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12%+ Yielder, Hedged To Higher Rates, With Upside Although Risks Remain


  • NRZ has sold off with the market allowing for some new shares to be acquired at opportunistic yields.
  • The Shellpoint acquisition may be the future of their growth strategy adding new servicing capabilities in addition to UPB.
  • The non-agency market is likely dormant for them given float constraints but should provide a multi-year tailwind.
  • The business model has many hedges to higher interest rates that should protect earnings as the long-end of the curve rises.
  • The dividend is well covered by core earnings and even embedding no growth to the payout, the shares are cheap.

New Residential Investment Corp. - (NRZ)

NRZ recently issued its fourth quarter earnings and held its quarterly conference call. We thought it would be an excellent time to revisit the idea as it conducted some actions in the last few months and in light of the recent market volatility. For 2017, the shares returned 26% on a total return basis and it increased its dividend twice.

Shares of NRZ have fallen greater than the market as anything that is a yield-play has been clobbered. REITs have suffered the most since the start of the year after a terrible last year. NRZ is clearly lumped in with those securities and assets given that it is a mortgage REIT, albeit one with unique features. In fact, NRZ is so unique that it is virtually impossible to recreate another business like it today.


Fourth Quarter Review

  • Acquisition of Shellpoint Partners - On November 29, 2017, NRZ announced an agreement to acquire Shellpoint Partners, a vertically integrated mortgage platform with origination and servicing capabilities. The cost of the deal was $190 million, net of financing. The purchase netted NRZ $8 billion UPB of Fannie Mae and Freddie Mac MSRs from Shellpoint in January 2018.
  • Mortgage Servicing Rights ("MSRs") - NRZ acquired MSRs totaling $32 billion UPB for a total purchase price of $307 million. It also priced two fixed rate MSR notes in January and February of this year, totaling $930 million, at a weighted average cost of funds of ~3.6%.
  • Non-agency securities and call rights - During the quarter, NRZ continued to accelerate the execution around its deal collapse strategy by executing clean up calls on 36 seasoned non-agency residential mortgage-backed securities with an aggregate UPB of $1 billion. Subsequent to the end of the fourth quarter, it completed

This article was written by

Alpha Gen Capital profile picture
Yield Hunting: Alternative Income Opportunities is a premium service dedicated to income investors who are searching for yield without the high risk of the equity market. We are one of the top experts in closed-end funds ("CEFs") in the country having spoken at many national conferences on how to incorporate CEFs into client portfolios. We manage four portfolios that investors can follow:

- YH Core Income Portfolio: yield ~8%
- YH Flexible Income Portfolio: yield 7.53%
- YH Taxable Core Portfolio: yield 5.24% (some tax free)
- YH Financial Advisor Model

Plus: Muni CEF Shopping List.

Our team includes:

1) Alpha Gen Capital - I am a former financial advisor and investor. Not someone from another career doing this on the side. My analysis is meant to provide safe and actionable insight without the fluff or risky ideas of most other letters. My goal is to provide a relatively safer income stream with CEFs and mutual funds. We also help investors learn about investing and how to properly construct a portfolio.

2) George Spritzer - Another career financial guru who runs a registered investment advisor with a specialization in closed-end funds for individuals. George uses the following investment strategies:1) Opportunistic Closed-end fund investing: Buy CEFs at larger than normal discounts to NAV and sell them when the discounts narrow. 2) Exploit special situations: tender offers, fund terminations, fund activism, rights offerings etc.

3) Landlord Investor- spent his career as a management consultant for public sector clients at a multinational consulting firm in the DC area. He has transitioned to a new career as a full time landlord. His investment portfolio is comprised of two parts -- broad-based index funds and income plays such as preferred stock, CEFs, and REITs. He also owns individual/baby bonds which he buys on margin to boost total return. Landlord is our 'individual preferred stock' expert analyst.


Analyst’s 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.

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Comments (31)

when will NRZ declare the dividend?
russellb73 profile picture
Does anyone know the impact of potential repeal of 2008 banking laws (Dodd-Frank) on NRZ?? Am I correct and remembering that big banks had to divest or wanted to divest MSR's? Are MSR's going to be worth more?

Warren Democrats for Wall Street
Wall Street Journal 49m ago
10 years after financial crisis, Senate prepares to roll back banking rules
Highly Cited Washington Post Mar 4, 2018
for what it's worth from nasdaq.com: Net Activity11,026,765
Just as a public service, for what it's worth (which isn't a lot, but it's free) here's an current independent technical perspective on NRZ - with no judgement as to fundamentals:

"Over the last 50 trading sessions, there has been more volume on down days than on up days indicating that NRZ is under distribution, which is a bearish condition."

Now, this condition is not unique to NRZ, in fact there are many stocks that have this same condition given the early February issue. However, the items that are in this specific condition are, technically, those considered to be the weakest holdings in the market and ones that have been and will be unloaded first and most with volatility. It's also important to note that this condition predated the Feb market drawdown. The stock was heavily sold in the first half of Jan, culminating in almost 30MM shares trading on Jan 17, which was a gap down day. Average daily volume in the item is around 4MM shares - so 30MM reflects serious money unloading. That gap was promptly filled and then just as promptly the price reversed again to the downside.

All this is to simply suggest holders and potential buyers may want to think twice as to who they are buying it from and why. When you see a persistent lopsided relationship between volume on up days (low volume) versus down days (higher volume) you have to set aside your arrogance as to what you think you know about the fundamentals and pay attention to what the market is saying.
Franklin123- you make an excellent point on difference in volume on down days versus up days. Thanks for your input.
Talking of HI dividends! IEP increased distribution from $6 to $7 bringing it to about 12%! Any thoughts? By the way, $6 has been paid consistently for long time! Long NRZ, IEP.
Hampton108 profile picture
Not sure what Carl is on, but he’s hitting all the right buttons. Not the best liked guy on Wall Street, so look for some hit pieces this and the coming weeks...don’t forget he’s a friend of Trump...

Long: NRZ1000 IEP2500
TrihawkJon profile picture
I appreciate your analysis. I’ve been holding NRZ for about two years now, and it is my largest holding, but I have been working to diversify that money into other holdings (with mixed success). I’m interested in your service, but haven’t found a way to contact you. Any suggestions?
D.Graves profile picture
Hit the Blue Link under his name at the top before the article.
TrihawkJon profile picture
Thank you. I found it using a different browser; had to go to a Macintosh to find it. Odd.
This article provides a balanced assessment.

Just a couple of contrary perspectives that I think could and should have been addressed.

With so much capital, and not just "dumb" capital, chasing return now, why is it that investors seem to be running away from NRZ? Is this all attributable to fund redemptions? I'm not sure if it's a valid point or not but just for example, it appears that NRZ has managed to consistently outperform REM YTD - even if slightly.

What are the circumstances that could lead to write-downs in the portfolio? It would seem that market values of the underlying assets are highly leveraged to delinquency rates (still low) and LTV (still pretty low as well). Those metrics can change quickly. I haven't seen anything that projects the hit book value might take for an X basis point increase in DQ's.
NRZ does not own the loan, they own the MSR...Even if a loan goes delinquent and defaults, the home is foreclosed on and the servicer is paid any funds owed from the sale of the property...What effects them the most is prepayments/refinancing where the revenue stream goes away since there is no longer a loan to service.
So, jmor, are you suggesting that the LTV makes no difference because these are MSR's? If the loan is underwater, which would be the likely case if the borrower is going to be DQ (at least in numbers), then the MSR takes the first loss as I understand it.
This article makes the point that I attempted to make:

"Servicers have four main sources of income,
listed in descending order of importance:
The monthly servicing fee, a fixed percentage
of the unpaid principal balance of the loans in
the pool;
Fees charged borrowers in default, including
late fees and “process management fees”;
Float income, or interest income from the
time between when the servicer collects the
payment from the borrower and when it turns
the payment over to the mortgage owner; and
Income from investment interests in the pool
of mortgage loans that the servicer is servicing.
Overall, these sources of income give servicers
little incentive to offer sustainable loan modifications,
and some incentive to push loans into foreclosure.
The monthly fee that the servicer
receives based on a percentage of the outstanding
principal of the loans in the pool provides some
incentive to servicers to keep loans in the pool
rather than foreclosing on them, but also provides
a significant disincentive to offer principal
reductions or other loan modifications that are
sustainable on the long term. In fact, this fee
gives servicers an incentive to increase the loan
principal by adding delinquent amounts and
junk fees. Then the servicer receives a higher
monthly fee for a while, until the loan finally
fails. Fees that servicers charge borrowers in default
reward servicers for getting and keeping a
borrower in default. As they grow, these fees
make a modification less and less feasible. The
servicer may have to waive them to make a loan
modification feasible but is almost always assured
of collecting them if a foreclosure goes
through. The other two sources of servicer income
are less significant.

Why Servicers Foreclose
When They Should Modify
and Other Puzzles of
Servicer Behavior
good article, thx
NV_GARY profile picture
"Mortgage applications have fallen sharply and with the new tax bill, deductions are maxed out at $10,000."
Sorry for the caps below:

The mortgage interest on homes up to 750k is still deductible.

So not as bad as it might sound.
PearlGreatPrice profile picture
Thanks for the well balanced analysis of NRZ, including the risk portion. The stock price pretty much follows the market so I use stop losses, and buy in lower when it consolidates. It looks like the next ex-dividend date is at the end of March.
I hold a position at $17 with this stock but it has been on a downward trend for the last 3 months. I am looking to go in for more at an even better price. I was thinking around $16. Question is how much longer will this downward trend continue? The last time it went below $16 is when they had that issue with OCWEN but quickly recovered. Will it go below $16 again or are we seeing the bottom here in this recent cycle before another surge?
tech attorney profile picture
Thanks AGC, another informative and well-written article.
" Core earnings rose to $2.83 per share in 2017 compared to $2.14 per share in 2016, an increase of 32%!"

You fail to point out that there is a significant one time gain in the 2017 core earnings stemming from the deal with Ocwen in the second quarter, that repriced the MSR's due to the servicing cost reduction in the new deal with Ocwen...If I recall, the one time gain was approx. $.50/share or more.
Mem e (meme) profile picture
You are correct. The EPS predictions for 2018 and 2019 are much lower and the distribution of dividend (IF $2 PER YEAR CONTINUES) WILL BE ABOUT 93% OF EARNINGS.
Can we expect a dividend rise with these predictions?
From the second quarter earnings call explaining the one-time gain in the quarter from the Ocwen transaction:

if you take Ocwen out of the numbers, the core business and core earnings were, give or take, around $0.50 to $0.51. The addition of the Ocwen agreement, as we thought about it for Q2 earnings, the way the company was modeled on a go-forward basis, our initial subservicing fee that we were paying was 26 basis points. In Q2, in June, we had multiple quotes that gave us subservicing quotes of 13 basis points. So there was a change in assumption in the model, which is a retro adjustment. And overall, that ended up adding something around $0.50, low 50s. So that's how you go from the low 50s to $1.03 or $1.04 for the quarter in Q2.
Chancer profile picture
Market volatility will continue.

I will wait for an entry price of $15. If it does not get there, many other stocks out there at cheaper prices.
Hampton108 profile picture
$15 or below is a decent price, but cheap isn’t always better...IMHO
dwladaver profile picture
Best mgmt around. Div raised continually. Stick very undervalued, imo
My second largest holding. With continuing excellent coverage and the ability to thrive even if interest rates rise, I will continue to hold and perhaps add when indicated.
long nrz
ralph1563 profile picture
thank you for the very informative article and as long as nrz continues to pay me my dividend and possibly increase it once in awhile I am extremely happy with its overall performance
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