Now Is The Time To Buy This 11.5%-Yielding Mortgage REIT Again

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About: New Residential Investment Corp. (NRZ)
by: Achilles Research

Summary

There is another buying opportunity for high-yield income investors in New Residential Investment Corp., in my opinion.

The mortgage REIT reported very strong Q3-2018 results last month.

New Residential Investment Corp. continues to outearn its dividend with core earnings.

Shares are attractively valued on a run rate core earnings basis.

An investment in NRZ yields 11.5 percent.

New Residential Investment Corp. (NRZ) is an attractive high-yield mortgage real estate investment trust that offers income investors high, recurring dividend income and a shot at capital growth over the time. New Residential Investment Corp. has considerable earnings upside in a rising rate environment and continued to easily outearn its dividend with core earnings in the third quarter. I think there is a reasonable chance for a dividend hike in the next several quarters, or maybe even a special dividend. Shares are affordable and yield 11.5 percent at today's price point.

New Residential Investment Corp.'s shares have dropped lately on the back of a new capital offering, which I think opens up yet another buying opportunity in the mortgage REIT. New Residential Investment Corp. regularly sells new shares in order to raise capital for new investment, so the capital offering is business as usual for the company.

Source: StockCharts

New Residential Investment Corp. - Portfolio Overview

New Residential Investment Corp. is structured as a mortgage REIT and invests in mortgage servicing rights, residential securities and call rights, and residential and consumer loans.

At the end of Q3-2018, mortgage servicing rights, or MSRs, made up the majority of New Residential Investment Corp.'s investment portfolio, accounting for ~50 percent of all investments.

Here's a portfolio snapshot as of the end of the September quarter.

Source: New Residential Investment Corp. Investor Presentation

Mortgage servicing rights tend to increase in value as interest rates go up, which makes them unique investments in the mortgage universe. As the Fed tightens and interest rates rise, prepayment speeds for mortgages drop, which in turn increases the value of mortgage servicing rights. In a nutshell, the higher interest rates climb this tightening cycle, the better the potential for earnings growth for New Residential Investment Corp.

Source: New Residential Investment Corp.

Is The Dividend Safe?

The single biggest reason to buy New Residential Investment Corp. for a high-yield income portfolio, in my opinion, relates to the mortgage REIT's excellent excess dividend coverage, which leaves room for a dividend hike, or a special dividend.

New Residential Investment Corp. pulled in an average of $0.60/share in core earnings in the last thirteen quarters, and not a single time did the mortgage REIT underearn its distribution. For comparison, the mortgage REIT paid out an average of $0.48/share over the same period of time. The implied average quarterly core earnings payout ratio is just 83 percent.

Here are New Residential Investment Corp.'s major dividend coverage stats, updated for Q3-2018 earnings.

Source: Achilles Research

Valuation

Income investors wanting to access New Residential Investment Corp.'s covered 11.5 percent dividend yield currently pay ~6.9x Q3-2018 run rate core earnings. New Residential Investment Corp.'s shares are also priced at a slight premium to book value. The premium is justified, in my opinion, thanks to the mortgage REIT's exceptionally good distribution coverage.

Chart NRZ Price to Book Value data by YCharts

Risk Factors Investors Need To Consider

New Residential Investment Corp. is a high-risk, high-yield mortgage REIT. The company has doubled down aggressively on mortgage servicing rights in the last couple of years, which probably won't do as well in a falling rate environment (shorter fee stream, lower MSR values). As a result, investors need to continuously monitor the mortgage REIT's financial performance and dividend coverage stats going forward. A deterioration in excess dividend coverage would be a major red flag for high-yield investors.

Your Takeaway

New Residential Investment Corp. is one of the best high-yield income stocks in my investment portfolio. The mortgage REIT has considerable earnings upside as interest rates go up, thanks to its large investments into mortgage servicing rights. New Residential Investment Corp. also easily covers its dividend with core earnings, which could point to another dividend hike, or a special dividend over the short haul. Shares are not too expensive, given the strength of the value proposition. Buy the drop for income and capital appreciation.

If you like to read more of my articles, and like to be kept up to date with the companies I cover, I kindly ask you that you scroll to the top of this page and click 'follow'. I am largely investing in dividend paying stocks, but also venture out occasionally and cover special situations that offer appealing reward-to-risk ratios and have potential for significant capital appreciation. Above all, my immediate investment goal is to achieve financial independence.

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.