Project Description

New Residential Spin-off (Mortgage Originator) Notes

December 3, 2020 – Update

  • Here’s a great article on New Residential on Motley Fool.
    • New Residential is primary a mortgage REIT or mREIT.
    • I don’t know much about mortgage REIT’s but here’s a good primer.
    • Thesis of article is that the market is valuing New Residencial like a typical mortgage REIT on a price to book value multiple. New Residential currently trades at 0.88x book value.
    • But it also has a mortgage originator. The market values mortgage originators at a multiple of earnings.
    • Public mortgage originators include:
      • Rocket Companies (RKT): Trades at 5.3x 2020 earnings)
      • Pennymac Financial Services (PFSI): Trades at 2.9x 2020 earnings.
      • Mr. Cooper (COOP): 3.0x.
    • They trade at such depressed multiples because earnings are at a cyclical high due to the boom in new mortgage originations.
    • It decided to IPO its mortgage originator.
    • Assuming the origination business trades at 3.0x 2020 net earnings of $667MM, it would be worth $1,969.5MM or 415MM ($4.75 per share).
    • The origination business has a book value of $900MM or $2.17 per share. And NRZ is only getting valued at 0.88x of that $2.17 which works out to $1.90.
    • So theoretically, NRZ could add $2.85 in value to the stock by IPO’ing the business.
    • NRZ currently trades at $9.63. So this represents 30% upside. Plus NRZ pays a 6% dividend yield.
    • Great WSJ article on non bank mortgage originators.

November 26, 2020 – Update

  • New Residential (NRZ) recently submitted a draft registration with the SEC for an IPO of its mortgage lending and servicing arm New Rez LLC. New Residential is a mortgage REIT company based in NY that also runs a operating business (New Rez LLC).
  • mREITโ€™s have been struggling as an asset class, but the unique operating business run by NRZ is something which NRZ management believes is not being valued by the market fairly.
  • Thus, this IPO is valuable to shareholders if management values their New Rez LLC business correctly. The transaction is not actually a spin-off, but a pure IPO which raises capital for the company.
  • Thus, shareholders of NRZ will not receive shares of the new company. I am not exactly sure what the company will do with the capital raised through the IPO, but NRZ just received authorization to repurchase $100mm of shares, so that could the target of the funds. The company could also be making additional investments or increase its dividend.ย