At the end of 2015, I penned a piece on mortgage investment company New Residential Investment Corp. (NYSE:NRZ), titled "New Residential Investment: My Top High-Yield Underdog Stock Pick For 2016", in which I contended that an investment at ~$12 at the time was offering shareholders a compelling reward-to-risk tradeoff. Fast forward three months and shares of New Residential change hands for less than that price - $11.59 to be precise. Most recently, I penned a piece on New Residential and argued that the investment company is substantially undervalued, and deserved to trade at $20, or a ~9 percent yield that would more appropriately reflect the risk of New Residential's investment portfolio.
One reason why New Residential sells below accounting book value, or ABV, is that investors don't seem to be able to discern between mortgage investment company New Residential and other mortgage real estate investment trusts that, for the most part, invest in mortgage securities. New Residential, as opposed to mortgage REITs, invests in mortgage servicing rights, which are mortgage assets that increase in value when interest rates go up, non-agency securities, call rights, and servicer advances.
But that's not all New Residential is investing in. It was reported last week that New Residential Investment teamed up with The Blackstone Group L.P. (NYSE:BX) and purchased a joint venture from OneMain Holdings, Inc. (NYSE:OMF), a personal finance company. New Residential did not release a press statement detailing the terms of the transaction yet, but OneMain Holdings did, and it gives us, at least, a little bit of a clue of what's going on:
EVANSVILLE, Ind. - (BUSINESS WIRE) - OneMain Holdings, Inc. (the "Company") today announced the sale of its 47% interest in SpringCastle, a joint venture formed to purchase a consumer loan portfolio from HSBC in 2013, to certain affiliates of New Residential Investment Corp. and funds managed by The Blackstone Group, its joint venture partners. The Company continues to service the SpringCastle portfolio through its London, KY servicing center.
So far, New Residential has not made a statement explaining the deal and its economics (at least not at the time this article is being written), but the $112 million acquisition of a consumer loan portfolio could serve one important purpose: It could be a positive catalyst for New Residential's shares.
New Deal Announcements Could Be Positive Catalysts For New Residential's Shares
New Residential's shares have essentially been locked in a tight range of $10-$12 over the last three months. I have made the case for New Residential before, and on more than one occasion, listed numerous reasons why NRZ was a discounted income gem (two dividend raises last year, record core earnings, covered dividend, understated asset values), but every once in a while shares need a nudge. And such a nudge could come from another deal announcement on the part of New Residential that also lays out the deal economics of the SpringCastle portfolio acquisition.
The last time New Residential announced an accretive acquisition, the 2015 purchase of Home Loan Servicing Solutions Ltd., NRZ went bananas and climbed ~38% to a new 52-week high of $17.91. Shareholders love nothing more but book value-accretive acquisitions, and New Residential is in desperate need of a positive catalyst to drive shares higher.
New Residential had record earnings all throughout 2015, and covers the dividend with core earnings. NRZ is cheap on both an accounting book value and run-rate core earnings basis. But what the company needs more than anything is a positive catalyst that would breathe some new life into its shares. The SpringCastle portfolio acquisition enhances New Residential's consumer loan exposure, and, if the deal is as good as New Residential's previous acquisition, it could be a catalyst for NRZ, too. Buy for income and capital appreciation.
Disclosure: I am/we are long NRZ.
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.