Newcastle Investment Corp. Q1 2010 Earnings Call Transcript

Newcastle Investment Corp. Q1 2010 Earnings Call Transcript
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Newcastle Investment Corp. (NCT)

Q1 2010 Earnings Call Transcript

May 7, 2010 1:00 pm ET


Nadean Finke – IR

Ken Riis – President and CEO

Brian Sigman – CFO


Matthew Howlett – Macquarie



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Good afternoon. My name is Brooke and I will be your conference operator today. At this time, I would like to welcome everyone to the Newcastle first quarter earnings conference call.

(Operator instructions) Thank you. Ms Nadean Finke, you may begin your conference.

Nadean Finke

Thank you, Brooke and good afternoon everyone. I would like to welcome all of you today, May 07, 2010 to Newcastle’s first 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 statements disclaimer in our earnings press release, including our 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 afternoon everyone and thank you for joining our first quarter 2010 earnings call. The first quarter was very active as credit markets continued to stabilize. As expected, credit spreads tightened as investors readjusted the pricing of risk. The events of the last few days may change investors’ perception of risk, but the general view is the markets will improve as liquidity improves.

That said, there are still a lot of great investment opportunities in the pipeline. Companies with cash to invest should be able to structure attractive investments with high returns, generating investment multiples of two to three times, you just have to work hard to find them.

The commercial real estate markets continued to struggle with increased delinquencies and maturity defaults. The potential restructuring of the $110 billion of commercial debt maturing over the next two years will be a big opportunity for us. We will look to purchase existing debt cheaply and restructure with borrowers willing to invest capital in the properties.

As it relates to Newcastle, we have been very busy and have accomplished a lot in the first part of 2010. We completed four major transactions that deleveraged our balance sheet and reduced operating expenses. First, we closed our preferred exchange offer. In the exchange, we issued 9 million shares of common stock and used $16 million of cash to buy back 60% of our preferred stock. The result is we retired $91 million of preferred stock and eliminated $8 million of annual dividends. Second, we repurchased $52 million of our junior subordinated notes eliminating 50% of these outstanding notes saving $4 million of annual interest expense. Third, we were able to buy back $56 million of CDO debt for $7.5 million or a price of $0.13. There is currently other debt for sale and I anticipate an increase in this activity over the next couple of quarters. Finally, we repaid $76 million of recourse debt basically eliminating all of our short-term recourse debt obligations.

These events greatly simply our balance sheet and are highly accretive to our common shareholders. We eliminate a significant amount of debt and equity senior to our common stock at deep discounts, and reduced annual interest and dividend expenses by approximately $13 million.

The results of the first quarter were very positive, today we are positioned for growth. We no longer have to retain cash in our balance sheet to repay recourse debt. This frees us up to invest our current (inaudible) restricted cash and grow. We currently have $25 million of unrestricted cash and $160 million of CDO cash to invest. We will continue to focus on highly accretive investments and transactions that build shareholder value.

Now, I want to turn it over to Brian Sigman, our CFO, to discuss our first quarter results in more detail. Brian?

Brian Sigman

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

As Ken said currently, we have $25 million of unrestricted cash and $160 million of restricted cash for reinvestment in our CDOs, primarily all of which is held in CDOs VIII, IX, and X. Adding to our liquidity was $13 million of cash flow received in the first quarter from our CDOs, pretty much unchanged from the prior quarter. We continue to pass the respective cash flow tests in CDOs VIII. IX, X and continued to receive senior management fees on our other deals.

In April, we repaid the remaining $13 million of our repurchase agreement and therefore now only have $6 million of short-term recourse financing, which we expect to repay in the next quarter or so. In the first quarter, we also terminated the last four derivatives that we held outside of our non-recourse financing.

Now, on to our financial results for the quarter, we had GAAP income of $3.36 per share with the following components; our net interest income, less our expenses and net of accrued preferred dividends resulted in income of $13 million or $0.24 per share, basically the same as last quarter. Additionally, we had other income of $1.86 per share during the quarter due to the following four items; one, a gain of $0.90 per share on the repurchase of $56 million of our own CDO debt at an average price of $0.13 on the dollar with a current average rating of DD, originally the debt was rated AA+; two, a gain of $0.80 per share on preferred stock exchange; three, a net gain of $0.24 per share on the sale of $193 million face of assets; and four, a net loss of $0.08 per share primarily due to the termination of our remaining derivatives.

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