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New Residential Investment Corp.

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Msg  2887 of 2897  at  7/10/2019 1:47:52 PM  by

crashcardigan

The following message was updated on 7/10/2019 1:48:57 PM.

NRZ Preferred Info

  
 Pretty good read for anyone interested in buying the new preferreds:
 
 

New Residential Investment Corp.: Another Fixed-To-Floating Preferred Stock Issued By A mREIT

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9 comments
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About: New Residential Investment Corp. (NRZ), NRZ.PA
Summary

Overview of New Residential Investment Corp.'s new preferred stock - NRZ.PA.

Brief view of the company.

Comparison with the sector.

Where in the context of all Fixed-to-Floating preferred stocks does NRZ.PA stand?

Comparison with the other mREITs' preferred stocks.

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Introduction

Our goal is to present to you our IPO analysis for every new fixed-income security that enters the market and to find out if there is any trading potential. In this article, we want to shed light on the newest Preferred Stock issued by New Residential Investment Corp. (NRZ). Even though the product may not be of interest to us and our financial objectives, it definitely is worth taking a look at.

The New Issue

Before we submerge into our brief analysis, here is a link to the 424B5 Filing by New Residential Investment Corp - the prospectus.

Source: SEC.gov

For a total of 5.4M shares issued, the total gross proceeds to the company are $135M. You can find some relevant information about the new preferred stock in the table below:

Source: Author's spreadsheet

New Residential Investment Corp 7.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (NYSE:NRZ.PA) pays a fixed dividend at a rate of 7.50% before 08/15/2024 and then switches to a floating rate dividend at a rate of three-month LIBOR plus a spread of 5.802%. The new issue bears no S&P rating, pays quarterly dividends, and is callable as of 08/15/2024. Currently, the new IPO trades above its par value at a price of $25.54, it has a 7.34% Current Yield, and a YTC of 6.99%. The dividends paid by this preferred stock are noteligible for the preferential 15-20% tax rate on dividends. They are also not eligible for the dividend received deduction for corporate holders. This means that the "qualified equivalent" Current Yield and YTC would be 6.12% and 5.83%, respectively.

Here is the product's Yield-to-Call curve:


Source: Author's spreadsheet

The company

New Residential Investment Corp. (NRZ) is a publicly traded real estate investment trust ("REIT") that focuses on investing in, and actively managing, investments primarily related to residential real estate.

We aim to drive strong risk-adjusted returns primarily through investments in (I) Excess Mortgage Servicing Rights ("MSRs"), (II) Servicer Advances, (III) non-Agency residential mortgage backed securities ("RMBS") and associated call rights.

Our objective is to leverage our proven investment expertise to deliver attractive returns that will help drive strong and growing dividends to our shareholders. We target assets that generate stable long term cash flows and employ conservative capital structures to generate returns throughout different interest rate environments.

Over the last few decades the complexity of the market for residential mortgage loans in the U.S. has dramatically increased. We believe that unfolding developments in the approximately $21 trillion U.S. residential housing market are generating significant investment opportunities. For example, in the aftermath of the U.S. financial crisis, the residential mortgage industry is undergoing major structural changes that are transforming the way mortgages are originated, owned and serviced. These changes are creating a compelling set of investment opportunities. We believe that New Residential is one of only a select number of market participants that have the combination of capital, industry experience and key business relationships we think are necessary to take advantage of this opportunity.

New Residential was formed as a wholly owned subsidiary of Newcastle Investment Corp. We were subsequently spun off as a separate publicly-traded entity on May 15, 2013. We are externally managed and advised by an affiliate of Fortress Investment Group LLC and benefit from the resources of a highly diversified global alternative investment manager.

Source: Company's website|Who We Are

Below, you can see a price chart of the common stock, NRZ:


Source: Tradingview.com

For 2018, the common stock paid a $2.00 yearly dividend. With a market price of $15.72, the current yield of NRZ is at 12.72%. As an absolute value, this means it pays out $830M in yearly dividends. For comparison, the yearly dividend expenses for its newly issued Series A Preferred Stock is $10.125M.

In addition, the market capitalization of NRZ is around $6.51B.

Capital Structure

Below, you can see a snapshot of New Residential Investment Corp.'s capital structure as of its quarterly report on March 2019. You can also see how the capital structure evolved historically.


Source: Morningstar.com|Company's Balance Sheet

As of Q1 2019, NRZ had a total debt of $6.95B ranking senior to the newly issued preferred stock. The new Series A preferred stock rank is junior to all outstanding debt and equal to the other future preferred stock of the company. At this point, NRZ.PA is the only issued preferred stock.

The Ratios Of New Residential Investment Corp. Which We Should Care About

Our purpose today is not to make an investment decision regarding the common stock of NRZ but to find out if its new preferred stock has the need quality to be part of our portfolio. Here is the moment where I want to remind you of two important aspects of the preferred stocks compared to the common stocks.

  • Preferred shareholders have priority over a company's income, meaning they are paid dividends before common shareholders.
  • Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders.

Based on our research and experience, these are the most important metrics we use when comparing preferred stocks:

  • Market Cap/(Long-term debt + Preferreds): This is our main criterion when determining credit risk. The bigger the ratio, the safer the preferred. Based on the latest annual report and taking into consideration the latest preferred issue, we have a ratio of 6510/(6952 + 135) = 0.92, indicating the company's liabilities is slightly larger than its equity but generally the ratio is satisfactory as there is almost enough to cover all its debt and preferred stocks.
  • Earnings/(Debt and Preferred Payments): This is also quite easy to understand approach. One can use EBITDA instead of earnings, but we prefer to have our buffer in what is left to the common stockholder. The higher this ratio, the better. The ratio with the 2018 financial results is 964/(606 + 10) = 1.56, indicating significant buffer for the preferred stockholders and the bondholders so to be calm about the payments. Moreover, the company manages to pay more than $800M dividend expense for its common that is junior to its liabilities.

All REIT Preferred Stocks

Below, you can see two charts with a comparison between all fixed-to-floating preferred stocks with a par value of $25, issued by a REIT company. It is important to take note that none of these preferred stocks are eligible for the 15% federal tax rate.

By Yield-to-Call and Current Yield


Source: Author's database

By Years-to-Call and Yield-to-Call

Source: Author's database

The higher the YTC, the better the security. With its 7%, NRZ.PA is located somewhere in the middle. Of course, part the preferred stocks in this group have a more distant call date making them less attractive. Except for NLY.PG and NYMTN that are trading below par value, for the rest of the securities of this group, it is the Yield-to-Worst.

Here is the full list:


Source: Author's database

mREITs

The next chart displays all preferred stocks issued by mREITs by their % of Par value and Current Yield.


Source: Author's database

Fixed-to-Floating Preferred Stocks

This section contains all preferred stocks that pay a fixed-to-floating dividend rate and has a par value of $25.

  • By Years-to-Call and Yield-to-Call


Source: Author's database

  • By Yield-to-Call and Current Yield

Source: Author's database

Special Optional Redemption

Upon the occurrence of a Change of Control, we may, at our option, subject to certain procedural requirements, redeem the Series A Preferred Stock, in whole or in part, within 120 days after the first date on which such Change of Control occurred, for cash at a redemption price of $25.00 per share of the Series A Preferred Stock, plus any accumulated and unpaid dividends thereon (whether or not authorized or declared) to, but excluding, the redemption date, without interest. If, prior to the Change of Control Conversion Date, we have provided notice of our election to redeem some or all of the shares of the Series A Preferred Stock (whether pursuant to our optional redemption right described above or this special optional redemption right), the holders of the Series A Preferred Stock will not have any right to convert the Series A Preferred Stock as described below under "Description of the Series A Preferred Stock-Conversion Rights" with respect to the shares of the Series A Preferred Stock called for redemption.

Source: 424B5 Filing by New Residential Investment Corp.

Use of Proceeds

We estimate that the net proceeds from our sale of the Series A Preferred Stock in this offering will be approximately $130,447,500 (or $150,059,625 if the underwriters exercise their over-allotment option to purchase additional shares of the Series A Preferred Stock in full) after deducting the expenses of this offering and the underwriting discount. We intend to use the net proceeds from our sale of the Series A Preferred Stock in this offering for investments and general corporate purposes.

Source: 424B5 Filing by New Residential Investment Corp.

Addition to the iShares U.S. Preferred Stock ETF

With the current market capitalization of the new issue of around $135M, NRZ.PA is a possible addition to the S&P US Preferred Stock iShares Index during some of the next rebalancings. If so, it will also be included in the holdings of the main benchmark, PFF, which is the ETF that seeks to track the investment results of this index and which is important to us due to its influence on the behavior of all fixed-income securities. I'll just remind you about the last year rally in the fixed-income borne from the redemption of the two "giants" HSEA and HSEB and the released cash of over $600M used from PFF to buy more of the rest of its holdings.

Conclusion

As fixed-income traders, we follow every one preferred stock or baby bond, which is listed on the stock exchange. As such, NRZ.PA is on exception, and the homework we always do we share it with the public. It is not necessary for the IPO to be an arbitrage and a bargain but in many cases, the new security happens to be better than the ones already trading on the market.

The company is well leveraged, having 0.92 equity-to-debt ratio. Also, the net income coverage is also very decent. With a $6.5B market cap, NRZ is one of the biggest mREITs and with the $830M common stock dividend, it is 83x times more than what it will be paying to the preferred stockholders. As for the returns, NRZ.PA does not have the highest yields when we compare it with all other F2F preferreds issued by a REIT; with Yield-to-Worst of 7%, it is somewhere in the middle by this indicator. If we take a closer look at the issues that are with the nearest call dates, Chimera Investment Corporation 8% PFD CUM SER D (OTC:CIM.PD), PMT.PA, PMT.PB, XAN.PC, and CHMI.PB have a slightly better YTW. However, these companies, Chimera Investment Corporation (CIM), PennyMac Mortgage Investment Trust (PMT), Exantas Capital Corp. (XAN), and Cherry Hill Mortgage Investment Corporation (CHMI) are a lot smaller companies with quite worse debt-to-equity ratio. So, this 7.00% does not seem so bad. Overall, I consider the new IPO an excellent mREIT preferred stock.

 (charts omitted above for space)
 


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