New Residential Investment Corporation (NYSE: NRZ) is a mortgage REIT, or a real estate investment trust that primarily invests in mortgages, mortgage-backed securities, and related financial instruments. And it's a fairly large one, with a market capitalization of about $4.4 billion as of March 2021.
In this article, we'll take a look at what New Residential does, how it has performed for investors, and recent developments that investors should be aware of before buying shares.
New Residential company profile
The company's portfolio consists of $23.5 billion worth of assets, including residential mortgage loans and mortgage-backed securities (residential MBS), mortgage servicing rights (MSRs), and more.
Unlike many mortgage REITs, New Residential is also a major residential mortgage originator and servicer, with $61.6 billion in origination volume in 2020 alone, making it one of the 15 largest non-bank mortgage originators in the United States. And from 2018 through 2020, New Residential was the fastest-growing mortgage originator in the market. The company originates mortgages direct to consumer, as well as through joint ventures and wholesale outlets.
On the mortgage-servicing side of the business, the company owns a servicing portfolio consisting of nearly $300 billion in mortgage principal balances and is one of the top 10 mortgage servicers outside the banking industry. About two-thirds of the loans it services were originated in-house (the company is known as NewRez to consumers), and the rest are third-party loans that were originated elsewhere. And the company owns an investment portfolio of mortgage servicing rights that makes it the largest non-bank owner of MSRs in the U.S.
Rapid spikes in interest rates can be bad news for mortgage REITs, but New Residential's massive MSR portfolio gives it a unique advantage. When rates rise, mortgage prepayment risk falls, and it makes existing servicing rights far more valuable. In fact, the company estimates that a 100-basis-point rise in the 10-year Treasury yield from its year-end 2020 level would result in the value of its MSR portfolio rising from $4.5 billion to $5.2 billion, which would add $1.80 per share to the company's book value all by itself. While higher rates would also likely lead to a slowdown in the origination business, New Residential believes its MSR portfolio would more than make up for it.
Finally, it's important to point out that like most mortgage REITs, New Residential uses a rather large amount of leverage to achieve its returns. At the end of 2020, the company had a leverage ratio of 3.6 to 1, meaning that for every $1 million in assets, the company had $3.6 million in outstanding debt. This is completely normal for a mortgage REIT, especially one with lots of high-quality agency-backed mortgages in its portfolio, but it's worth knowing that leverage can spell trouble in turbulent times (as mortgage REIT investors found out during the COVID-19 pandemic -- more on that in a bit).
New Residential news
By far, the biggest news item New Residential shareholders should be aware of is the COVID-19 pandemic and how it affected the company (and the mortgage REIT industry in general).
The short explanation is when the pandemic swept across the United States in early 2020, it created a great deal of uncertainty, especially before the CARES Act and its various foreclosure protections were passed. As a result, the values of mortgage securities plummeted. Since mortgage REITs use lots of leverage in their portfolios, the plunging asset values resulted in margin calls, or the need to sell assets at fire-sale prices to deleverage balance sheets.
As New Residential CEO Michael Nierenberg said in the company's first-quarter 2020 earnings release:
"Asset values in the mortgage market went into free fall as liquidity left the system. In response, we sold down approximately $27.9 billion in assets and significantly de-leveraged our balance sheet. Our investment portfolio as of April 30, 2020, is 61% smaller than it was on December 31, 2019, which we believe puts us in a strong position to navigate the current and forward environment."
And not only did the company sell a huge amount of assets, it was forced to cut its dividend as well.
To be fair, New Residential weathered the storm as well as it possibly could have. The company's asset sales were prudent moves, and New Residential took several steps to bolster its liquidity in the months that followed the initial panic. By the end of the second quarter, the company had started to recover, and the surge in refinancing and purchase mortgage activity provided a boost to the company's profitability. And in the third and fourth quarters, New Residential started to aggressively invest billions to rebuild its residential mortgage portfolio, which represented the bulk of the asset sales at the start of the pandemic.
Since the early days of the pandemic, New Residential has recovered nicely. Origination activity has been very strong, and the company has been very opportunistic about building up its portfolio of agency mortgages in recent quarters. But it's important to realize that the pandemic did significant damage to the company's business in the early days of the pandemic, and the effects are still apparent.
Also, unlike many mortgage REITs, New Residential has been buying back its stock recently, presumably to take advantage of its valuation. At the end of 2020, New Residential had a book value of $10.87 per share, and the company repurchased one million shares during the fourth quarter at an average price of $7.44. And the company has said that its business is worth significantly more than its book value reflects. After all, its operating company (the mortgage originator) is mostly not reported as a balance-sheet asset. In February 2021, the company authorized a new $200 million stock repurchase program through the end of 2021, so it appears the buybacks aren't done yet.
New Residential stock price
At first glance, New Residential Investment's stock-price performance might not look too stellar. Since its 2013 IPO, the mortgage REIT's shares have fallen by about 23% as of early March 2021. However, there are two big caveats here:
1. The COVID-19 pandemic was devastating on the mortgage REIT industry, as discussed in the last section, and the stock had about a 20% gain throughout its seven-year history prior to it.
2. Mortgage REITs are designed for income, not stock-price appreciation. New Residential Investment has paid a dividend yield of 10% or greater for much of its history.
With that in mind, here's a chart of New Residential's performance over certain time intervals and how it compares with the S&P 500 index: