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Newcastle Investment Corp. (NYSE:NCT)

Investor Update Conference Call

June 16, 2014 4:30 PM ET

Executives

Wesley R. Edens – Chairman

Analysts

Douglas M. Harter – Credit Suisse Securities LLC

Bose George – Keefe, Bruyette & Woods, Inc.

Matt P. Howlett – UBS Securities LLC

Operator

Good afternoon, my name is Vanessa and I will be your conference operator today. At this time I would like to welcome everyone to the Newcastle Investor Update Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to turn the call over to Mr. Wes Eden, Chairman of the Board of Newcastle. Please go ahead sir.

Wesley R. Edens

Great. Thanks, operator and thanks everyone for dialing-in. I am going to spend a few minutes going through a supplement that we put on to our webpage here just a few minutes ago. So hopefully you have a copy of that. Look through that briefly talking about the spin that we announced at the opening business today that we filed for. At the end of that I will open it up for questions that folks might have. I’ll direct you for this specific numbers that are in the filing are the ones that are publicly available, so we can find our remarks to that. But we’ve got a good overview for it, so let’s start with that.

So page four, overview of Newcastle. Newcastle today consists of a senior housing business and a portfolio of other investments. If you look at the box in the bottom $501 million of the actual invested capital that is paid for right now of senior housing. This is the business that we started internally here a couple of years ago. We made our first acquisition two summers ago. So it’s been nearly exactly two years ago. We have invested $501 million in capital thus far; we have committed another $230 million in capital approximately that we expect to close over the next 30 to 60 days or so.

But in terms of the numbers that will show up today in our filings is the $501 million as we referred to you. That the legacy business is on the right hand side. We have the real estate CDO portfolio that is currently expected to have a recovery of $408 million that is down from our $540 million or so at the end of the first quarter because we actually collected, there has been a number of liquidations in that. And then the golf portfolio, we referenced recently that we had a debt investment to be converted into equity that’s $79 million in capital.

In addition to that there is approximately $150 million of investable cash. So you can see that the bulk of the capital that we expect to fund the future of senior housing investments is from cash on hand or other financings that we do. We don’t anticipate issuing equity at this time.

Page five, the rationale for the senior spin-off is something again we have spoken about before. We expect to create a privately pay focus senior housing vehicle with a tremendous runway for growth both organically in terms of the performance of the assets we have bought and then of course in terms of the acquisitions that we expect to be able to make.

Number one, the market is a large one with a very addressable significant demographic tailwind to it. The U.S. population is expected to double, those people over seven years old from 28 million people in 2010 to over 53 million people in 2030 there is over $300 billion in assets in the market. So it’s a very big market right now and one that is expected to grow substantially as that population continues to age.

Two is in the market that we’re in right now; we think that there is a significant amount of upside in terms of our cost of capital both on the equity side and the debt side. We think that by separating out this business, so people can see what transparency what the business is and what it becomes. We will get better pricing for it and that will create a lot of shareholder value. And three is we think that this Senior Housing is a business that has got a very broad investment base already with this company being spun will be in the top 10 of senior living focused REITs. So there is a big addressable audience in the investment side and invested positive as well.

So page six, this is the snapshot of what the portfolio looks like today between the existing invested assets and prospectively what we’ve committed to and not yet funded. We have got 99 properties, 12,400 beds in 28 different states, you can see from the map there are some significant clustering in a handful of places. We bought 12 properties in 2012 when we started making these investments 72 last year and to date this year, 15 properties a total of 99.

The operating model is split roughly down in the middle between triple net leased properties as well as managed properties, so kind of just a bit over a half in the triple net lease what we think over time. That will end up being what happened now.

Page seven; this is the chart we’ve shown many times and we think that the significant runway for us on the acquisition side is from the mom and pop operators. So 70% of the business is dominated by people, there are the managed handful of assets that’s where we have done a lot of productive work and we think we are going to continue to do so.

Again the demographics on the left hand side show the very significant uplift in terms of number of seniors that are prospective clients for it. The aggregate numbers in the industry only about 7% of those people they are the target audience are actually in the senior living facility right now. I think the 7% went to 8%, but it’s still up virtually every bed in America. So it’s a terrific technical and fundamental experience in front of us.

Page eight, the market has been active. We have a very significant investment pipeline. So again purchased and committed to date $1.9 billion up to $730 million in equity, 99 properties. Near term pipeline and assets and we had LOIs outstanding on about three quarters of a billion dollar in properties right. So equity is another $250 million to $260 million and then there is an additional very robust pipeline behind that.

Page nine, this is a case study, this is the first investment that we’ve made, it’s a portfolio we call BPM, it was a portfolio we purchased in July of 2012. We bought eight senior housing properties we manage these ourselves with our Blue Harbor comrade company and you can see we’ve had a tremendous amount of growth since we bought it even in the short time we’ve owned it. Occupancy is gone from 87% and 93%. NOI acquisition of $11.4 million up 27% or $14.5 million today. These are the kind of things we can achieve with this cohort of properties.

The section of the market page 10 that we are going to focus on is really the independent living and assisted living/memory care. There is some skilled nursing in some of these facilities, but the dominant section of the market we are looking at is the independent living and assisted living. That’s what we think basically provide a multifamily plus food, plus services to people, not that much health care that apply directly by us in fact that’s a distinguishing characteristic of these markets versus the more health care centric models of the skilled nursing. There is a lot more government involvement in those sectors and we think that as a result the independent living and assisted living is a better fit for us.

Page 11 what Newcastle looks like post-spin, we are going to focus on two things. One is to continue to manage the existing CDO and debt businesses something that Ken Riis is the CEO of the company has done a terrific job with over time. We have made a lot of money in that buying back debt liquidating assets over time, that process continues, we’ve had a very good quarter in that respect thus far. We think it happens – the bulk of it happens over the next several years.

The golf business again we are very happy with the investments that we have made not clear, if it’s going to be just simply one-off standalone trade or it’s going to evolve into a more robust business. But I think on the standalone basis we are excited about what we have done thus far and we think we have some good numbers to reflect that.

Page nine just gives you a sense of it, even there is about 14,000 golf courses in the country with 92 courses in this portfolio. We become the third largest operator and the fourth largest owner of golf courses, so you can see that there is a very, very splintered market and we think there is going to be some good opportunities.

Lastly and I’ll stop and open it up for any questions folks have. The expected spin-off timeline, we expected to trade separate companies sometime in the third or fourth quarter. We filed for the spin this morning. We expect the first round of the comments from the SEC in about a month. And then in our past experiences the total timeline from beginning to end is probably approximately 90 days, obviously a big chunk of that is out of our control in terms of the dialogue with the SEC.

We have segment reported these investments for some times, so there is a good track record in terms of our disclosure with them. So we feel like that will give us a leg up as we go through the process and it’s possible this still happen well sooner. The sooner the better we think in terms of evaluation for shareholders, but that’s we are doing.

I mean when you look at the some total of all the businesses that we have built that we have – this is the second one which we announced spun out or third one now which we get spun out. We created a lot of our shareholder value. I think if you go back to two and a half years ago when we first started raising capital for kind of the new resurgent in Newcastle the total share price is around $4.5 a share. If you add up all these spins and dividends and whatnot over that two and a half years we’ve gotten pretty close to $15 in total value out of them. So this hopefully is another leg and what we think will be a very successful walk forward and this is the business we think it got a lot of potential to grow and deliver a lot of value to shareholder.

So with that I’ll pause and operator to get opened up for any questions.

Question-and-Answer Session

Operator

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

Douglas M. Harter – Credit Suisse Securities LLC

Talking about the opportunities for remaining Newcastle you also mentioned potential focus on the commercial real estate space. And can you just give a little more detail what that might entail?

Wesley R. Edens

Well, we’re looking at a number of things in the commercial real estate side. There is one very – large equity investment that we have spend some time on that is still on the developmental stage, but expected I think an asset that we think is interesting. The debt markets where we have done a lot of good work over the years are much more difficult to feel good about it in the acquisition side now. Of course that can change as markets change, but with very low interest rates with low volatility the debt markets are pretty well bid. So right now we have a portfolio that yields about 14%, so we feel like we’ve got a lot of time to look thoughtfully in other kind of opportunities. Doug, but right now there is nothing specific enough to really through that..

Douglas M. Harter – Credit Suisse Securities LLC

And then on the senior living side, when we are looking at kind of the leverage yields that you’ve shown us in the various slides throughout over the past couple of quarters. I guess kind of that number compared to kind of what an AFFO yield would look like, is it relatively comparable?

Wesley R. Edens

Is relatively comparable there are additional expenses that are loaded in the acquisition side, and particular for the FFO calculation, as we detailed in the filing, but I think the, look what we’ve done on the assets they have been bought one by one where we have taken over the management ourselves. We’ve bought assets that had leveraged yields in the mid-teens.

And we’re optimistic we’ll end up with 20 plus percent returns on that side, on a lower risk side of things, the triple-net leases we’ve done, obviously those are lower yields, they are less growth and they are also senior in the capital structure. So, we think the returns there, are going to be a bit lower, but on a blended basis, we think it’s an extremely attractive portfolio.

Douglas M. Harter – Credit Suisse Securities LLC

Great. Thank you, Wes.

Wesley R. Edens

You bet.

Operator

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

Bose George – Keefe, Bruyette & Woods, Inc.

In terms of the equity that’s invested in the business. Now, look at the F3, it had $407 million. So, the $501 million to $730 million, it’s basically that $407 million, where it stands at the end of the year, where it stands today is $501 million and where it stands in 30 days to 60 days is $730 million, is that right?

Wesley R. Edens

That’s right. I think today the numbers $501 million, which is down from $503 million, there must be just an adjustment of a few million dollars there on one thing or another. But it’s $500 million of invested capital right now. That plus the committed but not yet closed, investments brings it up to the $730 million number.

Bose George – Keefe, Bruyette & Woods, Inc.

Okay. And then, in terms of the $500 million to $730 million, $150 million of that is going to be funded by the cash you guys have available, and is the rest cash it’s going to be sort of released from some of these other CDO investments or…

Wesley R. Edens

It is – we have a lot of flexibility in terms of financing the additional assets we are buying. So, we can choose to leverage and not more or less to make that 230 number come down a little bit, or I think more likely to say we are likely to have against some natural run-off from the existing portfolio to fund that up. But we’ve got the bulk of it’s book in for right now and we don’t anticipate raising any capital pro forma this transaction. So, we think it will come from internally generated capital.

Bose George – Keefe, Bruyette & Woods, Inc.

Okay, great. Thank you.

Wesley R. Edens

You, bet.

Operator

(Operator Instructions) Your next question comes from the line of Matthew Howlett from UBS.

Matt P. Howlett – UBS Securities LLC

Thanks, Wes. Just on the FFO number, in terms of what we can expect from the new senior – I mean can you give us more clarity on what sort of you are looking in terms of the – is it AFFO, and then adjusted AFFO, over these sort of metrics that senior housing people would tend to value the entities at?

Wesley R. Edens

Yes, I was actually very mindful of fact, it’s in the middle of June. So we’re about two and a half months into a three month periods. So I don’t want to preannounce our numbers or anything. I think when we go through the numbers at the end of the second quarter we’ll lay that for you, and very explicit detail and kind of walk you through that. Obviously there are some adjustments as you go from kind of more of a private equity return on capital metric down to FFO or adjusted FFO, and there are some obviously kind of adjustments you make for that. We want to be obviously kind of shoulder to shoulder with the rest of the firms out there. So I’m sorry I can’t be more specific about the exact numbers, but I don’t want to give myself sideways on the disclosure.

Matt P. Howlett – UBS Securities LLC

In terms of what you’ve been paying on $0.10, I mean could you sort of tell us of the core EPS, Newcastle, what is sort of coming from the senior housing and what’s distributed from the legacy and can you sort of an indication we can sort of working to it?

Wesley R. Edens

It’s now about 50-50, historically again I am a little reluctant on these numbers about comprehensive view, because things have shifted around as we’ve made additional investments – but it’s been roughly 50-50 and those numbers will shift a little bit more to the senior housing side as that part of the portfolio gets bigger obviously.

Matt P. Howlett – UBS Securities LLC

Gotcha, right. And then could you assume that your payout ratio and then the ultimate leverage, it’s going to look like the bigger group, I mean is that sort of the goal – sort of fit into.

Wesley R. Edens

That’s very much of the goal. Right, so again we are in the top 10 in terms of the size even though we’re a brand new company or will be a brand new company will be not small except by comparison to the biggest ones obviously. Payout ratios leverage levels those are all things under consultation with boards and we are not – but I think that certainly our goal is to look very much like the other REITs just there. Where our goal is to actually be a fast growing company that produces lot of value I think at the time what we have done thus far, we are extremely happy with, the portfolio is great, we’ve got a great operational group down in Dallas that has done some terrific acquisitions work for us, but and that plus the folks we have in New York we feel that we’ve got a great squad to put in the field and are excited about it.

Matt P. Howlett – UBS Securities LLC

I mean as your advantage or competitive advantage not only the cost of capital, but the choice sort of the market you go after sort of the small niche if it is where that bigger players really can’t look at. Is that some of the what the advantages versus some of the bigger guys out there?

Wesley R. Edens

I think it’s in part that is also we have a deep culture here investing in the space, I think the first investment we made in senior housing was either in 1999 or 2000. So we’ve been around the space for a long time and we see things that work and things that work less well. So obviously we’re hoping to benefit from those experiences, but I think that the pie chart of the 70% mom and pop operators that’s a big one and obviously one-off transactions for the very large REITs or just less interested in them and that’s been a big sales force, look it’s a competitive market, but I think the combination of the experience we’ve gotten and people and resources we have to throw at it, we’re really excited about the opportunity.

Matt P. Howlett – UBS Securities LLC

Great, thanks Wes.

Operator

We have now reached the allotted time for questions I will now turn the call over to Mr. Wes Eden for closing remarks.

Wesley R. Edens

Great, well thanks everyone for calling in and look forward to seeing you all soon. Thanks.

Operator

This does conclude today’s conference call. You may now disconnect.

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