Newcastle Announces Third Quarter 2007 Results
Third Quarter Highlights
- FFO of $(39.0) million, or $(0.74) per diluted share
- FFO excluding the effect of non-recurring charges was $35.9 million, or $0.68 per diluted share
- Declared 3Q07 dividend of $0.72 per common share
- Completed $2.5 billion of non-recourse term financings
- Board of Directors approved a potential buy back of up to $100 million of common shares
NEW YORK, Nov. 7 /PRNewswire-FirstCall/ -- Newcastle Investment Corp. (NYSE: NCT) reported that for the quarter ended September 30, 2007, Funds from Operations ("FFO") was $(39.0) million, or $(0.74) per diluted share. FFO includes non-recurring charges of $74.9 million. Excluding the effect of such charges, we generated FFO of $35.9 million, or $0.68 per diluted share and a FFO return on average invested equity of 14.2%.
For the three months ended September 30, 2007, income available for common stockholders was $(39.3) million, or $(0.74) per diluted share. Excluding the effect of non-recurring charges, income available for common stockholders was $35.6 million, or $0.67 per diluted share.
Of the net charges recorded in the quarter, $67.4 million was related to a non-cash impairment on $133.5 million face amount of securities representing other than temporary impairment under U.S. GAAP. The remaining $7.5 million of other non-recurring charges related to our CBO refinancing, the replacement of the ABCP program and unrealized losses on assets financed with total return swaps. This resulted in a reduction of FFO and income available to common stockholders of $1.42 per diluted share.
Our GAAP common equity book value decreased to $12.66 per share, or $668 million at September 30, 2007. Under U.S. GAAP, we are required to mark our available for sale security investments and derivatives to fair value, but not our loan investments or liabilities. If we marked all of our assets and liabilities to fair value, our net book value per share would be $15.69.
Our portfolio is largely financed to maturity with long-term, non-recourse debt that is not callable as a result of changes in value. Accordingly, unless there is a permanent impairment in value that would result in a payment not being received on a security, changes in book value of our portfolio will not affect our recurring earnings and our ability to pay a dividend.
For the quarter ended September 30, 2007, we declared a dividend of $0.72 per common share. We also declared dividends on our 9.75% Series B, 8.05% Series C and 8.38% Series D Cumulative Redeemable Preferred Stock in the amounts of $0.609375, $0.503125 and $0.523438 per share, respectively.
For a reconciliation and discussion of GAAP income available to common stockholders to FFO and GAAP book equity to invested common equity, please refer to the tables following the presentation of GAAP results.
Selected Financial Data (Unaudited) ($ in millions, except per share data) September 30, September 30, 2007 2006 (Per (Per Diluted Diluted (Amount) Share) (Amount) Share) FFO (1) $35.9 $0.68 -- -- FFO (loss) ($39.0) ($0.74) $29.9 $0.68 Income available for common stockholders (1) $35.6 $0.67 -- -- Income (loss) available for common stockholders ($39.3) ($0.74) $29.7 $0.67 (1) In 3Q07, excludes gains, loss in extinguishment of debt, other income, gains/losses in discontinued operations and other than temporary impairment (net of incentive compensation). As of As of September 30, June 30, Balance Sheet Data: 2007 2007 Total assets $8,505 $10,024 Total liabilities 7,685 8,890 Common stockholders' equity 668 980 Preferred stock 153 153 Total equity 821 1,133
Newcastle's $8.9 billion investment portfolio consists primarily of commercial, residential and corporate debt. The following describes our investment portfolio at September 30, 2007 ($ in millions):
Face Face WA Amount $ Amount % Number Credit(1) Life Commercial Assets CMBS $2,522 28.3 % 292 BBB- 5.3 Mezzanine Loans 949 10.6 % 26 72 % 1.8 B-Notes 436 4.9 % 14 63 % 1.9 Whole Loans 129 1.4 % 5 75 % 1.5 Investment in JV (2) 39 0.4 % 106 NR 12.0 Total Commercial Assets 4,075 45.6 % 4.1 Residential Assets MH and Residential Loans 671 7.5 % 16,559 696 5.5 Subprime Securities 619 6.9 % 122 BBB 2.9 Loans Subject to Call Option 406 4.6 % NA NR 1.6 Residual and Retained Securities 151 1.7 % 8 NR 2.9 Real Estate ABS 109 1.2 % 26 BBB 5.2 Total Residential Assets 1,956 21.9 % 3.7 Corporate Assets REIT Debt 927 10.4 % 93 BBB- 5.4 Corporate Bank Loans 597 6.7 % 14 58 % 3.0 Total Corporate Assets 1,524 17.1 % 4.4 Total Core Portfolio 7,555 84.6 % Other Assets FNMA/FHLMC Securities 1,266 14.2 % 43 AAA 4.4 ICH Loans 108 1.2 % 59 NR 0.5 Total Other Assets 1,374 15.4 % 4.1 TOTAL/WA $8,929 100.0 % 4.1 (1) Credit represents weighted average rating for rated assets, LTV for non-rated commercial assets, FICO score for non-rated residential assets and implied AAA for FNMA/FHLMC securities. (2) Excludes other operating real estate of $39.1 million.
The following table compares certain supplemental data relating to our investment portfolio at September 30, 2007 versus June 30, 2007:
Total Portfolio Core Portfolio Sept. 30, June 30, Sept. 30, June 30, 2007 2007(1) 2007 2007(1) Weighted average asset yield 7.36 % 7.46 % 7.72 % 7.85 % Weighted average liability cost 5.82 % 5.96 % 5.99 % 6.13 % Weighted average net spread 1.54 % 1.50 % 1.73 % 1.72 % (1) Investment portfolio proforma for the securitization of the subprime loans held for sale that closed on July 12, 2007.
We own $4.1 billion face amount of commercial assets which includes CMBS, mezzanine loans, B-Notes and whole loans.
* During the quarter, we purchased $273.7 million, sold $55.9 million and had paydowns of $254.9 million for a net decrease of $37.1 million. * Our $2.5 billion CMBS portfolio continues to perform well as only 0.33% of the underlying loans are delinquent with average credit support of 7.8%. * Our $1.5 billion mezzanine loan, B-Note and whole loan portfolio currently has no delinquencies. * We had 16 CMBS securities or $117.0 million upgraded with one security or $16.0 million downgraded. * Credit spreads widened on average by 110 basis points on our CMBS portfolio and 105 basis points on our mezzanine loans, B-Notes and whole loan portfolio.
The following table summarizes our CMBS portfolio by vintage as of September 30, 2007 ($ in thousands):
Average Face Face Principal Vintage Rating Number Amount $ Amount % Subordination Pre-2004 BBB+ 118 $677,762 26.9 % 12.7 % 2004 BBB- 61 458,449 18.2 % 6.0 % 2005 BB+ 53 631,615 25.0 % 4.4 % 2006 BBB- 36 449,552 17.8 % 7.4 % 2007 BBB 24 304,867 12.1 % 6.8 % TOTAL BBB- 292 $2,522,245 100.0 % 7.8 %
The following table summarizes the loan-to-value ratios on our mezzanine loans, B-Notes and whole loan portfolio ($ in thousands):
Whole Mezzanine B-Note Loan Total Face amount $948,755 $436,455 $129,160 $1,514,369 Weighted average first $ loan to value 59.2 % 47.1 % 10.0 % 52.1 % Weighted average last $ loan to value 71.8 % 62.9 % 74.6 % 69.6 %
We own $1.9 billion face amount of residential assets which includes manufactured housing (MH), residential loans and subprime securities.
* During the quarter, we sold $16.1 million and had paydowns of $72.6 million for a decrease of $88.7 million. * Our $562.9 million manufactured housing loan portfolio continues to perform well as only 0.75% of the underlying loans are delinquent versus 0.73% for the second quarter 2007. * We own $76.4 million of retained bonds and $74.2 million of residual interests in two subprime loan pools. The first pool is 25 months seasoned and continues to perform as expected with only 0.13% of cumulative losses. The second pool is only 7 months seasoned and none of the loans are more than sixty days delinquent. * We own $618.8 million of subprime securities. The following table summarizes our portfolio as of September 30, 2007 ($ in thousands): Collateral Characteristics Deal Cumulative Age Collateral 90+ Loss 3 Month Vintage (months) Factor Delinquency to Date CRR 2003 49 0.15 9.9 % 2.1 % 23.8 % 2004 39 0.20 12.0 % 1.0 % 30.5 % 2005 26 0.42 14.6 % 0.9 % 38.4 % 2006 14 0.75 14.2 % 0.4 % 20.3 % 2007 6 0.93 4.5 % 0.0 % 15.5 % Total 29 0.42 13.2 % 0.9 % 29.7 % Security Characteristics Current Average Face Principal Vintage Rating Number Amount % Subordination 2003 A 16 $47,601 7.7% 24.4 % 2004 A- 30 202,667 32.8% 19.1 % 2005 BBB+ 44 201,303 32.5% 14.1 % 2006 BB+ 29 159,497 25.8% 3.9 % 2007 BBB+ 3 7,750 1.3% 10.0 % Total BBB 122 $618,818 100.0 % 13.8 %
Note: The table above excludes subprime retained securities and residual interests of $150.6 million.
* In addition to the principal subordination of 13.8%, the securities are further supported by approximately 227 basis points of excess spread. * The current average rating of our $618.8 million subprime securities portfolio was BBB. * Our subprime securities portfolio had 16 securities or $57.3 million downgraded. * In the quarter, we recorded a $67.9 million impairment; $63.4 million was related to 19 subprime securities with a current face of $117.5 million. 17 of these securities, or $114.7 million, are related to the 2006 vintage. The valuation decline was the result of credit performance below our expectations.
We own $1.5 billion face amount of corporate assets including REIT debt and corporate bank loans.
* During the quarter, we sold $10.6 million and had paydowns of $1.9 million for a net decrease of $12.5 million. * We had one investment or $85.0 million upgraded in our bank loan portfolio and no rating changes in our REIT debt portfolio. * Credit spreads widened on average by 94 basis points on our REIT debt portfolio and 111 basis points on our bank loan portfolio.
We own $1.4 billion face amount of other assets including FNMA/FHLMC securities and ICH loans.
* During the quarter, we had paydowns of $59.0 million.
Third Quarter Investment Activity
The following table summarizes the investments and sales that we completed in the third quarter ($ in millions):
Face Amount $ % Number Credit WA Life Purchases CMBS $240 87.6 % 19 BBB+ 6.8 B-Notes 34 12.4 % 1 61 % 1.6 Total $274 100.0 % 20 6.2 Face Amount $ % Number Credit Sales CMBS $56 67.7 % 12 BBB+ Real Estate ABS 16 19.5 % 2 AAA REIT Debt 11 12.8 % 2 BBB+ Total $83 100.0 % 16
Financing and Capital Markets Activity
In July, we closed a $1.09 billion securitization of the subprime mortgage loan portfolio which we acquired in March and April 2007. Newcastle, through the securitization trust, issued $1.02 billion face amount of investment grade notes of which $979 million were sold to third parties. Newcastle invested approximately $50 million of equity in the transaction.
In July, we closed a $1.4 billion collateralized debt obligation where the proceeds from the offering were used to redeem liabilities issued in three of our prior securitizations. We were able to reduce our financing cost by 39 basis points on $1.29 billion of debt and extend the average expected maturity on our debt from 5.6 to 10.0 years. In connection with this transaction, we recorded a one-time net charge of $0.9 million in the third quarter from the write-off of deferred financing costs and early termination payments offset by gain from the sale of assets.
During the quarter, we significantly reduced our exposure to the asset backed commercial paper (ABCP) market and have subsequently replaced the financing of our FNMA/FHMLC securities with repurchase agreements provided by three investment banks with terms ranging from one to six months. In connection with the termination of our ABCP program, we recorded a one-time net charge of $3.5 million including the write-off of deferred financing costs and other hedge related items.
We seek to match fund our assets predominantly through non-recourse long- term financing structures that are not affected by changes in rates and spreads. As of September 30, 2007, 76% of our assets are unleveraged or financed with non-recourse debt that is non-callable based on changes in the value of the underlying assets. 14% are FNMA/FHLMC securities, which are highly liquid with an implied AAA rating, financed with repurchase agreements. Of the remaining assets, 7% are short duration commercial and corporate loans financed with term repurchase agreements, and 3% are primarily Newcastle CBO bonds financed with monthly repurchase agreements.
As of today, our liquidity includes $200 million available on our credit facility, $35 million of cash to invest and $61 million of restricted cash to invest in our CBOs. In addition, we have three committed warehouse facilities aggregating $1.2 billion of which $974 million is available to finance new investments.
Share Buy Back
The Company has been authorized by its Board of Directors to repurchase up to $100 million of shares of our common stock.
Newcastle's management will conduct a live conference call today, November 7, 2007, at 2:30 P.M. Eastern Time to review the financial results for the quarter ended September 30, 2007. All interested parties are welcome to participate on the live call. You can access the conference call by dialing (888) 243-2046 (from within the U.S.) or (706) 679-1533 (from outside of the U.S.) ten minutes prior to the scheduled start of the call; please reference "Newcastle Third Quarter Earnings Call."
A simultaneous webcast of the conference call will be available to the public on a listen-only basis at www.newcastleinv.com. Please allow extra time prior to the call to visit the site and download the necessary software required to listen to the internet broadcast. An online replay of the webcast will be available until December 31, 2007.
A telephonic replay of the conference call will also be available until 11:59 P.M. eastern time on Wednesday, November 21, 2007 by dialing (800) 642-1687 (from within the U.S.) or (706) 645-9291 (from outside of the U.S.); please reference access code "21020190."
Newcastle Investment Corp. owns and manages an $8.9 billion highly diversified real estate debt portfolio with moderate credit risk that is primarily financed with match funded debt. Our business strategy is to "lock in" and optimize the difference between the yield on our assets and the cost of our liabilities. Newcastle is organized and conducts its operations to qualify as a real estate investment trust (REIT) for federal income tax purposes. Newcastle is managed by an affiliate of Fortress Investment Group LLC, a global alternative asset management firm with approximately $43.3 billion in assets under management as of June 30, 2007. For more information regarding Newcastle Investment Corp. or to be added to our e-mail distribution list, please visit www.newcastleinv.com.
Certain items in this press release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to the stability of our business model and achievement of certain goals. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements; Newcastle can give no assurance that its expectations will be attained. Factors that could cause actual results to differ materially from Newcastle's expectations include, but are not limited to, the risk that we can find additional suitably priced investments; the risk that investments made or committed to be made cannot be financed on the basis and for the term at which we expect; the relationship between yields on assets which are paid off and yields on assets in which such monies can be reinvested; the relative spreads between the yield on the assets we invest in and the cost and availability of debt and equity financing. Such forward-looking statements speak only as of the date of this press release. Newcastle expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.
Newcastle Investment Corp. Consolidated Statements of Income (dollars in thousands, except share data) (Unaudited) For the Three Months Ended For the Nine Months September 30, Ended September 30, 2007 2006 2007 2006 Revenues Interest income $169,770 $140,330 $523,860 $378,446 Rental and escalation income 1,323 834 3,898 3,616 Gain on sale of investments, net 4,825 2,642 14,014 10,722 Other income (7,053) 288 (557) 4,545 168,865 144,094 541,215 397,329 Expenses Interest expense 117,434 100,239 368,108 265,113 Loss on extinguishment of debt 7,752 - 15,032 658 Property operating expense 1,019 1,041 3,099 2,808 Loan and security servicing expense 2,091 1,553 7,772 4,961 Provision for credit losses 2,820 2,682 7,945 5,868 Provision for losses, loans held for sale - - 5,754 4,127 General and administrative expense 1,335 1,187 4,150 3,979 Management fee to affiliate 4,597 3,475 13,048 10,420 Incentive compensation to affiliate - 3,094 6,209 8,780 Depreciation and amortization 359 290 1,030 767 137,407 113,561 432,147 307,481 Income before other gains (losses) 31,458 30,533 109,068 89,848 Other Gains (Losses) Other than temporary impairment (67,860) - (73,813) - Income before equity in earnings of unconsolidated subsidiaries (36,402) 30,533 35,255 89,848 Equity in earnings of unconsolidated subsidiaries 488 1,506 2,154 3,916 Income from continuing operations (35,914) 32,039 37,409 93,764 Income from discontinued operations 17 (12) (2) 212 Net Income (Loss) (35,897) 32,027 37,407 93,976 Preferred dividends (3,375) (2,328) (9,265) (6,985) Income (Loss) Available For Common Stockholders $(39,272) $29,699 $28,142 $86,991 Net Income (Loss) Per Share of Common Stock Basic $(0.74) $0.68 $0.55 $1.98 Diluted $(0.74) $0.67 $0.55 $1.97 Income (Loss) from continuing operations per share of common stock, after preferred dividends Basic $(0.74) $0.68 $0.55 $1.97 Diluted $(0.74) $0.67 $0.55 $1.97 Income from discontinued operations per share of common stock Basic $ - $ - $ - $0.01 Diluted $ - $ - $ - $ - Weighted Average Number of Shares of Common Stock Outstanding Basic 52,779,179 43,999,817 50,894,424 43,978,625 Diluted 52,779,179 44,136,956 51,045,418 44,091,003 Dividends Declared per Share of Common Stock $0.720 $0.650 $2.130 $1.925 Newcastle Investment Corp. Consolidated Balance Sheets (dollars in thousands, except share data) September 30, December 31, 2007 2006 (unaudited) Assets Real estate securities, available for sale $5,186,147 $5,581,228 Real estate related loans, net 1,960,762 1,568,916 Residential mortgage loans, net 662,624 809,097 Subprime mortgage loans, held for sale - - Subprime mortgage loans subject to call option 392,992 288,202 Investments in unconsolidated subsidiaries 34,097 22,868 Operating real estate, net 33,348 29,626 Cash and cash equivalents 40,772 5,371 Restricted cash 107,415 184,169 Derivative assets 21,907 62,884 Receivables and other assets 65,409 52,031 $8,505,473 $8,604,392 Liabilities and Stockholders' Equity Liabilities CBO bonds payable $4,728,805 $4,313,824 Other bonds payable 588,971 675,844 Notes payable 85,233 128,866 Repurchase agreements 1,583,842 760,346 Repurchase agreements subject to ABCP facility 98,655 1,143,749 Financing of subprime mortgage loans subject to call option 392,992 288,202 Credit facility - 93,800 Junior subordinated notes payable (security for trust preferred) 100,100 100,100 Derivative liabilities 46,164 17,715 Dividends payable 40,251 33,095 Due to affiliates 7,741 13,465 Accrued expenses and other liabilities 12,098 33,406 7,684,852 7,602,412 Stockholders' Equity Preferred stock, $0.01 par value, 100,000,000 shares authorized, 2,500,000 shares of 9.75% Series B Cumulative Redeemable Preferred Stock 1,600,000 shares of 8.05% Series C Cumulative Redeemable Preferred Stock, and 2,000,000 shares of 8.375% Series D Cumulative Redeemable Preferred Stock liquidation preference $25.00 per share, issued and outstanding (Series D issued in 2007) 152,500 102,500 Common stock, $0.01 par value, 500,000,000 shares authorized, 52,779,179 and 45,713,817 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively 528 457 Additional paid-in capital 1,033,322 833,887 Dividends in excess of earnings (91,973) (10,848) Accumulated other comprehensive income (273,756) 75,984 820,621 1,001,980 $8,505,473 $8,604,392 Newcastle Investment Corp. Reconciliation of GAAP Net Income to FFO (dollars in thousands) (Unaudited) Three Months Ended Three Months Ended September 30, 2007 September 30, 2006 Net income available for common stockholders $(39,272) $29,699 Operating real estate depreciation 285 221 Funds from operations ("FFO") $(38,987) $29,920
We believe FFO is one appropriate measure of the operating performance of real estate companies because it provides investors with information regarding our ability to service debt and make capital expenditures. We also believe that FFO is an appropriate supplemental disclosure of operating performance for a REIT due to its widespread acceptance and use within the REIT and analyst communities. Furthermore, FFO is used to compute our incentive compensation to our manager. FFO, for our purposes, represents net income available for common stockholders (computed in accordance with GAAP), excluding extraordinary items, plus real estate depreciation, and after adjustments for unconsolidated subsidiaries, if any. We consider gains and losses on resolution of our investments to be a normal part of our recurring operations and therefore do not exclude such gains and losses when arriving at FFO. Adjustments for unconsolidated subsidiaries, if any, are calculated to reflect FFO on the same basis. FFO does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs. Our calculation of FFO may be different from the calculation used by other companies and, therefore, comparability may be limited.
Newcastle Investment Corp. Reconciliation of GAAP Book Equity to Invested Common Equity (dollars in thousands) (Unaudited) September 30, 2007 Book equity $820,621 Preferred stock (152,500) Accumulated depreciation on operating real estate 5,725 Accumulated other comprehensive income 273,756 Invested common equity $947,602
SOURCE Newcastle Investment Corp.
Released November 7, 2007