Quarterly report pursuant to Section 13 or 15(d)

RECENT ACTIVITIES

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RECENT ACTIVITIES
3 Months Ended
Mar. 31, 2013
Recent Activities  
RECENT ACTIVITIES

12.     RECENT ACTIVITIES

 

These financial statements include a discussion of material events that have occurred subsequent to March 31, 2013 (referred to as “subsequent events”) through the issuance of these consolidated financial statements. Events subsequent to that date have not been considered in these financial statements.

 

On March 5, 2013, New Residential agreed to co-invest in a portfolio of consumer loans with a UPB of approximately $4.2 billion as of December 31, 2012. The portfolio includes over 400,000 personal unsecured loans and personal homeowner loans originated through subsidiaries of HSBC Finance Corporation. On April 1, 2013, New Residential completed this co-investment through newly formed limited liability companies (collectively, “the consumer loan companies”). The consumer loan companies acquired the portfolio from HSBC Finance Corporation and its affiliates. New Residential invested approximately $250 million for 30% membership interests in each of the consumer loan companies. Of the remaining 70% of the membership interests, Springleaf Finance, Inc. (“Springleaf”), which is majority-owned by Fortress funds managed by New Residential’s Manager, acquired 47%, and an affiliate of Blackstone Tactical Opportunities Advisors L.L.C. acquired 23%. Springleaf will act as the managing member of the consumer loan companies. The consumer loan companies financed $2.2 billion of the approximately $3.0 billion purchase price with asset-backed notes. The consumer loan companies were formed on March 19, 2013, for the purpose of making this investment and commenced operations upon the completion of the investment. After a servicing transition period, Springleaf will be the servicer of the loans and will provide all servicing and advancing functions for the portfolio. Consumer loans will be treated as a separate segment. Included in general and administrative expenses for the three months ended March 31, 2013 is approximately $2.5 million of professional fees related to consumer loans.

 

On April 9, 2013, New Residential financed additional Non-Agency RMBS with approximately $144 million of repurchase agreements, at a cost of one-month LIBOR plus 200 bps. The weighted average advance rate for these repurchase agreements was approximately 70%. These repurchase agreements, which contain customary margin call provisions, have an initial term ending on July 9, 2013.

 

On April 19, 2013, the Master Repurchase Agreement between NIC RMBS LLC and Credit Suisse Securities LLC was amended. Under the terms of the amendment, Newcastle was terminated as the Guarantor and replaced by New Residential on May 15, 2013.

 

On April 26, 2013, Newcastle announced that its board of directors had formally declared the distribution of shares of common stock of New Residential, a then wholly owned subsidiary of Newcastle. Following the spin-off, New Residential is an independent, publicly-traded REIT primarily focused on investing in residential mortgage related assets. The spin-off was completed on May 15, 2013 and New Residential began trading on the New York Stock Exchange under the symbol “NRZ”. The spin-off transaction was effected as a taxable pro rata distribution by Newcastle of all the outstanding shares of common stock of New Residential to the stockholders of record of Newcastle as of May 6, 2013. The stockholders of Newcastle as of the record date received one share of New Residential common stock for each share of Newcastle common stock held.

 

On April 29, 2013, New Residential’s certificate of incorporation was amended so that its authorized capital stock now consists of 2,000,000,000 shares of common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per share. After completion of the spin-off, there are 253,025,645 outstanding shares of common stock which is based on the number of Newcastle’s shares of common stock outstanding on May 6, 2013 and a distribution ratio of one share of New Residential common stock for each share of Newcastle common stock.

 

Effective May 15, 2013, the Manager is entitled to receive annual incentive compensation in an amount equal to the product of (A) 25% of the dollar amount by which (1) (a) New Residential’s funds from operations before the incentive compensation per share of common stock, plus (b) gains (or losses) from debt restructuring and gains (or losses) from sales of property and other assets per share of common stock, exceed (2) an amount equal to (a) the weighted average of the book value per share of the equity transferred by Newcastle on the distribution date and the prices per share of New Residential’s common stock in any offerings (adjusted for prior capital dividends or capital distributions) multiplied by (b) a simple interest rate of 10% per annum, multiplied by (B) the weighted average number of shares of common stock outstanding. “Funds from operations” means net income (computed in accordance with GAAP), excluding gains (losses) from debt restructuring and gains (or losses) from sales of property, plus depreciation on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations will be computed on an unconsolidated basis. The computation of funds from operations may be adjusted at the direction of New Residential’s independent directors based on changes in, or certain applications of, GAAP. Funds from operations is determined from the date of the spin-off and without regard to Newcastle’s prior performance. Funds from operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of New Residential’s performance or to cash flows as a measure of liquidity or the ability to make distributions.

 

Effective May 15, 2013, the Manager is entitled to receive a management fee in the amount equal to 1.5% per annum of New Residential’s gross equity calculated and payable monthly in arrears in cash. Gross equity is generally the equity transferred by Newcastle on the distribution date, plus total net proceeds from stock offerings, plus certain capital contributions to subsidiaries, less capital distributions and repurchases of common stock.

 

On May 15, 2013, New Residential had a cash balance of $181.6 million.

 

On May 20, 2013, New Residential acquired, through a joint venture, an interest in Excess MSRs from Nationstar on a portfolio of mortgage loans with an UPB of approximately $23 billion as of March 31, 2013. New Residential has committed to invest approximately $40.2 million to acquire a one-third interest in the Excess MSRs. Nationstar is the servicer of the loans and has retained a one-third interest in the Excess MSRs; a Fortress managed fund has acquired the remaining one-third interest. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs will be included in the portfolio, subject to certain limitations. New Residential, Nationstar and the Fortress fund will share equally in these Excess MSRs.

 

Effective upon the spin-off, New Residential has a Nonqualified Stock Option and Incentive Award Plan (the “Plan”) which provides for the grant of equity-based awards, including restricted stock, stock options, stock appreciation rights, performance awards, tandem awards and other equity-based and non equity based awards, in each case to the Manager, and to the directors, officers, employees, service providers, consultants and advisor of the Manager who perform services for New Residential, and to New Residential’s directors, officers, service providers, consultants and advisors. New Residential has initially reserved 30,000,000 shares of its common stock for issuance under the Plan; on the first day of each fiscal year beginning during the ten-year term of the Plan in and after calendar year 2014, that number will be increased by a number of shares of New Residential’s common stock equal to 10% of the number of shares of common stock newly issued by New Residential during the immediately preceding fiscal year (and, in the case of fiscal year 2013, after the effective date of the Plan). New Residential’s board of directors may also determine to issue options to the Manager that are not subject to the Plan, provided that the number of shares underlying any options granted to the Manager in connection with capital raising efforts would not exceed 10% of the shares sold in such offering and would be subject to NYSE rules.

 

Prior to the spin-off, Newcastle had issued options to the Manager in connection with capital raising activities. In connection with the spin-off, 21.5 million options that were held by FIG LLC, (the Manager), or by the directors, officers or employees of the Manager, were converted into an adjusted Newcastle option and a new New Residential option. The exercise price of each adjusted Newcastle option and New Residential option was set to collectively maintain the intrinsic value of the Newcastle option immediately prior to the spin-off and to maintain the ratio of the exercise price of the adjusted Newcastle option and the New Residential option, respectively, to the fair market value of the underlying shares as of the spin-off date, in each case based on the five day average closing price subsequent to the spin-off date.

 

New Residential’s outstanding options at May 15, 2013 consisted of the following:

 

    Number of Options     Strike Price     Maturity Date
      6,000     $ 9.35     05/30/13
      116,380       10.91     07/16/13
      304,604       12.28     12/01/13
      328,350       14.17     01/09/14
      343,275       13.86     05/25/14
      162,500       16.95     11/22/14
      330,000       15.97     01/12/15
      2,000       16.68     08/01/15
      170,000       15.87     11/01/16
      242,000       16.90     01/23/17
      456,000       14.96     04/11/17
      1,676,833       3.29     03/29/21
      2,539,833       2.49     09/27/21
      2,000       2.74     12/20/21
      1,897,500       3.41     04/03/22
      2,300,000       3.67     05/21/22
      2,530,000       3.67     07/31/22
      5,750,000       5.12     01/11/23
      2,300,000       5.74     02/15/23
Total/WA     21,457,275     $ 5.35  

 

On June 3, 2013, New Residential granted options to its independent directors to purchase 8,000 shares of New Residential’s stock at a price of $6.79.

 

On June 6, 2013, New Residential financed additional Non-Agency RMBS with approximately $47.0 million of repurchase agreements, at a cost of one-month LIBOR plus 160 bps. The weighted average advance rate for these repurchase agreements was approximately 65%. These repurchase agreements, which contain customary margin call provisions, have an initial term ending on June 28, 2013.

 

Subsequent to March 31, 2013, New Residential acquired approximately $156.4 million face amount of Non-Agency RMBS for approximately $122.0 million. New Residential also purchased $97.5 million of Agency RMBS for approximately $103.0 million. Newcastle contributed an additional $265.6 million face amount of Agency RMBS subsequent to March 31, 2013 with a fair value of approximately $281.2 million as of the contribution date. These additional agency RMBS were financed with $267.0 million of repurchase agreements.

 

New Residential declared a quarterly dividend of $0.07 per common share for the quarter ended June 30, 2013, which will be paid in July 2013.