Newcastle Investment Corp (NCT) to Spin-Off New Residential March 2013
Newcastle Investment Corp is expected to spin-off New Residential Investment Corp. by March 31, 2013. New Castel announced the transaction January 7, 2013 making it a resonably quick spin.
Core Earnings Down 23% QOQ
On February 28, 2013, Newcastle Investment Corp (NYSE: NCT; Market Capitalization: $2.8 billion) reported earnings for the fourth quarter ending December 31, 2012. NCT’s performance slowed down during the quarter, as compared to strong performance during the previous quarter ending September 30, 2012. Residential servicing and securities portfolio exceeded company’s initial expectations during the quarter, while performance in the commercial real estate asset category took a hit. Core earnings, representing net interest income, decreased 23% QOQ to $33 million, as compared to $43 million during the previous quarter ending September 30, 2012, while cash available for distribution almost remained flat on QOQ basis at $35 million. The decline during the quarter was due to two primary reasons - $245 million of average un-invested capital in the quarter and an additional general and administrative expense related to co-investment in Excess Mortgage Servicing Rights (MSRs) from Residential Capital LLC (ResCap) and the planned spin-off of New Residential Investment Corp ("NRZ"). The company, however, expects to invest their capital and continue to grow their earnings in coming quarter.
In the month of February 2013, company completed the sale of 23 million shares of its common equity. The gross proceeds from the sale were around $241 million. In the last 2 months, the company completed sale of approximately 81 million shares of its common stock for gross proceeds of approximately $780 million.
On January 6, 2013, NCT, through a newly formed 50:50 joint venture, entered into a definitive agreement with Nationstar Mortgage LLC (NYSE: NSM), an affiliate of NCT’s external manager, Fortress Investment Group LLC (NYSE: FIG), to acquire excess MSRs. Simultaneously, NSM entered into an agreement to acquire MSRs on residential mortgage loans with a total unpaid principal balance (UPB) of around $215 billion as of November 30, 2012, from Bank of America. NCT agreed to purchase one-third of the Excess MSRs on this portfolio for approximately $340 million. Following these transactions, the board of directors of NCT determined that a spin-off of its residential real estate assets is in the best interest of the company and shareholders.
Accordingly, on January 7, 2013, "NRZ" filed its initial Form-10 providing details about the business and asset portfolio. The company is yet to announce the detailed time line and spin structure. We expect the spin-off to occur before March 31, 2013. The spin-off is expected to be taxable for federal tax purpose.
Additional Earnings Information
Core earnings, representing net interest income, decreased 23% QOQ to $33 million, as compared to $43 million during the previous quarter ending September 30, 2012, while cash available for distribution almost remained flat on QOQ basis at $35 million. The decline during the quarter was due to two primary reasons - $245 million of average un-invested capital in the quarter and an additional general and administrative expense related to co-investment in Excess MSRs from Residential Capital LLC (ResCap) and the planned spin-off of New Residential Investment Corp (NRZ).
New Residential Investment Corp (NRZ): In the recent quarter, return in NRZ’s assets exceeded management expectation. Both MSR’s and Non-agency RMBS generated good cash flows and increased in value compared to 3Q’12. The MSR assets generated 19% average IRR and outperformed its initial expectation of 18% average IRR. Weighted average constant prepayment rate (CPR) life-to-date was 12% as compared to company’s initial expectation of 20%. During the quarter, value of Non-agency RMBS increased by $11 million and generated $8 million in total cash flow. Since December 31, 2012, the company has invested $347 million in excess MSRs and $191 million in Non-agency RMBS. In the MSR business, the company remains optimistic in generating more than mid-teen un-levered returns.
NCT Stub: In the commercial real estate asset category, during the quarter, asset value increased only $21 million, as compared to an increase of $39 million during 3Q’12. During the quarter, principal repayments on repurchased CDO debt was $47 million, as compared to $172 million during 3Q’12. Investment in senior living properties outperformed company expectation during the quarter. Since December, company invested $111 million commercial real estate assets.
S&P/Case-Shiller U.S. Home Prices increased 7% during 2012, and management believes the current low interest rate and supply demand mismatch would further increase home prices. On the commercial business assets, we believe lower vacancy rate and higher rental income witnessed in 2012 to continue during 2013. Overall, based on new investments allocation, we believe management is more optimistic in the residential segment than the commercial asset category. We continue to remain positive on the overall market environment driven by housing market recovery on the one hand and continued lower interest rates on the other hand.
About Newcastle Investment Corp (NCT)
Newcastle Investment Corporation is a real estate investment and finance company. NCT invests and manages a portfolio of real estate securities, loans, excess mortgage servicing rights (MSRs), and other real estate related assets. NCT’s investment strategy focuses primarily on debt investments secured by real estate. The company plans to separate its residential mortgage assets into a separate entity.
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