Novastar Financial waives healthy dividend

NovaStar Financial’s stock plummets after waiving dividend
By DAN MARGOLIES
The Kansas City Star
In the latest sign of mounting woes that threaten its survival, NovaStar Financial lost about a fifth of its value Monday after deciding to stop paying dividends to investors.
The Kansas City-based subprime mortgage lender said its inability to pay the dividend would cost the company its status as a real estate investment trust. The action also could lead to its delisting by the New York Stock Exchange.
The struggling company said that it expected the change in its corporate structure to have “a significant adverse impact” on its third-quarter results, although it said it was in the process of determining its tax liability.
NovaStar’s stock took a beating in after-hours trading following the announcement. Shares tumbled nearly 20 percent in the evening to $6.70, down $1.54.
NovaStar has been scrambling to surmount the turmoil that has engulfed the subprime mortgage market in recent months. Among other actions, the company has slashed its work force from more than 2,000 last year to about 600 employees.
Crimped access to the credit and equity markets has roiled the once fast-growing company, which focused on providing mortgages to borrowers with shaky credit records. Monday’s announcement came two weeks after NovaStar canceled a $101 million stock offering to raise capital.
The company has gotten out of the retail and wholesale lending business and is now confining itself to managing its investment portfolio and servicing existing loans.
“We continue to take steps to preserve liquidity, mitigate risks and manage our portfolio in the midst of a difficult environment for the mortgage industry and capital markets,” Scott Hartman, NovaStar’s chairman and chief executive, said in a prepared statement Monday.
“Clearly, we did not anticipate the drop in market value or the level of demands on liquidity caused by the market turmoil this summer. Based on these events, we now believe canceling the previously planned dividend is the only reasonable and prudent course of action.”
Company officials could not be reached for further comment.
NovaStar had expected to drop its REIT status after reporting earlier this year that it expected little or no taxable income through 2011. The company, however, had planned to declare a dividend in the third quarter of 2007 to satisfy tax code requirements governing the distribution of its 2006 taxable income.
REITs are companies that specialize in owning and managing real estate for the benefit of shareholders. They pay little or no federal taxes on their profits provided they distribute most of those profits to shareholders in the form of dividends.
But NovaStar’s plan to distribute about $157 million in dividends to shareholders, by way of convertible preferred stock, fell by the wayside amid questions raised by its auditor, Deloitte & Touche, about its viability as a going concern. The company’s lush dividends — $5.60 per share last year — have been one of its chief attractions to investors.
One analyst, Scott Valentin of the investment firm Friedman Billings Ramsey Group, said in a report two weeks ago that the odds of NovaStar becoming insolvent had “increased significantly.” Valentin also said the eventual liquidation of the company was “highly probable.”
Like scores of other subprime lenders, NovaStar has experienced increased delinquencies and defaults among its borrowers, who do not qualify for conventional mortgage loans.
In the past, NovaStar has sold most of its loans to investors, but investors have stopped buying them because of the loan problems. Likewise, lenders to subprime companies have cut off much of their funding, forcing scores of subprime lenders to shut down, declare bankruptcy or look for investment partners.
NovaStar said the termination of its REIT status will be retroactive to Jan. 1, 2006. It said it expected the resulting tax liabilities to be offset by its tax losses this year.