Newcastle Investment CEO Discusses Q3 2010 Results - Earnings Call Transcript

Newcastle Investment Corp. (

NCT

)

Q3 2010 Earnings Call

November 9, 2010 11:00 am ET

Executives

Nadean Novogratz - VP of IR

Ken Riis - CEO and President

Brian Sigman - CFO

Analysts

Matthew Howlett - Macquarie

Joshua Barber - Stifel Nicolaus

Presentation

Operator

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Previous Statements by NCT
» Newcastle Investment Corp. Q2 2010 Earnings Call Transcript
» Newcastle Investment Corp. Q1 2010 Earnings Call Transcript
» Newcastle Investment Corp. Q4 2009 Earnings Call Transcript
» Newcastle Investment Corp.Q3 2009 Earnings Call Transcript

At this time, I would like to welcome everyone to the Newcastle third quarter earnings call. (Operator Instructions) Thank you. Ms. Novogratz, you may begin your conference.

Nadean Novogratz

Thank you, Cynthia, and good morning, everyone. I'd like to welcome all of you today, November 9, 2010 to Newcastle's third quarter earnings conference call. Joining us today are Ken Riis, our CEO and President; and Brian Sigman, our Chief Financial Officer.

I would also like to point out that statements today, which are not historical facts, may be forward-looking statements. Our actual results may differ materially from the estimates or expectations in any forward-looking statements. These statements represent the company's beliefs regarding events that, by their nature, are uncertain and outside of the company's control. So you should not place undue reliance on any of these statements.

I would encourage you to review the forward-looking statement disclaimer in our earnings press release, including the recommendation to review the risk factors contained in our annual and quarterly reports filed with the SEC.

Now I would like to turn the call over to Ken Riis. Ken?

Ken Riis

Thanks, Nitty. Good morning, everyone, and thank you for joining our third quarter 2010 earnings conference call. The third quarter was very productive and towing for us. Our financial metrics are improving, cash for new investment is growing, and the value of our portfolio is increasing.

First, let's talk about our financial results. Operating income increased $0.12 to $0.48 per share and cash flow from our CDOs increased over $1 million to $17 million versus the second quarter. A key highlight relating to our CDOs is we increased the over-collateralization cushion in CDOs VIII, IX and X by $59 million despite $194 million of asset downgrades. As a very productive result for us and highlights our ability to successfully manage these portfolios and source new investments at discount dollar prices.

Today of the three, CDO X is the most challenged, as it has the largest amount of assets on downgrade watch and the lowest OC cushion at $44 million. On the contrary, CDOs VIII and IX have over $100 million of cushion, and the cash flow generated from these two portfolios is more reliable.

Now, moving on to cash for new investments. Since we last spoke to you in August, our cash has grown by $76 million to $239 million. This is comprised of $63 million of on balance sheet cash and $176 million of cash in our CDOs. During the quarter we've purchased $148 million of assets at a price of $0.70 on the dollar, generating a 30% unleveraged return. We also repurchased $48 million of CDO debt for $105 million.

We see our CDO debt as the best opportunity to deploy capital and increase shareholder value. We still have $3.4 billion of debt owned by third parties, which may offer good value depending on the price. We expect selling pressure to intensify going into year end and spread should widen. We are currently seeing a lot of good investment opportunities and we are well positioned with cash on hand to take advantage of these opportunities.

Finally, I would like to highlight the performance of our portfolio. Our current investment portfolio totals $4.7 billion of assets, financed with $3.7 billion of non-recourse debt. We actively managed our portfolio with the focus on maximizing values and the recovery of principal and interest.

We are starting to see the results of our efforts reflected in the price of our portfolio. In the quarter, the value increased 6% or by $178 million. For the nine months of 2010, the value increased 20% or over $500 million. As a benchmark over the same nine-month period, the BBB CMBS indices are up about 13%.

I am proud of our performance year-to-date and have a positive outlook regarding the future performance of our portfolio.

With that, I'll now hand it over to Brian Sigman, our Chief Financial Officer to review the quarter in more detail. Brain?

Brian Sigman

Thanks, Ken and good morning, everyone. Based on Ken's broader view of Newcastle in the markets, I will drill down on our liquidity, financial results for the quarter and finish with some key points.

Our liquidity, as Ken mentioned, we currently have $63 million of unrestricted cash and $176 million of restricted cash for reinvestment in our CDOs, all of which is held in CDOs VIII, IX and X. Adding to our liquidity was $17 million of cash flow received in the third quarter from our CDOs, which is approximately $1 million higher than the prior quarter. We continue to pass the respective cash flow tests in CDOs VIII, IX and X and in September we once again passed the quarterly test for CDO V, which had previously failed in the fourth quarter '09 and first quarter 2010.

We continue to receive senior management fees on all of our other deals. Early this quarter, last quarter and the third quarter we repaid the last remaining fees of our short-term recourse financing. And as stated previously, we don't have any funding commitment, corporate margin exposure or any recourse financings expect for our junior subordinate notes, which are due in 2035.

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