New Residential Investment (NYSE: NRZ) is one of the larger mortgage real estate investment trusts (mREITs) in today's market. The company -- which specializes in originating and servicing residential mortgages and investing in agency and nonagency securities -- is growing quickly, putting this mREIT on a lot of investors' radars.
Since announcing its acquisition of Caliber Home Loans, and at a time when mortgage applications are on fire, there's reason to believe the company could be in a much stronger and larger position within the next three years.
New Residential Investment today
The company earns revenues in a variety of ways, including loan originations through its mortgage subsidiary NewRez, servicing through its subsidiary Shellpoint, mortgage servicing rights (MSRs), and servicing advances. Additionally, the company buys and securitizes loans and other securities and sells them in the secondary market.
Calling, buying, and selling these loans and securities allows the company to recapitalize and leverage its portfolio to buy and originate more loans, thus helping it grow its portfolio and revenues.
As of Q1 2021, the company had $24.5 billion worth of assets in its portfolio and $304.6 billion worth of loans in its servicing portfolio, making it the largest non-bank owner of MSRs and a top 10 non-bank mortgage servicer. In the first quarter of 2021, the company originated $27.2 billion in loans, up 138% year over year (YOY).
The growth over the past few quarters has largely been driven by market conditions among residential real estate. High demand for housing backed by low interest rates has created a refinancing and buying frenzy.
These conditions have surely boosted the company's revenues and, in turn, helped offset some of the negative impacts from the COVID-19 pandemic, including New Residential's 60,350 borrowers among its servicing rights currently in forbearance and the 25% of its residential loan and securities portfolio that is delinquent. Despite this recent boost, core earnings per share as of Q1 2021 is still down 29% YOY.
In April 2021, New Residential raised $522 million in a common equity offering, which is being used in part to acquire Caliber Home Loans for an acquisition cost of $1.675 billion. This acquisition adds $141 billion in unpaid balances to New Residential's portfolio while adding new systems, software, and technology to its business model.
Where the company could be in three years
The latest acquisition and current market conditions should propel New Residential forward over the next few years, adding to its earnings per share and net revenues, particularly from its servicing rights and loan portfolio growth. The company predicts the acquisition alone will result in a 25%+ return on investment by 2022.
The biggest challenge the company faces within the next five years is the low-interest-rate environment and risk of increased defaults as forbearance plans begin to expire. A significant portion of the company's portfolio is in some stage of delinquency or forbearance.
Eventually, the company will need to rectify these delinquencies either through a loan sale or loss-mitigation efforts, which can be timely and costly. Its leverage ratio is 3.5x, so the company does carry notable debt in relation to its assets, making it something to keep an eye on over the next several quarters.