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Newcastle Investment Corp. (NYSE:NCT)

Dividend Policy Update Following the Spin-off of New Residential Conference

June 03, 2013 16:30 AM ET

Executives

Wes Edens - Chairman of the Board

Analysts

Douglas Harter - Credit Suisse

Matthew Howlett - UBS

Jason Stewart - Compass Point

Bose George - KBW

Henry Coffee - Sterne Agee

Operator

Good morning. My name is Stephanie and I'll be your conference operator today. At this time, I would like to welcome everyone to the Newcastle and New Residential update conference call. (Operator Instructions) I would now like to turn the conference over to Wes Edens, please go ahead sir.

Wes Edens

Thank everyone for calling in. This should be brief call on brief update. We just announced this afternoon our dividends for the quarter for New Castle, NCT as well as the New company NRZ which is the spinout company, and given that it was a partial tiers of quarter and we are in the process, so we have actually announced from the company and I think in the effort to be having abundance of transparency and information for folks who wanted to just take a few minutes and walk through both what the dividends represent for the quarter as well and then give some guidance as to where our expectations are for the second half of the year.

So just to recap; the dividend most recently in a quarter for the collective NCT was $0.22. We had given guidance that we thought that a fully invested rate of that would be something higher in the 20s or $0.28 has been a more specific value we talked about. Our expectation would be that as investments settled up over the next handful of months that we would kind of close the gap between us too.

So first of all starting with New Castle our NCT, the dividend for the second quarter has been determined to be $0.17 and the dividend for NRZ, the spinoff company, is $0.07. Now what that represents is a partial period, so this spinout half happened basically right in the middle of the quarter, I think that the actual date was 16th of May. So in effect half of the NRZ dividend is being attributed to New Castle in this case. So we take the 17 plus the 7 and total, that's $0.24 as the total. So that's represents a couple of cents increment over the $0.22.

And then as you step forward into the next two quarters, the third quarter and the fourth quarter and what our expectations are, is that we think that in both cases that we are going to get to kind of a collective result, that approximates the $0.28 guidance that we had given before and the way that I think that will break down is a range of kind of $0.14 to $0.15 quarterly on NRZ and a range of $0.12 to $0.13 for NCT.

So again because just worth repeating, $0.22 as a dividend rate in the first quarter for NCT goes to a collective $0.24 in the second quarter on its way to what we expect to be approximately $0.28 once you get to fully invested over the next quarter or two, and the breakdown of that is $0.17 and $0.7 for the second quarter for NCT and NRZ respectively, and then the normalized run rate is kind of $0.12 to $0.13 on NCT, $0.14 to $0.15 on NRZ.

The factors that will influence dividend policy, because of course we are not pre-announcing dividends in the third and fourth quarter, we are just trying to give you some clarity what our expectations are, the factors that influence them for the two companies respectively. On Newcastle, it has a lot to do with, number one, the pace of the realizations of the debt portfolio and as part of the materials we just sent out, we are actually making an announcement about CDO for (inaudible) can talk about that in just a second as to what that means but we are basically having a lot of success in the debt side.

And again to refer to materials that have been previously posted, our expectation in the aggregate, in the kind of legacy debt business was approximately $850 million in total collection, in fact we have shared last night, but I am rounding it just to make it simple. I wish we think roughly $600 million will come out of legacy CDOs. It is about $250 million in other balance sheet investments and so the factors influence earnings here over the relatively near term is one, the pace of those debt realizations in particular out of the CDOs versus the pace of the investments that we make are going to replace them and to take that on the senior housing side.

We have had a lot of success on the senior housing investment business. Again, the numbers there to fresh those up a little bit. We invested equity in senior housing, thus far of approximately $75 million. We have another $100 million roughly of investments that are close to being committed and or closed, so plus or minus over the next 30 to 45 days, we think the next increments of investment are going to come in the door there. And then we have a very robust pipeline on top of that, really kind of the low side of a couple of hundred million dollars in the equity in the high side it could be increments of that. So there is a lot of activity in that side. Andrew White who is with me here, if you have questions, is going to address those then.

So it’s at NCT pace of debt realizations versus pace of senior housing acquisitions and then kind of the wild card factor that as I mentioned before are the special situations on some of our balance sheet investments which are very idiosyncratic. It’s hard to generalize about, but again without disclosing something before we are ready to talk about it we think could be very positive to our earnings profile overall because those are things we look forward to talking about when in fact and in fact they come to pass.

On the NRZ side, the balance sheet and investment profile, the earnings profile indeed is actually very simple at this point. The first kind of issue that is something we’re focused on is just the settlement of the committed transactions over the months of June and July. We’ve got about $200 million in equity capital which is committed, $75 million in June and $125 million in August, those timings are somewhat fluid and if they rely on other third parties approvals and just timing of our counter parties, they have proven to be consistent with our expectations thus far and so we have every reason to believe that there will be but obviously they move around a little bit that could influence the earnings in any one given quarter. Although we think the likely they happened has we have signed up for them to be very high but it is about $200 million in capital there.

The only other kind of ex-factor on the balance sheet of NRZ is just the incremental cash to invest, the capital to invest which totals now about $60 million in capital. We have a pipeline of transactions on the MSR front that we think are very likely to happen that are now with that (inaudible) but actually substantially more of that so that we think there could be some good news there but just to get to the base case numbers to get to $0.14, $0.15 it really it’s those two things, the settlement of the committed transactions of $200 million plus the incremental investment up of the $60 million or so capital that we have.

Now, in term so growth of NRZ in particular that are the factors that we think could cause incremental growth are really two things. One would be the investment of and the acquisition of investment in incremental investments in particular on the MSR front and to give some sense of what that all means. These are all factor dependent in terms of what our assumptions are but a half of billion dollars are incremental investment and will end up being $0.12 to $0.15 accretive versus the quarterly $0.15 number annual, $0.16 number. So, in other words in simple terms you can find another half a billion dollars of investment, the achieved result of something like $0.12 to $0.15 increase over this $0.16 kind of base rate, that’s one.

Two is incrementally better performance on the MSRs if rates are in fact to go higher, MSRs happen to be one of the handful things in world that would benefit from a monetary perspective directly if rates were to go higher. What that would mean in terms of annualized earnings is relatively modest, it’s probably in $0.02 to $0.05 in terms of the aggregate impact in the short term, the capitalize those investments we think could actually have a much, much profound impact and we’ll describe more and give you some (inaudible) more about that. So in terms of total lines as we think of how do you turn $0.60 into $0.70 or $0.75 or $0.80 it is really these two combinations of factors that are relevant.

So, that’s all. It’s really dividend announcement and it’s just an extraordinary period and we’re up in the middle of the quarter and want to make sure that people both copy information from us and then have the ability to ask any questions and we have the all relevant folks that are here.

So, with that operator, I’d like to pause and I’m happy to answer the questions from anybody.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Douglas Harter with Credit Suisse.

Douglas Harter - Credit Suisse

Thanks. On the NRZ side, can you just clarify whether you’re already earnings from that 200 million of committed capital but that hasn’t closed yet?

Wes Edens

No. We’re not. Those kind of investments as they settle that those earnings will come on and so, we’ve got out of 200, 75 million is scheduled to funded this month, month of June and 125 in August. So, it will be modest gain in the third quarter earnings pending that but it is pretty modest at this point.

Douglas Harter - Credit Suisse

I guess I just was been trying to clarify if you did $0.07 for half a quarter and you still have a significant amount of capital to still close, why isn’t that greater than doubling of the current dividend.

Wes Edens

It’s just the arithmetic of it. It really is, there is a little bit of noise in there in terms of some of the other collapse and some of things were contemplating, but I think our base case numbers are exactly as I described there is no real incremental magic to them happenings sooner than later. As I said, it happens a little bit slower then you have a modest drag in the third quarter before (inaudible) thereafter but we think it’s going to be pretty close to what I described to you.

Operator

You next question comes from the line of Matthew Howlett with UBS.

Matthew Howlett - UBS

Just on NRZ again, the incremental capital for the opportunities that you see out there (inaudible) $500 million, 50 million in cash. Could you drive that from the non-industry side calling those deals, taking leverage up or are you looking at the preferred market, what are some of the ways to sort of re-lever the company?

Wes Edens

We have a lot of balance sheet flexibility and we are very underleveraged in total. So, we certainly think that there are opportunities and we’re looking at different financing structures on non-agency side to give us a little flexibility and then with as much kind of unleveraged capital as we have either - I don’t believe that we are going to access a different kind of capital, I

I like the clean capital structure that we have created it creates a lot of simplicity and transparency and I like that. One thing that I have considered overtime that I think we will think about is that if we get into a situation where there is a big opportunity and we are worried about missing it due to just the timing constrains of raising capital we thought about putting short-term leverage against the NSRs and on a very low leverage basis really more as a financing tool than anything else. Having $625 on its way to $709 in equity capital and something looks like that it gives you a tremendous amount of flexibility but I think that the up to middle and preferred route is to do as we have done before which is raise capital kind of a long side to the timing of transaction that they come up. I think also last point here the long answer to your very short question is the nature of the pipeline that we see now is very different than it was even a year ago and it was still robust (inaudible) size its many more transactions. So they are less likely to be the big single transaction that’s really the large ones that we have seen and more of lots of small ones that also makes it easier to manage from a capital standpoint.

Matthew Howlett - UBS

Great and then just a follow-on the dividend yield on energy I mean 8.5% yield on sort of your base guidance here, it’s probably a bit higher than what I think you and I both were expecting I mean, what do you attribute that to just the dividend hasn’t been raised yet or is it kind of fully understand the recapture provision you have with nations throughout the split concerns of prepayment, I mean this is expected to be very stable cash flow stream from this servicing asset?

Wes Edens

It does I think that we try to be very conservative during the first half of this year as we are splitting the company out and give people guidance about what we thought a fully invested run rate would look like obviously that has come to pass and we again we try to be very transparent with respect to the performance of the underlying portfolio and you can see for yourself the impact of how these things have performed right they have been very stable to recapture rates on all of the over ventured stuff are running kind of 50% plus. so we have got a great earnings profile on that I think obviously it's been a very tough last 30 days in the mortgage market, given the agency mortgage market and I think the troubles in that side has impacted valuations across the sector far as much less so than others but I think when you look at these numbers you realize kind of the earnings potential of this and also having a big chunk of your balance sheet, it would be something that could actually do much better in a high rate environment that’s obviously very, very, very different than the agency on books that are out there.

Matthew Howlett - UBS

Right and your agency exposure NRC in terms of equity has been very small right as…

Wes Edens

Yes its $15 million or something very small.

Operator

Your next question comes from the line of Jason Stewart with Compass Point.

Jason Stewart - Compass Point

Just to follow on that agency discussion for a quick second could you walk us through again and remind us your asset selections there if it can be specific to anything specified or not that would be great and maybe coupon? And then how you are hedging it and perhaps if you wanted to update us on how it was performing in this well I think it gives you a word volatile environment?

Wes Edens

We don’t have (inaudible) numbers available but (inaudible) right they are designed to be the lowest possible duration instrument shortest possible duration instrument and the one that has the least amount of volatility in terms of pricing. so I know that just the antidote to some of the other books of business are include both some fixed rate stuff and some other but they actually all are very, very short duration frequently resets some.

Jason Stewart - Compass Point

Okay and then if we could go through CDO IV, I don’t know if it hasn’t hit the website yet but I don’t see anything about the collapse and I mean if there is nothing out if you could just walk us through your thoughts on timing and what needs to happen in order for that to be effectuated?

Wes Edens

Yes can you give update on that?

Unidentified Company Representative

Yes we are going to announce that we sold all the assets in CDO IV so it’s 153 million face of assets that we sold at around $95 price. We own half of the capital structure of the CDO so what it results to us is about $68 million of proceeds. So we sold all the assets, the bonds are going to settle and the distribution will come on June 24. So it’s really a procedural thing now with the CDO. All the outstanding third party debt holders we paid off at par and we will receive $68 million of proceeds. The nice thing about it is we bought $60 million of bonds at $0.52 on the $1 over the past few years. So really what’s happening is we are getting part at proceeds on $60 million of debt that we have purchased at $0.52 an additional $8 million of proceeds to our subordinated notes that we have owned in CDO IV. So a great result for us and it should hit fairly soon for us.

Wes Edens

And from an NCT standpoint what I think is the kind of real growth potential is less phenomenal growth of earnings in dividends from the $0.12 to $0.13 that I described which is again comparable on that portion of it would have been $0.10 we have a pretty substantial bump in our estimation of the second half of the year to a $0.12 to $0.13 versus the $0.10 but really it’s the notion of replacing kind of these very short duration now and debt cash flows with property cash flows on the senior housing side, obviously senior housing reads health care reads trade at even net of all the markets disruption is traded very attractive yield and if we can take and simply move a big chunk of the capital out of the debt business and redeploy it in the senior housing business that the returns that we have been able to realize, our quality of earnings have been improved fairly dramatically and I think the evaluation prospects of that are actually terrific.

Operator

Your next question comes from the line of Bose George with KBW.

Bose George - KBW

Just wanted to follow up on the last question. So the 68 million of proceeds that relates to the direct holdings with 77 million, is that right?

Unidentified company representative

Yes that's right.

Bose George - KBW

And in terms of the earnings impact, CDO IV was locked out so in that sense it just frees up the capital, is that right?

Unidentified Company Representative

Yes we weren't really generating any material cash flows at the CDO IV. So we just got 68 million sort of.

Bose George - KBW

That's perfect.

Unidentified Company Representative

It was well in June 24th, sorry.

Operator

(Operator Instructions). Your next question comes from the line of Henry Coffee with Sterne Agee.

Henry Coffee - Sterne Agee

I am a little new to the story but my understanding is that a large percentage of NRG's capital is essentially going to be parts temporarily in short duration assets, is that the way to think about it or?

Wes Edens

Well at this point about their (inaudible) capital is actually in the non-agency securities that are securities that are serviced by nation size, so that kind of service in partner as it were. And the unleveraged returns in that portfolio now are in the single digit, kind of 7% of the good round number for it. On a leverage basis they generate mid team returns and we do things that some portion of that portfolio, we will be able to collapse in a manner very similar to what Ken was just describing on the CDO book of business where he basically owns securities in discount, collapse them and realize power in those cases after markets and collateral and some of that case is quite valuable. That is depending on what percentage of that book we are able to effectuate that collapsing of 10%, 20% of the book, that adds another 400, 500 basis points in return.

So we think that the two investment portfolios are very strategic, one next to the other. We think that they are complementary and they don’t really compete for an investment balance sheet and we are hoping that they will generate kind of similar returns over time. So, one I guess significant difference between the two and this is why, we want balance we are. We own more proportion of MSR than we do of non-agency stuff as we do think that it is a tremendous defensive instrument in one, in a higher rate environment it could have a tremendous amount of upside. So most of the stuff that we own in a non-agency side is also floaters, so the effective duration of them is a lot less than it would be if these are fixed rate securities. But that being said, if you had a materially higher interest rate environment you are going to benefit most directly from the MSR portfolio.

Henry Coffee - Sterne Agee

Now, the MSR as you obviously are earning; a fairly high return on the legacy assets, but as you look forward, it seems pricey as moving up a little bit, can you give us a sense of what types of returns on a unleveraged basis you are expecting to see and what the capacity for leverage is on those new assets?

Wes Edens

Well I think that the market has certainly got more competitive versus than was a year ago. There is still a lot of substantial structure on (inaudible) people getting into business. You still have to have relationship with the service A high quality service; B wanted to have a lot of capital to go invest alongside you and C, if there is terrific originator to kind of recapture any loans that kind of prepay. So those requirements in addition to just all of the relationships with the agencies, other counterparties planning for their (inaudible) that are, to create a fairly substantial barrier to entry but they are definitely are more than a few folks that are interested in the gaps in space. The one thing, I would say, is that I think the last 30 days, all the volatility that you have seen in the mortgage space; mortgages had a tough month, it's been in certain respects, probably the worst months from mortgages going back all the way to 1994. I think my experience where you had a big change in interest rates and people have a very cut off side. I think this change that people perceive at a higher rate environment is on the horizon, maybe sooner than folks expected. I think one thing you have done is probably have increased the sense of urgency of some of the mortgage banking community to look harder maybe selling down their holdings on the service side. So, again these are not the kind of hallmark transactions of the past year or two. There is a very large; the Lehman Brothers that (inaudible) the earlier transaction from Bank of America.

Henry Coffee - Sterne Agee

We all know what the old world looked like; the new world seems to be priced clearly north of anything that the old world was offering.

Wes Edens

Well we'll see, I think the balance of issues will be the competitive pricing landscape which is clearly more competitive, versus maybe some of the supply stuff from many more sellers out there, so I'm optimistic that we'll find good opportunities to invest capital, I think it will be more work and it'll be many more transactions than the ones in the past but I'm still pretty optimistic about it.

Operator

Your next question comes from Jason Stewart with Compass Point.

Jason Stewart - Compass Point

One quick follow up on the MSRs, you noted a little bit of the smaller transaction size. Is there any change in the way that you're bidding on these, is this direct, or is it more competitive in an open market, and maybe one last one, historically you’ve been buying legacy MSRs, would you shift the focus on to new production flow or is the return profile just too different?

Wes Edens

On the first transaction, on the first question it's hard to generalize because there could be any combination of competitive deals and of course a lot of the big deals over the last few years have been competitive as well. But there's a in particular when you're working with some of the small originators I think there's likely to be less of a competitive dynamic and more focused on operationally how do you effectuate the deals and make them happen et cetera. So I think it has been a mix between the negotiated and the bid transactions and it's likely to continue. I think in terms of the nature of the MSRs you're undoubtedly going to get a mix of those as well where they're certainly new production stuff as we see, our own originations have increased substantially there's a bunch of new MSR from both ourselves as well as other originators, but there're still plenty of legacy assets that are out there, right when you looked at the banking sector, they had maybe plus percent of all mortgage servicing, you know, three years ago, they're probably still 80% plus today. So there's still big chunks of legacy assets that exist and I think will actually be sold eventually.

Operator

At this time I would like to turn the conference back over to Wes Edens for closing remarks.

Wes Edens

That's all, great thanks everyone for calling on short notice and we look forward to talking to you again at our next quarterly call. Thanks.

Operator

Thank you, this concludes today's conference, you may now disconnect.

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