Newcastle Investment Corp. (NYSE:NCT), a real estate investment trust managed externally by Fortress Investment Group (NYSE:FIG), made a major foray into the senior housing market with the $1 billion acquisition of a chunk of Holiday Retirement’s portfolio, and they’re gearing up for more.
The REIT previously concentrated investments in CDOs (collateralized debt obligations) along with media assets which Newcastle plans to spin off to shareholders early in 2014. With the purchase of 51 independent living communities from Holiday Retirement, which is owned by Fortress, Newcastle solidified its senior living and care sector presence and heralded a re-focusing of investment targets.
“The Holiday purchase brings NCT’s senior living holdings to about 50% of equity invested, post closing of the New Media spinoff,” says Jason Stewart, CFA, who covers Newcastle as a senior analyst with investment firm Compass Point LLC, where he is also a managing director and co-director of research.
Holiday will continue to operate the communities, which are expected to produce a stable return, he says. However, the 6.5% initial lease yield is lower than other senior living assets Newcastle has been purchasing in off-market transactions and was at a lower cap rate, too.
Newcastle plans to distribute New Media to shareholders in January, and the REIT is expected to close on another approximately $90 million of additional senior living properties early in the fourth quarter of 2014, according to Stewart.
“The primary remaining catalyst for the stock will be the unwinding of their CDO investments; there is the potential this doesn’t occur as several debt holders in the CDOs expect to receive a full payoff in the next 2-3 years,” he says. “This would complicate the story, but they are [generating] mid-teens returns on equity so it would not dilute earnings potential.”
Because of the fragmented nature of the senior housing industry, Newcastle will have “good prospects” for future growth, according to a Financials Trend article.
“As Newcastle spins-off its businesses into real-estate investments in sectors likely to see growth as well as Media, it holds great promise,” says Financials Trend. “[The] healthcare sector, unlike other sectors, will always see higher rate increase annually and Newcastle can continue to upgrade rents and prices, remaining profitable in the long run.”
Written by Alyssa Gerace