New Residential Investment: This 11.9%-Yielding Mortgage REIT Has Room To Rally In 2019

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

New Residential Investment Corp. reported strong Q4-2018 results on Tuesday.

New Residential Investment Corp.'s share price has rebounded considerably from the market sell-off in December.

That being said, I see more upside in 2019.

The mortgage REIT easily covers its dividend with core earnings.

An investment in NRZ yields 11.9 percent.

New Residential Investment Corp. (NRZ) released another set of convincing financials for the fourth quarter on Tuesday that continues to support the investment thesis. The mortgage real estate investment trust again widely outearned its going dividend rate with core earnings, and shares remain undervalued, in my opinion, leaving room for price appreciation. An investment in New Residential Investment Corp. at today's price point yields a whopping 11.9 percent.

New Residential Investment Corp. - Portfolio Overview

New Residential Investment Corp. is a high-yield income vehicle structured as a mortgage real estate investment trust with an equity value of $6.2 billion. The REIT has considerable investments in mortgage servicing rights - which accounted for about half of New Residential Investment Corp.'s investment portfolio at the end of the December quarter - residential securities, call rights, residential and consumer loans.

Here's a portfolio snapshot as of the end of 2018.

Source: New Residential Investment Corp. Investor Presentation

New Residential Investment Corp. is partially a play on rising short-term interest rates. As interest rates rise, mortgage prepayment speeds decrease, which in turn increases the value of New Residential Investment Corp.'s mortgage servicing rights, or MSR portfolio. Overall, New Residential Investment Corp. has slightly positive interest rate sensitivity.

Source: New Residential Investment Corp.

Strong And Consistent Book Value Growth Over Time

New Residential Investment Corp. ended 2018 with a book value of $16.25/share, representing an increase of 6 percent year over year. New Residential Investment Corp. has been able to consistently grow its book value over time through a combination of capital raises and strong financial results.

See for yourself.

Source: New Residential Investment Corp.

Distribution Coverage

New Residential Investment Corp.'s fourth quarter dividend coverage stats were fully convincing, again. The mortgage REIT earned $0.58/share in core earnings compared to a stable $0.50/share quarterly dividend. On average, New Residential Investment Corp. earned $0.61/share in core earnings in the last twelve quarters compared to an average dividend rate of $0.49/share.

New Residential Investment Corp.'s core earnings payout ratio (last twelve quarters) averaged just 82 percent, which is exceptional for a mortgage REIT with an almost 12 percent dividend yield.

Source: Achilles Research

Valuation

I once again recommended New Residential Investment Corp. during the heavy market sell-off in December in my article titled "New Residential Investment: Don't Panic And Buy The Drop" @$15.57. As of today, New Residential Investment Corp.'s share price has recovered all losses sustained during the December market rout.

Source: StockCharts

Yet, shares remain quite cheap on a run rate core earnings basis: Today, income investors wanting to buy one of the "safest" high-yield mortgage REITs in the sector pay just ~7.2x Q4-2018 run rate core earnings and 1.02x book value for New Residential Investment Corp.'s dividend stream.

NRZ has historically traded at much higher book value multiples.

Chart Data by YCharts

Risk Factors Investors Need To Consider

New Residential Investment Corp. is a bet on rising interest rates and a strong U.S. economy. Higher interest rates reduce prepayment speeds, which in turn makes these mortgage assets more valuable. A downturn in the U.S. economy and a decrease in interest rates are the two biggest risk factors investors face.

Hence, investors MUST continuously monitor New Residential Investment Corp.'s financial performance and distribution coverage going forward in order to react timely to a deterioration in sector or company fundamentals.

Your Takeaway

Frankly, it is quite hard to find a mortgage REIT in the sector that is comparable to New Residential Investment Corp. in terms of financial performance and distribution coverage.

New Residential Investment Corp., in my opinion, is one of the best high-yielding mortgage REITs on the street. The company has consistently been able to raise capital at a premium to book value, and it has covered its dividend payout with core earnings in each of the last twelve quarters.

New Residential Investment Corp. has positive interest rate sensitivity, and shares have historically sold for a higher P/B multiple than today. As long as interest rates are rising, New Residential Investment Corp.'s shares have room to rally in 2019. 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.