Newcastle Investment Corporation (NCT)

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Newcastle Investment Corp. (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

Presentation

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.

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