Is New Residential Investment a Good REIT to Own?

The stock of New Residential Investment Corp. (NRZ) has gained 38.5% over the past year as housing demand skyrocketed in the United States. Rising house prices–with home demand hitting 10-year highs–has  driven NRZ’s stock 14% higher year-to-date.

However, with declining inventory  amid the buying frenzy, which has been accelerated by  near-zero interest rates, is expected to cause a pullback in the stock in the near term. Furthermore, with the government extending a mortgage-payment  moratorium until June, and with Freddie Mac and Fannie Mae’s lowered mortgage acquisition policy, housing property loans are expected to become costlier in the coming months.

This may hamstring  NRZ’s growth over this period. Further, because as the Fed might raise rates in response to rising inflation–notwithstanding its commitment to keeping  interest rates low for the “foreseeable future”–NRZ, which as a REIT is  heavily dependent on debt for its operations, will face  higher interest expenses.

Here’s what could drive NRZ’s performance in the near term:

Federal Reserve Policy Expectations

The housing market has been soaring on the back of near-zero interest rates  for nearly a year now. However, with  Treasury bond yields hitting one-year highs earlier this month, and  market sentiment suggesting  a potential rise in interest rates, a  setback for this market may be forthcoming. While the Federal Reserve announced its plans to keep interest rates steady during its meeting yesterday, rising inflation is still a concern among investors.

Also,  a recent bank rate survey of national mortgage lenders revealed that certain institutions are gradually raising the costs of buying or refinancing a home despite the Fed’s continued $120 million per month bond purchases. Furthermore, housing markets are currently dealing with the ramifications of low inventory and unfavorable weather conditions in Southern states, which ar driving mortgage rates. As per a CNBC report that highlighted the Mortgage Banker Association’s seasonally adjusted index, total mortgage applications declined 5.1% in the second week of February as the average contract interest rate for 30-year fixed mortgages increased 20 basis points.

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Fannie and Freddie Policies

Freddie Mac and Fannie Mae have  announced their plans to limit acquisitions of single-family mortgage loans secured by second-home investment properties to 7%, owing to U.S. Treasury regulations. This policy is set to take effect from April 1.

This move is expected to drive the interest rates on government-backed mortgages significantly, making government-guaranteed investment property loans more costly. Absent  having substantial backing from two of the largest companies in the secondary mortgage markets, investors are expected to be unwilling to pour their funds in riskier mortgage-backed securities (MBS), with memories of the subprime crisis of 2008 still fresh.

High Dividend Yield

NRZ’s forward dividend yield of 7.19% is 188.9% higher than the industry average of 2.83%. Its non-GAAP forward earnings yield of 12.47% is 65.1% higher than the industry average of 7.55%.

In addition,  the company’s one-year and three-year yields on costs of 5.08% and 2.9% are significantly higher than respective industry averages.

Consensus Price Target Indicates Marginal Decline

NRZ has an average broker rating of 1.38, reflecting favorable analyst sentiment. Of 12 Wall Street analysts that rated the stock, four rated it Strong Buy and seven rated it Buy.

However, analysts expect NRZ to dip 2.1% to hit $10.84 soon.

Mixed POWR Ratings

NRZ has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

NRZ has a C grade  for Sentiment and Quality, and D for Stability. The company’s negative ROE and ROA  expected price decline, and high beta of 1.89 justify these grades.

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NRZ is ranked #25 of 30 stocks in the D-rated REITs- Mortgage industry. In addition to the grades I’ve highlighted, one  can check out additional POWR Ratings for Value, Growth, and Momentum here.

There is one stock in the REITs – Mortgage industry with an overall rating of B. Click here to view it.

Bottom Line

The  winter freeze in the crowded Southern states has halted home constructions, putting pressure on the already low inventory. This, coupled with recent restrictions placed in the secondary mortgage markets, could  lead to a pullback in NRZ’s stock. Thus, we think investors should wait before betting on NRZ.

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NRZ shares were trading at $11.01 per share on Thursday afternoon, down $0.32 (-2.82%). Year-to-date, NRZ has gained 10.76%, versus a 4.72% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don’ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More…

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