Newcastle Investment Corp. (NYSE: NCT) is one of the harder to analyze mortgage-backed securities REITs that pays investors a high dividend yield. It is confusing because Newcastle manages senior housing properties but also derives much income from investing in mortgage securities. Its stock had rallied, but in less than a month we have seen shares peak around $6.00 and then fall to $5.18. If you just annualize the dividend it come to a 13.2% yield on the surface (see below), and now the REIT has said that it is raising new capital in a secondary offering.

The REIT is planning a public offering of 30,000,000 shares of common stock. BofA/Merrill Lynch, Credit Suisse, and UBS are listed as the joint book-running managers for the offering. The underwriting group will have an option to purchase up to an additional 4,500,000 shares of common stock for 30 days after the secondary offering.

We would note that this appears to be an artificially high dividend compared to the past. It said at the time of the most recent dividend declaration, “The second quarter dividend includes forty-five days of earnings generated by assets that were subsequently spun-off to form New Residential Investment Corp. on May 15, 2013.”

Newcastle had a market cap of about $1.3 billion before the news hit, so this $150 million or so is enough that it will be noticed by shareholders. The REIT said that it intends to use the net proceeds from this secondary offering for general corporate purposes. This is said to be to make investments, primarily in senior housing properties, but Newcastle also said that the acquisitions could also include acquisitions of CDO debt, other real estate securities and loans, operating businesses or other assets.

What the firm did not specify is that this gives the REIT capital to still pay a high dividend. This would fall under the “general corporate purposes” point but it was not specified. We have long considered that REITs issuing lots of stock do so to protect that dividend. In some cases it is to give the company artificial cushions to keep paying out dividends because even REITs hate to cut their dividends. We will leave it up to you to decide whether that is the case here for Newcastle.

Earlier in June Newcastle said that it had sold $153 million face amount of collateral for $145 million. The sale was said to result in $77 million of third-party debt being paid off using its ownership interest.

The stock closed down 1.5% at $5.15 in under-normal trading volume against a 52-week trading range of $2.88 to $6.00. Shares were seen trading down almost 3% at $5.00 in the after-hours reaction to this dilution.

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