Newcastle Investment Corp. CEO Discusses Q4 2011 Results - Earnings Call Transcript

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 |  About: Newcastle Investment Corp. (NCT)
by: SA Transcripts

Operator

Your next question comes from the line of Joshua Barber with Stifel Nicolaus.

Joshua Barber

Hi. Good morning. Following up somewhat on Matt's question, can you talk a little bit more about your $133 million of restricted cash that you noted but you said about $53 million is still awaiting settlement. Is that additional CDO debt repurchases? Or would that be assets within the CDOs that are CDO debt?

Brian Sigman

No. Those are assets that we're purchasing outside of our repurchase of CDO debt. So those are just straight investments in real estate loans and real estate securities.

Joshua Barber

Okay. When you look at the duration of the assets in CDO VIII, IX and X, would you say that that’s probably comparable to your weighted average portfolio life of about four year? And how successful have you been in the few quarters of being able to term that out as much as possible?

Brian Sigman

Most of our assets until we really invest more of the cash are in the CDOs. So it's definitely that weighting is definitely geared to CDOs VIII, IX and X. And we have over the past six to nine months, we'll continue to try and extend out the life if it makes sense in the CDOs in order to keep the excess spread going.

Joshua Barber

When I look at the disclosures on your CDO cash receipts, about $17.1 million in the quarter. I noticed one of the footnotes noted that about $3.1 million of that interest was some retained and repurchases CDO bonds. Is that something that's new? Looking at previous disclosures you generally just included the excess interest and the collateral fees. How would you say that compares to the cash flow from repurchased CDO bonds that you had throughout the entire year?

Brian Sigman

We really just tried to give more disclosure so we did just break it down further. The number was always there. It's roughly about $3 million a quarter of interest on that debt. We just wanted to give the breakout specific to exactly what was in the $17 million.

Joshua Barber

Okay. So – but the $3 million has always been pretty much flowing through for the last year?

Brian Sigman

Yes. Obviously as we bought back more, it's grown a little bit. But, yes.

Joshua Barber

Okay. My last question is focusing on new business lines. You guys have talked about the MSR business and the returns there certainly seem very attractive right now. But are there any other places that you're looking at going today. It could even be the old Newcastle business. We've seen some of the other REITs today that have gotten new credit lines and gone back into CMBS and CRE lending. Is that something that you'd like to do with your cash position today and hopefully get some financial flexibility to do that.

Wes Edens

The original CBO that we did for Newcastle, we did I guess in 1998, right. It was a long time ago. It was the first that was done. It was really term financed. And the initial thesis of it then is still very much applicable today. It was basically to buy high quality diversified pool of both CMBS and REIT debt. Finance it modestly, to term and manage for interest rate and credit exposure over that period of time and collect the next spread.

That initial transaction did very well. The market really took off from that point and there was a lot of activity. Some of it that ended up not working out so well and some of the more volatile assets like some of the residential stuff and the like, but for us fortunately the lion's share of these CDOs have managed the test of time well.

And really the focus over the period of financial crisis in 2009 and 2010 in particular was to reduce balance sheet exposure so that really the bulk of our investing activity was done inside these locked up debt-financing structures. To the extent that there was a) a good market opportunity to make investments that we thought made sense and b) access long-term financing markets, this would absolutely be a viable part of the investing structure of the company.

And I think both of those things are possible as the world continues to mend here a bit. You haven't seen some CLOs that have gotten done. I'd say the new supply of investable assets has not really regenerated itself in the way that a lot of people including I would have guessed it would have. In other words the CMBS market is still a pretty dormant market when you compare to its heydays in 2005, 2006, 2007.

But circumstances change and I think as again if the economy continues to bump along and things improve, I do think that the structured financing markets will also respond and that'll be a new supply of assets and we would look hard at it.

One of the things that we think is so interesting about the MSR investment is that the supply/demand technical's there are very attractive, i.e., there's a lot more for sale then they are people that are set up to buy them. Since we hit the road in September talked to investors about this, about what our thoughts and plans were for, and then subsequently made the investment, there has been a lot of activity in the sector. So I think the work that we did on the road was a little pioneering four or five months ago. Since then you've had a lot of things written about the various service providers, the biggest being really Nationstar and (Aquin) in particular but there's others.

(Aquin) priced a transaction earlier this week, HLSS, that is a in some part, a form of what we're talking about investing here. They're investing brief includes both servicing advances as well as MSRs and whatnot so it's not a direct comparable to this. But I do think you're going to see a lot of investment activity around this sector given the nature of the assets and we think what one of the things that makes it so attractive is of course that in addition to them being very attractive returns and very cash flow front end loaded, you're also able to achieve those at lower and in our case, no leverage.

So an asset that has got that kind of investment profile without having to take on financial leverage we think is really a terrific asset and that's why we've been there. But that’s not to say that the old business is not a good business because it has been at times a terrific business and we obviously have the infrastructure and the capability to transact if that becomes more actionable.

Joshua Barber

That's really helpful. But just to clarify one comment. Would you need a – what comes first when you're looking at those business plans? Would you need to be able to do term financing on the right side of the balance sheet or if there was a number of assets that you were comfortable with on the left side of the balance sheet, would you say I'm willing to play with financing that may be less than optimal if the returns are really there on the asset side.

Wes Edens

It's not really possible to put it in absolute terms, at least not in my view. I think that the number one cause of death for financial services companies is a lack of liquidity. Bad credit performance. Bad investment will kill you in the long run. But a lack of liquidity we know historically has been the number one cause of death and it certainly was the case from the financial crisis.

We didn't die and in fact lived and are now we think on the road to prosperity. So adhering to that financing principal we think is not just a good idea, but it's a hard and fast rule. That said, if we really thought that the right thing to do would be to lay into that in some capacity and put some form of short-term debt, we would certainly consider it.

But I'm very happy with the position where we are right now, which is we essentially have a balance sheet of term financed assets, cash and unleveraged investments in the form of MSRs. That's a rock solid balance sheet. We like that profile and by and large we intend to continue to pursue that. (inaudible) a direct answer as what you're looking for but I think that that's where it is right now.

I do think it's possible – certainly in the realm of possibility that this year you'll see a return to a more actionable financing market assuming the world continues to move along in a constructive way. But that's – the future is not yet written so we'll find out.

Joshua Barber

I think we'd all be pretty happy to see that. All right. Thank you very much.

Operator

We have reached the allotted time for questions and answers. Thank you for your participation. I hand the program back over to management for closing remarks.

Cameron McDougall

We thank everyone for attending today and we look forward to speaking with you next quarter. Thanks so much.

Operator

This concludes today's conference call. You may now disconnect.

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