NovaStar Admits it Will Fail to Pay Dividend, Terminates REIT Status

Troubled subprime lender Novastar Financial, Inc. said today that it will not be able to pay a $156 million dividend based on 2006 taxable income, citing liquidity demands on the company’s core operations — thus costing the Kansas City-based outfit its REIT status and further clouding NovaStar’s future.

From the press release:

NovaStar said it expects that the termination of its REIT status for the 2006 tax year will have a significant adverse impact on its financial statements for the third quarter of 2007, which will include a period expense in the third quarter for the 2006 tax provision. The Company is in the process of determining the amount of income tax expense in the third quarter which will also include a charge for penalties and interest, and a valuation allowance against its deferred tax assets.

Translation — we’re going to lose a whole lot of money in the third quarter of this year. The REIT termination will be retroactive to January 1, 2006, NovaStar said, and may cost the company its listing on the New York Stock Exchange.

On September 4, Novastar said it had ceased most funding activity and would focus on managing its portfolio of residential loans, as well as exploring the potential sale of its servicing platform.

Today’s news has hidden significance, depending on how the company’s various financing and servicing contracts have been written — some creditors may have covenants in place regarding continued listing status and/or dividend distribution. Others most certainly have income provisions in place, and with losses mounting, it appears that NovaStar will be busy attempting to obtain continued waivers or renegotiated terms for its servicing and financing deals.