Newcastle Investment Corp. (NYSE:NCT) operates as a mortgage REIT with investments mostly in real estate securities, excess mortgage servicing rights, and other residential loans. However, a few days back, it split itself into two after a spin-off of New Residential Investment Corp (NYSE:NRZ). I am bullish on Newcastle Investment Corp. (NYSE:NCT) because I believe that the migration of the company’s portfolio towards a senior living property focus, away from the commercial real estate debt, will create upside.
Newcastle Investment Corp. (NYSE:NCT) has completed its spin-off of New Residential Investment Corp (NYSE:NRZ). Each investor who held one share of Newcastle Investment Corp. (NYSE:NCT) was allotted one share of New Residential Investment Corp (NYSE:NRZ). New Residential, as the name suggests, will focus on the residential financing sector, and I believe that this focused approach will allow the company to fly high as the U.S. housing markets continue their recovery.
The company has assumed a portfolio of excess mortgage servicing rights (MSRs), non-Agency MBS, and consumer loans, which should allow it to generate a steady ROE of 13%. Better credit on consumer portfolio and lower prepayments on the excess MSRs can increase this return further.
One of the key drivers for New Residential Investment Corp (NYSE:NRZ) are the additional sources of excess MSR transactions, which can drive sustainable returns and create room for growth.
Old is gold
Newcastle Investment Corp. (NYSE:NCT) presents some promising returns as well. Among other recent moves made by Newcastle is a shift towards senior housing and away from the commercial real estate debt. The company has invested around $80 million in senior housing, while it will close on $200-$300 million of senior living properties in the beginning of the third quarter.
Further, active discussions are underway for the acquisition of $800-$1,200 million worth of senior housing. I anticipate the acquisitions will be financed by 60% debt and 40% equity, while additional acquisitions will be funded by the collapse of the CDOs or additional capital raises.
I rate this move as an intelligent one, particularly considering the U.S. population is aging. Besides, the move will allow Newcastle some diversity and leave the company less sensitive to the changes in interest rates.
Both Newcastle Investment Corp. (NYSE:NCT) and New Residential Investment Corp (NYSE:NRZ) compete with Nationstar Mortgage Holdings Inc (NYSE:NSM). The company is a leading mortgage servicer with a servicing portfolio of around $312 billion.
Nationstar Mortgage Holdings Inc (NYSE:NSM) increased its guidance for the second quarter of the current year. It expects origination volumes of $23 billion, up $7 billion from the prior guidance given in March. Much of the increase in the guidance could be attributed to the acquisition of Greenlight Financial. The latest acquisition would close in the second quarter and would be accretive immediately.
The company continues to look to expand its servicing and subservicing portfolio through acquisitions as large banks get rid of their MSRs. This will further drive growth for Nationstar Mortgage Holdings Inc (NYSE:NSM).
Newcastle Investment Corp. (NYSE:NCT)’s spin-off of New Residential Investment Corp (NYSE:NRZ) has created another opportunity for investors looking to expand their regular income. Additional sources of excess MSR transaction are a key driver for New Residential, while the shift away from commercial real estate towards senior living will create an upside for Newcastle. Therefore, I am bullish on both companies.
The article There Is Upside in Store for These REITs originally appeared on Fool.com and is written by Adnan Khan.
Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Adnan 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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