Newcastle Investment Corp., (NCT) a Mortgage REIT managed by Fortress Investment Group, will continue to contribute management fees to FIG’s income statement for at least another year. But whether NCT makes it out of 2010 is an another question. Newcastle is suffering from a host of balance sheet issues, including a portfolio full of CDOs that are struggling to meet their O/C tests and an inability to raise fresh capital.

Newcastle is externally managed by Fortress, and Fortress owns 2.3% of the Newcastle common, so it’s no surprise that one of the first moves Fortress made was to threaten the preferred holders with de-listing unless they agreed to convert into common at about $0.20 on the dollar (cheers: Richard52). However, it turned out that the preferred holders, who were primarily retail investors with limited ability to organize, ultimately prevailed. Their ace in the hole was the right to appoint two members to NCT’s Fortress-sponsored board if NCT failed to pay their dividends for six consecutive quarters. Last week, after two previous attempts to strong-arm the preferred holders and about one month before six consecutive quarters would have elapsed, Fortress and NCT both blinked.

However, with those pesky preferred shareholders now finally out of the way, NCT still faces an incredibly difficult task. After the preferred redemption, which will cost Newcastle $27 million in cash (in addition to the issuance of 9.1 million in new common shares), Newcastle will be left with about $31.5 million in unrestricted cash. (As February 17th, Newcastle had $58.8 million of unrestricted cash available, down from $68.3 million at year end.) This is not a healthy cash cushion for a highly leveraged company that’s in the business of manufacturing net interest income, even if most of that leverage is now non-recourse.

The reason is that in 2010 Newcastle, like Northstar, is going to have an increasingly difficult time managing its CDO overcollateralization tests (see “CDOs Explained“) . However, because its ability to manage the tests is even more limited, Newcastle appears to be at even greater risk than Northstar. NCT’s CDO re-investment periods are not only coming to an end, eliminating Newcastle’s ability to rebalance the CDO asset cushions, but NCT’s CDO trustee also recently notified NCT that it can no longer repurchase individual CDO notes without the approval of senior noteholders (see “CDO Buybacks Explained, Step By Step“).

With at least $1.1 billion of CDO assets under negative watch for possible downgrade by at least one of the rating agencies as of January 31st, and with CDOs IV, V, VI and VII already out of in compliance with their applicable over collateralization tests as of February 17, 2010, NCT’s margin for error is slight. To the extent Newcastle fails to meet its O/C tests on any of the remaining $1.1 billion in CDOs under watch, interest income on those CDOs would be diverted away from the junior noteholders (NCT is a junior noteholder) to the senior noteholders, and NCT’s precariously low cash position would quickly become even more precarious. In certain cases, NCT could also be replaced as Collateral Manager, which would further jeopardize its cash flow.

Certainly, retiring the preferred shares (and paying off the accrued dividend liability) is the first step in recapitalizing the company, but it’s not the last. Newcastle still needs to raise additional capital to eliminate its remaining non-recourse debt, to defuse its ticking CDO time bombs, and to re-invest in new debt instruments that are accretive. The latter third of this proposition is the life blood of a company like Newcastle, and without that NCT’s prospects remain exceptionally unexciting.

Lhis is the most complete, up-to-date Mortgage REIT list on the web; prices and yields update daily at the close. It includes links to the latest news and the home page of all REIT stocks on the list but one (Webster Preferred). The list is organized alphabetically and categorized by investment strategy.

Given all that has happened to Mortgage REITs, I included the good, the bad and the ugly; If it still trades, even fitfully, it’s listed. The list is updated carefully however, and it does include all REITs that managed to go public in Q2 and Q3 of 2009. Links to additional REIT lists by property type can be found below the table. Sadly, investing in some Mortgage REITs has become an exercise in buying penny stocks.

See also the REIT Definition post, which provides more information on REIT Wrecks’s raison d’etre. That definition helps explain why there may be some interesting dividend plays in the REIT universe. However, especially with Mortgage REITs, investors need to scrutinize REIT dividends very very carefully.

Click here for a list of Apartment REITs
Click here for a list of Healthcare REITs
Click here for a list of Hotel REITs
Click here for a list of Industrial REITs
Click here for a list of Non-Traded REITs
Click here for a list of Office REITs
Click here for a list of Retail REITs
Click here for a list of Storage REITs
Click here for a REIT ETF List
Click here for a list of all REITs
Click here for a list of REITs paying dividends in stock

Click here for a list of Non-Traded REITs
Click here for a list of REIT Funds

Information on how REITs work can be found in the post REIT Definition.

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