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New Residential Investment Company (NRZ) might be the best high yield mREIT on the market right now. MREIT suffered liquidation during the COVID-19 pandemic, but is now making a comeback. The dividend has been increased three times in a row in 2020, once in 2021, and could be increased again in 2022. Investing in new residential stocks can offer investors attractive return potential, including an 8.3% return. .

An excellent choice MREIT

New Residential is not your typical mREIT. When most investors think of mREITs, they think of Annaly Capital Management, which is a major investor in the agency security industry. New Residential’s business strategy is broader and more differentiated than Annaly’s, but the company is still classified as an mREIT.

New Residential’s core business is capital investment in mortgage-related assets. Examples of such investments are residential mortgage securities backed by agency and non-agency assets, mortgage management rights and residential loans. New Residential also serves as a manager, administering and distributing funds for blocks of pooled mortgages. Recently, New Residential has increased its capacity to create mortgages on its own, which, given the size of the mortgage market, is a promising new area of ​​growth for mREIT.

Total new residential assets

New residential – Total assets

Quarterly supplement from New Residential Investment Corp. PDF

The mortgage market is huge, and so is the opportunity to profit from it. According to data from the New York Federal Reserve, total household debt in the United States was about $ 15 trillion in the second quarter of 21, with mortgage debt accounting for two-thirds of the total (about $ 10 trillion). dollars).

Evolution of household debt and credit in Q321

Evolution of household debt and credit

There are many steps that anyone who wants to refinance real estate, whether residential or commercial, needs a mortgage to refinance, and there are many steps that mortgage investors can take. Mortgages can profit from this either by keeping the loan on their books and charging interest, or by selling it to someone else.

Managing mortgage pools, which includes collecting and disbursing mortgage payments, generates income for managers. Securitized loans are sold to investors seeking yield. New Residential is involved in all of these stages and increasingly becomes a vertically integrated mortgage investor, which means that mREIT creates, manages and sells loans at a profit. It also invests in single-family homes.

MSR and SF houses offer an advantage

Inflation is on the rise, which can be a good thing for New Residential. The consumer price index in the United States rose 6.8% in November after rising 6.2% in October, indicating that inflation continues to accelerate. Nevertheless, the interest rates are at zero. The mismatch between interest rates and inflation means that the central bank will face increasing pressure to raise interest rates in 2022. This rate hike may be beneficial for two of New Residential’s investments:

  1. Mortgage management rights
  2. Single-family homes

Rising interest rates are helping New Residential’s mortgage management rights work. As interest rates rise, these rights become more valuable. If the Fed raises interest rates this year, as it should given the inflationary environment, New Residential’s mortgage services portfolio will become more valuable and could be sold at a profit or generate higher commission income. As of Q3’21, New Residential had $ 635 billion in mortgage management rights exposure.

New residential exhibition

New residential – Mortgage management rights

Quarterly supplement from New Residential Investment Corp. PDF

At the same time, the relatively low cost of financing available to US borrowers is fueling the appreciation of real estate portfolios. Because the Fed is unlikely to grab interest rates anytime soon and make sure to raise them gradually, cheap financing could further support house prices. The new home portfolio includes 2.2K single-family rentals with an average cost of $ 227K. The upward valuation of New Residential’s SF rental portfolio is attractive and could lead to an increase in the dividend this year.

New SFR residential portfolio

New Residential – SFR Portfolio

Quarterly supplement from New Residential Investment Corp. PDF

Interest rate risks

If the central bank deviates from expectations and keeps interest rates low despite high inflation, the hike in mortgage management fees disappears. However, as New Residential diversifies into other businesses and integrates more vertically, mREIT is prepared to face a variety of interest rate scenarios.

Pending an increase in dividends

New Residential has recently focused on acquisitions, but mREIT has increased its payment three times in 2020 and once in 2021. A fifth rate hike is also possible.

The COVID-19 pandemic has forced New Residential to cut its dividend in 2020, but mREIT’s core earnings are improving, so the dividend has room to rise again. New Residential’s core earnings in Q2’21 ($ 0.31) and Q3’21 ($ 0.44) were significantly higher than the dividend of $ 0.25.

New residential basic income

Basic profit of new residential

Quarterly supplement from New Residential Investment Corp. PDF

Buy new residential stock below book value

The book value of New Residential increases and the stock trades at a 4% discount to the book value. Book value rose 0.7% year-on-year in the third quarter of 21, and the stock was trading at higher book multiples before COVID-19.

NRZ share price at book value

My conclusion

New Residential’s mortgage management rights portfolio and SF rental have potential for value gains as real estate finance is still cheap at the moment, and rising rates would support MSR stocks.

With basic earnings well in excess of the current dividend payout, there is room for the dividend to grow. The ability to buy new residential stocks for less than book value makes mREIT the most attractive as a high yield investment.