Adding a mREIT to 2 Portfolios
By: Tim McPartland,
In what we believe to be a 1st for the model portfolios we have added shares of mREIT New Residential Investment Corp (NYSE:NRZ) to 2 of the models. This decision was made as shares traded sharply lower as the company did a stock offering of 50,000,000 shares. We should also note that we follow many investing message boards and our awareness of this potential “bargain” was highlighted by the wise men and women on the Silicon Investor–1 of many sites we follow. Honestly we have made better decisions in investing by paying attention to message boards (and NO-not Yahoo message boards) for over 10 years as the cumulative amount of wisdom imparted by seasoned investors can’t be bought—sometimes it is their wisdom that is valuable and sometimes it is simply “ideas” that are floated.
We have added 500 shares to the 2015/2016/2017 Blended Income Portfolio. This portfolio has had plenty of cash available and we were able to buy shares early today for $15.30 share. Additionally we have added 3oo shares to the 2015/2016/2017 Moderate Duration Portfolio with Zip–these shares are almost the perfect “zip” for this portfolio and it raises the current yield on this relatively conservative portfolio to 6.68%. NRZ just raised their dividend from .46/quarter to .48 for a current yield of 12%.
We have been hesitant to own shares in mREITs in the past because of the complexity of their business models, but we think we have a good handle on the business of NRZ. In general it is fairly straighforward.
NRZ is a REIT which is primarily an owner of Mortgage Servicing Rights (MSR’s). MSR’s are purchased from mortgage originators and New Residential receives a fee for servicing these mortgages. Servicing involves receiving payments, disbursing interest and principal, insurance and taxes. For this service they receive a fee and from the originator. In addition to MSR’s NRZ has a modest portfolio of residential mortgage backed securities as well as a portfolio of consumer loans. Each of these businesses has specific risks, but in the end the risks are minimized as long as the general economy fairly healthy.
The 50,000,000 share offering that the company just sold was to finance a purchase MSRs on $97 billion in unpaid mortgage balances. They are paying about $950 million for the MSRs which is a typical price (normal pricing is around 1% of unpaid mortgage balances). This will give them MSRs on almost $600 billion in unpaid mortgages. With a relatively solid economy we see little current risk in owning NRZ.
For investors interested in NRZ you can find an informative presentation on the company website here.
Additionally one should read this recent article on Seeking Alpha which adds some color to NRZ.
We are hopeful we will hold this investment for a long time, but when and if we get a whiff of recession we will have to exit.
Disclosure – we have also purchased for our personal account.