Overreaction To Prepayment Fears Creates
Buying Opportunity Ahead of Spin
Reiterate Buy Recommendation and $14 PT Ahead of Spin:
We expect the spin off of the company’s residential business to take place in the first two weeks of April. On a combined basis, NCT trades at just 5.6x our 2015 estimate of $1.90. We recommend investors purchase shares ahead of the spin.
We Still Feel Good About Servicing:
We understand the rationale behind the NCT sell off, but it has not altered our fundamental modeling forecast. The reaction in the stock has been more knee-jerk as it relates to blanket fears surrounding higher prepayments, which could negatively impact NCT’s MSR portfolio and anchor the newly spun NRZ. Our view remains that NCT’s MSR portfolio is well positioned for the prepayment landscape ahead with the potential to outperform its current mid double-digit IRRs.
No Rest For the Weary:
NCT remains one the fastest growing REITs in our coverage universe. The company recently closed a $1.6B portfolio of consumer loans and next on the docket should be additional MSR portfolios and senior living properties. Capital extraction in the form of CDO collapses should accelerate in 2013 while we expect the company to begin harvesting gains from RMBS clean up calls in 1H13.
Valuation: $14 PT (SOTP)
We estimate near-term valuations for NewCo (NRZ; New Residential) at $7 and
for OldCo (NCT; legacy operations) at $5 post spin. Our 12-mo valuations for NRZ and NCT are $8 and $6, respectively.