Drive Shack Inc.
Q1 2015 Earnings Call Transcript

Published: 8 May 2015

[Operator:]

Good morning. My name is Laura, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Newcastle First Quarter 2015 Earnings Call. [Operator Instructions] I'll now turn the call over to Ms. Lilly Donohue. Please go ahead.

[Lilly Donohue:]

Thank you, Laura, and good morning, everyone. I'd like to welcome you today to Newcastle's first quarter 2015 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; and Julien Hontang, our Chief Accounting Officer. We have posted an investor presentation on our website, which we encourage you to download if you have not already done so. Before I turn over the call over to Wes, I would 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. We encourage you to review the disclaimers in our press release and investor presentation regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC. And now, I would like to turn the call over to Wes.

[Wesley Robert Edens:]

Thanks, Lilly, and welcome, everybody. I want to refer to the presentation that we have posted, so if you could just follow along, we'll go through this relatively quickly. So let's start with Page #2, the overview of the company. Newcastle is a real estate company that has a combination of a Debt business and a Golf business. It's got a $350 million market cap and has been the source of a number of the different spends that we managed here at Fortress so new residential, new senior and new media all are -- began life within the confines of Newcastle. As a result of those spends and the subsequent success of those vehicles, we've had great results for the Newcastle investors, a 50% annualized return over the last several years that we have grown these businesses. If you look at Page #3, the financial performance for the quarter was very strong. We had -- it's our first full quarter since we spun new senior, with Core Earnings of $7.6 million or $0.12 per share. We paid a $0.12 dividend, and it was a very, very good and solid quarter for us. Page 4, the first quarter and subsequent highlights. The 2 businesses, Debt business, which Ken will talk about in just a second, increased in value by $6 million over the quarter, received $43 million for all the pay downs, generated $15 million for net investment income. Subsequent to the quarter, we sold 3 office properties that we own directly on balance sheet, generated $2 million in net proceeds to Newcastle. The Golf business has been a real success for us. It's the business that we acquired through the Debt a couple of years ago and you can see, and I'll talk about that in just a few minutes, is that the results, since we have taken it over, have been very encouraging, 73% growth in adjusted EBITDA year-over-year. Basically, the business is one that was under managed and had fought the challenges in terms of the changes in ownership, et cetera, and then you see great results as we brought in new management that have focused on the business. Page 5 is a snapshot of what the business is today. We have 2 aspects to it

[Kenneth M. Riis:]

Yes. Thanks, Wes. I'm on Page 8 in the deck. And today, we own about $1 billion of Real Estate Debt, $630 million of non-agency assets and about $400 million of liquid agency securities. Our portfolio is performing well. Low interest rates and credit spreads continue to move prices higher. Year-over-year, our non-agency portfolio has increased in value by 6 points or $39 million. And in the quarter, the price increased 0.75. Also, in the first quarter, our total $1-billion portfolio increased in value by $6 million. The portfolio, as Wes said, generated an annualized return on equity of 16% on $15 million of net interest income. For the quarter, we didn't sell any assets, but we received $43 million of pay downs, returning $7 million of capital back to Newcastle. As you look at the portfolio, we've had a good run. We had a good run within the last couple of years. Today, about 1/3 of our non-agency portfolio is valued at par or higher. So given where we are in the interest rate and credit cycle, it would be prudent to look to selectively sell some assets and recycle the capital into higher-yielding investments. If you go to Page 9, we highlight our 2 largest CDOs, CDOs VIII and IX. They have de-leveraged, and we own a large percentage of the capital structure. The reason I highlight that is the relatively small amount of third-party debt gives us a lot of flexibility to manage assets and potentially collapse those deals. We're looking hard at that and may look to do something in the second half of this year. The goal would be to sell some assets, but not all, and retain loans and securities that we feel have the most upside, very similar to what we've done with other CDO collapses in the past. Now I'll keep you updated on that as we progress and move ahead. So now, I'll pass it back to Wes to talk about the Golf business.

[Wesley Robert Edens:]

Great. Thanks, Ken. Turn to Page 11, please. This is a picture and an overview of what the Golf business is at Newcastle today. We're the third largest owner operator in the United States with 88 properties, with locations across 14 states. It's primarily oriented towards the West and Southwest, so in good weather, high-growth areas. We expect to generate approximately $30 million to $33 million of EBITDA in 2015, which represents about 50% of growth since we took it over in 2013. As you can see on the chart on the right-hand side, we had terrific results and have been really across the board and steady on virtually every market. Page 14, the performance in the fourth quarter. We continue to expect upsides on play. We added 270 new private club members, 1.9% increase, public round increased about 9,000 and 1.4% over the prior year. And then, especially on the management of the -- on the expense side of the equation, guys have done a terrific job for us. In March, we entered into a new 21-year lease with Los Angeles County. Our portfolio split approximately 50-50 between leased portfolio and an owned portfolio, but we've got a very, very, substantial presence in the managed and leased business on the municipal side. It's been a terrific source of revenue for us, and we're very happy with the results thus far. I'd say that when we acquired the assets, I said on one of these calls, that it was unclear to us if this was a great trade or perhaps, the beginnings of another great business. I'm increasingly optimistic that it's the latter. We've seen good opportunities on the acquisition side. We're very focused on one, in particular, a high-growth initiative that, if we do go ahead and pursue it, we'll talk about it at some length here in the coming quarters. But the performance on a current basis is terrific, going from $22 million to $33 million, that's where we end up on this, is a great result thus far, and we're feeling good about the business. So with that, I will turn it back over to Justine.

[Justine A. Cheng:]

Thanks, Wes, and good morning, everyone. I'll turn back to Slide 3, where we discussed our financial performance and dive into that in a little more detail. As both Ken and Wes just discussed, we had a terrific start in both our businesses, and that's certainly reflected in our strong Core Earnings for the first quarter. Just a quick recap on our balance sheet. We ended the quarter with $1 billion of asset face value in our Real Estate Debt portfolio. As Ken discussed, we received $43 million of pay downs and collected $7 million of net proceeds, and what remains now is $340 million to $390 million of projected recovery value. On the Golf side, to remind folks, our basis is $83 million, and we had total third-party debt of $157 million. And as you saw on Page 6, our expected recovery value for that business is $125 million to $155 million. We ended March with roughly $40 million of uninvested cash and corporate liabilities of $113 million. Turning to our Core Earnings, which came in strong, we generated $8 million or $0.12 per share. This was principally driven this quarter by our strong investment returns in our legacy portfolio of over 16%. On our Golf portfolio, as Wes just reviewed, we had a solid year-over-year adjusted EBITDA growth of over 73% despite a challenging season. This reflects really the positive momentum we're getting on the sales side and the impact of our cost-cutting initiatives as well as our successful negative lease restructuring, and we're certainly on a great track to realize our targeted adjusted EBITDA of $30 million to $33 million this year. Our AFFO for Newcastle, which is our net income adding back depreciation and amortization, was $7.4 million or $0.11 per share. There are no gains to report of, really, in this quarter, which would materially impact that metric. GAAP income was a loss of $2.1 million or a loss of $0.03 per share, but that does include depreciation and amortization of $9 million. Lastly, we feel pretty comfortable with where we set our dividend in Q1, and we paid out our Core Earnings of $0.12 per share this quarter, which is roughly a little over a 9% yield on our current stock price. So looking forward, we're in a great position to continue to generate attractive returns on our Debt and our Golf portfolio. And that pretty much sums up our presentation, and I'll turn the call back over to the operator for Q&A.

[Operator:]

[Operator Instructions] Your first question comes from the line of Jason Stewart with Compass Point.

[Jason Stewart:]

I wanted to start [Audio Gap] where it's an option to scale or if there are any derivatives off of that, that we can think about, talk about?

[Wesley Robert Edens:]

Well, the Intrawest investment for Newcastle has been a terrific one. We actually made the investment in a number of years ago. It's been a big portion of our earnings profile. It's a very high-yielding investment. We don't have any plans at the current moment to do anything with it. The company continues to perform well. We are very well secured and so it's been a good investment. It's a good question, though, because one of the things we had spent a lot of time talking about internally is the nature of the business that we're going to migrate into here at Newcastle. Given the success that we had in the Golf business, we look at other leisure-related activities, and of course, Intrawest is a big pod of leisure-related activities with their ski and other kinds of businesses. But at the current moment, we have no plans to change the profile of our holdings.

[Jason Stewart:]

Okay. And I guess, I mean, all of that progress into leisure-related activities is something we can, I would expect, continue to think about but no updates there?

[Wesley Robert Edens:]

No. The Golf business, we wanted really proof of concept that what we thought could be accomplished with the Golf portfolio. In fact, we feel great about the progress made thus far. I'm less focused on simply adding assets and more focused on growth, right? So again, we're happy with the core of the portfolio we've got that we don't think that the path to happiness is to buy a new digital asset here or there. We're trying to look at different things that we think will be interesting to invest and it could generate really substantial amounts of growth. There's a couple of concepts in the golf world that I think are, in particular, attractive. I don't really want to spend a lot of time talking about it now because they're not something that we're into pushing or into executing on today, but I'm optimistic in the next 6 months or so of the year that we're going to find a number of good things to pursue.

[Jason Stewart:]

Okay, that's fair. And Wes, I think yesterday you, and this is an interesting concept to explore. I think yesterday you said 12 to 15 was your target for year end for permanent capital vehicles, and I'm just wondering how NCT, as a vehicle, fits into your view of that 12 to 15?

[Wesley Robert Edens:]

Well, it's one of the fixed vehicles that we have. It's the original one, and again, it's been the progenitor of a number of our you know very successful spends. I think, at this point, we're very focused on Newcastle having its own identity, its own path and its own growth in generating returns for shareholders that we want. What we have tried to identify as a firm are sectors that have scalability so that we can be a relatively small part of a very large pie and thus, achieve the kind of returns that we wanted to. And if you look at senior housing, the residential business, certainly the transportation and the infrastructure business which they're in the market with an IPO right now. Those all have hallmarks of that. The golf industry is 14,000 golf courses. There's a lot of distress in the business. It's 14,000 courses. We have 88 of them. We're the third largest owner operator. You can tell by those numbers how incredibly splintered and fractured the business is. And again, I don't desire to simply add golf courses for the purpose of just adding assets, but I think that there could be real opportunities for growth, and those are the things we're really focused on.

[Operator:]

[Operator Instructions] There are no further questions at this time. I turn the call back to the presenters.

[Wesley Robert Edens:]

Great. Well, thanks everybody for calling in, a very, uneventful but uneventful in a good way, quarter. Our first quarter since the spend of the senior housing business, and we look forward to updating you guys this summer. Thanks much.

[Operator:]

This concludes today's conference call. You may now disconnect.