Newcastle Investment: Spin-Off Machine Providing A Triple Threat

| About: New Residential (NRZ)

In May 2013 Newcastle Investment (NCT) spun off its residential mortgage wing into New Residential (NYSE:NRZ). In Q1 2014 NCT expects to spin off its media assets into a new company, New Media, 1 share for 1 share owned of NCT, the same as was done with NRZ. I am bullish on all three companies and will provide my reasons why I think value and dividend growth investors should consider all three.

NCT's focus now is senior living properties. The recent deal with Holiday Retirement adds 52 properties to NCT's portfolio that are 100% private-pay independent living properties totaling 5,885 beds. The occupancy rate as of last quarter was just over 90% for those properties. The total senior living properties in NCT's portfolio after the deal will be 84. The demographics of the US make me extremely bullish on senior living REITs. Consider the following: the median age of a US citizen is roughly 37 which is actually an old median age for a nation and that 10,000 plus baby boomers will turn 65 every day for the next couple of decades, a population fact that began on January 1, 2011.

The conclusion here is that this industry should likewise see extraordinary revenue and earnings growth over the same time period and in turn make the properties themselves more valuable and the dividend grow. NCT stock is also currently cheap trading at a trailing P/E of 7.81, while yielding 7.3%. Note that other senior living REITs typically yield between 4.5% - 6%. Price appreciation would need to occur for NCT's yield to be in line with the industry. Tangible book value is $2.39 making the P/B 2.29. Funds from operations came in at $0.09 a share last quarter. NCT declared a .10 quarterly dividend, but the dividend is expected to be maintained at .10 with FFO improving now that NRZ is separated from NCT, New Media about to be spun off from NCT, and NCT puts its cash to work buying more senior living facilities and opportunistically collapsing their CDOs.

NRZ holds the agency and non-agency RMBS and mainly mortgage servicing rights (MSR). NRZ has been unjustifiably punished in my opinion due to the taper tantrum talk of the Fed scaling back QE3 bond purchases (or QE forever that some pundits have dubbed it). What is being lost in the selling reaction to taper talk is that MSR value and cash flow improve when interest rates rise. That is so because when interest rates rise people are less likely to provide extra mortgage payments for principal curtailments. If the principal of mortgages is not being paid off more quickly then the cash flow from the MSR is larger and more stable. The higher the principal balance the more interest collected and the lower the principal balance the less interest collected. And if the cash flow from the MSR is higher and more stable then the value of the MSR increases.

Now would be a good time to buy NRZ and hold it until the yield curve inverts at some point in the future, which I believe is a long way off since the Fed has not even begun to taper QE let alone raise interest rates. But the one certainty is that interest rates cannot get lower so downside risk is minimal at these levels. NRZ stock is also cheap trading at a trailing P/E of 7.43 while yielding 11.6%. Other mREITs yield in the 6.5 - 8% range, thus once again, price appreciation would need to occur for NRZ's yield to be in line with the industry. Tangible book value is $4.92 making the P/B 1.23. Funds from operations came in at $0.25 last quarter and NRZ declared a .175 quarterly dividend.

Finally New Media, the upcoming media spinoff, I feel has potential even though it is not the sexy new tech media that everyone seems to want to own nowadays. According to the presentation, which can be viewed here on NCT's website, the new company will have 433 newspapers and 350 websites. These will be local papers that have stabilized cash flow with digital services that appear to be offsetting any decrease in the traditional ad and print revenue as 35% of total revenue now comes from non-advertising. The company also expects to yield 20% to shareholders.

Also in the presentation, citing a 2012 community newspaper readership study from the National Newspaper Association, over 80% of readers rely on local papers. Why is this so? I thought long and hard about this and realized that the small town gazette is really the only place a citizen of a small town can read about very specific local news, happenings, and events in small town, whereas the bigger regional, big city, and national papers compete with each other and the internet overlapping major stories. As a shareholder of NCT I plan to receive the New Media spinoff and give it a chance to perform as a 20% yield with stabilized cash flow appeals to me.

Disclosure: I am long NCT, NRZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I will also be long the New Media spin-off when it occurs.

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