Newcastle Investment's CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 3.13 | About: Newcastle Investment (NCT)

Newcastle Investment Corp. (NYSE:NCT)

Q1 2013 Earnings Call

May 3, 2013, 8:30 a.m. ET

Executives

Sarah Waterson – Investor Relations

Wes Edens – Chairman

Ken Riis – CEO, President

Brian Sigman – CFO

Greg Finck – Managing Director

Paul [Inaudible] – Senior VP, Residential Strategy

Andrew White – Managing Director, Senior Housing Strategy

Analysts

Douglas Harter - Credit Suisse

Matthew Howlett – UBS

Bose George – Keefe, Bruyette & Woods

Jason M. Stewart – Compass Point Research

Jim Fowler – Harvest Capital

Stephen Errico – Locus Wood Capital

Operator

Good morning. My name is Brooke and I'll be your conference operator today. At this time, I would like to welcome everyone to the Newcastle first quarter 2013 earnings conference call. (Operator Instructions)

I would now like to turn the conference over to Sarah Watterson, Director of Investor Relations. Thank you, Miss Watterson. You may begin your conference.

Sarah Watterson

Thank you, Brooke, and good morning. I'd like to welcome you all today, May 3rd, 2013 to Newcastle's first quarter 2013 earnings call. Joining us today are Wes Edens, Chairman of the Board of Directors, Ken Riis, CEO and President, Brian Sigman, CFO, Paul [Inaudible], Senior VP Focus on our Residential Strategy, and Andrew White, our Managing Director focusing on our senior housing strategy.

Before I turn the call over to Wes, I'd like to turn 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 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 of the forward-looking statements. I encourage you to review the disclaimers in our earnings release regarding forward-looking statements and expected returns to review the risk factors contained in our annual and quarterly reports with the SEC.

Thank you, and I'd like to turn the call over to Wes Edens.

Wes Edens

Thanks, Sarah, and welcome everyone.

We just posted on the webpage a flip book that I'll refer to as I go through it, which gives a good summary of all the activity. I mean to start with, the financial result's core earnings for the quarter were $37 million, $0.15 per share. But it's a messy quarter in that there was a tremendous amount of uninvested capital that was committed, the vast majority of which will be fully invested by the end of June, so $630 million of average uninvested capital for the quarter. Once that capital is invested, our core earnings will be a total of $0.28 per share. So the big gap between where we are and where we will get to, but the visibility is very clear.

Also a very busy quarter in the capital structure and the spinoff of new residential. And so we'll spend a lot of time on that. So Brian will come back and detail the financial results at the end. But core number is $37 million. Core numbers pro forma, the investment of capital, again, which is 90% plus of it is actually committed and will be funded here over the course of this quarter would be $0.28 per share. So really a terrific uptick in terms of earnings on a pro forma basis.

Next page, the big news for us in recent days and really since the beginning of the year is the spinoff of new residential. It creates two distinct companies, both of which with distinct strategies. It should bring a lot of transparency to it. Since the time we made the announcement that we intended to spend our residential investment brought the stock prices up about 30%. We still think that once the numbers become very clear and the transparency is there that we've got a good deal of upsize from here. But we're very happy with what's happened from the first of the year until now.

NRZ, new residential, which is now trading on a win issue basis, which will be a subtle security, it will go from a win issue to actual cash security on the 15th of May, 16th of May, excuse me, is really just three business lines right not. It's the excess MSRs, which has been a very successful line of business for us for the past year and a half or so, the non-agency RMBS we talked about before. And then also in the quarter, one significant investment we made that was new other than the MSR trade in early January was the chunk of the consumer loan portfolio we bought that closed last month that we think has got a lot of promise.

The post-spin NCT then becomes also a much clearer picture. And it's got really just two lines of business. There's the legacy real estate debt portfolio, which is a lot of interesting things and good news going on that side. And an emerging and increasingly larger part of our business, which is the senior housing business, which Andrew White will talk about. So NRZ, the residential business, the post-spin NCT, a combination of the legacy debt business, and the senior housing business.

Next page if you flip to it, you know the anticipated spend timeline has shown here. So we made the announcement on January 7th that we had filed on form ten of the SEC. This is post the large MSR investment that we made early in January. On April 25th, the NCT board formally declared distribution of NRZ share and set the record date. The registration statement became effective on April 30th. The win issue trading started happening on May the 2nd. The record date, May 6th. The distribution date is the 15th. And then the 16th is the date that they will trade as separate public companies.

So with that, let's turn to our discussion about NRZ. I'll spend a little bit of time here just giving you a bit of an overview. And I'll turn it over to Paul Shykora. Paul is the person who's responsible for the non-agency and excess MSR book inside the business.

The company has got a tremendous amount of exposure to the housing market. It is residential focused and consumer focused. When you look at page seven in the presentation if you've got it in front of you, we detailed the investments line by line. $600 million invested in excess MSRs today. $186 million invested in equity and non-agency RMBS. $250 million in capital invested in the consumer loan business. We've got a small residential mortgage loan portfolio. And then a small equity commitment to agency RMBS to help with re-test kind of, et cetera. $55 million in investible cash. Of the $55 million of investible cash, a good portion of that is committed. We think we'll have another MSR to announce here in the next week or two. That will get our MSR balance up closer to $650 million of original capital. So about half of our equity capital invested in MSRs. The way to think about the investible cash going forward over the rest of the year, through a combination of return of principle, net of the dividends, we think we've got in round terms about $100 million in capital to invest. So we've got some drive power to the existing business right now.

The return profile on the right hand side, MSR booked, this is unleveraged book through turning, high teens, 18% right now. We're very happy with that. Non-agencies is in the middle of the pack, so kind of 14%. We think this is good upside there in terms of some of the class stuff that Paul will walk through.

The consumer loan book, which I'll talk about with a portfolio that we bought from HSBC, which NRZ ends up owning about a third of the equity of that portfolio, but that's an [inaudible]. It's something we are excited about. And the rest of it are just some small pieces to it.

Flip to the next page. Let me just give a little bit of an overview and I'm going to turn it over to Paul. So we have closed or committed on ten different pools. So there's a lot of information contained on this pool. It's a tremendous amount of transparency. We think that you can see what's happening in the mortgage market on the origination side in a very, very effective way here.

So if you just go the middle column, which on my page are colored purple if you have the coloration in front of you, start with Pool 1 just to get grounded in what it is. This is a pool that we committed to in September of 2011. We actually closed it in December. $9.9 billion original pool balance. We own 65% of it. 35% of it is owned by Nationstar. We made a $43.7 million investment. Life-to-date in the last year and a half, we've returned about half of the capital, $21.7 million. The book mark on the remaining MSR is marked at about the same price we paid for it. I think it's marked at about $39, $40 million. So this has obviously been a tremendous investment. Any time you can make an investment, get back of it in cash, and still own something that's worth about what you paid for it, that's obviously been a very good one.

Estimated future cash flow, $81.1. Life-to-date prepayment speed, 16%. There's a lot of credit sensitive assets in these portfolios in investments that Paul will touch on here in a second. That's been materially lower than what we underwrote the prepayment speed to. Our recapture rate life-to-date, 37%. The one month number, 48%, we're very happy about. We thought that the upside in Nationstar once they got focused on the recapture rate on these portfolios was north of 50%. And we are very happy that these early portfolios are all trending to that kind of a number.

If you skip down to the settled sub-total line, you can see that we've got $152 billion face value of UPB of MSR that we had this settled. We have invested $393 million. $80 in cash this far. Estimated future cash flows of $736. If you add those two up and divide it into the initial investment, that's a multiple of about 2.1 times. That's so that the net investment returns, if you skip to the right, estimated lifetime returns 19%, 2.1 times our money. On an unleveraged basis, and something we think has a material amount of upside if and when interest rates have arrived. So this a good snapshot of it. It walks you through kind of pool by pool. The bottom two pools are the one that we have committed to that have yet to close. That's a big chunk of the uninvested capital that gets pushed out the door. Once that all happens, we'll be just under $300 billion in UPB, $290.5. Investments of $606.7. As I said, there's another investment out there for another $40, $45 million that we'll get that up to. But $650 million and those are the performance numbers below it.

So with that, I'm going to turn it over to Paul who will walk through the next couple sessions. Paul.

Paul [Inaudible]

Thanks, Wes.

And so I think where we're going to start, if you flip to page nine, this really kind of helps level set the portfolio and get an understanding of how we actually think about the underlying loans.

The portfolio itself is what we consider to be predominately about 50% non-agency and other 50% GAC. And when you further sub-divide the portfolio, the reason why we really like it is that over 39% of the portfolio is what we call credit sensitive. And 50% is non-agency. So combines about close to 90% of the portfolio has characteristics that we think limit the borrower's refinance options, which slows pre-pay speed. We think that these borrowers are – Nationstar is actually able to have higher recapture rates. And also just given the profile of the borrowers, they have by their nature slower pre-payment speeds.

Talking a little bit about the credit sensitive borrowers for a second, we define these basically as borrowers who for the most part have higher LTDs, lower FICOs. Some may have some payment history problems in the past. But for the most part, these are the kinds of borrowers that we like and prefer. The most reason, predominately it's because Nationstar has the ability to get either these loans to re-perform or for the most part have related to recapture, a pretty meaningful chunk of them.

So what this actually means, if you look over to the upper right, you can see that the recapture rates on these kind of borrowers, they have for the most part trended with our expectations. And since December of 2012, have actually popped above our expectations. And that's the nature of the borrowers themselves.

If you look at the bottom chart, the prepayment fees, again just kind of confirming our suspicions about the portfolio that the agency portfolios prepaid about 10 to 15 CPRs slower than the industry. And also the non-agency side has been relatively flat just given the lack of recent options for a non-agency borrower.

So if you flip the page, what does this really mean for the portfolio? If we again look at Pool 1, which is the one where we have the most amount of performance history, we did it back in December of 2011. It was close to a $10 billion pool. Now it's about $8 billion, which of that $8 billion, $700 million is from recapture loans. And life-to-date CPR has been about 16. Impressively, we invested about $44 million. And we've got back close to 50% of our cash.

And really the purpose of this page is to kind of give some dimensions around what we think the potential future of this portfolio could look like under various prepayment fees and also various recapture rates. And so the first one really is what the current assumptions are. And so we said if you run it out at the current fees, which is a 17 CPR and a 35 recapture, you're looking at a portfolio that's worth today about $40 million or about $81 million of future cash flows, which is roughly two multiple. If you slow down the prepayment fees, which would be realistic given any kind of rising rate environment, you can see some meaningful pickup in the portfolio that the $81 million of future cash flow grows close to $113. And based off of your current value of about 40, it's almost 2.8 times multiple.

Then if you slide down to the bottom, the higher recapture scenario, what this scenario really claims is the fact that there is some meaningful upside from moving from 35% to 50% recapture. But what we really think about in terms of recapture is just to mitigate any sort of downside risk where if prepayment fees were to pick up. That's really where we see the protection and the added value.

I'm going to spend a few minutes just talking about the non-agency portfolio. Just to give kind of a backdrop on the market, I would say over the quarter, we saw a pretty significant rally in bonds in general. But given the size of the markets, still about $1 trillion market, we're still seeing some great opportunities out there.

And what I would say, over the quarter, we've did purchase about $374 million of face, put to work $227 million for average price of $61.

Our strategy and I lead to identifying those purchases is really to continue to stay selective and very disciplined. And what we're finding is that the prepayment story is starting to change. And it's more of a nuance prepayment story now where you have to really dig in and do the credit work. And what we find is that bonds that have an interesting profile would be ones that typically we think could improve from a delinquency or re-performance perspective. And also ones that potentially have some value on the collapse side.

To summarize the portfolio, initially, we invested $516 million for about a purchase price of $62 for a face of $130 to date. We've received about $40 million of cash flow. And so if you look at the portfolio as of 3/31, that's amortized down to about $784 million of face with a current market value of 66 and a current value close to $519 million. So it's up slightly even though it's amortized down. And even since the end of the quarter, the marks are up probably another $30 to $35 just in the last month.

A couple of things maybe to highlight on this page is if you look at it on a returns basis, we on this portfolio had a 7% unlevered. To date, we've used some limited amount of leverage just given the cash on our balance sheet. And so it's been around a nine. We think that by the end of the quarter once we've put to work the rest of the cash flow, we'll lever up this portfolio to about 65%. And we're looking at probably close to about a 14% return once we get that 65% leverage.

Last thing to highlight on the page is what we consider to be the potential pop from a deal collapse. In the quarter, we were successful in one on the Newcastle portfolio and we do have a few in the pipeline. The way we think about it is that we own these bonds at a pretty meaningful discount, 30 to 35 points. The ability to collapse one of these deals, which at the moment, we consider to be a relatively small, maybe 10% to 20% really accelerates those cash flows. And accelerating the cash flows could generate anywhere from maybe a 3% to 5% additional pop in yield.

Wes Edens

Thanks, Paul. Just a few seconds on the next page. The consumer loan portfolio that we made a large investment in, I think it closed on the 1st of April. We committed to it during the first quarter. It is at the moment a one-off transaction, a large one, albeit that, but just a one-off transaction. We're certainly looking at other consumer opportunities as we think that that's a big and interesting market. And one that is underserved. This is a transaction that we engaged in with Springleaf. Springleaf Financial is the old American General. This is a company that a private equity fund invested in about nearly three years ago. It's a very large standalone consumer finance business. They were the successful bidder. We were the successful bidder on a $4 billion portfolio of – kind of raw portfolio from HSBC of consumer loans. You can see the characteristics of the loans there. The $3 billion purchase price was financed with $2.2 billion in senior loans. Springleaf took a big chunk of the financing of the equity of the portfolio. And then NRZ invested $248 million in total.

The financing ended up at 3.75% on this. It's a term financing, so it's not a bridge financing business. It's expected to last for the term of these assets.

Net unleveraged returns for the portfolio we think are going to be in the mid-teens. So obviously, it's the extent we have a 3.75% financing rate. This is a very, very attractive investment. Our base case expectations are about a 20% CPR. That's based on 12% charge-off rate at prepayment speed of 16%. You can see in the little box above the one month and three month numbers in terms of the CRRs and the charge-off rates. Both of them are trending in positive directions. And economic reports, the favorable report that came out here with everybody at the start of this call. Yet another kind of brick into the whole recovery story here in the economy. We see things getting modestly better in lots and lots of our businesses, kind of steady across the board. And this portfolio I think is a good exposure to it to generate a ton of incremental cash flow also will be a short duration portfolio. Hard to say though there will be more of these to do, but it's something we would be interested in.

So last thing before I turn it over to Ken, the pipeline for investments right now is good. I would say the world gets a little bit more competitive every day. We see a lot of competitors coming into the MSR space. I was kind of following the activities that we've had. The good news is that there still are high various entry to really effectively transact. You still need a great servicing partner, a great originator. And we have that with the folks at Nationstar. The non-agency business as Paul said, we do think that there's still a lot there to do. That's been one of the best performing sectors in the whole fixed income market in the past year and a half. Our portfolio has been the beneficiary of that. Again, our portfolio is exclusively focused on securities that are serviced by Nationstar in whole or in part. So that's stuff that we think has got good upside. And we're looking always for new opportunities for us. But our focus is going to be very residential consumer focused. That's really what the company is oriented towards.

Kenny.

Ken Riis

Thanks. I'm going to talk about the Newcastle business.

And as Wes mentioned, it's done somewhat simplified with the spinout. And it's basically our legacy depth portfolio that we've owned for a fairly long period of time. And it also consists of new investments in senior housing assets that we started investing in about a year ago. So it's about a $3 billion face amount of assets with $1.6 billion of debt. And it generates about a 16% return.

If you go to page 16 in the presentation, the real estate debt portfolio is still very large. At the peak, we managed about ten CDOs. And currently today, we manage four. Over the years, we've done a very good job at maximizing recoveries on the assets in our portfolio. But also we've done a very good job at buying back debt at discount prices. So over the years, we've bought back about $1 billion of CDO liabilities at an average price of $30. So net created value for shareholders in debt repurchases and also maximizing recoveries on the assets.

Looking at it going forward, the portfolio on the real estate debt side is $2.6 billion. Finance was $1.5 billion of debt. So our direct holdings on our balance sheet is $1.1 billion of face amount of investment. Of that $1.1 billion, we expect to recover about $800 to $850 million of principle over the life. And that's an average life of about four years.

Our plan isn't to sit around and wait to collect the principle. We're going to be very aggressive at accelerating the recovery of that principle with the strategy of reinvesting in senior housing assets and opportunistic restructurings on some of the debt that we own in the portfolio today. So those would be the two strategies going forward. And my goal is to accelerate the recoveries of that $850 million of principle over the next year to year and a half.

So to talk about this senior housing portfolio, I'll hand it over to Andrew White.

Andrew White

Thanks, Ken.

So the senior living is a business we started inside Newcastle about nine months ago. But it's a business fortress we've been active in for about 15 years.

Senior living has three basic product types. There's independent living, assisted living, and skilled nursing. And we're focused on independent living and assisted living with the primary businesses providing food, housing, and personal care for seniors.

The industry as you can see from slide 17 is supported by really favorable supply and demand imbalance. The senior population is estimated to grow three to four times faster than the base population. And yet supply is still at record lows.

This is also a huge and highly fragmented industry. There is $300 billion of senior living assets across the country. And yet 70% of those assets are owned by people with fewer than 15 properties. So we think there is a huge opportunity for consolidation.

Recently, the industry has been dominated by the large healthcare REITs. But the largest healthcare REITs are now so large with total enterprise values in the range of $25 to $30 billion that the smaller portfolio acquisitions just don’t move the needle.

Also structurally, those healthcare REITs aren't really set up to take advantage of portfolios with operational upside. In contrast, Fortress has recently acquired a property manager that is company based in Portland so that we can control the operations of the portfolios that Newcastle acquires and drive the organic growth.

And so we're looking for small portfolios with some operational upside where we can leverage our affiliated operation relationships and drive the organic growth. The operational upside is typically some combination of growing occupancy, increasing rates, or rationalizing expenses.

We've been targeting yields in the low teens on acquisition in the 12% to 14% range where we hope to get the 20% cash-on-cash on stabilization. So far, we've acquired $200 million for the properties as you can see on page 18 and invested $80 of equity. We generated 14.5% levered yield in Q1. So that was 17% run-rate in March. And we expect that to get above 20% in the next one to two quarters.

We've got a pipeline incremental of about $1 billion of assets, about $250 million of which is in contract. And most of this is affiliated all but $250 million with source off market. And we think these will have return profiles that are similar to what we've closed already. So we should have more news on this in the future.

Brian Sigman

In the quarter, we had GAAP income of $0.15 per share. This included core earnings of $0.16, $0.01 of other income offset by $0.02 of depreciation. Our common dividend for the quarter was $0.22 per share, which we've recently paid. Our first quarter financial results were affected by having approximately $630 million of average uninvested capital in the quarter including $500 million of average univested cash and $130 million of potential financing from our unlevered non-agency RMBS. If this capital had been fully invested in the quarter, our core earnings would have been increased by $0.12 per share. As we continue to fund our commitments in the quarter, the earnings will continue to grow.

Additionally, you'll notice our G&A expenses were higher relative to previous quarters as a result of some of the expenses that were associated with the consumer loan deal and the planned spin-off of new residential.

[Inaudible].

And therefore in the second quarter, [inaudible] of a month and a half of activity as a standalone company.

That ends our prepared remarks. We'll now take your questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from Douglas Harter with Credit Suisse.

Douglas Harter - Credit Suisse

Just talk about – on this slide deck you talked about a four-year weighted average life on the real estate, that and the last one it was five. Was there a reason for that acceleration in the recovery of those cash flows?

Brian Sigman

Yeah, it was really kind of rounding and then one big asset we heard about that was going to be sped up a little bit. So I think it rounded down from 4.5 to 4.4.

Douglas Harter - Credit Suisse

Got it. And then if you could just talk about the impact of the HARP extension on the excess MSR investments and whether that changes any of your return assumptions?

Ken Riis

Sure, I can take that. I think that we definitely did a lot of work in terms of identifying what percent of the portfolio is HARP eligible and I’d say net-net it’s probably focused – it’s not positive, but if you pie-chart that, what I was referring to, that credit sensitive slice, about 1/3 of those are HARP eligible and if you look at what Nationstar has been able to do just on HARP-eligible loans, their recapture rates are north of 55, almost 60% just on those loans.

And so, you know, we think that anyone that does get HARP, you’re derisking the borrower. The propensity of them to dealt in the future is lower and you’re also expending out your cash flow. So net-net, we think it’s actually a positive for the portfolio.

Douglas Harter - Credit Suisse

Great. Thank you, guys.

Operator

Your next question comes from Matthew Howlett with UBS.

Matthew Howlett – UBS

Thanks for taking my question. Ken, just on the acceleration of the four CDOs and the expected recovery, it looks like CDO 4 and 6, you’re not getting any cash and residual on, you know, I think the overall cash sale is probably fairly low on those two deals. What would stop you from collapsing those deals sooner rather than later? Is there anything you can tell us that, you know, in terms of working with the bondholders? You are the senior bond holder I think on Studio 6, and what’s preventing you from collapsing those deals sooner?

Ken Riis

Right now it’s CDO 4 is one that is high on our radar screen to collapse in the near term, so we’re working on that as we speak. CDO 6, we have a large investment in the capital structure and really, it’s all about timing. We’ll collapse these deals as we need the money and as we get closer to investing in the senior housing portfolios that we have in our pipeline. So really, nothing’s really stopping us other than timing of when we need the cash.

CDO 4 though, I think will be, in the near term, something we’re going to address and collapse.

Matthew Howlett – UBS

Okay, so there’s no more negotiations that have take place with the butter-bond holders or anything of that nature?

Ken Riis

You know, there is an opportunity for us to buy some of the debt back at a discount, but the values of the bonds have gone up materially so that arbitrage is sort of going away but it doesn’t mean that, you know, on CDO 6 for example, we own almost the whole capital structure, or part of the majority of it that we purchased a very low dollar prices, so it’s really just a timing on where and when to accelerate those cash flows.

CDO 4 though, it’s a smaller deal, that it’s a very straight capital structure, it’s about $150 million of assets, $77 million of third-party debt, so it’s just when you want to liquidate the assets and pay off the debt if we have to pay it off at par. And in the past, we’ve purchased about $60 million of debt back at about $0.50 on the dollar.

Matthew Howlett – UBS

Yeah, it’s been great for you guys. Correct me if I’m wrong, but those four CDO 4 and 6, you’re not getting that much cash or you guys would call it CAD in terms of non-principal earnings, the residuals aren’t earning anything and you’re just getting through the coupon right on the bonds you own, right? Is that just sort of – could it be accretive to go put that in the cash basis, put that to work in senior living immediately?

Ken Riis

Yes, that’s the plan.

Matthew Howlett – UBS

Okay.

Ken Riis

But we’re also, in CDO 6, we do – we did buy the senior bonds a very low dollar price, was it 67? So with the discount recovery between 67 and par, it goes into our CAD numbers and that’s a recovery of principal.

Matthew Howlett – UBS

Go you, okay. Okay, and then just moving to the excess MSRs, it’s a stated pipeline of 300 billion that you guys are looking at and there’s 20 billion on a deal that imminent, but I guess, you know, how close are we on the 300 billion? We know – we’ve seen a lot of REITs, you know, as you said, announced that they’re getting into this, what are multiples that they’ve gone up in terms of in-servicing multiples? Are we still – do you still feel like you can do a 15% IRR? I’m assuming your typical assumptions, the 30% recapture, doubling of lifetime, is that still obtainable with all the new entrants?

Ken Riis

We think it is, yes. The – the market has definitely been evolving from – away from some of these very large kind of headline trades to smaller one-off trades or flow basis. The big picture of the market though is still about $10 trillion in mortgages in the U.S., $10 trillion in mortgage servicing rights. The percentages owned by the big banks is in the low 90s, 91, 92, 93%, you know, for many, many years. With all these sales that has gone down, it’s gone down to about 84%. You know, when we started this whole thing, our thesis was at the end of the day that, you know, when all the dust was settled and you end up with half or so of that market ending up in the non-agency servicers for the non-bank servicers and so I do think that there’s still a good migration to go.

In addition, you know, the current production of mortgages this year is estimated to be about $1.5 trillion, so about 15% of the market is going to sell on some kind of a flow basis and so we do think that there are good portfolios.

The one thing that I think you’ll see going forward are probably smaller portfolios and more of them and a lot more flow arrangements. And it’s more competitive for sure, but we still think that there’s a lot of attractive things to do in the marketplace.

Matthew Howlett – UBS

And on the flow arrangement, those are still the mid-teens IRRs you can get on the new production?

Wes Eden

They are. I mean, they are – the purchase price of those investments are higher proportionally than you’d expect them to be because they have the coupon rates and have been recently financed at 3 ¼ or 3 ½% gross rates versus our credit-impaired stuff at 6. It does put, I think, a greater premium on your ability to be a greater originator. You know, those people that have just refinanced have demonstrated that they have access to the refinancing markets, they are slippery borrowers in that respect, so you have to be better and more on your game to be an originator in that respect. So you know, we feel like the effort that we made at Nationstar a couple years ago to really become best of class as an originator is something that is going to become more and more relevant, not just in terms of capturing origination volumes but also to be in the recapture business and be on top of this.

So the characteristics that I think will change, one of the things that have gotten equal highlight in the future here will be as we have gone through and started to recapture substantial portions of these portfolios and as they turn over, you’re changing the nature of your investment to the positive very dramatically.

As Paul said in that first case where there’s $800 million of recapture loans in there, that is a much higher quality MSR than the 6% gross whack that it replaced, so we’re using, I think, you know, good generic numbers as we show you in our disclosure but the nuances behind these things, I think the will dictate a lot of the returns and xcess returns that we’re hoping to generate.

Matthew Howlett – UBS

And then just to clarify, the 100 million is the dry powder, you expect to have an NRZ following the closing of all the stuff you have in the pipeline for this year?

Wes Eden

Actually, the 55 million goes down to about 10 or $15 million, it’s pretty fully invested here by the end of the quarter, so you’re going to get a very, very full snapshot. The third quarter will be fully invested as the vast majority settles here in the second quarter with the ability to raise capital or change or capital structure. But you know, that’s some guidance there.

Matthew Howlett – UBS

Great. That’s very helpful. Great, thanks, guys.

Operator

Your next question comes from Bose George with KBW. Bose, your line is open. His question has been withdrawn, your next question comes from Jason Stewart with Compass Point.

Jason M. Stewart – Compass Point Research

A follow up on the CDO question from earlier, the 10 million you repurchased in the quarter, was that related to the collapse of the deal or can you tell us which deal that was in?

Wes Eden

Yeah, that was in CDO 8, so we bought the senior bonds in CDO 8.

Jason M. Stewart – Compass Point Research

And CDO 8, and the later CDOs, is there – do you need to repurchase anymore of the senior bonds in order to effectuate the collapse or are you at the point now in those later ones where you can still negotiate with holders to collapse them?

Wes Eden

No, there’s always an opportunity to negotiate with holders to buy back the debt. You know, the capital structure of CDO 8 and 9 are pretty good in that there’s low cost of financing and we’re generating a lot of positive net spreads so we’re weighing the collapse of that, buying back third-party dept at a discount and generating positive cash flows for the company. So the immediate trend you will be on, you know, the more seasoned CDO 4 and 6 and 8 and 9 will come over in later stages.

Jason M. Stewart – Compass Point Research

Okay, that makes sense. Thank you. And a bigger picture question. When we look at, you’ve given us great disclosure about where you think the economics end up for both NRZ and NCT, how should we think about, or maybe you can tell us how the board and the executive management team thinks about the dividend following cash earnings and how the progression gets you to the 61 and $0.50 of earnings?

Brian Sigman

The dividend question would definitely be a headline topic for us at our next board meetings. We have regularly scheduled board meetings after the quarter end and you know, in particular, once you achieve this whole investment profile, which is where we’re headed over the course of this quarter, you know, given the gap between where we are – where our core earnings are and the first quarter and pro forma where they are net of the [inaudible] capital is obviously, there’s some real room for improvement on the dividend side. So we’re going to talk about that at the next board meetings.

Jason M. Stewart – Compass Point Research

Okay, and one last question on HSBC on the acquisition there. It looks like when we’re looking at the slide, the charge-off rate of 12% is an annual rate and you’re combining the seniority with 20 IRR, is there any opportunity once the servicing gets transferred to Springleaf for those assumptions to decline in terms of charge off? And then perhaps to refi that portfolio in a transaction like Springleaf is executed in some of their other core products?

Wes Eden

Yeah, I think the short answer is yes. You know, we think that Springleaf is a terrific servicer. Their own portfolios have materially lower charge-off rates than this portfolio has had historically, so we are – we, Springleaf, they’re taking over the servicing operation in Kentucky and they, after an interim period, will step in and assume full command and control of that. And we’re hopeful that they can improve on it, obviously. We use a similar structure that we have done with Nationstar in the past so Springleaf owns a big chunk of the equity of this in addition to being the servicer, so their incentives are our incentives and they’re very focused on reducing those numbers.

The general trend line, even before we took it over has improved fairly substantially in six months. We showed you the little snapshot of the one and three month stuff, but the profile is definitely improving as consumer credits get a little bit better around the country.

The financing we put in place, I mean is a dramatically better financing than I think the market anticipated and even better than what we had anticipated at the time that we bid. You know, the financing that was profiled at the common bid had coupon rates from anywhere from 6.5% to 8.5% and actually had cash flow characteristics to completely trap all the cash flow inside the structure and so that became a very, very short financing and a relatively expensive one at that.

So if you go from a cash flow trap, 6.5 to 8.5 to a cash flow pay through at 3 3/4s, it’s a gigantic difference in a portfolio this size. So you know, we’re very excited about this portfolio. I’d like to say we had ten more behind it but that’s just not the case, but you know, the consumer market, still in the U.S., in the nearly 50% of all ours are subprime. This, I think, is one of the more interesting sectors in the whole financial services space because it’s still quite underserved by the banks and I think it’s likely to stay underserved for a period of time across asset classes.

So we’re certainly going to work hard with the Springleaf guys to try and find other things to do. This is a big transaction that we managed to land and we’re excited about it. We think it does give real earnings power to the company, but more to come.

Jason M. Stewart – Compass Point Research

Great. Thank you.

Operator

Your next question comes from Bose George with KBW.

Bose George - KBW

Just on the legacy Newcastle, when you look at that a couple of years out, is that largely going to be an owner of real property?

Wes Eden

You know, I think when you look at what we’ve got in there right now, Bose, we’ve got the senior housing business, which is substantial on, as Andrew said, is on its way to be more substantial. We’re quite optimistic about the prospects there to make that a material business. The legacy debt business, at this point, is just that, it’s the legacy debt business. There are a couple of large debt positions that we are fooling around with to kind of restructure into more direct equity and it’s a little too early to report on those but there’s two things to take here that I’m actually keen on that we think are both interesting standalone opportunities, A, and B, are potentially a big market opportunity.

So I do think there’s a possibility for the legacy business to certainly turn the senior housing business apart, but maybe one or two other things and we’ll have more to report on that hopefully over the next couple of quarters or so. And we have not at all written off our legacy business as a go-forward business, it still has not actually had the kind of return characteristics, risk return characteristics that we think are attractive, but we look at it all the time.

Bose George - KBW

Okay, great. Thanks. And then switching to the non-agency MBS, the point you made about potentially collapsing some of those deals and accelerating the returns, I’m just curious on how it accelerates the returns and what do you need to have in order to collapse the deals?

Wes Eden

Well, the – if the call rights are typically held either by the servicer, if they’re the only servicer, or by the master servicer if there’s a number of servicers. Nationstar, at the end of the day has either servicing or master servicing on a couple hundred billion dollars of the 900 billion or whatever it is in the markets. They’re roughly 20, 25% of the overall market. That’s a large part of the population, that’s why we focused our efforts on that regard.

The mechanics of calling it are typically subject to a call or a factoring of the original pool down to about 10%, some cases as high as 25% and some cases as low as 5 but 10 is fairly typical. Inside that universe of $900 billion, there’s a big chunk of the deals that are callable right now. And so then really the issue becomes purely an economic one. It’s actually not terribly different than the collapse analyst that [inaudible] has been doing on the CDOs to the extent that we can buy back securities at a discount, that kind of lowers the bar in terms of what is economically viable for us and with the concentrations that we’ve build up in a handful of these deals we think we’re in the strike zone, you know, on a couple of things now and I’m hoping we’re going to do something sooner rather than later that will give you a good snapshot of what the impact of this can be.

As Paul said, you think, you know, if the – the way I think about it is, if we end up collapsing, you know, 10%, 15%, 20% of our overall deals over some period of time, which is probably a good starting point assumption, we [inaudible] going to add anywhere from 300 to 500 basis points to returns in that overall portfolio. So it’s not life changing in the sense that it doesn’t make them 50% returns, but it does actually generate really attractive returns in the sector.

Bose George - KBW

Okay. And do most of these bonds have these, whatever, clean up, call options?

Wes Eden

They all have these clean up call options, or all that I’m aware of.

Bose George - KBW

Okay, great. The – you mentioned the servicing advances as a potential area of investment, you know, is that through Nationstar again and what are the kind of ROE opportunities? And also I guess, I assume that your opportunities are kind of limited by the REIT status as well, right?

Wes Eden

They are. I mean, I characterize them as very high IRR, very low – very short durations They’re one of the things we have looked at before. You know, one of the things that has come out of the whole financial crisis where servicing advances are much greater than what people originally forecasted them to be. So I mean, again, as an example, when we, collectively, we bought the portfolio from Bank of America back in the first part of the year, total purchase price included about 6.5 or $7 billion worth of advances. So it was a very large number on a couple billion dollar investment overall. So these portfolios can be big. Obviously, as things improve, the opportunities of that is dimensioning but we still think that there's a handful of things that are out there that are worthwhile pursuing on.

Bose George - KBW

Okay, great. Then just one last thing. On the non-agency MBS side, is there an opportunity for permanent financing through resecuritization and just curious about the economics of that versus just their repo funding.

Wes Eden

Yeah, there’s been actually a fair bit of permanent financing that has happened in the sector and going back over the last couple of years as conditions have improved a bit. But what I’m focused on is certainly term financing which we are very desirous of for obvious reasons, but I want to have flexibility to move assets in and out of it as we want to collapse deals and buy securities, sell securities, et cetera. We are working a bunch of things in that regard, but we could go permanently finance tonight I think and do so at very, very attractive levels but that becomes an ectatic kind of pay down and that really is not – that is not what we want to do.

Bose George - KBW

Okay, that makes sense. Thanks a lot.

Operator

Your next question comes from Jim Fowler with Harvest Capital.

Jim Fowler – Harvest Capital

Good morning, Wes. You covered a couple of the detail points on the pools. I wanted to ask you a couple of, I guess, more macro questions. The first is, although it was eliminated from the box from the Menendez bill, are you giving any thought or are you seeing other folks giving thought in the valuation of the GSC MSRs to the prospect of an extension to 2010 of HARP, of the eligibility for HARP, therefore potentially allowing [inaudible]?

Wes Eden

Well, the HARP, they’ve already announced they’re going to expend it through next year, right. As Paul said, there’s a good news/bad news, which we think our balance is going to be good news, which is on one had it extends the financability of that so you can have more people refinance, that’s the bad news in a sense, but on the flip side, the recapture rate of that is north of 50% and we think it should be north of 75%. That’s – we inspire to capture all those borrowers and we are the home team and that those borrowers need a lot of hand holding to get through the refinance process, and you’re the servicer. So I think it has been extended and we think on balance, although a little higher prepayment, the net result on MSR that we have out of the recapture is, you know, mitigates that to a substantial amount and it’s a better quality MSR net of the lower coupon.

I think that on the GSE front and just the, you know, on the government, the government in general, if you look at the announcement of the FHFA and some of – and what his statement have been about access of borrowers to refinance, I think that there is – there’s still going to be a lot of focus to get at that non-agency segment. That’s what we think is the big opportunity for us with respect to our servicing portfolio. It’s also a big opportunity we think on the non-agency bonds side. So you know, the reason that these securities trade at the discounts for the most part at this point has less to do with credit environment and people’s worry about credit and more of the fact that they’re just very low coupons with still very long durations. So any meaningful uptick to the prepayments on the non-agency side would have a big impact, I think, on the upside of that market. But you know, the wheels of justice in Washington turns slowly, so I don’t think anything is going to happen, you know, that’s going to surprise us overnight.

Jim Fowler – Harvest Capital

So the timeframe is 2015 but you’re not giving – it’s not being factored right now that the eligibility date could go from 2009 to 2010? That’s more [inaudible].

Wes Eden

We’re not and I mean, that’s a factor, for sure. But I think it’s just a nuance, it’s an important nuance but a nuance.

Jim Fowler – Harvest Capital

And then one more even broader question, just, you know, your insights. Do you – you know, I’ve been surprised a bit about some of the new entrance into the MSR purchasing recently just – I mean, my assumption has been that the GSEs have to be agreeable to have the MSRs just given the fact that they want these – the customers in the hands of the borrowers and the hands of very competent people like Nationstar and a couple of the legacy folks. I’m just wondering, does it feel to you like it’s a financial transaction for these new entrants or could it be the case that the GSEs are looking at the three legacy guys as growing very rapidly, potentially having some capacity constraints and for a short period of time they’re allocating, you know, they’re indicating some of these MSRs to go to other buys as you – and the other two folks get the recent large acquisitions settled and then you know, you’ll be again a preferred buyer just given your confidence. Any insight would be helpful.

Wes Eden

Well, I mean, I’m not surprised that there are people that are trying to come into this sector. I mean, at a zero interest rate environment, 20% unleverage returns with two times your money is a pretty attractive investment profile. So – and we probably have, on a contributed advantage by being as transparent as we have been, but I think – I still think balance is the right thing for shareholders and it’s been the right thing for us. But there’s no doubt that that has highlighted some of the investment characteristics of it.

You know, in regards to the GSEs, that’s a question better directed at Jay Bray, you know, who runs Nationstar, but I think our own standing with the GSEs is terrific and because these guys have done a great job. A number of the guys you’ve seen that have done files or made statements about being in this space are either A, originators themselves, they’ve got modest amounts of MSRs they’ve created on their own book of business or B, are people that I think do have kind of more financial aspirations for it. There are obviously a handful of competitors that will go unnamed on this call that are very large that have done a good job. Where they stand at the GSEs, I can’t really speak to, you’d have to talk to those guys directly, but I do think that the world is evolving more towards a flow basis, that’s where it will go eventually. But there will undoubtable be some notable transactions I think as this market continues to unfold.

Jim Fowler – Harvest Capital

Thanks, Wes.

Operator

Your next question comes from Stephen Errico with Locus Wood Capital.

Stephen Errico – Locus Wood Capital

Hi, Wes. How are you?

Wes Eden

I’m great, thanks.

Stephen Errico – Locus Wood Capital

So just to clarify because this is kind of an exciting transformation. The CDO book, it’s 800 to 850 million and your plan is to basically get out of that and get into more hard assets like senior living. And did I hear you think that happens over the next 12 to 18 months? And specifically, you mentioned you could collapse CDOs 4 and 6 at any time based on when you can buy some senior living housing. How much capital would be able to come out of just those two CDOs, out of the 800 million?

Wes Eden

The short answer is, that’s exactly what the game plan is right now. It’s – that can change, obviously, if the market was to change, but we think that the – when you look at the performance that Andrew had even in the brief period we’ve owned the senior housing, it’s pretty exciting stuff, right. I mean, 12% leveraged returns going in, 14% for the quarter, 17% run rate in a marketplace where the [inaudible].

Stephen Errico – Locus Wood Capital

We’ll get a much higher multiple if we move into that business, that’s for sure.

Wes Eden

Yes. If we could transform a big chunk of the balance sheet into that, I think it’s would be a great thing for shareholders and that’s something we’re very, very focused on. The legacy business though, I don’t want to discount. We do think we can [inaudible]. Kenny and the guys have done a perfect job in buying the stuff back. There’s a meaningful amount of capital that can come out of these things in the short term and I think, I mean, you said it in plain terms, if we held the maturity at about a four year, you know, 4 ½ year experience for us, if we’re able to accelerate that, it goes in the next 12 to 18 months and so I think that there could be an entirely new light on the Newcastle side.

One of the things I’m very excited about with this even going through the numbers and the presentations and stuff last night is that this does create just a tremendous amount of clarity around two companies and I think that that’s going to be the benefit of everybody, kind of gets you very focused as an investor, it gets you focused as a shareholder and I think that we can execute on it and we’ve got a lot of good things to come.

Stephen Errico – Locus Wood Capital

But just as a down payment, if you didn take CDO 4 and 6, how much, you know, out of the 800, how much could we put into this new business?

Wes Eden

Yeah, it’s about – honestly, it depends on the market value of the assets, so that could move around over time, but looking at it today, it’s about 120 million to $150 million of proceeds that we would get back.

Stephen Errico – Locus Wood Capital

Great. Terrific. Thank you very much, guys.

Operator

At this time, there are no further questions. I’ll turn the conference back to Wes Eden for closing remarks.

Wes Eden

That’s all. Thanks for indulging us on a bit more of an explanatory call, but obviously with the news around the business we thought it would be good to walk through, again, what the attributes are of the two companies and I think we’ll revert more to the ordinary course, just a simple description of the earnings and the activities of the quarter on the next one. We’re excited about all the events and thanks very much.

Operator

Thank you. This concludes today’s Newcastle first quarter 2013 earnings conference call. You may now disconnect.

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