On April 26, Newcastle Investment Corp. (NCT) finally announced the spin-off date for shares in its wholly owned subsidiary New Residential (NRZ). The distribution is expected to be made on or about May 15, 2013. Below is a helpful timeline from the presentation related to the spin-off of New Residential:
(click to enlarge)The spin-off of New Residential should allow the companies to become more focused on their core businesses. The post-spin Newcastle will become a commercial focused REIT, with its core businesses being CDOs, senior housing properties, and other real estate related debt. Meanwhile, New Residential will become a residential focused mREIT, with its core business being excess MSRs, agency and non-agency RMBS, and other residential loan assets. Both companies will retain Fortress as their external managers.
New Residential has an ample pipeline for growth, with the legacy MSR market being over $300B, with an extra $25B to $30B coming online every year. There is also a $600B is the US non-performing loan, or NPL, 'universe', with an extra $25B to $40B mid-term pipeline for NPLs. In addition, the company may potentially seek to invest in servicing advances on related debt. New Residential has a targeted return on equity of between 15% to 20%.
(click to enlarge)The post-spin Newcastle will seek to accelerate cash recovery in its legacy assets. The post-spin Newcastle also has a near-term pipeline of between $600M to $750M in senior living assets, with an investment value of $250M to $300M. The company may also engage in opportunistic investments and restructurings in its existing real estate and debt portfolio. The post-spin Newcastle has a targeted return on equity of between 15% to 20%.
The spin-off is expected to unlock value for both companies, as the more focused nature of the companies should allow for better pricing of their assets. In addition, each company will have its own separate dividend policy. The current average yield of New Residential comparable peers is 7.2% vs. Newcastle's current yield of 8.1%, while the current average yield of Newcastle's comparable commercial peers is 7.7%. The REIT sector is often priced based on yield and the separated companies' yield should move towards their peers' average yield post spin-off.
(click to enlarge)New Residential's annual dividend is anticipated to be about $0.61 per share. If New Residential were to trade at its peers' average yield of 7.2%, this would imply a share price of $8.47. Post-spin Newcastle's annual dividend is anticipated to be about $0.50 per share. If post-spin Newcastle were to trade at its peers' average yield of 8.1%, this would imply a share price of $6.17.
The separated companies' implied combine dividend may be as high as $1.11 per share. At current prices, this would make Newcastle yield about 10%. However, I suspect that both of the separated companies will move towards the average yield of their respective sector peers. The post spin-off value of the separated companies may very well be north of $14. Newcastle is currently trading for about $11 per share. This implies that the stock may have a potential 30% of upside remaining. Newcastle is a buy at current prices.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.