Newcastle Investment's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Newcastle Investment Corp. (NCT)

Q1 2012 Earnings Call

May 10, 2012 8:30 am ET


Ivy Hernandez - IR

Ken Riis - CEO and President

Wes Edens - Chairman

Brian Sigman - CFO


Josh Barber - Stifel Nicolaus

Jason Stewart - Compass Point

Bose George - KBW

Matthew Howlett - Macquarie



At this time, I would like to welcome, everyone, to the Newcastle first quarter 2012 earnings conference call. (Operator Instructions) I would now hand the conference over to Ms. Ivy Hernandez.

Ivy Hernandez

Thanks and good morning. I'd like to welcome you today, May 10, 2012, to Newcastle's first quarter 2012 earnings conference call. Joining us today are Ken Riis, our CEO and President, Wes Edens, the Chairman of our Board of Directors; and Brian Sigman, our CFO.

Before I turn the call over to Ken, I'd like to point out that certain statements made today may be forward-looking statements. Forward-looking statements are not statements of fact instead, these statements describe the company's current beliefs regarding events that by their nature are uncertain and outside of the company's control.

The company's actual results may differ materially from the estimates or expectations expressed in any forward-looking statements. So you should not place undue reliance on any forward-looking statements. I encourage you to review the disclaimers in our earnings release regarding forward-looking statements and expected returns and to review the risk factors contained in our annual and quarterly reports filed with the SEC.

Now, I'd like to turn the call over to Ken.

Ken Riis

Thanks, Ivy. Thanks everyone for joining our first quarter earnings conference call. Before I go into the discussion on the first quarter, I want to let everybody know that in addition to posting our press release last night, we also posted our first quarter supplement on our website at

Since first doing this in March, we see the lot of positive feedbacks. And I think it's a good resource for our shareholders to gain a better understanding of how we make our money. And now, we slide into the quarter.

We had a great first quarter in first four months of the year. Our portfolio continues to generate stable cash flows and we are seeing attractive investment opportunities to deploy capital at 18% to 20% return.

Our first excess mortgage servicing investment is performing better than expected, which we'll discuss in a minute and our operating metrics continue to improve. Quarter-over-quarter, core earnings improved $0.03 to $0.33 per share and cash available for distribution increased $1.5 million or $0.02 per share to $0.19.

We have been very active on the investment side. In the quarter we committed to invest $170 million in excess mortgage servicing rights and purchased $70 million of assets for our CDOs. Our MSR pipeline is robust and we expect to deploy additional capital in the sector in the near term.

On the call today, Wes and I will highlight our activity in the real estate debt and excess mortgage servicing businesses. And Brian will close with a discussion on the overall financial highlight for the quarter. So let's first talk about the real estate debt business.

In the quarter this segment generated $35 million of total cash flow, an increase of $1.5 million over the fourth quarter. The overall value of our real estate debt portfolio increased by $100 million or 3.5% to an average price of 97.5% of par. And I see meaningful upside from here as credits improve and spreads tighten.

The over collateralization in CDOs VIII, IX and X has been stable and currently stands at $233 million. In the coming quarters, I expect the OC in these three CDOs to remain constant with the potential to increase slightly, as we successfully workout and restructure assets or receive payouts of higher valuations in the current amount of OC credits received in the CDOs.

We ended the quarter with $95 million of restricted cash to invest in our CDOs. We invested $60 million to purchase $70 million face amount of CMBS, ABS and commercial real estate loans at an average price of 87% of par and average yield of 10%.

Finally, resourced and repurchased $30 million of our CDO liability. In the quarter, we bought 100% of the A-3 class in CDO X at a price of $30 million, investing $9 million as an expected return of 18%.

Since we started buying back our CDO liabilities in 2008, we have repurchased a total of $950 million at an average price of $0.38 on the $1. We continue to have active dialogue with current third-party holders anticipate increased selling in the coming quarters.

Now, I'll pass it over to Wes, our Chairman.

Wes Edens

Thanks Ken, welcome everyone. I'm going to give just a few comments on the newest lines of business, the mortgage servicing rights excess servicing interest that we have invested in and a couple of thoughts on those markets.

As we have told you before, we've made a handful of investments in the sector. We've currently have or we've committed to about $250 million of investment in MSRs. The first investment which we've made back in November is detailed in our supplement you can see it up on our webpage. The performance of that investment continues to be terrific. We made a $44 million investment. It has been slower in prepayments that we anticipated.

The recapture rate which is our term that we created to describe the refinance activity by Nationstar which is our partner on this investment, on has been terrific and it has gone really pretty much inline with what we had hope where they startled out, obviously are recapturing zero because it was a new portfolio to them.

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