Drive Shack Inc.
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Good morning. My name is Robin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Newcastle Second Quarter 2015 Earnings 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. I would now turn the conference over to our host, Mr. Cameron MacDougall. You may begin your conference. Cameron MacDougall Great. Thanks so much. Thank you and good morning, everyone. I’d like to welcome you today to Newcastle’s second quarter 2015 earnings call. Joining me here today are Wes Edens, our Chairman of our Board of Directors; Ken Riis, our Chief Executive Officer, and Justine Cheng, our Chief Financial Officer. We posted an investor presentation on our website, which we encourage you to download if you’ve not already done so. Before I turn over the call over to Wes, I’d like to point out that certain statements made today will be forward-looking statements. And these statements, by their nature, are uncertain and may differ materially from actual results. We encourage you to review the disclaimers and risk factors in our press release and investor presentation regarding forward-looking statements and 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.

[Wes Edens:]

Great. Thanks, Cameron. Thanks everyone for dialing in. I’ll start with a few of the highlights. Second quarter was a very good quarter for Newcastle, strong financial results. Core earnings $0.17 that compares to $0.12 in the first quarter, the highlights of that were the gains from some of the sale and the debt business, we’ll talk about in a second. We paid a cash dividend of $0.12, just as we did in the first quarter, GAAP income of $0.26 per share or $17 million. If you look at page number 4 of our supplement, just to go through some of the highlights. Of the top of the list is on the debt side, we collapsed two of our last two CDOs, CDOs VIII and IX. We paid off $159 million in third party debt we received $70 million in cash proceeds, generated $30 gain on sale, greatly simplifying our balance sheet and kind of preparing us for the next stage of life. We retained $245 million of the assets that are held in these CDOs that are basically unencumbered in our balance sheet the current portfolio is $373 million of non-agency assets, $202 million in agency securities. And the current path for us we believe is, things go as we plan, is that we expect to liquidate the bulk of those investments between and year-end. No assurance as to that but that at this point is our plan. The Core business in our Golf side had a very, very good first six months of the year, 5.6% year-over-year growth in June, year-to-date compared to last year, same-store June portfolio operating metrics improving year-over-year. Private clubs grew 2.2%, public golf rounds increased by 3.5%. We’re on track to generated adjusted EBITDA of $30 million to $33 million in 2015. We think that the future in 2016 is going to be brighter than that. On page number 5, little bit more about the Golf business. The big news for the quarter is that we just yesterday signed definitive documents to buyback existing first mortgage debt. If you look at the picture on the left-hand side, it gives you a depiction of what it looked like prior to this. There was a first mortgage of which we owned a portion of it, and a portion of it is owned by a third party. And then a second mortgage owned by another party. That debt was sold in auction. We were the successful buyer of it. So, we bought $157 million of third party debt at a price of $0.90 of par $141 million. The capital structure on the right side shows our new de-leveraged balance sheet. So, $70 million is all we have left in short-term debt. Equity value of $230 million which compares to our equity investments of $154 million, so, a big gain relative to what we paid for the portfolio originally. The folks on our management side have done a terrific job in managing it thus far. And we’re now well positioned in terms of putting the more long-term capital structure in plan. If you look on page number 6, it gives you the picture on what the golf business looks like post debt repurchase. And you can see our balance sheet is actually quite simple now. Our real estate debt portfolio of non-agency assets of 373 agencies of $202 million, those are short duration portfolio with mid-teens returns. And then we have the Golf portfolio. 88 properties in prime locations, 14,840 private members, again our targeted EBITDA for 2015, $30 million to $33 million with a forecast that we’re going to do substantially better than that down the road. So, with that, let me turn over to Ken Riis to go through some of the details on the debt side. Ken?

[Ken Riis:]

Thanks Wes. We had a very active quarter. Going into the quarter, our strategy was to take advantage of low interest rates and tight credit spreads. So the time is right to sell. We sold low-yielding assets while retaining securities and loans with meaningful upside and principle recovery in our portfolio. In the quarter we sold $203 million of securities at 96% at par and $7 million of real-estate properties. Also we received $32 million of pay-downs. The sales generated $30 million of gains and the $234 million of proceeds we used to paid off third party debts resulting in $73 million of net proceeds to NCT. Today we own $373 million of non-agency assets and $200 million agency securities. Our expected recovery from this portfolio is $270 million to $320 million. I’m on page 10 in the deck. I just wanted to highlight so the bulk of our activity related to the collapse of CDOs VIII and IX. Through the sale of assets at par and pay-downs received, we paid-off all third party debt terminating the CDOs and generating $70 million of cash to NCT. We also retained $245 million of assets that were held in the CDOs that are now un-leveraged on our balance sheet and represent meaningful recovery of principle to NCT. So, our timing was good, we sold assets at a low point in interest rates and maximize proceeds. We also raised cash allowing us to take advantage of the opportunity to buyback our Golf debt at a discount. So, I’m really happy with that. I’ll pass over to Wes.

[Wes Edens:]

Great. Yes, just back on the Golf business in short. Page 12 is a very good snapshot of what the portfolio looks like. We are the third largest owner and operator of golf courses in the United States. The golf business is a big business, and there are 14,000 golf courses nationwide. As an owner and operator of 88 that makes us the third largest that demonstrates very clearly what the opportunity is we think on the consolidation of it. The portfolio is very well located want to have golf in the places where the sun shines. You can see we’ve got big concentrations in California and Texas in the Northwest in particular. We expect to generate EBITDA this year between $30 million to $33 million the first half was very strong for us. There is a 50% growth in EBITDA since we actually acquired the portfolio. Page 13, gives a little bit more detail in terms of some of the underlying metrics in terms of number of rounds played, number of private club members added etcetera. Again you can see, first half of the year versus second half of year - first of the year, a year ago we’ve had very substantial growth. And we’re on, we’re on pace to have a very good next part of the year. If you refer back to the capital structure plan, what we’ve got right now is an underleveraged asset on our balance sheet in the golf course. So, $70 million we think is less than the business, we’re comfortable there. And that’s something we’ll look to put in place over the second half of the year, is a capital structure which is low-cost coupon but also long-dated in its maturity that we think again, takes advantage of our ability to buy back the debt at discounts. So that should be a good financial result for us in the short term and a good operating result in the long-term so we can put the right debt in place to grow the business properly. If you refer back to page number 7, which is, sum-of-the-parts valuation, this is a question we often get asked so let me just walk through this page. And then I’ll open it up for questions. So, or excuse me, give it over to Justine to go through the numbers, and then with your questions. So, sum-of-the-parts, the current market capitalization of the company $326 million or $4.91 a share. The way we look at the business is as broken as the components listed below. The real estate debt portfolio, which again, now that it is un-leveraged and on our balance sheet, we think it is something that is readily salable and we expect to harvest that in due course over the next 6 to 12 months. The golf course value, we give a range of valuations there. There’s a lot of clarity now that in terms of the position of that asset, the growth of it and now the capital structure is there. Investable cash is likely to go up a fair bit because as we liquidate our debt securities, as we look to re-leverage the golf course, we end up with more investable cash. We’ve got thoughts both in the golf course business as well as in few other regards in things that we’re looking at that we’ll give you reports on in the future. So, net of those, we add those all up. We end up with a range of valuations between $6 and $7 a share. We think that’s a good starting point of departure in terms of valuation discussions. That’s obviously a substantial premium to the $4.91 we are right now. So I think the company represents really good value there. Justine, you want to go through highlights.

[Justine Cheng:]

Sure Wes. To wrap up we had a terrific second quarter. We monetized a good portion of our legacy real-estate portfolio and generated $30 million and $73 million of net proceeds for reinvestment. We collapsed our two main CDO portfolios and retained the $245 million of assets which we expect to continue to generate mid-teen returns. And on the golf side, as we discussed, we agreed to acquire the debt back at an attractive discount which will generate $15 million gain. And that business as we just heard is well on track to hit our targeted EBITDA of $30 million to $33 million. As a result our balance sheet is pretty simple right now. The debt portfolio ended in Q2 was $575 million of asset face value, of which, $373 million are unencumbered assets and $202 million are agency securities. On the golf side in Q2, we had $83 million invested and pro forma for the buyback that will increase to $154 million invested. Post the golf deal, we’ll have cash balance of roughly $35 million. To summarize our earnings quickly which was on page 3, our core earnings was $12 million this quarter or $0.17 per share. Roughly 60% of that of the net investment income came from our debt portfolio and the balance came from the positive contribution of golf during their high season. Our AFFO which adjusts core to include net gains from sales was $27 million this quarter or $0.40 per share. Our GAAP income was $17 million or $0.26 per share which includes the impact of D&A of $10 million or $0.14 per share. And our lastly, our dividend declared for Q2 was $8 million or $0.12 per share which annualized represents a 10% yield on our current stock price. We’re very pleased with the results this quarter and we look forward to reporting our progress in Q3. And with that, I’ll turn the call back over to the operator.

[Operator:]

And your first question is from Doug Harter from Credit Suisse.

[Sam Cho:]

Hi. This is actually Sam Cho covering for Doug Harter. Just had a - I guess I just wanted to add a kind of a big-picture question. So, you guys mentioned that you’re liquidating, I mean, you liquidated the CDO and the debt portfolio. You mentioned that it’s going to happen throughout the course. So, how are you thinking about utilizing the capital going forward, is it safe to say that all that will be used for the golf business?

[Wes Edens:]

The answer is, that in part will be used by the golf business. And it could all be used by the golf business. We think there are opportunities there. There is, a number of initiatives that we’ve got that we are examining. We’re happy with the results I said. When we first made the investment in the golf business, we thought for certainly it was a good trade and we thought that prospectively it was a good business. I think now that we see the results from the business we’re certainly more focused on the latter part of that. We do think it is a good business opportunity. And we’re not in a rush to liquidate the debt investments we want them to get harvested in their kind of natural course. But we do think there is a substantial amount of discount still to be realized there. But as we make those realizations, as we generate incremental growth, which will then evaluate what we should be doing on the investment side. But certainly golf is a significant portion of it. We have thoughts on other related investments as well.

[Sam Cho:]

I see. So, I mean, you gave the timeline for liquidating, the next 6 to 12 months. So, is that, so, could that change given a significant change in market conditions?

[Wes Edens:]

It could change with market conditions of course, so you should be mindful of that. So, we’re not going to sell if the market got very bad. It’s an interesting time in the world, right. There is a lot of uncertainty in different parts of the world, China, Greece etcetera that affects our market here. But we think if things stay kind of on their natural course, that’s what you should expect.

[Sam Cho:]

Okay. All right. Thank you so much.

[Operator:]

[Operator Instructions]. And the next question is from Matthew Howlett from UBS.

[Matthew Howlett:]

Thanks for taking my question. Congratulations. Quite a surprise to see the golf debt paid off and collapse finally of those two CDOs. I think it’s going to go a long way to simplify the story and the balance sheet. My question is, on the assets you took back from the CDOs, I get it, that those are the lower, the bigger discounted securities. Does one of - is that the Interwest preferred, is that included in the securities you took back and if so, are there any plans with that company or that asset, I know I think it steps up in terms of the coupon at some point?

[Wes Edens:]

It was part of the asset, it’s part of the balance sheet. It’s been a great performing part of the balance sheet. And I really can’t comment on Interwest, they’re separate public company, you can talk to those folks in terms of what they’re doing, their prospects etcetera. We’re happy with our investment in the company. Another part of the firm where an equity holder is obviously the company, we’re pleased with the results of that company as well. But there are, there is nothing really to talk about in terms of plans with that right now. That’s really, the question is best directly with those folks.

[Matthew Howlett:]

Okay, got you. And then I guess just to allude, when you liquidate those legacy assets, just to try to dig a little bit deeper, are we talking redeploying those into more debt assets, maybe possibly using a credit line, or are we talking about equity investments along the way of other real estate that I think you guys have talked about sort of becoming this diversified real estate company?

[Wes Edens:]

I don’t have any plans to deploy back into the debt business of course. But if something opportunistic that we thought made a lot of sense, we would certainly evaluate that. But that’s not our plan. We do think the investors I think have been patient and we’ve been consistent what our message was that as we saw opportunities to wind down the debt business, we would. We would seek to find other things to redeploy them in. We made the investment in the golf business, that’s actually been a lucrative one for us. And we think that there is more to go on that side. And so, it’s very much that’s the plan. As always, so we’ve got a very good track record for this I think. We look for other things that we think are opportunistic. And there are a couple of things on the horizon I think are interesting and worthwhile and examining. But they’re not flushed out to the point where it’s actually a good idea to talk about them publicly. Obviously if we did something then we would talk about it immediately obviously. But right now the plan is exactly as I laid out.

[Matthew Howlett:]

Let me follow up this one, Wes, then. On the golf, you talk about there’s a nice growth, and EBITDA you’re hitting your targets. But, what else can you do on those properties to increase the revenue? You talked about bringing in, like, driving ranges and other entertainment. Is there more to do just on the existing assets that you have?

[Wes Edens:]

I think there is a ton to do. I would say the two big areas of opportunity in the golf business would be one

[Matthew Howlett:]

Great. Thanks. And then just last question on dividend, in terms of getting that intrinsic value you laid out in the report, does it make sense. Previously, it made sense, or you guys had the ability to increase the return of capital, the increase of the dividend. And thanks for the questions.

[Wes Edens:]

Well, I mean, the question on the dividend I think is, it’s a board matter obviously. We talk about it with our board. I think given the state of conversion that we’re going through right now it’s the kind of thing that we will examine at the end of the year, as what I would expect in the ordinary course. And so, we’ve been a consistent payer of the dividend, we certainly are a well-covered, more than well covered on where we are right now. But that’s something we’ll examine with our board as the year goes on.

[Matthew Howlett:]

Great. Thanks, guys.

[Operator:]

And there are no further questions.

[Wes Edens:]

Great. Well, thanks everyone for dialing in. Look forward to updating you with our third quarter results this fall. Thank you.

[Operator:]

This does conclude today’s conference. You may now disconnect.