One opportunity I’d like to highlight is New Residential (NRZ). NRZ is structured as a mortgage REIT (mortgage REITs typically mostly focus on managing portfolios of debt) but it also operates one of the largest non-bank mortgage originators/servicers in the country. There are opportunities to buy common shares, preferred shares, and corporate debt.
We wrote about mortgage servicers HERE
Access the NRZ quarterly presentation HERE
NRZ is rebranding to Rithm Capital on 8/1 and internalizing its management (it was previously externally managed by Fortress). The newco will be managed by all of the same key people including CEO Michael Nierenberg
Internalizing management should increase institutional ownership and reduce ongoing costs
A $400mm termination fee is being paid to internalize management – a strong sign of ample liquidity despite many market participants worried about liquidity/financing conditions
The common stock currently trades at a ~25% discount to book value (after payment of termination fee and Q2 dividend). This is a steep discount to NRZ’s average price to book ratio
Both the common shares of NRZ and the corporate debt (which matures in 3 years) yield ~11%
NRZ is one of the largest owners of mortgage servicing rights (MSRs), which provides book value stability in many interest rate environments.
NRZ’s book value does not even include the following –
The value of NewRez, which is its mortgage originator – one of the larger non-bank mortgage originators in the country
The value of their legacy RMBS call rights which could have substantial value when interest rates decline again
Full upside of its MSR position which will be marked up further if rates rise
On the last update call, NRZ’s CEO strongly hinted at share buybacks given the deep discount to book value – although Board authorization has not occurred yet
NRZ has no mark to market leverage against non-agency mortgage assets. This was not the case leading up to March 2020. Leverage is in a much better place now
Overall, we believe NRZ’s stock price is being dragged down by retail investors that are not able to differentiate NRZ from a simple mortgage originator without a balanced business
You can access the NRZ quarterly investor call HERE
Comments