REIT Preferreds: NCT Says Location, Location, Location

Boy did I make a mistake, and it was with real money. When Wes Edens stopped bothering to show up for Newcastle’s earnings calls, I should have realized what was going on. Sure he had purchased a bunch of NCT stock earlier in 2007, but with whose money? He had taken Fortress public just a few months earlier and reaped a huge windfall. So what’s a few million dropped along the ramparts of one of his embattled castles? He made his indifference public today with the announcement that NCT would not only skip the common dividend in Q4, but they would also stiff their preferred holders too.

It was only a few months ago that I thought NCT would pay a special dividend in Q4. In the second quarter, NCT reported operating earnings (Non-GAAP) which were twice the dividend, a big jump in cash, to $170 million, and $88 million in debt reduction, $57 of which was recourse. And they had effectively covered the entire annual dividend with just six months of operating earnings. What happened after that must have been a real disaster.

It appears as though NCT was forced to sell big chunks of the portfolio at a significant loss in the process of getting to this very precarious point. There is really no other explanation for deciding to stiff your preferred investors – it is tantamount to a default. Unfortunately, they gave no update on their cash position, which in and of itself, given the situation, is not reassuring.

As of July 31st, however, they had $170 million in cash and had already covered the dividend. By the time Ken Riis held the Q3 earnings call, unrestricted cash had dwindled to about $100 million, which was not great, but still not terrible, and it was certainly enough to fund the preferreds. However, by “electing” not to pay a preferred dividend, which is hardly an election, one can only assume that Q4 was a disastrous three months of losses driven by margin calls, and it looks like NCT is now in some serious, serious trouble.

Updating yields on the Mortgage REIT list keeps getting easier and easier. There are now more zeros than a room full of turnips.

Disclosures: None at the time of publication