Quarterly report pursuant to Section 13 or 15(d)

EQUITY AND EARNINGS PER SHARE

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EQUITY AND EARNINGS PER SHARE
9 Months Ended
Sep. 30, 2014
Equity And Earnings Per Share  
EQUITY AND EARNINGS PER SHARE
EQUITY AND EARNINGS PER SHARE
 
Equity and Dividends
 
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. At the time of the completion of the spin-off, there were 126,512,823 outstanding shares of common stock which was 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 (adjusted for the reverse split described below).
 
In April 2014, New Residential issued 13,875,000 shares of its common stock in a public offering at a price to the public of $12.20 per share for net proceeds of approximately $163.8 million. One of New Residential’s executive officers participated in this offering and purchased an additional 500,000 shares at the public offering price for net proceeds of approximately $6.1 million. For the purpose of compensating the Manager for its successful efforts in raising capital for New Residential, in connection with this offering, New Residential granted options to the Manager to purchase 1,437,500 shares of New Residential’s common stock at a price of $12.20, which had a fair value of approximately $1.4 million as of the grant date. The assumptions used in valuing the options were: a 2.87% risk-free rate, a 12.584% dividend yield, 25.66% volatility and a 10 year term.

An employee of the Manager exercised 107,500 options with a weighted average exercise price of $5.61 on May 7, 2014. Upon exercise, 107,500 shares of common stock of New Residential were issued. Employees of the Manager and one of New Residential's directors exercised an aggregate of 498,500 options with a weighted average exercise price of $5.62 in August 2014. Upon exercise, 276,037 shares of common stock of New Residential were issued.

New Residential’s Board of Directors authorized a one-for-two reverse stock split on August 5, 2014, subject to stockholder approval. In a special meeting on October 15, 2014, New Residential’s stockholders approved the reverse split. On October 17, 2014, New Residential effected the one-for-two reverse stock split of its common stock. As a result of the reverse stock split, every two shares of New Residential’s common stock were converted into one share of common stock, reducing the number of issued and outstanding shares of New Residential’s common stock from approximately 282.8 million to approximately 141.4 million. The impact of this reverse stock split has been retroactively applied to all periods presented.

On December 17, 2013, New Residential declared a quarterly dividend of $0.35 per common share and a special cash dividend of $0.15 per common share, totaling $63.3 million, for the quarter ended December 31, 2013. The combined dividend of $0.50 was paid on January 31, 2014. On March 19, 2014, New Residential declared a quarterly dividend of $0.35 per common share, or $44.3 million, for the quarter ended March 31, 2014, which was paid in April 2014. On June 17, 2014, New Residential declared a quarterly dividend of $0.35 per common share and a special cash dividend of $0.15 per common share, totaling $70.6 million, for the quarter ended June 30, 2014. The combined dividend of $0.50 was paid on July 31, 2014. On September 18, 2014, New Residential’s board of directors declared a quarterly dividend of $0.35 per common share, or $49.5 million, for the quarter ended September 30, 2014, which was paid on October 31, 2014 to stockholders of record as of September 29, 2014.
 
Approximately 2.4 million shares of New Residential’s common stock were held by Fortress, through its affiliates, and its principals at September 30, 2014.

In January and June 2014, New Residential issued an aggregate of 25,080 shares of its common stock to its independent directors as compensation.
 
Option Plan
 
New Residential’s outstanding options at September 30, 2014 consisted of the following:
 
Number of Options
 
Strike Price
 
Maturity Date
 
81,248

 
$
33.90

 
11/22/2014
 
164,999

 
31.94

 
01/12/2015
 
1,000

 
33.36

 
08/01/2015
 
85,000

 
31.74

 
11/01/2016
 
121,000

 
33.80

 
01/23/2017
 
228,000

 
29.92

 
04/11/2017
 
547,583

 
6.58

 
03/29/2021
 
849,916

 
4.98

 
09/27/2021
 
933,583

 
6.82

 
04/03/2022
 
1,132,499

 
7.34

 
05/21/2022
 
1,249,583

 
7.34

 
07/31/2022
 
2,874,998

 
10.24

 
01/11/2023
 
1,149,998

 
11.48

 
02/15/2023
 
4,000

 
13.58

 
06/02/2023
 
1,437,500

 
12.20

 
04/30/2024
Total/Weighted Average
10,860,907

 
$
10.46

 

 
As of September 30, 2014, New Residential’s outstanding options were summarized as follows:
Held by the Manager
8,970,161

Issued to the Manager and subsequently transferred to certain of the Manager’s employees
1,843,180

Issued to the independent directors
5,000

Issued to the Manager and held by its former employees
42,566

Total
10,860,907


 
Income and Earnings Per Share
 
Net income earned prior to the spin-off is included in additional paid-in capital instead of retained earnings since the accumulation of retained earnings began as of the date of spin-off.
 
New Residential is required to present both basic and diluted earnings per share (“EPS”). Basic EPS is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding plus the additional dilutive effect, if any, of common stock equivalents during each period. New Residential’s common stock equivalents are its outstanding stock options. During the three and nine months ended September 30, 2014, based on the treasury stock method, New Residential had 2,955,021 and 3,158,619 dilutive common stock equivalents outstanding, respectively. During the three and nine months ended September 30, 2013, based on the treasury stock method, New Residential had 3,408,249 and 1,754,208 dilutive common stock equivalents outstanding, respectively.
 
For the purposes of computing EPS for periods prior to the spin-off on May 15, 2013, New Residential treated the common shares issued in connection with the spin-off as if they had been outstanding for all periods presented, similar to a stock split. For the purposes of computing diluted EPS for periods prior to the spin-off on May 15, 2013, New Residential treated the 10.7 million options issued on the spin-off date as a result of the conversion of Newcastle options as if they were granted on May 15, 2013 since no New Residential awards were outstanding prior to that date.
 
Noncontrolling Interests
 
Noncontrolling interests is comprised of the interests held by third parties in consolidated entities that hold New Residential’s investments in servicer advances (Note 6).