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
Investment Portfolio
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.
Commercial Assets
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 %
Residential Assets
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.
Corporate Assets
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.
Other Assets
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.
Liquidity
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.
Conference Call
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."
About Newcastle
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.
Safe Harbor
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