Newcastle Investments's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Newcastle Investment Corp (NCT)

Q2 2012 Earnings Call

August 9, 2012, 8:00 a.m. ET

Executives

Cameron McDougall – Company Representative

Ken Riis - CEO and President

Wes Edens – Chairman

Brian Sigman - CFO

Analysts

Douglas Harter – Credit Suisse

Joshua Barber - Stifel Nicolaus

Jasper Burch - Macquarie

Bose George - KBW

Jason Stewart - Compass Point

Presentation

Operator

Operator

Good morning, my name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Newcastle second quarter 2012 conference call. (Operator Instructions).

Mr. Cameron McDougall, you may now begin.

Cameron McDougall

Thanks, and good morning. I'd like to welcome you today, August 9th, 2012, to Newcastle's second 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 Wes, I'd like to point out 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 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 do 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 Wes.

Wes Edens

Great, thanks Cam. Welcome everyone.

I'm going to give you a few kind of general remarks. And then we'll jump into it.

The quarter that was recently concluded was in many respects the busiest and most productive quarter the company has had in many, many years. Lots of investment activity, lots of new and interesting things that are going on in the sectors that we are closely involved in with the mortgage servicing rights. And also the non-agency residential securities market had very busy and active periods and a lot of activity to report there. We made new investments in a sector that we think has a lot of promise, the senior housing sector. And our core real estate debt business also had a very good quarter. So all and all, a good and productive period of time for us.

Just to start with financial results, the numbers that we look at, core earnings for the quarter, $39 million or $0.29 per share. Cash available for distribution, which is our measure of availability to pay sustainable and growing dividends, $22 million, which is about $0.16 a share. And the common dividend we paid was $0.20 a share.

Results for the quarter were definitely hampered to the extent that we had committed capital on transactions that did not get invested during the quarter. On balance for the quarter, we had $240 million on un-invested capital. All of that capital subsequent to the quarter and by the end of the quarter, was fully invested. The impact of our earnings was about $.07 per share. So in general terms, if you could take the earnings numbers that we had and just add $.06 to $.07 to get the impact of a full quarter of activity, it will give you a truer sense of the run rates. So third quarter results based upon that are off to a very strong start.

For the quarter, we invested $283 million in cash to purchase excess MSRs non-agency RMBS. And then subsequent to quarter, we made our first investment in the senior housing sector.

So investment activity, $220 million of the $283 that we invested was in excess mortgage servicing rights. Four different pools predominately the pools that we had agreed to purchase earlier in the year from Aurora. Aurora was the servicing operation of the bankrupt Lehman Brothers estate we committed to back in February. We had anticipated originally that transaction closing in May. It ended up closing close to the end of June. That was the big chunk of the un-invested capital. We expect the rate of return on this portfolio to be mid-teens, specifically 17.5%. We expect total cash flows from the portfolio to be about two times what we paid for it, $445 million and average life over the next six years.

In addition to the mortgage servicing rights, we invested $64 million in non-agency RMBS. Greg Sukenik is the portfolio manager for the RMBS portfolios. So I will have him go through what we're up there in a second. But this is a scenario that we think has a lot of promise.

In May of the quarter, we committed to invest up to $450 million with an expected amount between $150 and $300 million to buy a 65% interest in the excess MSRs from the ResCap transaction. ResCap is the mortgage servicing operation. It's a subsidiary of Allied Bank. It filed for bankruptcy on May 13th. Nationstar was named the stocking horse bidder. I know there will be a lot of questions about that, so I'll hold any further comments on that. But the net of it is that after a little bit of back and forth, we ended being confirmed as the stocking horse for that transaction. That auction is scheduled to take place in October. I think right now October 19th is the date folks have to be certified as bidders. And October 23rd is the expected bid date. So there is a lot of activity going on behind the scenes in that between ourselves and Nationstar as well. But I'll talk about that a little bit later.

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