the services it was previously providing to the Company immediately prior to the Effective Date (“Transition Services”). The Transition Services primarily include information technology, legal, regulatory compliance, tax and accounting services. The Company may elect to terminate any individual service at any time upon written notice to the Former Manager. The Transition Services are provided for a fee intended to be equal to the Former Manager’s cost of providing the Transition Services, including the allocated cost of, among other things, overhead, employee wages and compensation and actually incurred out-of-pocket expenses, and will be invoiced on a monthly basis. The Transition Services Agreement may be terminated earlier in accordance with its terms or if the Company and the Former Manager agree that no further services are required. The Company incurred $0.5 million in costs for Transition Services during the three and six months ended June 30, 2022, and these costs are reported in General and Administrative expense in the Consolidated Statements of Income.

Prior to the Internalization, the Company was party to a Management Agreement with its Former Manager which provided for automatic one-year renewals subject to certain termination rights. Specifically, the Management Agreement allowed the Company to terminate the Management Agreement by payment of a termination fee. Pursuant to the Management Agreement, the Former Manager, under the supervision of the Company’s board of directors, formulated investment strategies, arranged for the acquisition of assets and associated financing, monitored the performance of the Company’s assets and provided certain advisory, administrative and managerial services in connection with the operations of the Company.

Prior to the Internalization and the termination of the Management Agreement on June 17, 2022, the Former Manager was entitled to receive a management fee in an amount equal to 1.5% per annum of the Company’s gross equity calculated and

payable monthly in arrears in cash. Gross equity was generally (i) the equity transferred by Drive Shack, formerly Newcastle Investment Corp., which was the sole stockholder of the Company until the spin-off of Rithm Capital completed on May 15, 2013, on the date of the spin-off, (ii) plus total net proceeds from preferred and common stock offerings, plus certain capital contributions to subsidiaries, less capital distributions and repurchases of common stock.

In addition, the Former Manager was entitled to receive annual incentive compensation in an amount equal to the product of (A) 25% of the dollar amount by which (1) (a) Rithm Capital’s funds from operations before the incentive compensation, excluding funds from operations from investments in the Consumer Loan Companies and any unrealized gains or losses from mark-to-market valuation changes on investments and debt (and any deferred tax impact thereof), per share of common stock, plus (b) earnings (or losses) from the Consumer Loan Companies computed on a level-yield basis (such that the loans are treated as if they qualified as loans acquired with a discount for credit quality as set forth in ASC No. 310-30, as such codification was in effect on June 30, 2013) as if the Consumer Loan Companies had been acquired at their GAAP basis on May 15, 2013, plus earnings (or losses) from equity method investees invested in Excess MSRs as if such equity method investees had not made a fair value election, plus gains (or losses) from debt restructuring and gains (or losses) from sales of property, and plus non-routine items, minus amortization of non-routine items, in each case per share of common stock, exceed (2) an amount equal to (a) the weighted average of the book value per share of the equity transferred by Drive Shack on the date of the spin-off and the prices per share of Rithm Capital’s common stock in any offerings (adjusted for prior capital dividends or capital distributions) multiplied by (b) a simple interest rate of 10% per annum, multiplied by (B) the weighted average number of shares of common stock outstanding. “Funds from operations” means net income (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and gains (or losses) from sales of property, plus depreciation on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations was computed on an unconsolidated basis. The computation of funds from operations was subject to adjustments at the direction of Rithm Capital’s independent directors based on changes in, or certain applications of, GAAP. Funds from operations was determined from the date of the spin-off and without regard to Drive Shack’s prior performance.

In addition to the management fee and incentive compensation, Rithm Capital was responsible for reimbursing the Former Manager for certain expenses paid by the Former Manager on behalf of Rithm Capital.

In March 2020, the Company and certain of its subsidiaries sold (collectively, the “Sale”) through a broker-dealer to six purchasers (collectively, “the Purchasers”) of a portfolio consisting of non-agency residential mortgage-backed securities with an aggregate face value of approximately $6.1 billion (the “Securities”). The Sale generated proceeds of approximately $3.3 billion in the aggregate, excluding any unpaid but accrued interest. The Purchasers included an entity affiliated with funds managed by an affiliate of the Former Manager (the “Fortress Purchaser”), which purchased approximately $1.85 billion of Securities in aggregate face value for approximately $1.0 billion. In connection with the sale of the Securities to the Fortress Purchaser, the Company agreed to exercise certain rights, including call rights, that the Company holds under the securitization transactions with respect to the Securities sold to the Fortress Purchaser solely upon written direction by the Fortress Purchaser. Such rights include the rights, if any, to (i) amend and/or terminate the transactions contemplated by certain related residential mortgage servicing agreements, securitization trust agreements, pooling and servicing agreements or other agreements, (ii) acquire certain of the related residential mortgage loans, real estate owned and certain other assets in the trust subject to such residential mortgage servicing agreements, securitization trust agreements, pooling and servicing agreements or other agreements in connection with such amendment or termination against delivery of the applicable termination payment, and (iii) if applicable, direct certain related servicers, holders of subordinate securities and/or other applicable parties, to exercise the rights in (i) and (ii). Pursuant to such agreement, the Company and the Fortress Purchaser would share equally in any profits or losses arising from the exercise of any such rights, other than if the Company elects not to participate in the related transaction, in which case the Fortress Purchaser would realize all of the profits and bear all of the losses with respect thereto. 

On May 19, 2020, the Company entered into a three-year senior secured term loan facility agreement in the principal amount of $600.0 million and also issued common stock purchase warrants providing the lenders with the right to acquire up to 43.4 million shares of the Company’s common stock, par value $0.01 per share. Approximately 48% of the lenders and recipients of the warrants are funds managed by an affiliate of the Former Manager. In September 2020, the Company used the net proceeds from a private debt offering, together with cash on hand, to fully retire all of the outstanding principal balance on the term loan facility. See Notes 18 and 21 to the Company’s Consolidated Financial Statements for further details.

On June 30, 2021, the Company entered into a senior credit agreement and a senior subordinated credit agreement whereby the Company, and the other lenders party thereto, made term loans to an entity affiliated with funds managed by an affiliate of the Former Manager. The senior loan bears cash interest at a fixed rate equal to 10.5% per annum and the senior subordinated loan

bears paid-in-kind interest at a rate equal to 16.0% per annum, subject to certain adjustments as set forth in the respective credit agreements. As of June 30, 2022, the principal balance of the Company’s portion of the senior loan and the senior subordinated loan was $105.8 million and $58.5 million, respectively.

The following table summarizes Due to affiliates:

	June 30, 2022		December 31, 2021
Management fees	$	—	$	17,188
Expense reimbursements and other	—		631
Total	$	—	$	17,819

The following table summarizes affiliate fees and expenses:

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Management fees	$	20,985	$	23,677	$	46,174	$	45,839
Expense reimbursements(A)	104		125		229		250
Total	$	21,089	$	23,802	$	46,403	$	46,089

(A)Included in General and Administrative expenses in the Consolidated Statements of Income.

See Note 4 regarding co-investments with Fortress-managed funds.

See Note 23 regarding options granted to the Former Manager.