If you are looking for a high-yield income vehicle in the mortgage REIT sector that can deliver high-quality dividend income and, potentially, high risk-adjusted returns, look no further than New Residential Investment Corp. (NRZ). The mortgage REIT is well-positioned for different interest rate scenarios and has excellent distribution coverage stats. Plus, the company retains room to grow its dividend payout in 2019, or pay shareholders a special dividend. Management has proven to be shareholder-friendly, and shares sell for a very sensible core earnings multiple. New Residential Investment Corp. is my best high-yield income play for 2019.
New Residential Investment Corp.'s share price has bounced back nicely from the December sell-off. Today, the mortgage REIT has recovered all of the losses it sustained during the market rout last month.
See for yourself.
Source: StockCharts
New Residential Investment Corp. - Portfolio Snapshot And Interest Rate Exposure
New Residential Investment Corp. is structured as a mortgage real estate investment trust, which means the company is required by law to distribute the majority of its earnings/taxable income as dividends. The mortgage REIT invests in a whole range of mortgage assets, including mortgage servicing rights, residential securities and call rights, residential loans as well as consumer loans. Mortgage servicing rights, which tend to become more valuable as interest rates rise, make up the lion share of the REIT's portfolio.
Here's a portfolio snapshot.
Source: New Residential Investment Corp. Investor Presentation
Mortgage servicing rights are unique in the sense that their value increases as the Fed moves along the interest rate curve. The reason: Higher interest rates decrease mortgage prepayment speeds which in turn extends the life of New Residential Investment Corp.'s fee stream.
That said, though, New Residential Investment Corp. is well-positioned to deal with a whole range of interest rate path scenarios going forward.
Source: New Residential Investment Corp.
Growing Book Value
New Residential Investment Corp. has been able to grow its book value and raise capital at a premium to book value over time, thanks to the REIT's strong financial results. New Residential Investment Corp. last raised capital in November 2018 when the mortgage REIT sold 25 million shares and raised ~$433 million for new investments.
Here's New Residential Investment Corp.'s book value per share growth since 2013.
Source: New Residential Investment Corp.
Distribution Coverage
New Residential Investment Corp. is a high-quality income vehicle first and foremost because the mortgage real estate investment trust consistently outearned its dividend with core earnings in each of the last twelve quarters.
New Residential Investment Corp. earned $0.61/share, on average, in quarterly core earnings in the last twelve quarters which compares very favorably to an average dividend rate of $0.48/share. Due to New Residential Investment Corp.'s considerable excess dividend coverage, the mortgage REIT has plenty of room to grow its quarterly cash dividend, or pay shareholders a special dividend in 2019.
Source: Achilles Research
New Residential Investment Corp.'s management is shareholder-friendly, too.
Management has handed dividend raises to shareholders in the past, and the company could very well announce a dividend hike in the first half of 2019. The mortgage REIT has paid a stable $0.50/share quarterly dividend since Q2-2017.
Source: New Residential Investment Corp.
Valuation
New Residential Investment Corp. is attractively valued based on core earnings. Today, investors considering a purchase of this high-yielding mortgage REIT pay ~6.7x Q3-2018 run rate core earnings, making it unlikely that income investors are overpaying for NRZ at this low valuation point. The mortgage REIT now is priced at about accounting book value.
Data by YCharts
Risk Factors Investors Need To Consider
New Residential Investment Corp. is a high-yield, high-risk mortgage REIT, and the company has considerable interest rate risk, like all mortgage REITs do. A major downturn in the U.S. economy and a decrease in interest rates could put pressure on New Residential Investment Corp.'s valuation and lead to lower forward returns as a result. That said, though, New Residential Investment Corp.'s significant excess dividend coverage greatly limits the downside, in my opinion.
Your Takeaway
There is nothing about New Residential Investment Corp. that I don't like, and the mortgage REIT is my top investment pick in the high-yield sector for 2019. As opposed to other mortgage REITs, NRZ has been able to grow its book value and raise capital at a premium over time.
Distribution coverage, frankly, is excellent for this mortgage REIT with a ~12 percent dividend yield, and New Residential Investment Corp. could actually raise its payout in 2019, or pay a special dividend. The investment thesis is intact as long as distribution coverage stats remain robust. The company is well-positioned for multiple interest rate scenarios, and shares are undervalued on a run rate core earnings basis. Buy for income and capital appreciation.
Achilles Research
I am a dividend investor and look for undervalued investments in the stock market. I identify misunderstood and undervalued equity investments and hold those securities until their price approximates my estimate of intrinsic value. I am a long-term investor only. I am building a $100,000 high-yield income portfolio. I am running this portfolio as an experiment to see if long-term sustainable income can be generated from a diversified pool of high-risk, high-yield securities. I am willing to accept high risk in order to meet my performance goals.
Analyst’s 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.
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