NRZ.PD: A Comparison of Preferred New Residential Investments
(This article was co-produced with Hoya Capital Real Estate)
I’m always on the lookout for baby bonds and Preferreds, with a preference for those that have a maturity date, either to replace a called or matured asset or to expand the date range or size of my scale of bonds. I explained why I built a ladder and its current composition in a recent post: 2021 has been a tough year for investors who built a bond ladder.
I was recently able to add the PennyMac Mortgage Investment Trust 6.75% RED VFI C (PMT.PC) at par, with its call date of August 2026. Its YTC is well above most of what I currently own and also above baby bonds I have reviewed recently. Many preferred stocks with no maturity date have YTCs of over 6%, but without a maturity date they would have more interest rate risk. Believing that interest rates will climb over the next few years, having known maturity dates reduces the interest rate risk of a ladder built using these assets.
Here is how New Residential Investment (NRZ) describes itself:
New Residential Investment Corp. is a leading provider of capital and services to the mortgage and financial services industries. Our aim is to leverage our proven investment expertise and identity and invest in assets that offer attractive risk-adjusted returns while protecting our existing portfolio and generating long-term value for our investors. We target assets that generate stable long-term cash flows and employ conservative capital structures to deliver returns in different interest rate environments.
NRZ believes that its portfolio and strong track record sets it apart. Here are six reasons he lists on his website:
NRZ’s portfolio includes MSR, purchase rights, residential securities and loans, consumer loans, complementary operating activities and ancillary services.
Wallet hard to replicate
We have achieved scale with our differentiated and difficult to replicate portfolio of value-creating strategies.
Opportunistic growth strategy
We are disciplined and opportunistic where this aligns with our long-term strategy; our size, liquidity and positioning allow us to be agile when opportunities arise.
Throughout our history, we have created substantial long-term value and proven the strength of our strategy through execution and performance.
Focus on capturing the full value of the mortgage asset
We are well positioned to capture the incremental long-term value of the entire mortgage asset through our operating companies and partnerships.
Our ultimate goal remains to protect book value and generate stable earnings and risk-adjusted returns for our shareholders.
According to their website, NRZ operates in five segments of the mortgage market:
Mortgage service fees and service advances
A Mortgage Servicing Right (MSR) gives a mortgage manager the right to service a pool of residential mortgages in exchange for a portion of the interest payments made on the underlying residential mortgages. The repairer has a limited risk of not being reimbursed for the advances, since the advances are almost always “at the top of the cascade” in the event of a real estate sale.
Non-agency securities and associated purchase rights
Residential mortgage-backed securities are created by securitizing a pool of residential mortgages. We hold call rights on non-agency residential mortgage securitizations, which become exercisable once the current collateral balance falls below a certain threshold of the original balance.
New Residential’s residential loan portfolio consists of performing, non-performing, REO, non-QM and FHA insured loans.
New Residential’s consumer loan portfolios have provided differentiated and attractive income streams over time.
NRZ Subsidiaries and Partners
New Residential has made a number of opportunistic acquisitions, investments and partnerships to date. These acquisitions, investments and partnerships demonstrated New Residential’s disciplined and strategic approach to growth as markets evolve. – Source: newresi.com
Explore the new “D” Preferred
Extract important facts about New Residential Investment Corp. 7% RT REST PFD D (NRZ.PD), we see that
- The fixed coupon of 7.00% is valid until the first call date: 15/11/26. Payments are made quarterly on the F/M/A/N cycle.
- The variable rate is then reset every 5 years according to the following formula: 5-year UST rate + 6.223%. The current 5-year rate is close to 1.5%, which means that the variable rate is higher than the current fixed rate. Since the summer, the 5-year UST rate has risen by 80 basis points.
- Since NRZ is classified as a REIT, the payments are not eligible for special dividend tax rates.
- As with most issues, there is a special buyout feature if the company undergoes a change in control.
For more detailed information, the Prospectus is available.
Overview of other favorites
NRZ has three other fixed-to-float preferences: New Residential Investment Corp. 7.50% PFD SER A (NRZ.PA), New Residential Investment Corp. 7.125 SR B PFD (NRZ.PB), and New Residential Investment Corp. 6,375 PFD SER C (NRZ.PC). Each of these emissions can be called before NRZ.PD. Also, in common, their fixed markup percentage is lower and they use LIBOR 3-Mo (until it migrates) as their floating rate, while the “D” uses the UST 5-Yr rate.
What preference do New Residential Investment Corp investors want to add to their portfolio right now, understanding what they already own and what their goals are in adding another preference to their holdings.
Here are some of the variables that investors might consider important in selecting which ones they prefer to hold at this time.
- Call time: NRZ.PD has the longest time to call date, over 4.5 years. The shortest is both NRZ.PA and NRZ.PB at 2.5 years.
- Highest YTC: By far, NRZ.PC wins here with a YTC of 255bps above any other. More on that in a moment.
- Highest current yield: NRZ.PA offers the highest current yield of 24 basis points, with the other three all within a 19 basis point ban.
- Possible call order: I’ll admit that’s a personal opinion, based on my reading of the tea leaves. Between NRZ.PA and NRZ.PB, “A” will be called first because it has both the highest coupon and the highest fixed component after its float. I would place “A” at the top of the overall ranking due to its call date and highest coupon. With the lower coupon, NRZ.PC would be called last unless rates in 2025 were lower than its new floating rate. If the others haven’t been called by the time NRZ.PD can be called, I suspect they still won’t be called until “D” is called.
Why is the price of NRZ.PC so low?
With the other three Preferreds all trading above PAR, why is NRZ.PC below $23? I checked the Prospectus and couldn’t find where this issue ranks below previous ones in liquidation, which might justify a lower price. There are probably other reasons, but here are my take on two.
- The lowest available coupon definitely plays a leading role. Note that its current yield is still the lowest despite the low price.
- For years, its post-float calculation produces the lowest new coupon rate. With no maturity date, this offers the least price protection in a world of rising interest rates.
Assuming investors feel comfortable with New Residential Investment Corp, which variable fits their strategy should drive their decision to hold one of these preferred stocks. Ownership of issues in companies and industry segments is a smart strategy to reduce default risks.
I’m proud to have asked to be an early Seeking Alpha contributor at the 11/21 launch of Hoya Capital Income Builder Market Place.
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