We're already looking at a housing boom so robust that contractors and lenders are straining to ramp up capacity to deal with a flood of business coming in — and that's not a bad problem to have, notes Todd Shaver, editor of The Bull Market Report.
New Residential Investment Corp. (NRZ), a mortgage REIT with a yield of 7.6%, remains one of our favorite stocks, especially in the middle of what looks like a prolonged housing boom.
Here are a few of the many reasons why we love this company:
- Core Earnings of $145 Million, or $0.34 per share
- First Quarter 2021 Common Stock Dividend of $0.20 per Common Share
- 1Q21 Total Shareholder Return of 15%
- Cash of $1.04 billion as of March 31, 2021
- Net Equity of $5.5 billion as of March 31, 2021
- $11.35 Book Value per share as of March 31, 2021
- Book Value up 4.4% from December 31, 2020
- Raised $520 Million in a 52 million share offering on April 19, 2021 at $10.13
And then there are the headlines. New Residential is buying Caliber Homes for $1.675 billion and expects the deal to close by 3Q21. Caliber is the fifth-largest Non-Bank Mortgage Originator by purchaser volume, with 378 Retail Locations and over 630,000 accounts.
The ace in the hole, of course, is Mortgage Servicing Rights (MSRs). New Residential controls these fees on $515 billion in Residential Real Estate and expects the portfolio to become more valuable as interest rates rise.
Caliber Homes adds $140 billion of MSRs, giving the combined company a footprint of about $650 billion in this increasingly hot space. Management has backed up what we have always known, and that is that in a higher interest rate environment, MSRs become more valuable.
We expect this stock to be $12 later this year and $14 in 2022. It is one of top picks of all the stocks we follow. (Note: Todd Shaver does have a position in the common and preferred shares of New Residential.)
Apollo Commercial Real Estate Finance (ARI), is another REIT that doesn’t invest directly in properties. Its strategy is to buy debt. As the company’s name suggests, it mostly invests in commercial mortgage loans (84% of its $6.7 billion portfolio as of 3Q20). The balance is subordinated loans.
The 70 loans are spread across different sectors, with Office (28% of loans), Hotel (24%), Residential-for-sale (16%), Urban Retail (10%), and Healthcare (6%) making up the five biggest. Loans for buildings located in New York City make up 37% of its portfolio. The U.K. follows at 18%, and the remaining 45% is spread out across the U.S.
As you’d expect, COVID-19 hurt 2020’s results but now the numbers have normalized. Earnings came in at $0.39 per share last quarter, roughly in line with year-ago levels and well above the decline many investors were expecting. Revenue is also holding up relatively well above $70 million a quarter — enough to keep the dividends flowing, which is all we really want to see.
We are upgrading our $14 target to $18 and our $10 sell price is a long way down. We're raising that now to $13. Just know that we still see a lot of upside here, and while we wait for the stock to move slowly higher, we're more than happy with this outstanding 9%+ dividend.
