New Residential Investment Holds Lots Of Value For High-Yield Investors

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

New Residential Investment Corp. reported solid Q1-2019 results last week.

The mortgage REIT outearned its dividend with core earnings once again.

Mortgage REITs with top-of-class dividend coverage stats, neutral interest rate exposure and growing book values are on my shopping list in case the current trade war-related sell-off picks up steam.

Shares are attractively valued, but could get even cheaper.

I am going to double down on NRZ in case the current market sell-off accelerates.

New Residential Investment Corp. (NRZ) reported decent results for the first fiscal quarter last week. The mortgage real estate investment trust once again covered its dividend with core earnings, pointing to a sustainable dividend over the short haul. New Residential Investment Corp. has best-of-class distribution coverage stats which greatly limits dividend adjustment risks. I am prepared to double down on NRZ if stocks continue to slide.

New Residential Investment Corp. - Portfolio Overview

New Residential Investment Corp. is structured as a mortgage real estate investment trust and invests in mortgage servicing rights, servicer advances, residential securities and call rights, and residential and consumer loans. At the end of the March quarter, more than half of New Residential Investment Corp.'s investment portfolio consisted of mortgage servicing rights and servicer advances.

Source: New Residential Investment Corp. Investor Presentation

Mortgage servicing rights, or MSRs, are valuable mortgage assets in a rising rate environment. New Residential Investment Corp.'s mortgage servicing rights are expected to return 12-18 percent over their lifetime.

Here's a more detailed breakdown by asset type and associated target returns.

Source: New Residential Investment Corp.

New Residential Investment Corp. Has Value As A Hedge Against Different Interest Rate Scenarios

Due to the Fed's more dovish stance on interest rates (and guidance for no rate hikes in 2019), I have sold high-yielding BDCs this quarter since the investment appeal of companies with large floating-rate asset bases has effectively been decreased.

New Residential Investment Corp. has positioned itself for various rate environments, though its mortgage servicing rights portfolio would benefit the most when interest rates rise. Higher interest rates mean less prepayment risk and, therefore, point at a more valuable fee stream related to the servicing of mortgages.

New Residential Investment Corp.'s overall interest rate exposure, however, is neutral, meaning the company's investment portfolio should perform well in either rising or falling interest rate environments. As a result, New Residential Investment Corp. may be an interesting mortgage REIT for investors that seek to hedge against various interest rate paths going forward.

Source: New Residential Investment Corp.

Excess Dividend Coverage Limiting Downside?

New Residential Investment Corp. once again easily covered its quarterly dividend payout of $0.50/share with core earnings of $0.53/share. The mortgage REIT has covered its payout in every single quarter in the last three years, and often displayed considerable excess dividend coverage. As a result, New Residential Investment Corp.'s has a high margin of dividend safety.

Source: Achilles Research

Other high-yield income vehicles in the mortgage sector, Annaly Capital Management, Inc. (NLY) and AGNC Investment Corp. (AGNC), pre-announced dividend cuts on the back of lower yields and earnings expectations (see here and here). Both mortgage REITs have had thin margins of dividend safety for a while and reduced their payouts in the past, as opposed to New Residential Investment Corp. which has one of the best dividend coverage stats in the sector. Hence, I think NRZ could outperform other mortgage REITs in the sector going forward.

In fact, high-yield investors may want to consider overweighting NRZ in the event of an accelerating stock market sell-off due to the mortgage REIT's demonstrated ability to consistently cover its payout.

U.S. Trade War And Potential Entry Opportunity

U.S. President Trump reignited the trade war over the weekend when tweeting that U.S. tariffs on $200 billion worth of Chinese goods would go up from 10 percent to 25 percent on Friday. Stocks shortly sold off on Monday before recovering, but the sell-off started to pick up steam again on Tuesday.

Should a trade agreement fail to come about by Friday, stock market investors are likely confronted with a steep decline in asset valuations. A trade war-related market stampede, however, would be another opportunity to add NRZ to a high-yield income portfolio. I am prepared to double down at the $14.5-$15.0 price range which would imply a ~0.9x book value multiple.

Valuation And Growing Book Value

New Residential Investment Corp.'s shares are competitively valued. Income investors today pay ~7.9x Q1-2019 run-rate core earnings for the mortgage REIT's covered 12 percent dividend, which is exceptionally cheap. New Residential Investment Corp.'s book value multiple is 1.02x. The mortgage REIT has regularly sold for a premium to book value.

Chart
Data by YCharts

Another factor that speaks for New Residential Investment Corp. as an income vehicle is that the company has been able to grow its book value per-share in the last several years through strong financial results and capital raises. The most recent reported book value was $16.42/share, reflecting 1 percent year-over-year growth. Since 2013, New Residential Investment Corp.'s book value per-share has grown ~64 percent.

Source: New Residential Investment Corp.

Risk Factors Investors Need To Consider

In my opinion, New Residential Investment Corp. has less dividend risk than other high-yielding income vehicles due to the company's consistently strong dividend coverage. That said, though, risks do exist, especially as they relate to the general economic outlook and interest rate path. New Residential Investment Corp.'s shares sold off sharply in December, in lockstep with the broader market, on fears of an economic slowdown. Valuation risk, as far as I am concerned, is the largest risk factor investors have to account for with respect to New Residential Investment Corp..

Your Takeaway

New Residential Investment Corp. released solid first quarter results. The mortgage REIT once again overearned its dividend with core earnings which lends a higher-than-average degree of dividend safety to an investment in NRZ. New Residential Investment Corp. definitely is on my shopping list should the current sell-off get worse in the next couple of days or weeks. New Residential Investment Corp. is hedged against various interest rate paths and should be able to do better than income vehicles with largely floating-rate asset bases. Buy for income and capital appreciation.

Disclosure: I am/we are long NRZ, NLY, AGNC. 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.