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The following letter was sent to the CEO of Newcastle Investment today:
Charles Frischer
4404 52(nd) Avenue NE
Seattle, WA 98105
August 10, 2015
Mr. Wesley Edens
Co-Chairman
Fortress Investment Group
1345 Avenue of the Americas
46(th) Floor
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.
Buyback accretion
Post-buyback @
Current $5 Change
Net Asset Value of
Newcastle $442 million $342 million -$100 million
Outstanding shares 66 million 46 million -20 million
Per-share NAV of
Newcastle $6.65 $7.43 +11.7%
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.
Sincerely,
Charles Frischer
View source version on businesswire.com:
http://www.businesswire.com/news/home/20150810005579/en/
CONTACT: LF Partners
Charles Frischer, 917-528-1465
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