Drive Shack Inc.
Q4 2014 Earnings Call Transcript

Published: 2 Mar 2015

[Operator:]

Ladies and gentlemen thank you for standing by, and welcome to the Newcastle’s Fourth Quarter and Full Year 2014 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. I would now like to turn the conference over to Mandy Cheuk. You may begin your call.

[Mandy Cheuk:]

Thank you, Paula and good morning everyone. I would like to welcome you today to Newcastle’s fourth quarter and full year 2014 earnings call. Joining me here today are Wes Edens, the Chairman of our Board of Directors; Ken Riis, our CEO; Justine Cheng, our CFO, and Julien Hontang, our CAO. Before I turn 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. I 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.

[Wes Edens:]

Great, thank you and thanks everyone for dialing in. I’m happy to give you report on both the fourth quarter as well as the full-year for Newcastle. The company had a very solid fourth quarter, a very solid year just by the way of better context. And Newcastle actually is a product of a number of – sponsored number of spin-offs. We stared raising capital for the Company back in 2011 in a sense then we’ve actually spun-off three separate companies that generated a 51% comp and a return to shareholders and have grown those businesses substantially. What remains at Newcastle today is our legacy real estate debt business and our golf business, both of which we’ll talk about in some detail, but the net summary of our financial performance for the year was very solid. Fourth quarter core earnings of $0.12 per basic share, AFFO of $0.17 to the cash dividend of $0.12 per share; the year-end total, which is a little messy because it includes both the results from these core businesses as well as the prior, in particular the senior housing spend, core earnings of $100 million or $1.63 per share, AFFO of $155 million, pay cash dividends for the year of $1.92 per share. So again, there is a little bit of confusion about that, but the fourth quarter gives you a pretty pure measure what it really looks like. If you look at what Newcastle is today, the legacy real estate debt portfolio, which consists of three CDOs, $602 million of face amount of assets, other non-agency investments of $70 million and then a handful of other assets. We think has a projected recovery value between $350 to $400 million. The portfolio, as Ken will detail here, had a very good year. Last year, we generated total returns of about 14%, which again that portfolio has performed well from a credit perspective and it’s been a portfolio which is well positioned for the interest rate environment that we’re in. We are near to the end than beginning of that investment timelines. I expect that portfolio will be liquidated over the next year or two as we look at other opportunistic investments or looking to grow our other core business, but it’s been a very good year, last year, for legacy real estate debt part of business. The golf business, which again we took control of this golf company through the debt in a restructuring 87 golf courses, $292 million in 2014 revenues, brought in a new management team and a result of that have been impressive thus far. We’ve gone from $22 million in EBITDA up to a run rate at a 24 well on its way to a $30 plus million results, I’ll talk about that in a little bit more detail at the end, but I feel very good about the performance of both segments of the business thus far. With that maybe I will take a pause and have Ken to talk about the real estate debt portfolio.

[Ken Riis:]

Sure, thanks Wes. I’m on page 9 of the presentation. The real estate debt portfolio is performing well. The overall credit quality continues to improve as the portfolio seasons. In 2014, our non-agency assets increased in value by $43 million or 6.4 points and the overall portfolio increased in value by $47 million. Year-over-year, the portfolio reduced in size by about $900 million as we sold $440 million of non-agency assets, received $320 million of paydowns and reduced the size of our agency portfolio by $130 million. In the fourth quarter, we sold a small amount of non-agency securities that generated a $6 million gain on sale, and for the year we generated $54 million of gains from the sale of the $440 million of non-agency securities and loans. We ended the year with $700 million of non-agency assets with an average life of about 2.8 years and $400 million of agency securities. Go down to Page 10, we ended 2014 with a projected recovery of $650 million to $700 million from our debt portfolio, if we held the assets to maturity. Last year, we’re very active and opportunistic. In 2014 alone, we recovered over 40% or $305 million of our projected recovery with the majority coming from asset sales and paydowns. In 2015, we will continue to look for ways to optimize and accelerate the recovery of our remaining $350 to $400 million that we highlight going forward. As most of you know, the majority of our recovery in our – sort of legacy portfolio is coming from two of our CDOs, CDOs VIII and IX, and those are highlighted on Page 11, but we own a very large chunk of the capital structures of both of those deals and as we sell assets or a assets paydown, we will continue to receive principal of recovered capital from our investments in those two CDOs.

[Wes Edens:]

Great, thanks Ken. The golf business, turn to Page 13 of the presentation, American Golf, which I said we acquired the company through the debt, brought a new management and the performance of it has been terrific. Just to recap what American Golf is today, a total of 87 golf courses, 49 leased properties with an average lease term of about 12 years, 27 owned properties and 11 managed properties, very well located. We showed the map that highlights the concentrations in particular in California, Taxes and the Southeast. The percentage of revenues from the private course is 44%, public course is 56%. In Page 14, 2014, very much of a turnaround year, this is a portfolio that performed poorly during the financial crisis as a lot of the golf courses has been – but then did not really get a full recovery, brought a new management and the results have been pretty substantial. So 2013 EBITDA $22 million, 2014 $24 million, run rate by the end of the year $27 million and our forecast for this year is $30 million to $33 million. We have about a $150 million in debt and the portfolio, our basis in the equity is $82 million. We think we are – have value well, well above that, which is a terrific from a financial perspective, but it also gives us we think some good insights as where there might be opportunities in this sector and without going into a lot of detail about it right now, we are looking at a lot of different aspects of the business and the industry. I think there is going to be some good things to do this here. So with that maybe the financial results Justine.

[Justine Cheng:]

Yes, good morning everyone. I would like to turn back actually to Page 4, where we had highlighted our four quarter and full-year financial performance. Just a quick recap on the balance sheet, the debt portfolio ended with $1.1 billion of asset face value and during the year we had net collections of $305 million. What remains in the portfolio is another $350 million to $400 million of recovery value, which as Wes said we expect to realize it over the next couple of years. On the golf side, our basis is $82 million. We have total third-party debt of $157 million and the other key balance sheet items at year-end were $47 million of uninvested cash and corporate liabilities of $113 million. Wes already touched on this, but I’ll go over it really quickly. Our core earnings this quarter was $8 million or $0.12 per share, if you annualize that number that’s a 10% yield on our current stock price. For the full year, we generated $100 million of core or $1.63 per share and that reflects a strong earnings on our debt portfolio of 14% and looking into 2015 we expect that to continue. On AFFO, which effectively adjusted our core to include net gains from our selling activity that was $11 million this quarter, or $0.17 per share, and for the full year it was $155 million, or $2.52 per share. GAAP income this quarter was $0.16 loss for the quarter. This was driven by the large depreciation and amortization expense we had of $21 million or $0.32 per share, for the full year, we had $28 million of GAAP income, or $0.45 per share, and that number deduct G&A of $127 million, or $2.07 per share. In the fourth quarter, we declared a dividend of $0.12, or $8 million. And in addition to the stock distributed as part of our two spin, in 2014, we paid over $118 million of cash value to shareholders, or $1.92 per share. And with that, I’ll turn the call back over to Mandy for questions.

[Mandy Cheuk:]

Operator, we can open up the floor for question please.

[Operator:]

[Operator Instructions] Your first question comes from Douglas Harter of Credit Suisse.

[Douglas Harter:]

Thanks. Wes for a while now, you’ve been sort of – you’ve been a little bit more – you haven’t been certain as to whether the golf business was going to be as kind of an opportunistic investment or sort of an area where you would be able to continue to deploy capital. If – are you any closer to knowing if that’s going to be the area where you use the CDO cash as that continues to come in?

[Wes Edens:]

Yes. I think the – what I said before is exactly that Doug which is unclear when we first made the investment whether it was hopefully going to be a good trade or it was going to be more of business opportunity and I definitely think it is more of the ladder at this point. Less so in terms of just simply going out to buy other golf course as they grow the portfolio and more in terms of looking at kind of lesser activities and entertainment opportunities and things that we think could be – if you work with our base of assets and maybe create some incremental growth. So there is a handful of things that we’re looking at in the, I’d say, entertainment and leisure space, which golf is a component of it. Nothing to report at this point, but I’m definitely more optimistic about it. I’m very happy with the underlying performance of the portfolio. I think that the management team that we brought on board has done a terrific job of kind of revitalizing the private club portion of the business. The public golf course, the least part of the portfolio has also performed terrifically. We think that having the exposure in California is both unique and meaningful, but I am more optimistic about the overall prospects of it. And this is the year when we’re going to try to re-deploy the capital out of the debt portfolio, we think. And we will kind of show projections that run out of 2015, 2016, I think that the price of the debt assets that we own is now approaching far, we have had great performance for it, it’s a very liquid portfolio. So, again, we – I’m happy of the decision not to liquidate this stuff as we made big returns over the last couple of years as Kenny said, the 14 plus percent return last year. So we feel well served by that decision, but I think we’re closer to the end of the ownership of those assets than the beginning for sure.

[Douglas Harter:]

Got it And then I guess as you think as those sort of leisure activities is that something that get spun out or is that something at this point that just kind of NCT sort of morphs into that vehicle as the CDOs wind down?

[Wes Edens:]

I think the latter. I think that there is – the businesses that we have incubated that we have spun out had performed well, right. I’m very happy with the NRZ, which is the first of them. Then just a year ago as when we spun out new media that’s done terrifically; senior housing, we think has got tremendous prospect. So we feel very good about those sectors. I think it was the right decision to incubate them to own those assets and then give them their own kind of day to shine. I think with what remains right now, we’ll have a substantial amount of liquidity to redeploy as the debt portfolio continues to wind down. And I’m optimistic that we’ll find some fruitful ways of doing so. So I’ve got – again I'm not trying to be cute about it but I’ve got some thoughts on a couple of things in particular that we think are interesting to think about and we think that this leisure kind of branding opportunity for the business could be a substantial one and that’s where [indiscernible] spend some time on.

[Douglas Harter:]

Great, thank for the insights Wes.

[Wes Edens:]

Yes.

[Operator:]

[Operator Instructions] Your next question comes from Matthew Howlett of UBS.

[Matthew Howlett:]

Hi, guys. Wes, just a couple questions. What was the uninvestable cash during the quarter, what you consider your excess capital? And then two, would you put to look more repo into the CDO book as that continue to delever and run down? How much availability could you use to sort of lever that and drive sort of the core ROE a bit higher than what it's generating now?

[Wes Edens:]

Yes, the cash on hand of the business right now is $44 million. It was a bit higher than that over the course of the quarter. So a fair bit of cash is sitting around. In terms of generating liquidity on the debt portfolio, I think less in terms of marginally leveraging it up more and just in terms of liquidations, right. So, I think if we’re to pursue something on a corporate standpoint that we thought had a use for real capital I think we’d be more inclined at this point to liquidate and create liquidity from that side, than we could finance. We definitely have more capacity on the repo side, so on minutes notice, we could actually increase the leverage on that side, but I think that’s not the core part of the strategy going forward. I think it’s to hold of those assets until we decided to move on and do something else with the capital.

[Matthew Howlett:]

Great, Wes, and Just to follow on that strategy, could we think of it as something else in commercial real estate? Would you look to tie yourself to an originator, a bank? Would it be more of a holder of commercial real estate debt? Would it be residential? Is there any more indication we can kind of sense what direction NCT could take?

[Wes Edens:]

Less in terms of just kind of a generic commercial real estate and more in terms of real estate that is functional in an entertainment and leisure space I think that there is a lot of different examples that I don’t want to be cute about it. I think a REIT that has done a good job I think in an asset basis and that is probably entertainment properties trust. I think those guys have been thoughtful as how they have expanded their activities in a lot of different areas. Those without going into the specifics, I think that there are elements of that that we think are interesting. But also I think that that plus a core operating strategy to create businesses that can create growth on top of that and that’s the kind of mix of the business that I am thinking about. So…

[Matthew Howlett:]

Okay. And then presumably with the liquidation value, you said it could be as high as 5 in the debt book and that doesn’t include golf that you said it could be more 10 times EBITDA or something of that nature. Could – we presume that with the liquidity in the book that there wouldn’t be immediate need for external capital until you figure out the strategy?

[Wes Edens:]

That’s correct. We don’t need to – we certainly don’t need any capital right now, so there is no immediate need or whatsoever. In fact, it’s the opposite. We have probably a surplus of capital, based on where we are. We did something that was larger and we will profound then obviously we would talk about it then, but right now there is no need to think about third party capital at all.

[Matthew Howlett:]

Great, thanks Wes.

[Wes Edens:]

You bet.

[Operator:]

This concludes the question-and-answer session of today’s conference. I would now like to turn the floor back to Mr. Wes Edens for any closing remarks.

[Wes Edens:]

That’s great. Well thanks everyone for dialing in. Happy for the results that we had and we’ll look forward to talking to you again soon. Thank you.

[Operator:]

Thank you. This concludes your conference. You may now disconnect.