Newcastle's Need for Liquidity Puts the Dividend at Risk

Newcastle Investment Trust (NCT), a diversified REIT sponsored by Fortress Investment (FIG), announced dismal fourth-quarter results today, posting a GAAP quarterly loss of $2.01/share. The loss was driven by a huge $202.6 million other-than-temporary impairment charge, primarily related to NCT's portfolio of subprime RMBS and residual interests.

The writedowns do not have an economic impact on NCT's business, but do give insight into the market's continued distate for subprime assets.

More interestingly (at least to me), was the update that Newcastle provided for the first quarter of 2008. The Company has sold $1.3 billion of assets, about 16% of the balance sheet, since December 31.

The sales resulted in a $14.2 million net loss. Of the $1.3 billion, NCT was only able to unload $45 million in junk assets, while $770 million of the assets sold were agency-backed securities. The nature of the sales suggest that NCT was a bit desperate for liquidity, and the sale of a material amount of the portfolio at a significant loss may pressure future taxable income.

While Newcastle fully covered its 2007 dividends with taxable income, I would be cautious with NCT stock until the first quarter dividend is declared.

Disclosure: None

Comments

[thesession:]

Yes, it seems liquidity would be an issue for any mortgage type REIT. Makes sense they sold assets to raise cash and hopefully they can set aside enough for any type of margin calls or short term funding issues.

More interesting to know... were they "forced sellers" or "opportunistic sellers"?

And then, hopefully they can reinvest some of that into higher yeilding assets. Buying opportunities will be good once markets stabalize a little more.

2008 Feb 28 09:09 AM

[deefree:]

they sold enough assets to fully pay off all their short term debt, now they're earning, as of february 25th according to their press release, a 2% on the remaining $6.7 billion in assets. write off 100% of their "MH and residential" loans and you have 2% on $6.3 billion or $31.5 million in income per quarter. No more write offs and you have $33.5 million in income. 52.8 million shares outstanding means and less $5 million of overhead per quarter gets to about $.50/share in funds available for dividend, a significant drop from the current $.72 but still a 20% yield at current stock price.

2008 Feb 28 09:47 AM

[oilsands:]

Thanks for the excellent supplementary analysis, deefree. stock price will drop, jacking up the yield.

2008 Feb 28 11:57 AM

[deefree:]

actually, if the downside is $2/share, the stock should trade at $14. traded over $12/share briefly today, look for run up to $14/share prior to march 14th dividend announcement, some volatility after that, then a drop on the ex-dividend date. QED/

2008 Feb 28 12:11 PM

[Patrick Harden:]

Thanks for the insightful comments on NCT. I agree the stock is a buy even at a $0.50/share quarterly dividend. However, I still believe the current run rate is unsustainable given the realized taxable losses.

2008 Feb 29 06:15 AM

[Harry L:]

Just concerned that NCT sold so many of their highest rated government backed assets. Good news is that their subprime portfolio held up fairly well so far. Challenge is obviously the timing and reinvestment of the capital from the $1.3B into profit making assets. That will be a wait and see. In the meantime I believe we have to expect a significant reduction in dividends which, in wall street world, would create enough of a red light to cause an erosion in the stock price even though they are already priced fairly based on current assets.

2008 Feb 29 12:05 PM