Summary

• NCT expects to recover $350,000,000 to $400,000,000 in principal from its CDOs over the next one to two years.
• This recovered cash, along with current cash and its golf portfolio, gives NCT a future book value of $7.38 to $8.13 per share within two years.
• Management recently stated it believes the post-spin value of NCT is around $7 right now. With NCT currently trading at $4.50 per share, that’s a 60% upside potential.
• If NCT trades at a premium to book value, future upside is well north of 100% over the next one to two years.

Past History

A decade ago, Newcastle Investment Corporation (NYSE:NCT ) was a high flying REIT investing in real estate primarily by means of Collateralized Debt Obligations (CDOs). During the Great Recession, NCT almost went bust. Since then, Fortress Investment Group (NYSE:FIG ), has reinvented the company as an incubator of new investing ideas.

Over the past two years, Newcastle Investment Corporation has been a spin-off machine. First with New Residential (NYSE:NRZ ), then New Media Investment Group (NYSE:NEWM ) and most recently with New Senior Living (NYSE:SNR ). For those fortunate enough to have bought in about two years ago, there has been a 200%+ return when you add up the total value of the spin-offs and dividends from then until now.

If you did not have this knowledge of the stock and were just to look at its stock price and dividend history, you would think it was one of the worst performing stocks for the past few years, as its stock price and paid dividends have both gone down steadily since the spin-offs began in May of 2013. That is because of all of the spin-offs though, and not the poor performance of NCT.

A Bright Future

So what lies in store for Newcastle now? Fortunately, management has given us a sneak preview in their quarterly presentations and conference calls. Newcastle Investment Corp now consists of a legacy real estate debt portfolio that is generating a stable 15% yield and a golf portfolio with a targeted yield of 20%. They have $58 million of cash to invest, along with $82 million worth of equity invested in the golf portfolio.

The legacy real estate debt consists mainly of CMBS, commercial loans, and bank loans. Total managed assets are $750,000,000 and are financed with debt. Management has stated that they expect to recover about $350,000,000 to $400,000,000 over the next one to two years from their legacy real estate debt portfolio because they took advantage of buying up some of these loans when prices where down a few years ago. There shouldn’t be much of a problem recovering this money either, since they started 2014 with over $650,000,000 worth of recoverable principal and have already recovered over $300,000,000 in 2014 (most of the already recovered principal was put into the senior housing business that was recently spun off). The future recovery of principal will add a lot of value to future book value. Needless to say, NCT is currently trading significantly below it’s future book value.

While they have not come out and directly said what they plan to do with the recovered money, more than likely they will invest it in their golf portfolio, or the next best potential money maker that they see out there. Since on all of their investments and spin-offs in the past they have been able to generate a 15% to 20+% ROE, I trust that this time will be no different. In fact, they have already stated they expect to generate anywhere from 15% to 20%+ for the golf portfolio.

So, for the patient long-term investor who is willing to make an investment for the next few years, it looks like NCT will again be a home run if management is able to execute on its plans. The road will be a little bumpy on quarterly earnings though, since they will need to invest the money that they recover. Assuming this takes a few months each time, quarterly earnings will be up and down depending on how much investable cash is left on the table each quarter. (NOTE: I don’t recommend putting a stop limit on the stock to sell it, as the price fluctuates month to month anywhere from 10%-15%.)

A Look At Future Financials

Here is what I believe the future NCT will look like in terms of ROE and book value if they are able to recover the expected amount and invest it as similar rates of return to what they have done in the past. Scenario A is the more conservative estimate and scenario B is more of the best case scenario: