This is in no way, shape or form, fluid and function, an analytical, qualitative or intelligent compte rendu. There is absolutely no financial advice here because the only financial advice I can give is to research, research, and research. The purpose of this analysis is to serve as an example of an investigation into a company’s background, fundamentals, and assets through various lenses to determine if it is a good potential investment for you. The function of this write up is to serve as an educational resource for investors looking to understand how to find good investments. So read and learn some things about a company that may provide a supplementary income if the bull market holds to any investor, big and small.
REIT – Real Estate Investment Trusts
The concept of these are actually pretty damn cool, and I might have to do a real series on Dividend-based investing for those looking to supplement their own monthly income, or as a method of investing with far fewer risks and reinvesting those dividends as shares, which prevents getting taxed on the dividend and serves as a compounding feature on your investment. Essentially, shareowners of the REIT pool their money together to operate as a real estate company; owning property for leases, mortgages, real estate financing. This is an extremely profitable business that has been limited to the ultra wealthy. This money is managed by a board of directors/trustees, thus investing in an REIT is investing in 2 key elements.
First is property value, that is to say that property/real estate is valuable and will continue to grow in value, remaining valuable such that long term investments will be profitable. I am entirely unsure of what happens to REITs in the event of a major mortgage backed security crash, but I can’t imagine its great. For this reason alone I would avoid these for the time being, but not all REITs are equal in their “property”. Each REIT usually specializes in various real estate investments. Some might be primarily mortgages, some might be primarily retail leases, etc. The different specialties of these REITs are from the second element, the Investment Manager.
This Investment Manager is essentially the same as the investment manager of an , but for real estate deals. These people need to have a strong background in real estate, specific to the specialty of each REIT. This is the person, or people, that are handling your investment, and giving them money should be done via an “interview” process. Deep diving into their background is going to give you the best idea of how to judge the REIT as an investment, through good and bad times.
An REIT is fundamentally similar in market dynamics to an ; by purchasing shares of the REIT, you buy into the underlying investment pool, and thus the underlying assets. The share price isn’t meant to fluctuate to a great degree, even more than an , due to the nature of the underlying business, which is owning the actual properties. To that end, only 75% of the assets ( aka capital from the market) has to be in real estate, cash or treasury bonds. However, 75% of income has to come from some form of real estate. This is a pretty interesting concept, where it could potentially be abused by having large inflows allowing the REIT to buy treasuries, outflow right after to reclaim money, the income from the treasuries shouldn’t pop up until 10+ years, or until a time of extreme profitability for trading, creating a massive burst of income, allowing a huge surge in profit, allowing a well timed inflow to swallow that money and funnel it. I’m not saying that that could happen, or does happen, but I wonder if it could.
New Residential Investment Corp.
NRZ CEO Michael Nierenberg has quite a career. That’s an understatement. Starting at Lehman Brothers building their adjustable rate mortgage business, going on to Bear Stearns where he was co-head of mortgage backed securities around 2008 until a brief tenure at JP Morgan, off to Bank of America as head of global mortgages, and then 2013 CEO of NRZ and on. I don’t know how many times you have to step on a rake, get hit in the face before you learn to stop. Aside from the imminent housing bubble collapse, the guy just doesn’t learn. Looking at current portfolio of NRZ takes my breath away in shock. Reading up on what the guy wants to keep going after, and what he has made a giant portion of the business is just scary. I don’t think its fair to blame the collapse of two major institutions on him, and I don’t know how much his original ideas were perversed to create the monster that is major banks platform of mortgage backed securities, but I have little interest in finding out what happens next. This isn’t the part where I say go elsewhere and invest in literally anything else, I just caution anything in mortgage backed securities. Furthermore, over 50% of the investment portfolio is servicing mortgages, so if they don’t pay, NRZ don’t get paid. Another 48% is in some form of servicing, origination or securities of residential mortgages. If a depression, , recession hit, people will not be able to pay mortgages. Looking at just how bad 2020 was for NRZ , seeing them flaunt it now hurts just a little. That’s not say that the same issues plaguing them in 2020 are about to rear their ugly head, I just can’t imagine they have any ability to rotate.
With $1 billion cash in hand, they can sustain some heavy losses and a rough year or two more, but not while acquiring another business focused on retail mortgages for over half of that cash. There is a fine line the economy needs to ride for NRZ to make it through, and I don’t know if the economy will. At the very least, there are REITs and Dividend stocks with a basis far from 100% retail mortgages.
Furthermore, it looks like there might be a growing issue with their retail mortgage business.
They have ~6+ months of only 1 star reviews saying the same thing over and over; NRZ has delayed mortgage refinancing and blamed a billion things other than themselves. This is either indicative of a lack of liquidity, or just being a bad company. However, the way a significant amount of the reviews read to formula, I don’t know if this is a competitor or bear firm using social media to push a narrative.
The company’s fundamentals are great. They took a bruising over 2020, but they came back roaring in the first quarter.
By all rights, should there be no looming threats of a systemic collapse in mortgage backed securities and retail mortgages due to massive defaulting caused by , deflation, recession, etc.; NRZ is poised to have one hell of a run soon. The CEO might be playing a dangerous game, but he does do it well. Revenue, cash flow, growth, etc. are all impressive of the firm. That much is clear of the big stake Vanguard and Blackrock , likely for their fixed income ETFs and investment plans. 7.5% dividend guaranteed per year is huge. To put that into context, say you invest 10k at t0. Given dividend split each quarter of 1.875%, with the dividend being reinvested as shares:
At 10 years, with a 10k investment, you would have 17.5k, and that is without any sort of growth to the value of the share price. If you have ~200k and you invest in that, you would have a monthly income of $1250. With $1 million, you would have a monthly income of 6. 25k , or a yearly income of 75k, and you get to do nothing with your life. Do not underestimate the power of dividends. Of course all of that is pre-tax, but with the right accountant and the right financial advisor, money can be self-fulfilling. Of course, that is with out a major catastrophe to the underlying business. To that end, there has been a significant outflow of major institutional holders, with the only requisite inflow coming from Blackrock and Vanguard. Despite all their size, and all their power, even they can get it wrong. Caution is advised.
Thank you for your time, and I truly hope that it was worth it. Please do not use this to decide if you should make an investment or not, but rather use it as an example of how to do your own research. My analysis of information is not the same as the markets, which means I can and do get it wrong. The most critical lesson I can share with you is to read, research and hunt for information. Nobody on Wall Street is special, no one at any investment firm has anything over you but time, money, and better resources. Overcoming that, and making good investments, means reading and researching. Good luck, take care, and may you find fortune. I do not have an investment in the share price of NRZ as of May 25th, 2021. This is not financial advice, please trade carefully.