Newcastle Investment Corp. (NCT), New Residential Investment Corp (NRZ): There Is Upside in Store for These REITs

Newcastle Investment Corp. (NYSE:NCT) operates as a mortgage REIT with investments mostly in real estate securities, excess mortgage servicing rights, and other residential loans. However, a few days back, it split itself into two after a spin-off of New Residential Investment Corp (NYSE:NRZ). I am bullish on Newcastle Investment Corp. (NYSE:NCT) because I believe that the migration of the company’s portfolio towards a senior living property focus, away from the commercial real estate debt, will create upside.

The spin-off

Newcastle Investment Corp. (NYSE:NCT) has completed its spin-off of New Residential Investment Corp (NYSE:NRZ). Each investor who held one share of Newcastle Investment Corp. (NYSE:NCT) was allotted one share of New Residential Investment Corp (NYSE:NRZ). New Residential, as the name suggests, will focus on the residential financing sector, and I believe that this focused approach will allow the company to fly high as the U.S. housing markets continue their recovery.

The company has assumed a portfolio of excess mortgage servicing rights (MSRs), non-Agency MBS, and consumer loans, which should allow it to generate a steady ROE of 13%. Better credit on consumer portfolio and lower prepayments on the excess MSRs can increase this return further.

One of the key drivers for New Residential Investment Corp (NYSE:NRZ) are the additional sources of excess MSR transactions, which can drive sustainable returns and create room for growth.

Old is gold

Newcastle Investment Corp. (NYSE:NCT) presents some promising returns as well. Among other recent moves made by Newcastle is a shift towards senior housing and away from the commercial real estate debt. The company has invested around $80 million in senior housing, while it will close on $200-$300 million of senior living properties in the beginning of the third quarter.

Further, active discussions are underway for the acquisition of $800-$1,200 million worth of senior housing. I anticipate the acquisitions will be financed by 60% debt and 40% equity, while additional acquisitions will be funded by the collapse of the CDOs or additional capital raises.

I rate this move as an intelligent one, particularly considering the U.S. population is aging. Besides, the move will allow Newcastle some diversity and leave the company less sensitive to the changes in interest rates.

Competition

Both Newcastle Investment Corp. (NYSE:NCT) and New Residential Investment Corp (NYSE:NRZ) compete with Nationstar Mortgage Holdings Inc (NYSE:NSM). The company is a leading mortgage servicer with a servicing portfolio of around $312 billion.