Newcastle Investment Corp. (NCT), New Residential Investment Corp (NRZ): Spinoff May Hold Value for New Shareholders

Newcastle Investment Corp. (NYSE:NCT)Although it had been expected for some time, the recent announcement that New York-based REIT Newcastle Investment Corp. (NYSE:NCT) had completed its spin-off of New Residential Investment Corp (NYSE:NRZ) was greeted with enthusiasm by investors who had followed the spin-off process.

Although Newcastle Investment Corp. (NYSE:NCT)’s stock did take a significant tumble on the trading day that followed the transaction’s formal completion, this should not be taken to indicate a longer-term direction in the firm’s stock price. After all, the firm’s stock had risen by nearly 50 percent over the past four months. Meanwhile, New Residential Investment Corp (NYSE:NRZ) has traded in a relatively narrow range since the transaction. Investors who wish to profit from New Residential’s potential or take a closer look at Newcastle would do well to compare the two companies to other names in the increasingly competitive real estate investment space.

Newcastle Investment Corp. (NYSE:NCT) and New Residential Investment Corp (NYSE:NRZ) operate in an exceedingly competitive industry and face stiff challenges from some of the most formidable names in the investment world. One of the firms’ principal competitors is New York-based Annaly Capital Management, Inc. (NYSE:NLY), a large REIT that deals in mortgage-backed securities and other real estate investments.

Annaly Capital Management, Inc. (NYSE:NLY) is much larger than Newcastle Investment Corp. (NYSE:NCT) or New Residential. Its market capitalization exceeds that of Newcastle by a factor of about 10 and dwarfs that of New Residential by a factor of at least 15. Meanwhile, Annaly’s profit margin of about 80 percent is roughly in line with Newcastle’s buffer of 81 percent. In 2012, the larger firm earned nearly $1.7 billion on receipts of just over $2.1 billion. Newcastle’s earnings came to $393 million on about $487 million in revenues. However, these impressive takes were overshadowed by New Residential Investment Corp (NYSE:NRZ)’s eye-popping margin of 98 percent on earnings of $41 million and total revenues of $42 million.

Meanwhile, all three of these firms carry great deals of debt on their books. Annaly Capital Management, Inc. (NYSE:NLY)’s debt load of around $110 billion exceeds its cash hoard by a factor of 11, and Newcastle Investment Corp. (NYSE:NCT) has a debt ratio of six-to-one. For its part, New Residential Investment Corp (NYSE:NRZ) has almost no cash on its books and about $150 million in long-term obligations. However, this seemingly worrisome figure could change with time.

Similar Structures, Different Aims

Like many REITs, Newcastle Investment Corp. (NYSE:NCT) maintains a diverse portfolio of residential and commercial assets, including mortgage-backed securities and other financial products derived from physical assets. It also manages a basket of residential mortgages, commercial loans and mortgage-servicing rights. Finally, the trust’s physical assets include a significant portfolio of senior-living facilities. This lucrative group of core assets has supported Newcastle’s revenues and payouts in recent years and stands as a principal motivator for investors.

On the other hand, New Residential Investment Corp (NYSE:NRZ) does not hold many physical real estate assets. Instead, it operates a diverse basket of mortgage-backed securities, servicing rights and mortgage loans. Instead of initiating these loans on its own, New Residential usually purchases them in tranches from banks and other loan originators. It should be noted that both firms are structured as REITs for tax purposes.

Relative Strength and Industry Outlook

Although the housing market has shown tremendous signs of improvement in recent months, the recovery remains shaky and unevenly distributed. REITs that focus primarily on non-physical assets like servicing rights and mortgage-backed securities continue to struggle to gain traction.

Indeed, it is important to distinguish the now-feverish REIT conversion trend from the more complicated activities of “conventional” mortgage-focused REITs. Companies that own large tracts of physical real estate assets often create REIT spin-offs in order to reduce internal costs related to land management and site acquisitions. Such spin-offs are also nicely positioned to take advantage of appreciating land prices. Reduced tax burdens are helpful as well.

On the other hand, “pure” REITs tend to experience predictable returns in exchange for stagnant growth and stock-price performance. While New Residential’s asset portfolio appears to be stable and profitable, investors who believe that the company’s stock price will appreciate rapidly may be in for an unpleasant surprise. Individuals who buy into this firm should expect healthy distributions but little in the way of capital gains.

Invest or Stay Away?

With this in mind, investors may be right to question the investment-worthiness of New Residential or its former parent. These securities are certainly not suitable for those who have a natural aversion to yield-producing stocks.

At the same time, New Residential Investment Corp (NYSE:NRZ) is attractive relative to many other REITs in the sector. With a healthy portfolio of stable mortgage-backed securities and servicing rights, it is likely to throw off substantial amounts of cash for some time to come.

However, investors who seek a combination of yield and growth may be even more interested in Newcastle. Given the secular tailwinds that benefit the assisted-living and senior-housing sub-sectors, Newcastle appears to be in a great position relative to its peers. If it continues to add to this part of its portfolio, investors may see some tangible benefits.

Overall, this recently completed spin-off offers advantages for retirement investors, yield-seekers and growth investors alike. Those who wish to leverage the expected growth in Newcastle Investment Corp. (NYSE:NCT)’s senior-housing assets would do well to look at that name. Those who prefer stable yield without excessive risk might be interested in New Residential. Given the sheer number of REITs out there, it is always a good idea to look at similar companies before making investment decisions.

The article Spinoff May Hold Value for New Shareholders originally appeared on and is written by Mike Thiessen.

Mike Thiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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