Newcastle Investment Corporation (NCT)

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Newcastle Investment Corp. (NCT)

Q4 2009 Earnings Call Transcript

February 19, 2010 11:00 am ET

Executives

Nadean Finke – IR

Ken Riis – President and CEO

Brian Sigman – CFO

Analysts

Matthew Howlett – Macquarie

David Fick – Stifel Nicolaus

Presentation

Operator

Good afternoon. At this time, I would like to welcome everyone to the Newcastle fourth quarter and year-end earnings call.

I would now like to hand the conference over to Nadean Finke. Please go ahead.

Nadean Finke

Thank you, Christine. Good morning, everyone. I would like to welcome all of you today, February 19, 2010, to Newcastle’s fourth 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. Our actual results may differ materially from the 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 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 statements disclaimer in our earnings release, including the recommendation to review the risk factors contained in our annual reports filed with the SEC.

Now I would like to turn the call over to Ken Riis. Ken?

Ken Riis

Thanks, Nadean. Good morning, everyone; and thank you for joining us for our fourth quarter and year end 2009 earnings call. 2009 was a tough year for the markets we invest in, as loan defaults accelerated, ending the year at historically high levels.

On the positive side, risk premiums decreased, resulting in tighter credit spreads in the second half of 2009. For example, in the second half of 2009, AAA rated CMBS spread tightened approximately 300 basis points and have stabilized since year-end. Looking ahead in 2010, we are hopeful that interest rates will remain low, which should increase capital for new loans, improve liquidity in the market, and tighten credit spreads further.

Since we spoke last, at Newcastle, we have focused on two things; maximizing cash generated from our portfolio and utilizing some of our excess liquidity to deleverage our balance sheet.

In this regard, we had success. First, we continue to pass our Over Collateralization tests in CDOs VIII, IX, and X. These CDOs produced $12 million of cash, which was the main contributor to our net operating cash flow generated in the fourth quarter. Secondly, we de-leveraged our balance sheet. We reduced non-agency recourse debt by $20 million, and repurchased $37 million of CDO liabilities for $8 million, realizing a gain of $29 million. We then repurchased $52 million of our junior subordinated notes at approximately $0.33 on the dollar, and eliminated $4 million dollars of annual interest expense in this transaction.

Today, we have $59 million of unrestricted cash and $29 million of non-agency recourse debt, which gives us $30 million of excess liquidity available for investment or other corporate uses. In addition to our cash on balance sheet, we currently have $201 million of restricted CDO cash to invest in the three CDOs that generate significant cash flow to the company. Our goal is to invest this cash in stable credit assets yielding 8% to 9%. We will focus on securities that are priced at a discount to help build over-collateralization cushions in these CDOs.

In the near term, we will continue to look for opportunities to buy back debt at a discount and deleveraging ways that are accretive to shareholders. For the full-year 2009, we repurchased $250 million of CDO liabilities at an average price of $0.12 on the dollar and realized a gain of $215 million. It is hard to project how much and at what price we can buy back our CDO liabilities, but with $4 billion of debt outstanding, repurchasing this debt at steep discounts will be a major focus of ours in 2010.

Over the past year, I am proud of our ability to generate positive operating cash from our portfolio, increase liquidity, and reduce recourse debt. Despite our progress today, I feel we are too reliant upon the cash flows from CDOs XIII, IX, and X. In the past, we have done a good job maximizing the cash from these yields, but there is still much to do. Today, the visibility of future cash flows is quarter to quarter, and very hard to predict. Our goal in 2010 is to further deleverage our balance sheet and therefore position the company to generate stable recurring cash flows. Unfortunately, we aren't there yet, and we still have a lot to do.

I will now turn it over to Brian Sigman, our CFO, to discuss in more detail our financial results. Brian?

Brian Sigman

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

Our liquidity; currently, we have $59 million of unrestricted cash and $200 million of restricted cash for investment at our CDOs, primarily all of which is in CDOs VIII, IX, and X. We also have the following recourse debt excluding our junior subordinated notes

$21 million financing non-agency real estate securities loans and properties, and $8 million financing manufactured housing loans. As we have noted, all of this $29 million of debt is due through September 30 of this year. Additionally, we have a $49 30-day repo financing collateralized by Freddie Mac or agency securities. We currently have four interest rate swaps for the notional $69 million outside of our non-recourse financing structures and we have no future funding imminent.

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