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Buy This REIT Now While It's Uncool


There is still a lot to fear in the real estate market, but one potential buy is kicking off a reliable yield.


I'm of the opinion that as lousy as the housing market is right now, there will be incremental improvement in the fundamentals as the economy continues to improve.

The data is still very choppy, but that's where opportunity lies for those who want to take a position in distressed mortgages and loans. It's a hot sector for private pools of venture capital and hedge funds because distressed loans can be bought for $0.40 to $0.70 on the dollar in today's market.

One company that does business in this sector and has posted surprisingly strong fourth-quarter results is Newcastle Investment Corp. (NCT). It's a mortgage REIT by description, but it actually has a broader reach with other operations. In addition to playing the conventional spread in residential mortgages, as most agency REITs do, Newcastle also owns interests in commercial mortgage loans, manufactured housing loans, and real estate operations.

And the Newcastle story is getting some fast traction lately. The company has raised its dividend by 100% in the past year to its current $0.80 per share, which sports a 13.14% yield at its current price of $6.15.

Management's interests are fully aligned with shareholders, in that they've purchased 2.7 million shares on the open market in the past year and own roughly 3% of the outstanding shares, with institutions owning about 38%. So there's plenty of room for further accumulation.

The secret recipe for this recommendation lies in the company's recent entry into the $10 trillion mortgage servicing market, a place once dominated by the big banks before oversight and regulation from huge conflict-of-interest issues arose during the mortgage meltdown of 2007-2009. Newcastle is aggressively buying these mortgage servicing rights, making it an early entrant and adding what should be a hugely profitable division for the company.

As profits expand, so should the dividend payout. Assuming the prior momentum of 2011 carries through 2012, we could see another 50% hike in the quarterly dividend to new levels of $0.30 per share, which would imply a 20% yield. This would take Newcastle Investment Corp. up to $10 to $12, based on how much the market rewards such news.

Profit margins are running at 116%, and operating margins are humming along at 86%. Earnings are forecast to come in at $1.34 for 2012 and $1.52 for 2013, meaning the shares trade with a P/E of 4.5. This is an aggressive but compelling earnings/dividend recovery story in the making.

The stock's one-year chart shows a powerful technical upside breakout in March, reaching a new 52-week high before trading ex-dividend and putting out a secondary offering that was priced at $6.22 per share. A successful retest of the 50-day moving average at $6 occurred last week, and now Newcastle Investment Corp. should trend higher right into its next earnings and dividend announcements, which are expected in June.

In my view, this low $6 area is a very attractive entry point.

Editor's Note: This article was written by Bryan Perry of Cash Machine.

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Twitter: @TopProsTopPicks
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