maximize the
difference between the yield on our investments and the cost of financing these
investments while hedging our positions. We are organized and conduct our
operations to qualify as a real estate investment trust (REIT) for federal
income tax purposes.
Newcastle Investment Holdings Corp. currently owns substantially all of our
outstanding common stock. Newcastle Investment Holdings was formed in May 1998.
We were formed in June 2002 for the purpose of separating the real estate
securities and credit leased real estate businesses, our two operating segments,
from Newcastle Investment Holdings. We believe that separating these businesses
from Newcastle Investment Holdings provides an opportunity for achieving more
stable earnings. In connection with our formation, Newcastle Investment Holdings
changed its name from Newcastle Investment Corp. Immediately upon completion of
this offering, Newcastle Investment Holdings will own 68.2% of our common stock
and new investors in this offering will own 28.9% of our common stock, assuming
exercise of all outstanding options.
As a result of the initial transactions, we own a diversified portfolio of
credit sensitive real estate securities, including commercial and residential
mortgage backed securities and unsecured REIT debt, rated primarily BBB (BBB-
is the lowest investment grade rating) and BB (BB+ is the highest non-investment
grade rating). Mortgage backed securities are interests in or obligations
secured by pools of commercial or residential mortgage loans. We also own credit
leased real estate in Canada and Belgium, which we refer to in this prospectus
as the "Bell Canada portfolio" and the "LIV portfolio," respectively. We
consider credit leased real estate to be real estate that is leased primarily
to tenants with, or whose major tenant has, investment grade credit ratings.
After giving effect to the initial transactions as if they had been completed
as of the dates below:
- our portfolio consisted of approximately $1.2 billion of assets at June 30,
2002;
- our portfolio was encumbered by approximately $1.0 billion of debt at June 30,
2002;
- for the year ended December 31, 2001, we had revenues of approximately $77.4
million, expenses of approximately $50.3 million and income from continuing
operations of approximately $27.1 million;
- for the six months ended June 30, 2002, we had revenues of approximately $46.7
million, expenses of approximately $28.9 million and income from continuing
operations of approximately $17.8 million; and
- our income from continuing operations per common share was $1.60 for 2001 and
$1.05 for the six months ended June 30, 2002.
As of and for the six months ended June 30, 2002, 89% of our total assets was
comprised of real estate securities and 11% was comprised of credit leased real
estate, and 77% of our total revenue was derived from interest and gains on
settlement of investments from our real estate securities and 23% was derived
from rental and escalation income from our credit leased real estate.
We have entered into an agreement with EMC Mortgage Corporation, an affiliate
of Bear, Stearns & Co. Inc., that provides us with an option to purchase up to
$235 million principal amount of mortgage loans. For more information, including
a description of these assets and related financing.
We intend to focus on increasing our holdings in credit sensitive real estate
securities, including mortgage backed securities and REIT debt securities, and
to continue to invest in other real estate related investments, including credit
leased real estate and mortgage loans. We expect to finance our real estate
securities investments through the issuance of debt securities in the form of
collateralized bond obligations, known as CBOs, which are obligations issued in
multiple classes secured by an underlying portfolio of securities. CBO
transactions offer us structural flexibility to buy and sell certain investment
positions to manage risk and, subject to certain limitations, to optimize
returns.
The annual gross return on our weighted average equity investment of $92.3
million in our first CBO transaction issued in July 1999, which we refer to as
CBO I, was approximately 22.3% from inception through June 30, 2002. On April
25, 2002 we closed our second CBO transaction, which we refer to as CBO II. As
of June 30, 2002, the aggregate dollar amount of the collateral in CBO I and
CBO II is approximately $1.0 billion. The weighted average credit rating of the
collateral in CBO I and CBO II is BBB-. Pursuant to an agreement entered into
in July 2002, Bear, Stearns International Limited, an affiliate of Bear, Stearns
& Co. Inc., will provide financing to purchase securities for, and Bear, Stearns
& Co. Inc. will act as placement agent in connection with, our third CBO
transaction.
OUR INVESTMENT STRATEGY
The keys to our investment strategy are:
- to actively manage our investment portfolio to minimize credit risk;
- to use match-funded financing structures, such as CBOs, to minimize exposure
to interest rate fluctuations and to take advantage of the structural
flexibility offered by CBO transactions to buy and sell investment positions;
and
- to take advantage of our manager's significant existing business relationships,
its expertise in real estate investing and financing, capital markets,
transaction structuring and resolution of distressed assets, its operational and
risk management systems and the economies of scale associated with its current
business operation.
Our competitive strengths include:
- our diversified portfolio, by asset type, industry, location and issuer;
- our match-funding discipline, whereby we seek to match our assets and
liabilities with respect to interest rates and maturities to finance our
investments with like-kind debt;
- our creative financing strategies, in particular, CBOs and lease
securitizations; and
- our experienced management.
OUR MANAGER
We are externally managed and advised by Fortress Investment Group LLC. At
June 30, 2002, Fortress Investment Group and its principals owned approximately
16.4% of the equity of Newcastle Investment Holdings (25.8% upon exercise of
outstanding options). In connection with this offering, we will grant to our
manager an option to purchase 700,000 shares of our common stock, representing
10% of the number of shares being offered hereby, and subject to adjustment if
the underwriters' over-allotment option is exercised, at the offering price of
our shares in this offering. As a result, upon completion of this offering, our
manager and its principals will beneficially own approximately 20.5% of our
common stock, taking into account interests in Newcastle Investment Holdings and
assuming exercise of all of their options. We have no ownership interest in our
manager. Fortress Investment Holdings LLC is the sole member of the manager.
The beneficial owners of Fortress Investment Holdings LLC are Messrs.
Wesley R. Edens, Robert I. Kauffman, Randal A. Nardone and Erik P. Nygaard.
Our chairman and chief executive officer and each of our executive officers
also serve as officers of our manager. Our manager is entitled to receive a
base management fee from us and may receive incentive compensation based on
certain performance criteria.
As required by our management agreement, our manager provides a dedicated
management team to us, including a President, Chief Financial Officer and Chief
Operating Officer, whose primary responsibility is to manage us.
Our manager also serves as manager of Newcastle Investment Holdings. In addition,
our manager also manages other real estate-related assets and intends to engage
in additional management and investment opportunities and investment vehicles
in the future. However, our manager has agreed not to raise or sponsor any new
investment vehicle that targets, as its primary investment category, investment
in credit sensitive real estate securities, although these entities, and other
entities managed by our manager, are not prohibited from investing in credit
sensitive real estate securities.
Newcastle Investment Holdings was incorporated in the State of Maryland in
May 1998. We were incorporated in the State of Maryland in June 2002. Our
principal executive offices are located at 1251 Avenue of the Americas, New
York, New York 10020. Our telephone number is (212) 798-6100.