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Novastar Financial, Inc (NFI)

GAAP vs TI - sm...

GAAP vs TI - smoothjazz

mhatmccane

409 posts

Joined
1/20/2006

GAAP vs TI - smoothjazz
Posted: 05 May 06 3:25 PM

HERE WE GO AGAIN: GAAP VERSUS TI
by: smoothjazz0204

05/05/06 05:13 pm
Msg: 429093 of 429118

<Divend Exceeds EPS... How's that work? I'm a newbie to NFI. I noticed that NFI paid out $5.60 in Dividends last year and they are projecting $5.60 again this year. But their EPS for last year was only $4.40. How do they manage to do this?>

There is a short answer and a long answer. The short answer is these guys run a mean MREIT machine, and know how to maximize shareholder value to the hilt, with all kinds of market and non market forces against them.

The long answer is what you refer to as "EPS" means different things to different people and the IRS as it relates to MREITS. When you say this company has paid a higher dividend than EPS, you're obviously referring to GAAP (Generally Accepted Accounting Principles) which means very little to most MREITS.

GAAP
----------
GAAP is the most conservative financial metric an MREIT can use because it reflects NON CASH EXPENSES that may never impact the bottom line as a cash outflow. A major example of this is LOAN LOSS RESERVES. Like many companies, NFI takes a NON CASH hit to the P&L each quarter to account for loan losses that MAY OCCUR based on a stratification of its loans.

In many cases, these loan losses may never occur if the borrowers never go delinquent. Under this scenario, NFI has overstated its losses and understated its income. Beyond that, NFI also books an "Impairment on mortgage securities available for sale" that hits the P&L with a non cash offset to the Balance Sheet. Since the actual cash impact doesn't occur until the securities are sold, NFI is being conservative in taking a P&L hit for something that may never occur if it turns out they don't book a loss on the sale.

GAAP income dropped to 69cents in 1Q2006 because they changed how they accounted for securitization pools on their balance sheet, and the TIMING of how these expenses roll off and hit the P&L. No cash leaves the company in such a scenario; It simply means they have higher costs sooner and lower costs later, so over time it has no impact on their income statement. The simplest way to think about this is let's say you own an asset that goes up and down in value over time, but doesn't result in a cash loss because there is no permanent "impairment". Same concept here.

For all the reasons mentioned above, GAAP IS NOT RELIABLE WHEN LOOKING AT NFI'S EARNINGS POWER OR DIVVYS BECAUSE IT IS TOO CONSERVATIVE.

TAXABLE INCOME
-----------------------------------------
On the other end of the spectrum is TI, which is the metric upon which the divvy is based. Among other things, TI is the difference between what they earn on the investment portflio (commonly referred to as WAC) less cost of funds (NFI uses short term Libor and 2 yr swap as their average COF) plus any costs to service the portfolio, relevant 3rd party costs and the like. Since TI does not reflect certain non cash expenses that eventually becomes cash costs in the future, there are some who say TI overstates the true cash profits of the company.

I would agree and tend to look at true cash profits as a hybrid of GAAP & TI. In the past, if GAAP was $1 and TI was $2, I've used an average cash profit of $1.50. This is a "back of the envelope" estimate since I don't really know how much of their non cash GAAP expenses (ie loan loss reserves, securitization pool, etc.) ever make it to the bottom line as a permanenet impairment. That said, I'm very comfortable with the true cash profits of this company being in the $1.30 - $1.50 range in slow quarters and perhaps as high as $1.80 in higher volume quarters if WAC breaks their way.

Hope that helps & Best of luck.

mhatmccane

409 posts

Joined
1/20/2006

Re: GAAP vs TI - smoothjazz
Posted: 05 May 06 3:32 PM

Re: HERE WE GO AGAIN: GAAP VERSUS TI by: angine56 (ignored)	05/05/06 05:17 pm Msg: 429094 of 429121
Have to disagree! But let's wait for the 10-q. There were no securitizations in Q1, so the cash-flow statement should help us understand things a bit better. However, it's pretty clear the company needs to raise more capital, since dividend payments appear to be exceeding incoming cash flows, thus depleting core capital! I agree with you on this one!
Posted as a reply to: Msg 429093 by smoothjazz0204

mhatmccane

409 posts

Joined
1/20/2006

Re: GAAP vs TI - smoothjazz
Posted: 05 May 06 3:34 PM

Re: HERE WE GO AGAIN: GAAP VERSUS TI by: easter_bunny_d3 (100/Candyland) Long-Term Sentiment: Strong Buy	05/05/06 05:49 pm Msg: 429106 of 429121
So, just to spare you the next 40 or so identical posts, the new script came in, and it says: 1) NFI doesn't make enough to pay the dividend (which ignores that they clearly do - actually one of the basher myths from 3 years ago, memorialized at nfi-info.net). 2) Concentration of loans is in "scary" states. Ignores that the only thing scary about those states is in an entirely different demographic than what NFI lends to. Is that about it? Oh, and some feeble swipes at the GAAP issue, which was easily explained by me, the press release, the nfi-info.net news, and the company on the conference call. Enjoy your weekend work. May the cobra never see your eyes.
Posted as a reply to: Msg 429094 by angine56

mhatmccane

409 posts

Joined
1/20/2006

Re: GAAP vs TI - smoothjazz
Posted: 06 May 06 8:52 AM

Re: HERE WE GO AGAIN: GAAP VERSUS TI
by: smoothjazz0204

05/05/06 08:07 pm
Msg: 429145 of 429227

<Have to disagree! But let's wait for the 10-q. There were no securitizations in Q1, so the cash-flow statement should help us understand things a bit better. However, it's pretty clear the company needs to raise more capital, since dividend payments appear to be exceeding incoming cash flows, thus depleting core capital! I agree with you on this one!>

I said a lot in that post so I'm not sure what you disagree with. I will say that your meme "since dividend payments appear to be exceeding incoming cash flows" is the same ole shyte bashers have been blurting out ever since I've been here and longer I'm sure. Your securitization comment makes no sense either. I have no idea what you are trying to say in that posting and I'm not sure you do either.

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Specific Stocks

Novastar Financial, Inc (NFI)

GAAP vs TI - sm...