To say that Newcastle Investment Corp. (NYSE:NCT) is complex would be the understatement of the year. The REIT owns a hodge-podge of financial assets ranging from senior housing to debt investments and newspapers.
Yes, newspapers! This isn't your average REIT.
The company's third-quarter earnings report was relatively benign, but three things stuck out to me:
1. It's actually becoming a senior housing REIT... maybe
I've been critical of Newcastle Investment Corp in earlier articles, particularly one about its new newspaper investments it now calls New Media. At the time -- and even now -- newspapers seem like one giant distraction on the company's quest to become a senior housing-focused REIT.
However, the company made some progress on the senior housing front. It acquired $301 million of new assets, using $200 million of debt and $101 of cash equity. In all, Newcastle has 19 new communities under its growing umbrella.
The majority of the new acquisitions (15) were in Florida, an obvious market for a senior housing investor. The Florida purchase is particularly notable because of its size, but also because of the potential for operating improvements. Newcastle's latest quarterly filing shows an average occupancy rate of 80.1% for its recent acquisition. Rival Health Care REIT (NYSE:WELL) has an average occupancy rate of 90.1% in its senior housing portfolio, according to the company's last quarterly supplement. Newcastle Investment Corp. investors should use Health Care REIT's portfolio as an example for the potential profits in senior housing.
All in all, Newcastle reports levered yields from its new investments at 12%. Modest rental increases and vacancy rate improvements could send that quickly up to its target of 20% per year on its equity investment. Management noted that it had big senior housing deals in the pipeline, one of which includes a potential equity investment of $152 million to 200 million.
2. Newspaper spinoff to make headlines in January
Newcastle now expects to take control of newspaper company GateHouse Media, form New Media, and spin off New Media in a stock dividend perhaps as early as January 2014. New Media is without a doubt the biggest question mark for Newcastle shareholders.
Newcastle will own roughly 59% of New Media, according to the September presentation. Using its expected funds from operations of $74 million for 2014, New Media should deliver $43.66 million in earnings power to current Newcastle shareholders.
How the company prices at its initial public offering is the most important part of the puzzle. If priced at a 10% yield, current Newcastle shareholders would see their ownership worth $436.6 million, or roughly one-fourth of Newcastle Investment's current market value.
We'll know more about the company when Newcastle can file a full S-1 for a spinoff with the SEC. The company still has to form New Media and leverage it with debt under the new subsidiary before taking it public as a stand-alone company.
3. More CDO realizations
Newcastle's collateralized debt obligations play an important role in its move to become a senior housing REIT. This quarter, it restructured one collateralized debt obligation, selling a senior tranche for $88 million in cash while holding onto a $12 million position.
The CDOs and debt investments are Newcastle's piggy bank as it makes its transformation. When asked on the conference call if Newcastle would continue to liquidate its other CDOs, CEO Kenneth Riis said, "They are generating still good returns and good cash flows for us. I think as assets payoff and deleverage the transactions then we will look to potentially harvest the capital out of those."
He later added that "[e]ven if it's a slightly lower return initially, it's a positive thing for us, because that capital will be traded at a higher returns than our CDO assets would," referencing that he's willing to cash in on the CDOs to invest in real estate. He's right: Wall Street will likely value the cash flows from senior housing much higher than money from alphabet-soup CDOs.
Slow and steady improvements all around
Newcastle Investment shareholders should be happy with the company's transition to a senior housing REIT. Though the newspaper business has served as a distraction, the IPO would set Newcastle up to become a high-yield senior housing asset with dividends that are well above other senior housing companies like Health Care REIT. Newcastle Investment's immediate 12% levered yields on new acquisitions are proof that there is plenty of money to be made as an equity REIT. Now it just needs to execute.