What do living quarters for old people and newspapers have in common?
Not much.
So imagine the shock when investors learned senior housing REIT Newcastle Investment Corp. (NCT 2.12%) had plans to own and control more than 400 newspapers around the country.
Have investors gone mad?
The best way to describe Newcastle is "in seemingly permanent transition."
For months, the story has been that Newcastle would slowly divest its odds-and-ends collection of investments to focus on senior housing. Earlier this year, it spun off New Residential Investment Corp. (NRZ +2.79%) to take mortgage assets off its balance sheet. Since then, it's been cashing out of its collateralized debt obligations to invest the funds in real estate.
In June, investors were led to believe that the company would have fully wound down its CDOs to become a pure-play on real estate within one year. That plan seems to have been thrown out for a quick buck in a hodge-podge of daily and weekly newspapers located all around the country.
Connecting the dots
Newcastle is managed by a third party, Fortress Investment Group (NYSE: FIG), which happened to own nearly 40% of the equity in GateHouse Media, a newspaper firm that's going bankrupt.
Over the last few months, Newcastle Investment Corp. quietly acquired the majority of GateHouse's distressed debt, which gives it a very strong position to control the bankruptcy process.
Here's the plan:
- Send GateHouse into restructuring and offer debt holders $0.40 on the dollar in equity or cash.
- Combine GateHouse assets with 33 newspapers acquired from News Corp.
- Leverage the combined entity, with projections of 20% returns on equity.
- Spin off the assets as Newcastle Media Corp., a pure-play on newspapers that will pay out virtually all free cash flow as a dividend.
The plans include further investment in newspapers under the Newcastle Media name. The presentation goes so far to include projections that include making up to $1 billion worth of newspaper acquisitions by 2016.
But this is no sure thing. Newcastle has to work with creditors to finalize the GateHouse bankruptcy. Then it has to spin off a new entity as quickly as possible to avoid tax complications because it is a REIT, not a typical C-corporation.
And as for Newcastle's potential reward, it's really anyone's best guess. The final slide in the presentation shows projections of Newcastle's value at anywhere between $5.14-$9.19 per share, including the value of the newspaper business.
A company lacking direction
Having watched Newcastle for months, I'm left to wonder who Newcastle actually works for. Does it work for shareholders, or is it working for Fortress, its investment manager?
Newcastle shareholders clearly want to own a portfolio of senior living assets, yet Newcastle seems to be most interested in anything but senior living properties.
This newspaper deal really benefits Fortress, which can maintain control of its newspapers by directing Newcastle to invest in GateHouse's distressed debt. Should Newcastle get the nod to spin off Newcastle Media Holdings, Fortress will continue to manage the assets, possibly rewarding itself with a hefty management fee along the way. Newcastle Investment Corp. and Newcastle Residential currently pay 1.5% of equity in annual management fees.
There are just too many questions about Newcastle's future to make an investment. Will the bankruptcy proceedings at GateHouse go through without a hitch? Can Newcastle spin off the assets as quickly as it expects?
And if shareholders cash in from a spin-off, can we trust that Newcastle will actually follow through on its stated promise to invest in senior housing? In its June investor presentation, the future transition to senior housing seemed so clear. Next week, I wouldn't be surprised to learn Newcastle was sizing up a deal to buy a bike shop.
