The Basics of Newcastle Investment

A basic primer on regional Newcastle Investment, just in time for Worldwide Invest Better Day.

Amanda Alix
Amanda Alix
Sep 19, 2012 at 12:00AM


For well-nigh 20 years now, The Motley Fool has been here to help you invest better and smarter, using spot-on analysis and a razor-sharp wit. To celebrate Worldwide Invest Better Day on Sept. 25, we're taking some time to get back to the basics -- of investing, that is. In that spirit, I've rounded up some sweet financial-sector stocks that have been showing some real sparkle and promise lately.

Without further ado, let me introduce you to the focus of this article: Diversified mortgage REIT Newcastle Investment (NYSE: NCT).

Not your typical mREIT
Many mortgage real estate investment trusts, such as well-known Annaly Capital (NYSE: NLY), invest in Fannie Mae and Freddie Mac-backed mortgage securities, while others, such as Two Harbors Investment (NYSE: TWO), indulge in both agency and non-agency MBS products. New York-based Newcastle, however, focuses primarily on commercial real estate debt and mortgage servicing rights. The latter, a separate category from the actual mortgage, involves the right to handle payments and other services associated with the loan -- and is a very lucrative business.

This past June, Newcastle sealed a deal to pick up some of those profitable MSRs from Bank of America (NYSE: BAC) with partner Nationstar Mortgage (NYSE: NSM). Nationstar services the loans, but Newcastle invested $44 million to receive 65% of the monthly income from approximately $10 billion in loan balances. Banks such as B of A are unloading these rights in response to additional capital requirements, a lucky situation for companies such as Newcastle, which don't face the same regulatory scrutiny as the banks do.

Newcastle announced another juicy tidbit recently as well. The company just sold its second collateralized debt obligation in as many years, and the terms were just stellar: For approximately $90 million face value of subordinated notes in CDO X, the company received $130 million. After buying collateral held by the CDO for half of its face value, the deal brought Newcastle around $80 million in proceeds.

Not only does this give Newcastle some extra spending money, but it also provides a $200 million gain for Q3. The company manages another five CDOs, each of which it will doubtless bring tidy profits as well, sometime in the future.

An ambitious, well-managed REIT
Newcastle seems to have a savvy management team and is perfectly positioned to scoop up more MSRs, which banks are expected to shed in response to new Basel III requirements. Although the company hasn't been able to dispense dividends as generously as it did pre-2008, payouts have been inching upward over the past year. If you're interested in this particular sector, Newcastle Investments is definitely worth a look.

I'll be covering other great stocks over the next few weeks, as will my fellow Fools. Check out our special website set up especially for this investing extravaganza at There will be lots of great articles posted there through Sept. 25, all with a particularly informative take on various facets of investing. We'd love to have you on board, too -- so click through to the site and prepare to be informed and amused by the never-dull world of investing!