Shorts need to think twice about holding a short position in ARCP as the stock price continues to recover. And, if it turns out the audits don't turn up any accounting problems beyond those already disclosed by CEO Kay, then ARCP will gap up. As Dirty Harry famously said, "You've gotta ask yourself one question: 'Do I feel lucky?'"
Sentiment: Strong Buy
Bob, I think you are on to something. I expect NCT to maintain its reit status. Golf courses are a good reit asset. So, NCT should continue to pay out 90% of its taxable reit earnings to investors. Soooooooooooooo...that does suggest to me that the dividend will be a chunky one.
What's holding the stock price back is a lack of visibility on (1) the dividend (2) how the liquidation of the legacy portfolio will pan out (3) what will management do with the proceeds from the liquidation. Also, NCT stock price under $5 means most institutional investors won't consider buying it. It's only a matter of time before the board sets the dividend, and management articulates its vision for Newcastle. Wes didn't articulate a detailed vision of Newcastle's future on the last call, so I suspect the vision still hasn't been crystalized.
Sentiment: Strong Buy
The company has over $6 per share of annual operating cash flow, but pays no dividend, and has no plans to initiate a dividend. Instead of rewarding shareholders by paying a dividend, the company buys ailing businesses, such as reverse mortgage, which drain the company's cash and are a distraction to management. I think WAC's large investments in MSR's will ultimately pay off for shareholders, but WAC management lacks focus and consistency of execution. The trend in corporate boardrooms over the last several years has been a renewed push to reward investors with dividends and share buybacks--but not at WAC. One would think activists would buy shares, and then pressure the company to shed money losing divisions, simplify the company, sharpen its focus, and to initiate a dividend or buy back shares.
bored, I tend to agree with you. Mutual fund managers who own ARCP shares in their funds will dump their shares just so they don't have to answer questions about the investment. They don't want ARCP to show up on their list of stockholdings in the mutual fund annual report because they don't want to admit they bought stock in a company whose stock price later dropped because of an accounting problem. It's somewhat irrational behavior, because ARCP's stock price is likely to bounce back, but fund managers and other institutional investors often are short-sighted. They don't want to hold any stock that might make some of their investors nervous.
CFO Justine Cheng said that breaking down 3Q core earnings into its parts, 60% was attributed to senior living, and 40% to Newcastle's businesses (legacy and golf). In 3Q, the legacy biz generated $14 million, and golf generated $4 million, which ends the "high season".
To get an estimate for annual "core earnings" for Newcastle post-spin, I'm thinking 4 x $14, and then add in, say, $8 million for golf, which totals $64 million. There are 66 million shares outstanding, so Newcastle should earn just shy of a dollar of core earnings annually. Of course, the legacy portfolio will be liquidated over the next few years, and it's not clear how that cash will be redeployed in the future.
Anyone care to refine my analysis?
My interpretation of CEO Kay's comments on the CC is that because the signatories to the 2013 financial statements were the former CFO and CAO, whom have left the company, a process of re-verifying 2013 financial results is needed so that they can then be signed by the new CFO and CAO, which is probably per Sarbanes-Oxley, although Kay didn't specifically refer to Sarbanes-Oxley. I'm not an accountant, nor do I have any technical expertise in accounting or corporate regulation, but it sounded to me that Kay seemed to imply that ARCP management doesn't have any specific reason to suspect accounting shenanigans in the 2013 results, but a re-verification is required anyway because of the signatories. In other words, it sounds like it's more of a "standard procedure" when the annual financial results have to be recertified by new signatories that there is a process to re-verify the results. Like I said, I have little accounting knowledge, and I'm just saying that's how I interpret what Kay said on the CC.
If it turns out that the 2013 financial results are full of cockroaches which are uncovered in the audit currently underway, that would be a real black eye for the audit team that previously audited and approved the 2013 financial results. So, I'm not expecting big problems with the 2013 financial results to be turned up during the current audit, because from Kay's remarks on the CC, this doesn't appear to be an extensive accounting conspiracy a la Enron or WorldCom, but rather some small accounting goofs that the former CFO and CAO later covered up.
Sentiment: Strong Buy
Infiniti, I agree with you that a dividend cut is unlikely. I think as soon as the Board of Directors, CEO and Chairman learned of the accounting shenanigans, they lowered the boom on the miscreants, and then provided the required SEC filings and investor disclosure to make every attempt to bounce back from the accounting missteps. This doesn't appear to be a broad corporate management conspiracy. I take Kay at his word. I'm willing to bet that there won't be any significant revisions to historical AFFO. I'm 90% sure this will be a buying opportunity as ARCP quickly completes the audits of 2013 and the first two quarters of 2014, announces the audit results, makes the required accounting revisions which Kay previewed on the conference call, and puts this mess behind it.
Sentiment: Strong Buy
stockpick, I think you have laid out the "best case" scenario of ARCP well. The "worst case" scenario is if the audit uncovers more material weakness, systemic problems, or serious outright accounting fraud that has caused historical AFFO to be overstated by a significant degree. Even in the "worst case" scenario, it's hard to imagine that accounting fraud would cause ARCP to declare bankruptcy. IMO, it's unlikely that ARCP's books are fraudulent to the point they have overstated annual AFFO by more than 5%. Of course, I'm not 100% sure I'm right, but I doubt this is an instance of serious, material fraud extending over years.
Sentiment: Strong Buy
ARCP's dividend yield is currently north of 11%, because of the reit's disclosure of the intentional concealment of accounting errors related to employee bonus accruals. Also, it appears ARCP''s deal to sell it's Cole Capital business for $700 million is on the rocks, as RCP has walked away from the deal. I expect that RCP will be able to prove a "material change" in Cole Capital's business resulting from many brokers suspending sales of Cole Capital's products recently, so ARCP's lawsuit against RCP for breach of contract will not succeed.
My thesis is that if ARCP doesn't drop any more bombshells, then the stock is way undervalued. ARCP's annual dividend rate is twice that of its peers in the net leased reit space, and ARCP is the largest net leased property reit, so it should trade at a premium to its peers. Although ARCP has been criticized for its rapid growth and for overpaying for properties, it appears that rising property values over the last four years have worked in its favor, and have vindicated its strategy. I like the net leased property portfolio, and I believe ARCP's financial results will be stable going forward, the property portfolio will perform well in an expanding economy, and the properties will likely continue to appreciate in value.
I'm not dismissing the accounting problems as trivial. But, if new, serious and as yet undisclosed accounting problems don't come to light during the audit of 2013 and 2014 results currently underway, it is likely that the steep stock price discount will evaporate over the next 12 months. Even if more accounting problems are uncovered, I feel the size and financial strength of ARCP bodes well for a stock price rebound in the fullness of time.
Sentiment: Strong Buy
Nice to see there is at least one brokerage out there with some spine. Most of them put a "Buy" rating on anything that has gone way up, and if anything plunges like Genworth shares have, they all put "Sell" ratings on it (after the fact, of course). Raymond James is able to avoid that herd mentality, and take a contrarian view. In my opinion, Genworth's sum of parts is worth a lot more than where the stock is trading today, and the company has options for raising capital that don't entail selling more shares or adding debt. Also, Genworth is "takeover bait" at its currently depressed stock price. A large insurance company like AIG, Metlife, Prudential, or Travelers ought to swoop in and grab Genworth before the stock price goes way up. If Genworth is acquired by a large, well-capitalized insurer, it's capital shortfall goes away, and the acquirer gets Genworth's massive book of business on the cheap.
Metlife, Prudential, Travellers, Northwestern, or some other insurance giant should buy Genworth on the cheap. Genworth is trading for peanuts because some investors feel its capital position is shaky because of rating agency downgrades. A big, well-capitalized insurance company can swallow Genworth, and take over its massive book of business, and the worries about capital go away. In other words, at its currently depressed share price, Genworth is takeover bait.
WAC is tough to buy. Sure, the stock price is low, but there are good reasons for that. First and foremost is that WAC pays no dividend, which basically means either the Board doesn't give a rat's #$%$ about investors, or the Board doesn't think WAC will be consistently profitable enough to maintain a dividend payout--even a tiny dividend payout. In other words, WAC's BOD has zero confidence that the company can maintain a fixed dividend payout. Management's profit projections are a dart throw at best. The mortgage servicing biz is in the crosshairs of government regulators, who are scrutinizing all the servicers, looking for whom they can penalize or sue next. I think it's unlikely that WAC will emerge unscathed from regulator's scrutiny. It may take time for regulators to put a case together, but so many homeowners were screwed by so many servicers that it's hard to believe that WAC has always been consistently "angelic" as a servicer. So, although I do think WAC has tightened controls over the last year or so and is now compliant, nobody really knows what liability WAC still faces for past servicing transgressions.
WAC common trades at 60% of BV. It's a disgrace! WAC has such a lousy track record and no consistency to execution and profitability that its own board doesn't feel the company can pay a dividend. And, the board doesn't have any plan to improve the dismal situation so that WAC can pay a dividend someday. WAC's board seems to drift along in a lackadaisical fashion without bothering to supervise or shake up its incompetent management, who are unable to lead the company forward. Reverse mortgage has been a disaster from the beginning, and management appears unable to turn it around. Instead of paying shareholders a dividend, WAC's management buys ailing businesses like reverse mortgage, which are a distraction and require large investments that don't pay off. About the only saving grace for WAC is that it appears to be the healthiest horse in the glue factory. Compared to Ocwen, the poster child for abusive practices and lack of controls by management that incurs huge legal settlements and lawyer fees, WAC's management looks brilliant!
It's hard to say. I like the fact that WAC continues to purchase MSRs and to build its servicing portfolio. On the other hand, WAC's other businesses, such as reverse and originations, don't appear to contribute to profitability. In fact, reverse has been a disaster from the beginning. Until WAC's board initiates a dividend, one has to wonder if the business is capable of producing consistent profitability. Since WAC's own board doesn't have enough confidence in WAC's business prospects to initiate a dividend which would support the stock price, why should I have confidence in WAC?
mreitcmbs, your numbers seem to be on the mark. Wes Edens made comments on the CC that SNR "should" trade at $21.50-22.00 or so, with a 6.5% dividend yield. That corresponds roughly to an annual dividend payout of $1.40 or so. And, I vaguely recall that the SNR CFO also confirmed that FFO is projected to be roughly $1.40 or so. Your comments buttress my earlier post in which I made the case that lack of an explicit dividend guidance is holding back SNR's stock price, among other things. I agree with your point that it's hard for prospective investors to justify a purchase of SNR shares today, when the SNR board hasn't yet gotten around to setting the dividend payout. The new CEO stated on the CC that she fully expects a dividend to be paid, but she didn't give specific guidance for its dollar amount, since the board has yet to act. It's hard to understand why the board doesn't meet and set the dividend to provide investors clarity.
Clearly, some sharp-eyed investors homed in on the CFO's valuation comments. And, Ken Riis indicated during the Q&A that while he expects $350-$400 million in additional recovery from the legacy portfolio, he expects most of the recovery to occur during the coming year. I think the golf assets could turn out to be a long term winner. Golf courses changed hands at low prices during 2009-2011, but valuations have bounced strongly since then. I think the demographics of golf are superb, and as "baby boomers" leave more physically demanding sports like skiing and running in coming years, many of them will take up golf. Also, a growing number of U.S. retirees means a growing number of golf rounds will be played.
Well, another factor is that existing NCT investors have recently received the SNR shares in their brokerage accounts. When the SNR shares were trading on a "when issued" basis, NCT investors hadn't yet received the spun off shares, and weren't able to sell them. Now, they are able to sell them, and some of them have decided to do exactly that. I expect SNR shares to trade up to Wes's $22 share price target over the next 12 months as SNR sets an explicit dividend policy and establishes 12 months of operating history. There's no operating history of SNR as a standalone company, so it's a bit too soon for SNR to hit that target dividend yield of 6.5%.
The stock dropped over 5% today. I'm guessing that is because SNR management hasn't yet set the dividend payout, among other things. On the last CC, the new CEO stated that she expected the current dividend policy to continue, but she didn't specifically state what the dividend payout would be post-split. Wes Edens implied that he thought SNR stock should trade for $21.50-22 or so, which implies a 6.5% annual dividend yield. And, I'm guessing that SNR ultimately will trade at a 6.5% dividend yield in the next year or so. The trouble for existing SNR investors is that there's a lack of transparency for prospective investors as to what exactly is the dividend payout. Also, there's no track record of SNR as a standalone company. It makes sense to me that for a company that has recently been spun out as a new company with no track record, the shares should trade at a discount to peers. So, I see a couple of reasons for the stock to trade at a discount, including new, untested management, lack of an explicit dividend policy, and lack of financial transparency of SNR as an ongoing standalone company.