I did some simple cash flow calculations and it didn't make much since for next year. These calculations relate only to the Holiday purchase. They are not accounting for Media, CDO's, other Senior living or any other wild idea that Wes dreams up.
Assumptions:
Outstanding shares for the year 358 million (with addition of new shares)
Mortgage of 710 million (1.01 billion minus equity investment of 300 million)
Ten year mortgage (Somewhat common for commercial)
Interest rate 5% (WAG - Wild #$%$ Guess)
The income from the 6.5% lease would be $.18 per share for next year. Thats 1.01 billion * 6.5% divided by outstanding shares
The mortgage payment would be approximately $.24 per share for next year. A mortgage calculator gave me about 7.4 million for a monthly payment. I multiplied that by 12 and divided by the outstanding shares.
So on a strict simple cash-flow basis I see a $.06 deficit for the year for this transaction. I know that FFO and cash-flow are not strictly identical and that my assumptions could be wrong. But as JABARNES likes to keep reiterating, we don't get enough information. I would like to have a better understanding about how we get from my numbers above to the additional $.14 per share that they are hoping to get next year from this transaction. (That comes from 300 million (equity investment) * the expected return of 17% divided by the outstanding shares).
So back to the topic "What am I missing?"
I am not trying to bash the stock. I've made more than my share from NCT and still hold a substantial position (relative to my portfolio). I'm trying to figure out if this is a good entry point to acquire additional shares.
I'm hoping we can have a constructive dialog.
Thanks,
Bob
You are missing a lot. One you assumed a rate beyond what any REIT entity would pay. Think on the terms of three month libor plus 300 bps. Two it's never simple math when you take terms of the agreement. NCT has stated they are targeting a 17% return. So of the 300 invested they are looking at 51 million per year. Then adjust for depreciation which is additive. So your mainly looking at .04 to .06 per qtr more. Plus the upside for the rate increase for 17 years. The property is all ready managed. So it is as if Holiday spun out the assets as a REIT. But Wes wild dream of synergy is not so wild. We may see .12 to .14 per qtr without any return of capital.
Take the sum of the parts
NCT .12
NRZ .18
NMC .05
You get .35 per qtr and that my friend is called creating shareholder value. Wes has wild dreams but someone in America has to dream that's what makes us.
Hana,
1. I'm not sure three month libor terms apply to a mortgage. Per the press release, these properties will be financed with a non-recourse mortgage.
2 "It's never that simple when you take terms of the agreement". That's part of the problem, I don't think we have enough information about terms of agreement to make an informed decision about the value of the investment.
The remainder of your argument is based upon managements prediction that there will be a 17% return on the $300 million invested. While they have been somewhat (See NSM change in projections) reliable in predictions in the past, I'm trying to do a little work to see how reliable that may be.
Additionally, 17% return does not necessarily translate directly into cash available to stockholders for dividends. This transaction includes a mortgage which impacts cash differently than rolling short term loans. Investing in real property is not generally profitable or cash flow positive in the short term. Especially if your using a mortgage to finance it. While I'm a long term investor, I use dividends to live and I don't want to see them cut because of a change in cash flow.
As far as I'm concerned dividends are king, they provide income and the backbone for share value. If the dividends are compromised then I'm not happy.
Thanks for your input, hope I wasn't too harsh in the tone.
Bob
Yea, your math is off. Assume 5% mortgage on $700 million and 6.5% on $1 billion:
Net income: (0.065 * 1 billion) - (700 million * 0.05) = 65 million - 35 million = 30 million
Net income per share: ~30/350 = 8.5 cents.
Note that this is an extra 8.5 cents per year. Deduct some mgmt fees and we may see another penny per quarter that could be paid as dividends. Note also that I now value New Media at about 85 cents. So a buy here really means you are buying NCT at $4.55. A 10-cent quarterly dividend is really good; 11 cent quarterly is even better. IMO: 10% for an equity REIT is too good. (Small wonder that the pps did not fall much today.)
I agree with your calculations for net income. However I was trying to calculate cash flow. On top of the $35 million in interest, there is approximately $55 million in principal that will have to be paid.
Where does that $55 million come from? Borrowing, SPO, other cash flows that were formerly available to stockholders. I like to keep things simple cash-in/cash out, forget all the GAAP #$%$.
I know we have to spend to grow. But like I said before I'm trying to figure the impact of this purchase on next years FFO.
Just a reminder to people reading this, my numbers are somewhat fictitious in that I made some assumptions in the first post that may or may not be close to factual. I'm hoping they may be close enough to allow for discussion.
Note that my back of envelope analysis assumes the 10 cent dividend is unaffected by the extra 50 million shares. My bad. This does need to be factored in. Assuming nothing else changes, the 40 cents per year becomes 40 * (300/350) = 34 cents, but the acquisition at 5% mortage adds 8.5 cents, so the acquisition is accretive. I think 5% mortage is high considering that NCT is putting down 30%. The mortage is likely fixed rate, but rent increases on this acquissition and all other senior housing they have will increase earnings more going forward.
Your math is off. If the interest rate is assumed to be 5% and the first year lease rate is 6.5%, then the net is 1.5% and you cannot have a deficit!!! No matter how many shares! Its not going to move the needle alot in the initial year but will over time. More importantly, it makes this REIT approach the pivotal point of being considered a senior living REIT which gets it a higher multiple.