There are over 100 companies that have dividend yields above 10% annually. New Residential Investment Corp. (NRZ, Financial) is at the top of the list. Typically, REITs are not my bread and butter, but New Residential is different than most.
New Residential is a real estate investment trust (REIT) that invests and manages real estate investments across the U.S. The vast majority of its portfolio is made up of mortgage servicing rights (MSR), where the company collects income from these when the fee paid for an MSR exceeds the basic amount. These mortgage loans, extended to cover payments missed by homeowners, represent the majority of the carrying value of New Residential’s investments, and packaged securities have short and medium-term lifespans.
With MSRs, as long as the mortgage stays active, New Residential receives a fee to service the mortgage. When a mortgage gets paid off, that fee stream is gone forever. Thus, higher interest rates equate to less refinancing activity, which means a longer cash stream to the servicer and ultimately a higher return on the investment.
After being spun off from Fortress Investments (FIG) back in 2013, the company got a break when international bank rules were tweaked to make owning MSRs undesirable for large banks, and non-banks like New Residential began buying up as money center banks unloaded at discount prices. New Residential is really good at picking the right investments.
It also owns call rights on almost $150 billion of old mortgage securitization deals, and every quarter the company calls a section of these deals where it can buy at par and sell at the market price, pocketing easy money. This activity alone will create another $2 of book value for the company over time.
The last 12 months were good for New Residential, as the company generated $1.29 billion in net income on $1.85 billion in revenue, generating a 25% return on equity. It has grown book value (which now sits at $16.80) each of the last five years to support its increased dividend, and thanks to the acquisition of Shell Point Partners in July, New Residential should continue to see its financial performance grow right along with interest rates. Learn more about the deal here.
Aside from the 11% dividend yield, the company is expected to generate close to $1 billion in net income during each of the next two years, earning over $2.20 per share this year and over $2.30 per share next year. From a wholistic view, that $2 billion compared to $5.9 billion market capitalization also means that New Residential's share price should be trading much higher as well. With an earnings multiple of just 10x on $2.30 per share, investors would get at 30% return.
There is nothing better than a high dividend payment with capital gain potential. New Residential is going to be a buy all the way up to $20 a share if the company keeps up this level of performance.
Disclosure: I am not long/short New Residential.
