Alpha or Yield Opportunities in Residential Real Estate? Why Not Both?
We have written about mortgage servicers and opportunities to invest in residential real estate previously:
We have also highlighted a mortgage servicer that has potential upside in a rising rate or even recessionary environment:
Rithm Financial (Formerly New Residential)
For many mortgage servicers and mortgage related equities, June 16th kicked off a nice bull run (although the last week has not been great):
But what is there to like about a firm like RITM?
For investors, many mortgage related equities are trading a deep discounts to tangible book values. Check out some in the weeds data for RITM:
Corporate bonds paying out 6.25%
Preferred stock paying a 7% dividend
Common stock paying a 10% yield
All of these are priced at a discount, which can add additional yield.
RITM can be an effective way to buy residential mortgage risk at a 25% discount to where mortgage bonds are trading. Some other potential reasons to like RITM:
$1.8bn of cash and liquidity on the balance sheet
Unlike the period leading up to March 2020, virtually no reliance on short term financing against non-agency mortgage assets
Recently internalized management (keeping same very high quality management team) which will save 10-15 cents per share per quarter – possible dividend increase
RITM holds call rights on a large portion of the legacy RMBS universe. These are marked at 0 on the balance sheet and can represent significant value if interest rates decline
RITM’s mortgage originator, NewRez, is also marked at 0 on the balance sheet and has very little capital against it. If rates decline this could be spun off for significant value. An IPO was previously attempted
Management/the board seems inclined to buy back stock at these types of discount to book value which is very accretive to shareholders
Over time we expect the corporate bonds and preferred stock to deliver steady returns around 10%. The common stock should deliver returns well into the teens or higher as the price to book returns to historical norms and the dividend gets paid out consistently.
If you are allocated to equities, perhaps this is a place to take a look.