The mortgage REIT holding in our Blue Harbinger Income Equity strategy is up nearly 40% over the last year, and that is on top of its very healthy quarterly dividend payments. However, the stock price has been choppy this week as we received a few new pieces of news that are worth considering.
First of all, New Residential is a leading capital provider to the mortgage industry, including investments in three core business segments: Excess Mortgage Servicing Rights, Servicer Advances, and Non-Agency Securities & Associated Call Rights. We’ve written about this business several times in the past, and you can read more about it here:
New Residential: Huge Profits as Banks De-Risk—But is it Safe? (October 15, 2017)
New Residential Investment Corp (NRZ) – Thesis (May 7, 2016)
New Residential: Big Dividend, Discounted Price (April 17, 2016)
The first two news items we received this week are that (1) the company announced it will issued (to the public) 49,170,250 shares of its common stock at a public offering price of $15.00 per share, and (2) the shares will be used to fund a portion of the acquisition of approximately $97 billion unpaid principal balance of conventional mortgage servicing rights (“MSRs”) from CitiMortgage (you can read the press release here).
The market’s initial reaction to this news (on January 30th) was negative as the price declined, and has only just started to recover over the last few days as shown in the following chart.
Generally speaking, the market does NOT like it when a company issues new shares because it can be dilutive to the value of existing shareholders. However, in the case of NRZ, we much prefer to see new shares issued at a higher price. Specifically, shares have rallied 38% over the last year, and now is a much better time to issue shares than a year ago because the company is receiving a much higher price than they would have a year ago.
Also, we like what the proceeds from the offering are being used for. Specifically, the company has purchased more mortgage servicing rights from CitiMortgage. MSR’s are NRZ’s bread and butter. This is the growing lucrative business that they are in, and it helps them pay their big dividend. Most shareholders own NRZ for the dividend, and it’s encouraging to see the company continue to take actions to support the dividend. Were this a “growth” company that paid no dividend, we’d be far less pleased with the offering. However, we are more comfortable with it because it will support NRZ’s big dividend. Also, we appreciate that the shares currently trade well above book value, so essentially the company has issued the shares at a premium (a relatively good thing for shareholders)
The third piece of news we received (just this morning) is that President Trump will attempt to largely rollback the regulatory burdens of the Dodd-Frank Act. This was a law created after the financial crisis to protect consumers, however it has been extremely expensive to many financial companies. The impact of this on NRZ is not entirely clear yet, however there may be both positives and negatives. It could be positive in the sense that NRZ’s business will be subject to less expensive regulations which would help the bottom line (and ultimately help shareholders). However, it could be negative in the sense that it could create more competition for NRZ from the big banks. Remember, NRZ’s business grew rapidly after the financial crisis as banks were forced to shed risk and this helped NRZ’s business grow. We’ll be watching this one closely for more news regarding how regulatory changes could impact the company. In the meantime, we continue to own the stock and enjoy the very big dividend payments.