NCT - Newcastle Investment (spinoff)

[Olmsted]

This one has been a minor disappointment since the actual spinoff.

 

Anyway, Wes Edens hosted a call to clarify dividend policy and some guidance for the two halves.  Some highlights: NCT is starting out with a $.17 dividend and NRZ $.07.  But basically half of NRZ's quarter (prior to the split) is included in NCT's dividend, so it really comes out to be a $.10/qtr for NCT and $.14/qtr for NRZ.  Management is still targeting $.28/qtr between the two and expect it to come out to .12-.13 for NCT and .14-.15 for NRZ.

 

I liked what I heard about senior housing.  Edens said that $100m was close to being committed to senior housing investments, with a "very robust pipeline on top of that."  On the low end, they are looking at $200m more in that pipeline.  A high end estimate could be multiples of that.  Much of the money to invest in that pipeline is, and will come, from CDO collapses.  For example, they just collapsed CDO IV and realized $68m in proceeds ($8m paid to their sub notes, and $60m in senior notes they had bought at a discount that paid out at par).  Edens said that the transition to senior housing and some other special situations (which he did not go into) was a chance to improve earnings quality. (I agree - moving from assets that command a ~10% dividend yield to assets that command a ~5% dividend yield.  It is kind of a similar arb that GPT is performing with its business plan.)

 

NRZ has a pipeline of MSR deals in place that will use up its $60m in excess cash, and more.  Using up that $60m cash will get its earnings power to where it can support that $.14-$.15 dividend.  There was a good question about options to finance future MSR deals.  Edens said that, to an extent, their balance sheet is under-levered, and that they may look to lever up their agency portfolio.  But in general, he prefers financing MSRs with equity capital and likes the balance sheet to be "clean."  If they needed capital quickly to get a deal done, they would consider short-term leverage.

 

Speaking of MSR deals, Edens still sees a robust pipeline, but it will be made up of more, smaller deals in contrast to the blockbuster deals of the past couple years. 

 

Edens observed that the NRZ assets do well in a rising-rate environment, and because of this last month's action in the mortgage REIT market unduly hurt NRZ's share price.

 

The balance of questions on the call indicated more general interest in NRZ.  I'm still positive on both halves, but prefer 'old' NCT longer-term.

[Olmsted]

Wes Edens hosted a call to clarify dividend policy and some guidance for the two halves. 

 

Transcript out:

 

http://seekingalpha.com/article/1480571-newcastle-investment-s-ceo-hosts-dividend-policy-update-following-the-spin-off-of-new-residential-conference-transcript?part=single

[Olmsted]

I liked what I heard about senior housing.  Edens said that $100m was close to being committed to senior housing investments, with a "very robust pipeline on top of that."  On the low end, they are looking at $200m more in that pipeline.  A high end estimate could be multiples of that.  Much of the money to invest in that pipeline is, and will come, from CDO collapses.  For example, they just collapsed CDO IV and realized $68m in proceeds ($8m paid to their sub notes, and $60m in senior notes they had bought at a discount that paid out at par).  Edens said that the transition to senior housing and some other special situations (which he did not go into) was a chance to improve earnings quality. (I agree - moving from assets that command a ~10% dividend yield to assets that command a ~5% dividend yield.  It is kind of a similar arb that GPT is performing with its business plan.)

 

I was thinking about Wes Edens' comments on improving earnings quality by shifting more assets into senior housing.  I thought it would be useful to understand the magnitude of that impact.  So just some back-of-the-envelope numbers, if NCT executes on the senior housing opportunities it is close to closing ($100m), and the low end of Wes Edens' pipeline estimate ($200m), it will have $376m in senior housing equity.  If half of the cash for the senior housing comes from CDO collapses/runoff and the other half comes from equity raises, we are looking at a company that will be about 35% senior housing and 65% legacy assets (I'm ignoring the consumer loan stuff for now).  If we assume no improvement in IRR, we would still be looking at a $.50 dividend.  But now the weighted average yield target would have shifted down to 7%-8% as a result of the higher weighting in senior housing.  That reweighting alone would result in a price target of about $6.10-$7.20 based on comparables.  So not a huge impact, but not bad either.  And of course, there would be more upside as the entire legacy portfolio is run off an recycled into new investments.

[Olmsted]

Like clockwork, Edens and Nardone buy a pile in the latest NCT secondary:

 

http://www.minyanville.com/trading-and-investing/stocks/articles/Insiders-at-Kinder-Morgan-Inc-and/6/25/2013/id/50518?camp=syndication&medium=portals&from=yahoo

[Olmsted]

Finally closed the spinoff trade by selling the NCT + NRZ calls today.  Combined price of the underlying was 12.61 when I sold, short of the 13.25 low end of the range I had hoped they would trade at.  So a minor disappointment. 

 

The underlying companies are still attractive.  NCT should trade higher over time as it collapses CDOs and reinvests the proceeds into new investments.  The economics of NRZ's mortgage servicing rights continue to come in better than management had modeled, and there is an attractive interest rate hedge embedded in those MSRs.  The consumer loan portfolio numbers are also coming in very well - management modeled these with a higher default rate than was probably anticipated.  Fortress is very adept at very quickly entering opportunistic, 'forced sale' type situations like the HSBC portfolio.  So while I do not anticipate rapid price appreciation from here, it seems you could do worse than anchor an income-oriented part of a portfolio with either of these.

[BargainValueHunter]

http://www.fool.com/investing/general/2013/09/13/a-reit-thats-buyingnewspapers.aspx

 

Newcastle is managed by a third party, Fortress Investment Group (NYSE: FIG  ) , which happened to own nearly 40% of the equity in GateHouse Media, a newspaper firm that's going bankrupt.

 

Over the last few months, Newcastle Investment Corp. quietly acquired the majority of GateHouse's distressed debt, which gives it a very strong position to control the bankruptcy process.

 

Here's the plan:

 

    Send GateHouse into restructuring and offer debt holders $0.40 on the dollar in equity or cash.

   

    Combine GateHouse assets with 33 newspapers acquired from News Corp.

   

    Leverage the combined entity, with projections of 20% returns on equity.

   

    Spin off the assets as Newcastle Media Corp., a pure-play on newspapers that will pay out virtually all free cash flow as a dividend.

[CorpRaider]

Old folks homes and local newspapers?  Probably about a thousand jokes there, but I'll just say... interesting combination.

[merkhet]

http://www.telegram.com/article/20131106/NEWS/311069671/1237?app=noRedirect

 

 

"Holders of GateHouse's existing equity interests will get warrants for 5 percent of New Media's stock."

 

 

This could be interesting...

[rayfinkle]

NRZ has had an interesting few months--stock dove well below spin price (at times below $6) and has since rebounded on news of an acquisition. I've been researching companies w/ MSR exposure and am thinking of starting a thread for NRZ / CHMI. Anyone have interest?

[rohitc99]

NRZ has had an interesting few months--stock dove well below spin price (at times below $6) and has since rebounded on news of an acquisition. I've been researching companies w/ MSR exposure and am thinking of starting a thread for NRZ / CHMI. Anyone have interest?

 

you should look at this blog (not mine) - http://reminiscencesofastockblogger.com/

 

very good write ups on both - NRZ and CHMI. with low short term rates and improving housing, these could do well due to lower prepayment and defaults

[rayfinkle]

thanks rohit...good blog indeed. Going back a few months he's got a great primer on the MSR space in general.

[CorpRaider]

Spin completed.  Aonyone long?