If I had to cut through all the different financial metrics in which to measure MSR's I would look at this one closely. Nothing really beats cash on cash especially if you are skittish with regards to certain investments. If you look at the supplement posted on the website, you will notice this gem. To date they have invested 659 M and recieved cash back of 146 M. All of this in just a little over a year and lots of this number is towards the most recent period. If some one told me I could invest 659,000 (lets keep it realistic) and recieve 146,000 in just a little over a year and lots more to come, I would swallow that up in a second. A lot of this 146 M is not GAAP income but a return of capital.
Well, it is good considering they have not lowered, but increased, their Book Value of the investment. You are right, this is a real winner, especially if their expected future cash flow of $1.2 billion is correct.
$659 million initial investment in settled Excess MSR portfolio (“Settled”):
Generated $146 million of total LTD cash flows, including $35 million in 3Q (22% of investment over an average of 12 months)
Held at a current carrying value of $667 million
Expect potential future lifetime cash flows of $1.2 billion – implies multiple of 2.0x(1)
This isn't a return of capital, it is a diminishing investment. MSR's only last as long as the mortgage is active. The average mortgage is active for about 5 years. People sell their homes or refinance at that rate. A better way to look at it is a lease on a money making operation. The yield is great. It never ceases to amaze me that everything NRZ is buying is expected to yield at least 14%. Out of that they pay dividends. There is very little overhead and the cost of capital is very low. They have even started to borrow... at 3.5 percent I expect... and are investing that as well. What a business!
This drop is not supported by fundamentals. If management was better at communicating with investors, the stock would double in a few months. It will go much higher... soon. It needs to get to the dividend declaration. I think it will be higher than expected... at least 17.5 cents, the current yield. There is no way that the stock will yield more than 10% for any length of time.
It is very, very good. Its not income soley because GAAP measurements are conservative. In other words, GAAP will not allow the recognition of income until it is more certain. The income is earned on loans that are subject to prepayment, default, etc. Therefore, the first cash to come in will most likely go to a return on capital with cash coming in later to income. These MSR's were purchased at big discounts and put through quite a bit of metrics as can be seen on the presentation. If you loaned money to a friend to purchase a house and the first two years of payments were booked as a return of capital yet total cash flow over the life of the loan remained the same, would that not be pretty good?
Sure the market doesn't agree. I have made alot of money because the market did not agree. But later it did! :)
Wally, I am pretty well invested, but I am sure considering investing more. Not sure what I am missing and the market is seeing (which as I stated above has happened a few times :) ). Can anyone tell me what is wrong with this stock? Instead of stating the obvious.