Quarterly report pursuant to Section 13 or 15(d)

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

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PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
3 Months Ended
Mar. 31, 2013
Pro Forma Condensed Consolidated Financial Information  
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

13.     PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

 

The following unaudited pro forma condensed consolidated financial information was derived from the application of pro forma adjustments to the consolidated financial statements of New Residential. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the other information contained in these financial statements and related notes and with New Residential’s historical consolidated financial statements.

 

Condensed consolidated financial statements should be read in conjunction with the other information contained in these financial statements and related notes and with New Residential’s historical consolidated financial statements.

 

The unaudited pro forma information set forth below reflects the historical information of New Residential with certain adjustments. The unaudited pro forma condensed consolidated balance sheet has been adjusted to give effect to all of the transactions described below as if each had occurred on March 31, 2013, see Note 12. The unaudited pro forma condensed consolidated statement of income only includes adjustments to reflect (i) interest income from the Agency RMBS acquired subsequent to March 31, 2013; (ii) interest expense from the financing of Agency RMBS; and (iii) interest expense from the financing of certain Non-Agency RMBS, subsequent to March 31, 2013, in each case as if the transactions giving rise to (i), (ii) and (iii) had occurred on January 1, 2013. Accordingly, the unaudited pro forma condensed consolidated statement of income excludes adjustments for (i) earnings from the consumer loan co-investment transaction; (ii) earnings from the additional Excess MSR transactions; and (iii) interest income from investments in non-Agency RMBS.

 

· New Residential’s cash balance as of May 16, 2013 adjusted for subsequent purchases, sales and financings.
· Consumer loan co-investment transaction through equity method investees on April 1, 2013.
· Acquisition and settlement of additional Excess MSRs, directly and through equity method investees subsequent to March 31, 2013.
· Commitments to acquire additional Excess MSRs through equity method investees subsequent to March 31, 2013, see Notes 6 and 9.
· Acquisition of additional Non-Agency RMBS with a face amount of $156.4 million for approximately $122.0 million subsequent to March 31, 2013 net of sales.
· Acquisition of additional Agency RMBS with a face amount of $97.5 million for approximately $103.0 million subsequent to March 31, 2013.
· Newcastle’s contribution of an additional $265.6 million face amount of Agency RMBS subsequent to March 31, 2013.
· Entry into an additional $290.0 million of Repurchase Agreements related to additional Agency RMBS subsequent to March 31, 2013.
· Entry into an additional $187.8 million of Repurchase Agreements related to additional Non-Agency RMBS subsequent to March 31, 2013.

 

New Residential’s decision to include or exclude an adjustment in the unaudited pro forma condensed consolidated statement of income was based on whether such adjustment would be factually supportable and historically based, as set forth in more detail below.

 

With respect to Agency RMBS, Newcastle held substantial investments in Agency RMBS during the entire period covered by the pro forma statement of income. Although Newcastle did not own the exact securities contributed to New Residential for the entire period presented, management considers Agency RMBS to be fungible because, among other factors, they are guaranteed by the U.S. government and thus have consistent credit characteristics. As a result, New Residential determined that adjustments related to these securities are factually supportable.

 

In contrast to Agency RMBS, the yields of Non-Agency RMBS can have significant variances as a result of differences in the collateral and credit characteristics of each asset. Newcastle did not hold the specific Non-Agency RMBS contributed to New Residential during the entire period presented, and Newcastle does not have records relating to the performance of these assets prior to their acquisition. As a result, management believes that adjustments for the interest income from the Non-Agency RMBS would not be factually supportable.

 

The investments in equity method investees were made in newly formed entities with no historical operations. Neither New Residential nor Newcastle owned any of the underlying excluded investments prior to their acquisition by the investee entities. Furthermore, the underlying loans were not serviced by an affiliate of New Residential’s manager prior to their acquisition. As a result, Newcastle does not have records relating to the performance of these loans prior to the acquisition of the related investments.

 

In addition, the composition of the loan pools and the loans underlying the Excess MSRs and consumer loan investees necessarily differ from the composition of the respective pools during the period covered by the pro forma statement of income due to prepayment and default activity prior to acquisition. As a result, an adjustment related to these investees was not considered factually supportable.

 

In the opinion of management, all adjustments necessary to reflect the effects of the transactions described in the notes to the unaudited pro forma condensed consolidated balance sheet and pro forma condensed statement of income have been included and are based upon available information and assumptions that New Residential believes are reasonable.

 

Further, the historical financial information presented herein has been adjusted to give pro forma effect to events that New Residential believes are factually supportable and which are expected to have a continuing impact on New Residential’s results. However, such adjustments are estimates and may not prove to be accurate. Information regarding these adjustments is subject to risks and uncertainties that could cause actual results to differ materially from those anticipated.

 

These unaudited pro forma condensed consolidated financial statements are provided for information purposes only. The unaudited pro forma condensed consolidated statement of income and consolidated balance sheet do not purport to represent what New Residential’s results of operations and/or financial condition would have been had such transactions been consummated on the dates indicated, nor do they represent the financial position or results of operations of New Residential for any future date.

 

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
At March 31, 2013

 

    March 31, 2013
(Unaudited) (A)
   

Pro Forma

Adjustments

   

New Residential

Pro Forma

 
Assets                        
Real estate securities, available-for-sale   $ 1,318,023     $ 501,815 (B)   $ 1,819,838  
Investments in excess mortgage servicing rights at fair value     236,555       2,453 (C)     239,008  
Investments in equity method investees, excess mortgage servicing rights, at fair value     102,588       268,133 (D)     370,721  
Investments in equity method investees, consumer loans, at fair value     —       247,971 (E)     247,971  
Residential mortgage loans, held-for-investment     35,484       —       35,484  
Cash and cash equivalents     —       102,936 (F)     102,936  
Other assets     450       —       450  
    $ 1,693,100     $ 1,123,308     $ 2,816,408  
                         
Liabilities and Equity                        
                         
Liabilities                        
Repurchase agreements   $ 915,058     $ 477,840 (G)   $ 1,392,898  
Payable related to the investments in equity method investees, excess
mortgage servicing rights
    —       198,855 (H)     198,855  
Due to affiliate     7,784       —       7,784  
Accrued expenses and other liabilities     2,839       —       2,839  
      925,681       676,695       1,602,376  
                         
Commitments and contingencies                        
                         
Equity                        
Common Stock, $0.01 par value, 2,000,000,000 shares authorized, 253,025,645 issued and outstanding on a pro forma basis     —       2,530 (I)     2,530  
Accumulated Equity     735,710       444,083 (J)     1,179,793  
Accumulated other comprehensive income     31,709       —       31,709  
Total Equity     767,419       446,613       1,214,032  
    $ 1,693,100     $ 1,123,308     $ 2,816,408  

 

(A) Represents New Residential’s historical consolidated balance sheet at March 31, 2013.
(B) Represents the carrying value of securities contributed by Newcastle to New Residential and the acquisition of additional Agency and Non-Agency RMBS subsequent to March 31, 2013 net of sales.
(C) Represents the investment in additional excess mortgage servicing rights subsequent to March 31, 2013.
(D) Represents the investment in additional equity method investees, excess mortgage servicing rights, subsequent to March 31, 2013.
(E) Represents the investments in equity method investees, consumer loans, subsequent to March 31, 2013.
(F) Represents New Residential’s cash balance as of May 15, 2013 adjusted for subsequent purchases, sales and financings.
(G) Represents the additional repurchase agreements to finance the real estate securities described in (B) above, net of paydowns through June 10, 2013.
(H) Represents commitments of New Residential’s investments in equity method investees.
(I) Represents 253,025,645 shares of common stock at a par value of $0.01 per share. The number of shares of common stock is based on 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.
(J) Represents New Residential’s accumulated equity, including the additional contributions from Newcastle to New Residential subsequent to March 31, 2013, less the par value of the shares of common stock set forth in (I) above.

 

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

 

    Three Months Ended
March 31, 2013
(A)
    Pro Forma Adjustments     New Residential Pro Forma  
                         
Interest income   $ 16,191     $ 4,226 (B)   $ 20,417  
Interest expense     899       2,754 (C)     3,653  
Net Interest Income     15,292       1,472       16,764  
                         
Change in fair value of investments in excess mortgage servicing rights     1,858       —       1,858  
Change in fair value of investments in equity method investees     969       —       969  
Other Income     2,827       —       2,827  
                         
Expenses                        
General and administrative expenses     2,719       —       2,719  
Management fees allocated by Newcastle     2,325       71 (D)     2,396  
      5,044       71       5,115  
                         
Net Income   $ 13,075     $ 1,401     $ 14,476  
                         
Net Income Per Share                        
Basic     N/A             $ 0.06 (E)
Diluted     N/A             $ 0.06 (F)
                         
Weighted average number of shares outstanding                        
Basic     N/A               235,136,756 (E)
Diluted     N/A               240,079,144 (F)

 

(A) Represents New Residential’s historical consolidated statement of income for the three months ended March 31, 2013.
(B) Represents additional interest income from Agency RMBS acquired during the quarter ended March 31, 2013 and subsequent to March 31, 2013. The interest income was computed based on the weighted average accounting yield of the securities of 1.43%. A 1/8% increase (decrease) in the benchmark interest rate would result in an increase (decrease) in interest income of approximately $0.4 million for the three months ended March 31, 2013.
(C) Represents additional interest expense from additional repurchase agreements used to finance the real estate securities acquired subsequent to March 31, 2013. The interest expense was computed based on the actual terms of the repurchase agreements. A 1/8% increase (decrease) in the benchmark interest rate would result in an increase (decrease) in interest expense of approximately $0.4 million for the three months ended March 31, 2013.
(D) Represents additional management fees related to the capital transactions noted herein.
(E) Pro forma basic earnings per share and weighted average number of basic shares outstanding reflect an estimated number of shares of common stock outstanding based upon Newcastle’s weighted average number of basic shares outstanding for the three months ended March 31, 2013 (based on a distribution ratio of one share of New Residential common stock for each share of Newcastle common stock).
(F) Pro forma diluted earnings per share and weighted average number of diluted shares outstanding reflect shares of common stock that may be issued in connection with awards granted prior to the distribution under Newcastle equity plans based on the distribution ratio noted above in (E). While the actual dilutive impact will depend on various factors, we believe the estimate yields a reasonable approximation of the dilutive impact of the Newcastle equity plans and is based upon Newcastle’s weighted average number of diluted shares outstanding.