On January 19 New Residential Investment Corp (NYSE:NRZ) gave investors a rare thing to like so far this year. After months of a plunging stock price, management stepped in announcing a $200 million share buyback saying the "current stock price is at a significant discount to the value of our company".
I view the buyback as a smart move as it takes advantage of an undervalued share price and boosts management's credibility.
While management teams typically love to repurchase stock since it helps boost the value of their stock options, New Residential's management has a different set of incentives. New Residential is externally managed by Fortress Investment Group (NYSE:FIG) and Fortress gets paid a percentage of assets managed by its permanent capital vehicles including New Residential.
Since repurchasing stock reduces assets under management (compared to retaining and reinvesting) Fortress management is naturally hesitant to repurchase stock as it would reduce their fees. However, Fortress still wants to be able to attract investors to its permanent capital vehicles which is difficult to do when shares underperform.
In early December Fortress management made a move in this area by launching a $100 million buyback for permanent capital vehicle New Senior Investment Group (NYSE:SNR) as it looked to stop the share price bleeding. The New Senior buyback was an encouraging sign for potential buybacks at other Fortress managed permanent capital vehicles including New Residential, Newcastle Investment Corp (NYSE:NCT) and New Media (NYSE:NEWM).
By launching the New Residential buyback Fortress management shows that it is willing to put short-term assets under management aside in order to boost permanent capital vehicle share prices. At the same time investors should keep their eyes open for potential share buyback announcements from Newcastle and New Media given that they are also Fortress permanent capital vehicles with major 2016 share price hits.
What's $200 million buy?
Informed investors know that not all share buybacks are created equal and investors need to look at the fundamentals of the stock price and the company.
At the current share price of roughly $10 per share the buyback would repurchase 20 million shares or 8.7% of the outstanding shares. At the current dividend rate of $1.84 per year repurchasing these shares would save New Residential $36.8 million in annual dividend payments.
Strictly speaking, there are unlikely to be $36.8 million in annual dividend savings at the company level since New Residential would likely use the savings to boost the dividend for the remaining shares. However, the effect is similar for existing shareholders since it would mean a greater percentage of New Residential's dividends would go to existing shareholders. As a rough estimate, if the $36.8 million in dividend savings were added to the dividends for the remaining shares the quarterly dividend could rise by about $0.04 per share.
From a valuation standpoint it's tough to see New Residential as overvalued. The company trades at only 0.82x book value and 5.2x forward EPS. The reason for this has to do with New Residential being lumped in with the underperforming mREIT industry despite New Residential using mortgage servicing rights and call rights rather than the standard mREIT practice of leveraging mortgage bonds. At its current valuation, I view the buyback as an opportunistic way to take advantage of this market miscalculation.
The recently announced New Residential share buyback is highly positive in my opinion. While demonstrating management is willing to take action to boost the share price despite reducing assets under management, the company also takes advantage of a low share price valuation and significant dividend savings due to the high yield on the stock.
Keeping in mind that buyback completions always remain optional, investors need to keep an eye out to make sure that management does go ahead and complete the buyback as announced.
Disclosure: I am/we are long NRZ, NCT, AND MAY ADD TO NRZ IN THE NEXT 72 HOURS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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