Charles Frischer Calls For Newcastle Buyback
August 10, 2015
Mr. Wesley Edens
Fortress Investment Group
1345 Avenue of the Americas
New York, NY 10105
Dear Mr. Edens:
I recently filed a 13-D form on Newcastle Investment, disclosing my ownership of 3,442,000 shares or 5.2% of the outstanding shares. I have been a long-term investor in the company and recently purchased additional shares because they are trading at a significant discount to the net asset value of the company.
Last week Newcastle reported great earnings. Newcastle has two major assets: a real estate loan portfolio, which has just over 12 months of duration, and a portfolio of golf assets. The corporate actions taken by management in both buying back the company’s golf debt at a 10% discount and collapsing two of its main CDO portfolios were terrific. Buying the golf debt back at a discount created 25 cents per share of additional value, and collapsing the CDO portfolio further simplified the investment and removed considerable risk.
In the aftermath of a great earnings report, NCT shares were down 6.5% for the week. At the current stock price of $4.60, the market clearly is not giving the company credit for the value of the golf assets. Management has a responsibility to the Newcastle shareholders to immediately address this situation.
Therefore, I request that management immediately initiate a $100 million share buyback, with a ceiling price of $5.00 per share. If the company is not willing to implement this buyback, I request that it immediately begin a sale/liquidation of Newcastle Investment with the expectation that proceeds will exceed $6.65 per share, a 45% premium to the current stock price. ($6.65 is the midpoint of the sum of the parts valuation from page 7 of the second quarter 2015 investor supplement presentation.) There would also be a large number of both private equity firms and other investment companies who would love to take control of Newcastle at a $6.65 price.
The market price of Newcastle is also depressed because it is being grouped in with other mortgage REITs. Investors are assuming the company will be subject to significant asset deterioration due to future interest-rate hikes by the Federal Reserve. Not only is it uncertain when the Fed will raise rates and by how much they will increase, but a real estate loan portfolio with just over a 1-year duration should be sheltered from any unusual deterioration in value. Newcastle is a mortgage REIT in name only. The company owns a very short-term bond portfolio and a collection of golf assets with dramatically improving fundamentals. The current market disruptions are an opportunity that management must take advantage of immediately.
Newcastle is basically a special-purpose acquisition entity selling at a 35% discount to net asset value. I am confident that Fortress, acting as manager of Newcastle, will be able to execute on an accretive acquisition when it is identified. Another reason for the discount to net asset value is the fear that Fortress will do an ill-advised acquisition. I am confidant that Fortress will identify an accretive acquisition and that the market will give the stock a more appropriate and higher valuation once a deal is announced and explained to shareholders and the analyst community.
Fortress Investment Group, as the manager of Newcastle Investment, might have different motivations in regards to the capital it manages for Newcastle. The management of Fortress might be reticent about incurring a 30% reduction in management fees if the share buyback proposed was fully implemented. However, a short-term reduction in management fees could lay the groundwork for much larger management fees from Newcastle in the future. The market capitalization for Newcastle Investment is approximately $300 million. The medium-term goal for Fortress is to manage a capital base at Newcastle in the range of $1-2 billion. The buyback would dramatically increase the net asset value per share and lay the groundwork for a much larger company.
Based on my simple example, the per-share net asset value increases by more than 11.7% via a $100 million buyback. This is only the first step in the process. The corporate strategy for Fortress is to manage a much larger permanent capital vehicle at Newcastle. The market would love this buyback program and would afford the company a higher per-share valuation. There would still be plenty of capital at Newcastle to effectuate the next acquisition, whenever that may occur. The ability for Newcastle to do an even larger secondary offering at that time will be much improved because Fortress management will have proven itself to be willing to occasionally take a short-term hit to profitability to drive long-term growth.
The math is compelling and is in the long-term interest of Fortress. By virtue of this buyback, you will likely be able to sell shares to the public at a level at least 10% higher than absent this program. The buyback program would also provide great security to the already large and likely growing dividend. Assuming a $5.00 buyback price and the current 48-cent dividend, the company would be earning a risk-free 9.6% return on this $100 million. If the dividend is raised to 60 cents over the next 6 months, as many analysts believe it will be due to the strong results at the golf course division, the risk-free return earned by buying back the shares at $5.00 is 12%. These are very large risk-free returns that can be earned by buying back company shares.
The buyback is in the interest of both Newcastle and Fortress shareholders. A more basic argument could easily be made that the management of Newcastle should do what is best for the company, without any consideration for Fortress. The management of Newcastle has a fiduciary responsibility to its shareholders, even if those actions are not in the interest of Fortress. The course of action outlined here is in the interest of both parties and creates a mutually beneficial outcome.
If Fortress Investment Group, as the manager of Newcastle Investment, is not willing to implement this large buyback, I request an immediate sale/liquidation of the company. I believe this sale/liquidation will result in more than $6.65 per share. There are numerous buyers for the golf assets, including Club Corp, and the real estate loan portfolio can easily be liquidated as it matures over the next 12 to 18 months. There would also be numerous financial buyers interested in obtaining control of their own permanent capital vehicle at a minimum $6.65 per share. The shareholders of Newcastle must be treated fairly.
Please immediately address the issues raised in this letter with the Board of Directors. In addition, please send me a current list of your shareholders.
Wes, your team at Fortress has done a very good job managing Newcastle over the last 3-5 years. In the last 6 months, shareholders have not been excited about the stock price of both New Senior and Newcastle. A large buyback program at Newcastle would enable you to regain tremendous favor with your investors. This is a smart move for both Newcastle and Fortress shareholders. Please take immediate action on this capital allocation strategy.