Newcastle Investment Corp. (NCT) Q2 2016 Earnings Conference Call August 8, 2016 9:00 AM ET
Sohee Yoon -
Wes Edens - Chairman
Ken Riis - CEO
Justine Cheng - CFO
Eun Nam - CAO
Sarah Watterson - Managing Director, Golf Business
Josh Bolton - Credit Suisse
Jeff Render - UBS
Good morning. My name is Luke, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Newcastle Second Quarter 2016 Earnings Conference Call.
All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Sohee Yoon. You may begin your conference.
Thank you, Luke. And good morning, everyone. I'd like to welcome you today to Newcastle's second quarter 2016 earnings call.
Joining me here today are Wes Edens, the Chairman of our Board of Directors; Ken Riis, our Chief Executive Officer; Justine Cheng, our Chief Financial Officer; Eun Nam, our Chief Accounting Officer and Sarah Watterson, Managing Director, who Heads up our Golf Business.
We've posted an Investor Presentation on our website, which we encourage you to download if you have not already done so. Before I turn the call over to Wes, I'd like to point out that certain statements made today will be forward-looking statements.
These statements by their nature are uncertain and may differ materially from actual results. In addition, we will be discussing some non-GAAP financial measures during the call today. And the reconciliation of those measures to the most directly comparable GAAP measures can be found in the investor presentation. We encourage you to review the disclaimers in our press release and investor presentation and to review the risk factors contained in our annual and quarterly reports filed with the SEC.
And now, I'd like to turn the call over to Wes.
Great. Thanks and welcome everyone. We had a very solid second quarter at Newcastle. If you refer to the supplement we provided in page 2, which is where we'll start, we detailed the financial results there. GAAP income of $2 million or $0.02 a share, core earnings of $14 million, $0.21 a share. There still is a fair bit of noise in the numbers as we transitioning from the old business plan to the new business plan. So the quarterly run rate numbers are a little bit murky but when you disaggregate them into different pieces, there is a lot to be happy about. If you look on page number 3. Just to review in Performance we generated $12 million of net investment income from the real estate debt portfolio. That's an 18% return on $255 million of invested equity. Notable non agency event of the quarter, we sold this $19 million City Center Mezzanine Loan at par.
Number two on the Golf Business itself, the core business actually had a very good quarter after the slow start to the year. Notably in the quarter, we replaced short-term financing with committed long-term financing which Sarah will talk about just in a moment. We are very happy with the net outcome there. And the performance of that business is actually also quite good. And then lastly at the Drive Shack, we continue to make very significant strides in our -- I think our goal is by the next quarterly call to be able to detail in a much more specific way what our expectations are for the business, but bottom line we are at the doorstep of being committed on our first transaction. And there is a very robust pipeline behind that. But again Sarah will talk about that in a just a second.
Overall, when you look at the business, the goal as we said now for a number of years are to transition out of the debt business in an orderly fashion and return capital as we sold on those assets. The non agency which is the bulk of the portfolio at $195 million, our goal is to liquidate substantially all of that over the course of the next two or three quarters. So kind of Q4, Q1 next year. There are probably are at least one or maybe more than one investment that may stick around a little bit longer but the bulk of that we expected to come back out. So number one, number two the Golf Business we expected to continue to grow and perform. And lastly we are very excited about the growth initiatives in the Drive Shack.
So with that let me turn it over to Ken to go through the depth as he can.
Thank you, Wes. On page 4 the presentation and just to summarize the real estate debt business continues to perform very well from an earnings and credit perspective. And generating an 18% return on equity in the second quarter. Today we owned $650 million of assets; it is broken down by $220 million of non-agency loans and securities that we own unencumbered on our balance sheet. And about $430 million of agency securities that are financed. We continue to look forward opportunities to optimize recoveries and harvest the capital invested in this business. In year-to-date through the sale of our remaining economic interest in CDO VI and the sale of one mezzanine loan at par. We've recovered $18 million of principal. Again going forward we project to recover about $230 million to $280 million of principal from our debt portfolio with a substantial amount being realized within the next six months as some of our larger non-agency loans start to pay down. And we continue to sell other assets.
With that I'll hand it over to Sarah to talk about the Golf Business.
Thanks Ken. Good morning, everyone. For those of you who following along, I am on page 5 now of the presentation, our Golf portfolio remain the same quarter-over-quarter, 85 courses across 13 state, we remain diversified across public and private courses and owned, leased and managed courses. Our portfolio is very well situated in top tier cities and four season's golf climate. 75% of our courses are in top 20 US cities and on average our courses have exhibited playable conditions for 290 days out of the last 12 months. We now have 55,000 members and it had 4.2 million round played in the last year across our courses.
Turning to page 6 for second quarter results. We are happy with the progress we made this year. And the strong results achieved in the second quarter. Despite as Wes mentioned the challenging first quarter with El Nino conditions across much of the west course in Florida, we are able to make remarkable progress in 2Q. 2Q, 2016 same store revenue grew 3% year-over-year to $84 million and adjusted EBITDA came in at $12 million, or 9% increase from Q2, 2015. Much of this growth was achieved as a result of initiated, executed by our team across all public and private courses. On the private side where we have 24 courses in our same store portfolio, growth in this area was driven by both new members and dues increases. Our team added 119 full golf members over the past year of which 45 full golf members were added in the past quarter alone. On the public side, we continue to experience tremendous growth from The Players Club which is our monthly fee member program. At the end of the quarter, we had 40,000 members paying on average $35 per member which translates into about [$17] million of run rate revenue, a pretty attractive 25% plus margin. This 40,000 member count is a 150% from 16,000 in Q2, 2015 and 50% from 1Q when we had 26,000 members. We've earned about $15 million of adjusted EBITDA year-to-date and we are about half way through achieving our 2016 adjusted EBITDA target of $33 million to $35 million. We tighten this range this quarter to reflect this year's year-to-date progress and both reflect our optimism for the rest of the year.
Turning to page 7, As Wes alluded earlier; we are excited to announce that we completed a long-term financing of a portion of our golf portfolio. We closed on $102 million long-term financing supported by 22 of our courses. Net of the pay down of our existing short-term loan Newcastle generated $33 million of proceeds which will partially help towards funding out the building of Drive Shack. This loan is interest only with a rate of 6.50% and a term of three years with two 1-year extension. Our remaining 63 courses remain on encumbered so in the future we can look to add additional financing supported by a portion of these courses. We really like the flexibility of keeping a lower average across the portfolio.
Turning to page 8, we remain excited about the prospect of Drive Shack and working along TaylorMade to develop this entertainment golf site. As Wes mentioned we aim to have three to five sites in development by the end of this year and look forward to providing you more information on these. Once we build these sites we expect to scale rapidly and each site is expected to cost about $20 million. If we apply financing to all our portion of our sites and each site generate about $5 million or so the un-levered return to be north of 25% and levered return northward of 50%.
As I mentioned last quarter but I think it's worth reiterating it is important to look at both the future of our traditional and innovative golf businesses together. We expect the traditional golf EBITDA to grow about 10% this year and beyond 2016 we think this business has grow to approach 95% occupancy on the private site coupled with dues growth and then rate per round and round per on the public site.
So really when we look at the two businesses together we have a traditional golf business that can grow at about 10% or so per year complimented by Drive Shack that can fuel pretty outside returns for the company. If we are able to build somewhere between 7 and 10 Drive Shack site and achieve our target, we basically invested modestly to double the earning of our existing traditional golf business.
Turning to page 9, as Wes mentioned we really have three goals for the business. The first goal is to monetize the debt portfolio which we hope to do over the next couple of quarters or majority to do over the next couple of quarters. Second is really to grow the traditional golf business. Again, we think we can grow this business at 10% or so plus three years, which can be bolstered by additional reinvention opportunities or investment within our self. And then thirdly, we are working very hard to build out Drive Shack and expect to update you on the next call with information with regards to the next three to five sites.
Thanks very much. And I'll turn it over for questions.
Your first question comes from the line of Douglas Hurd from Credit Suisse. Your line is open
Hi. Good morning, guys. This is actually Josh Bolton filling in for Doug. Thanks for taking the question. Understandably, you said you are going to talk more in the third quarter about this but just curious the agreement you have with TaylorMade for the Drive Shack innovative gulf sites. Given the recent disclosures by [DAs] that they are looking to offload that brand. Has that given you guys any concern or you had -- have been in dialogues with them about the future of the brand? How that might affect this segment of your business?
Yes. We can't really speak to their own corporate situation. You referenced what they made public and that is what our understanding is well. We think TaylorMade is by far the best gulf club manufacturer. They got the best technology, they are the best brand and that's why we picked them as a partner. And they have been a terrific partner. And so that is not going to change. With their corporate ownership change is that something obviously we would need to reassess and make sure that their goals are still consistent with what they are currently. But in terms of the quality of the partnership and the quality of the company we feel terrific about it.
Your next question comes from the line of Jeff Render from UBS. Your line is open.
Good morning and congratulation on a very nice quarter. Can you fellows just comment a bit on the future of the dividend? We've been at the $0.12 per share per quarter. And I know in the past you've indicated that you would reconsider it typically at the end of the year but any guidance you can give us going forward?
Yes. The dividend is a decision of our board. And I think as Wes alluded to earlier our dividend really reflect the seasonality of the gulf business kind of coupled with our debt business right now. As we continue to grow their transition will continue alongside the board to look at the dividend. But I think if you look over the first two quarters, we had earnings of about $0.26, we paid a dividend of about $0.12 per quarter. So we like to keep it reflecting over the course of the year.
There are no further questions at this time. I'll turn the call back over to the presenters.
Thanks very much. We look forward to talk to you again next quarter.
This concludes today's conference call. You may now disconnect.
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