Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Newcastle Investment Corp. (NYSE:NCT)

Q2 2010 Earnings Call Transcript

August 6, 2010 8:30 am ET

Executives

Nadean Finke – IR

Ken Riis – CEO and President

Brian Sigman – CFO

Analysts

Josh Barber – Stifel Nicolaus

Matthew Howlett – Macquarie Securities Group

Operator

Good afternoon. My name is Cynthia and I will be your conference operator today. At this time, I would like to welcome everyone to the Newcastle second quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

Thank you. Ms. Finke, you may begin your conference.

Nadean Finke

Thank you, Cynthia, and good morning, everyone. I would like to welcome all of you today, August 06, 2010 to Newcastle’s second 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. Actual results may differ materially from 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 statement disclaimer in our earnings release, including the 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 morning, everyone, and thank you for joining our second quarter 2010 conference call. Things are looking better for us. I'm encouraged by the recent activities in the capital markets and our ability to execute Newcastle’s business plan. Even in the face of a sluggish economic recovery, we are seeing a resurgence in commercial real estate lending and the continued tightening of credit spreads.

Low interest rates continue to push investors to higher yielding product. As a result, credit spreads are tightening. For example, the AAA CMBS spreads tightened 45 basis points in the second quarter and 130 basis points since year end.

Liquidity in the commercial financial sector is starting to improve and the capital markets are becoming receptive to new issue deals. In the second quarter, 3 billion of new CMBS deals were priced and last week alone 1.5 billion of new deals were announced.

Currently, commercial loans are being underwritten conservatively with a maximum loan-to-values around 65%. A key dynamic, though, is an increased willingness to lend which gives some borrowers access to capital and ability to deal with upcoming debt maturities. This is a big improvement over last year and I believe that lending activity will improve and grow in the coming quarters.

At Newcastle, we have been very focused on executing our business plan to deleverage our balance sheet, stabilize operating earnings and increase the value and recovery of our current portfolio.

The second quarter was a direct result of our focus and ability to execute this plan. First, we generated $22 million of net operating income compared to $30 million in the first quarter.

Secondly, we tapped a new issue market and refinanced one of our Manufactured Housing Loan portfolios. This allowed us to recover $14 million of cash at closing and own a residual that has generated $2 million of cash since closing. Prior to this refinancing we weren't receiving any cash flow from the portfolio and we projected no principle recoveries, so that was a big recovery and turnaround for us as it relates to that Manufactured Housing pool.

Third, we improved our liquidity by $46 million in the quarter as we eliminated $20 million of short-term debt and increased unrestricted cash by $26 million. Today we have no short-term debt, $41 million of unrestricted cash on our balance sheet and $120 million of cash to reinvest in our CDOs.

Our complete focus is on investing current unrestricted and CDO cash plus future cash flow generated from operations with a goal of stabilizing and growing our net operating earnings.

Looking at the second quarter investment activities, we were able to source $200 million of new investments at a 50% unleveraged return; there is more to come. Today we are well positioned to take advantage of the dislocations in the markets and we are currently seeing several attractive investment opportunities.

Going forward, we are optimistic and confident in our ability to source new investments and build shareholder value.

I will now hand it over to Brian Sigman, our CFO, to discuss the second quarter results in more detail. Brian?

Brian Sigman

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

Our liquidity; as Ken mentioned, currently we have $41 million of unrestricted cash and $122 million of restricted cash for reinvestment in our CDOs, all of which are held in CDOs VIII, IX and X. Adding to our liquidity was $15 million of cash flow received in the first quarter from our CDOs, which is $2.5 million higher than the first quarter. We continue to pass the respective cash flow tests in CDOs VIII, IX and X and continue to receive senior management fees on our other deals.

Additionally, in June, we passed the quarterly test in CDO V, which had been sailing the previous two quarters and received about $1 million of cash from that deal. In the quarter, we repaid the remaining $13 million of our repurchase agreements and $5 million of other recourse financings. Then in July, we repaid the last remaining piece of our short-term recourse financing. At this point, we don't have any funding commitments, corporate margin exposure or any recourse financings left, except for our junior subordinated notes which are due in 2035.

Now, on to our financial results for the quarter, we had GAAP income of $1.90 per share with the following components; our net interest income less expenses net of accrued preferred dividends resulted in income of $22 million or $0.36 per share. This is up from $13 million in the first quarter. This $9 million increase is due to $4 million of interest expense and preferred dividend savings from the repurchase and the repayments of our debt. The remaining increase is a result of investing in our CDO cash, prepayment penalties received, and the cash flow plus interest on a loan that was in nonaccrual status and is about to be restructured.

Additionally, we had other income of $0.86 per share, primarily due to a gain of $0.75 on the repurchase of $64 million of our own CDO debt at an average price of $0.26 on the dollar with a current average rating of DD, originally rated AA+. Additionally, we had a net gain of $0.14 per share on the sale of $79 million face of assets.

In the quarter, we also booked income of $1.47 per share from the reversal of prior loss allowances on our held-for-sale loans, offset by $0.79 per share of additional impairments charge on our securities. Adding these components of $0.36, $0.86, $1.47 and subtracting the $0.79 gets us to our GAAP income for the quarter of $1.90 per share. To be clear, this is not comparable to our taxable income of which our dividend requirements are based on.

And lastly, I just like to point out some new information that you guys should look for in our 10-Q that we are going to file today, which I think will be very helpful. First, in our segment table, we broke out our unlevered investments by face, carrying value and type of investment. And second, in our loans table we gave a summary of our loan portfolio by maturity of the loan.

And now, we will take your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Josh Barber, Stifel Nicolaus.

Josh Barber – Stifel Nicolaus

Hi, good morning. I was wondering if you could talk a little bit about the fall in the OC covenant on CDO X. I know it went from about 6% coverage at the end of the first quarter to about 2.3 today. Was that due to Stuy Town or anything else? And how much – if you could also break out the cash – the restricted cash held in each CDO?

Brian Sigman

Sure. Stuy Town was actually before March – it was in a different deal, I think, before March 31. But it was actually due to downgrades. Last quarter, we disclosed that we had $300 million of assets on downgrade watch in that deal that’s down to $113 million. So obviously we had a lot of downgrades, which is good and bad. At least now we are getting them off the negative watch list. We do, in that deal, have $48 million of cash, so we have and we will look to continue to reinvest that at a discount to try and build that back up.

So in present CDO X, $48 million, and CDO IX we have $34 million and CDO XIII, we have $40 million, and you have that in the 10-Q, we list that out as well.

Josh Barber – Stifel Nicolaus

Is there any cash left in CDO IV and V, now that they are starting to cash flow a little bit more.

Brian Sigman

No. Those deals are past the reinvestment period. So to the extent, restricted cash comes in and sits, there it goes down to pay the AAAs at the water fall date and we can't reinvest those.

Josh Barber – Stifel Nicolaus

Okay. One deal that, I guess, has been in the press in the last few weeks has been Xanadu. Can you give us a little bit more detail about where that is if it has been written off? Can that be something that triggers some OC covenants in the next three months?

Ken Riis

The Xanadu investment that we have will not trigger any impact on OC triggers in the coming quarters. So it doesn't have an impact on us. It's in one of our CDOs and we can’t talk much about it, obviously a lot that’s going on. A lot of confidentiality. Just from a business sense, we don't really want to divulge too much.

Josh Barber – Stifel Nicolaus

Okay. Last question. Can you guys talk a little bit to your decision to keep the preferred dividend suspended this quarter after catching it up last time? I think that there were some expectations in the market that after it was caught up and with lower cash flow there that would be something on a more regular basis. What would cause you at this point to pay that or is that just on a quarter-to-quarter basis based on liquidity?

Brian Sigman

It’s quarter-to-quarter basis based on taxable REIT income to the extent we have distribution requirements (inaudible) them and the second is liquidity. I think actually our view had been even when we went out to buy that after the tender we probably would stop paying it because we do have a lot of losses that we are carrying forward from losses that we’ve taken on our portfolio. And it will go into the quarterly decision that the Board talks about every quarter going forward.

Josh Barber – Stifel Nicolaus

Thanks.

Ken Riis

You’re welcome.

Brian Sigman

Thank you.

Operator

Your next question comes from the line of Matthew Howlett with Macquarie.

Matthew Howlett – Macquarie Securities Group

Hi, guys. Congratulations to you first. I think it's clear now that you’ve fully turnaround the company. Before I get to some of the short-term questions, Ken, how do you envision Newcastle, you know, the business model transforming over the next year, three years, five years, etcetera, how you see fitting into the new sort of commercial market?

Ken Riis

Well, first of all, we are generating cash flow. We have cash on our balance sheet. We are going to focus on reinvesting that at accretive returns to shareholders. That’s our main focus. As it relates to the commercial real estate market, I see a lot of opportunities in the restructuring of loans that are coming due where we can participate and invest capital there in very low levered commercial real estate assets. We’ve done some restructurings in our portfolio in the last two quarters. I think we will see a lot more opportunity there to invest, not only in assets that – debt that we owe now, but in that unique capital to restructure.

The good thing is loans are being done at very low leverage points. I think we can participate at low risk and generate very high returns on our investments. So that’s where we're going to focus and I think there's a lot of opportunity there. Can’t get into specifics, but we are seeing a lot of opportunity right now.

Matthew Howlett – Macquarie Securities Group

With the reopening of the CMBS market, could we look at Newcastle potentially being an unlevered BP buyer, providing that capital to enhance securitizations and will be looking to you to partner with major securitization – or could it be yourself? Is it sort of that type of business model that you sort of would work towards as CMBS market begins to gradually reopen?

Ken Riis

Yes, we think we'll focus on sort of the bottom part of the leverage of the loan that’s going to 65% to 75% of the capital structure. I think we can commit some capital there. But also in some of the loans that we have that are being restructured there is an opportunity for us to invest in those deals also.

Matthew Howlett – Macquarie Securities Group

Great. We’ll certainly look forward to that news. I guess just on the CDO V that looked like it sort of – it began cash flowing [ph] intra-quarter just due to the natural triple pay of restructure. Any guidance or clarity you can give us on that deal or maybe potentially the reopening of any other feature CDOs that are under-collateralized or anything you can tell us on that? Your performance looks superb.

Ken Riis

Thanks. Yes. That was actually – we are pretty happy that CDO V is only $1 million, but it was off for two quarters so to have it turned back on was nice. Especially in that deal we're not able to reinvest the cash. There were some securities that were defaulted and getting very little credit and they turned around and I think we sold one and one paid off and built a lot of those to see that way. So now we have about $3 million of cushion. Unfortunately, we do still have $133 million on negative watch. So we are hopeful that some other things will pick up and turn around and maybe that will stay on another couple quarters, but it’s hard to tell with the agencies.

Matthew Howlett – Macquarie Securities Group

Great. And then the last question, just on (inaudible) plenty of extra cash. You're generating about $15 million per cash. Are you just going to be vigilant in terms of kind of between buying back debt accretively and putting that cash to work, anything else that you could suggest to us?

Brian Sigman

No, that's the basic business plan right now.

Matthew Howlett – Macquarie Securities Group

Great, guys. Thank you.

Ken Riis

Thanks, Matt.

Operator

At this time, there are no further questions. I would like to turn the call back to management for closing remarks.

Nadean Finke

Thanks again everyone for joining us today. We really appreciate it and we look forward to speaking to you next quarter. Thank you.

Operator

Ladies and gentlemen, this concludes today’s Newcastle second quarter earnings call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Newcastle Investment Corp. Q2 2010 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts