UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
S
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________ 
Commission File Number: 001-31458 
Newcastle Investment Corp.
(Exact name of registrant as specified in its charter)
Maryland
 
81-0559116
(State or other jurisdiction of incorporation
 
(I.R.S. Employer Identification No.)
or organization)
 
 
1345 Avenue of the Americas, New York, NY
 
10105
(Address of principal executive offices)
 
(Zip Code)
(212)798-6100
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
S Yes  No £ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer S Accelerated filer £ Non-accelerated filer £ (Do not check if a smaller reporting company)
Smaller reporting company £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No S
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date.
Common stock, $0.01 par value per share: 351,453,495 shares outstanding as of April 28, 2014.



CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments, the stability of our earnings, and our financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual outcome of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:

changes in global, national and local economic conditions, including, but not limited to, a prolonged economic slowdown and a downturn in the real estate market;
reductions in cash flows received from our investments;
the availability and cost of capital for future investments, particularly in a rising interest rate environment, and our ability to deploy capital accretively;
our ability to profit from opportunistic investments, such as our investment in golf, and to mitigate the risks associated with managing operating businesses and asset classes with which we have limited experience;
the relationship between yields on assets which are paid off and yields on assets in which such monies can be reinvested;
changes in our asset portfolio and investment strategy as a result of a spin-off of our senior housing business or other factors;
adverse changes in the financing markets we access affecting our ability to finance our investments;
changing risk assessments by lenders that potentially lead to increased margin calls, not extending our repurchase agreements or other financings in accordance with their current terms or entering into new financings with us;
changes in interest rates and/or credit spreads, as well as the success of any hedging strategy we may undertake in relation to such changes;
the risks that default and recovery rates on our real estate securities and loan portfolios deteriorate compared to our underwriting estimates;
impairments in the value of the collateral underlying our investments and the relation of any such impairments to our judgments as to whether changes in the market value of our securities, loans or real estate are temporary or not and whether circumstances bearing on the value of such assets warrant changes in carrying values;
our dependence on our property managers and tenants in our senior housing business;
the ability of our property managers and tenants to comply with laws, rules and regulations in the operation of our properties, to deliver high quality services, to attract and retain qualified personnel and to attract residents;
increases in costs at our senior housing properties (including, but not limited to, the costs of labor, supplies, insurance and property taxes);
geographical concentrations with respect to the mortgage loans underlying and collateral securing certain of our debt investments, our senior housing properties and our golf courses;
legislative/regulatory changes, including but not limited to, any modification of the terms of loans or changes in the healthcare industry;
competition within the finance, real estate, senior housing industries, as well as other industries, such as the golf industry, in which we have and/or may pursue additional investments;
the impact of litigation or any financial, accounting, legal or regulatory issues that may affect us or our property managers and tenants;
our ability and willingness to maintain our qualification as a REIT; and
other risks detailed from time to time below, particularly under the heading “Risk Factors,” and in our other reports filed with or furnished to the Securities and Exchange Commission (the “SEC”).

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The factors noted above could cause our actual results to differ significantly from those contained in any forward-looking statement.

Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management’s views only as of the date of this report. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.



SPECIAL NOTE REGARDING EXHIBITS
 
In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Newcastle Investment Corp. (the “Company”) or the other parties to the agreements.  The agreements contain representations and warranties by each of the parties to the applicable agreement.  These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
 
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.  Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
 
The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading.
 





NEWCASTLE INVESTMENT CORP.  
FORM 10-Q
 
INDEX
 
 
PAGE
PART I.   FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.   
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
March 31, 2014
 
December 31, 2013
 
(Unaudited)
 
Assets
 

 
 

Real estate securities, available-for-sale
$
439,023

 
$
984,263

Real estate related and other loans, held-for-sale, net
313,250

 
437,530

Residential mortgage loans, held-for-investment, net

 
255,450

Residential mortgage loans, held-for-sale, net
248,299

 
2,185

Subprime mortgage loans subject to call option
406,217

 
406,217

Investments in senior housing real estate, net of accumulated depreciation
1,374,710

 
1,362,900

Investments in other real estate, net of accumulated depreciation
262,403

 
266,170

Intangibles, net of accumulated amortization
187,101

 
199,725

Other investments
25,795

 
25,468

Cash and cash equivalents
122,053

 
74,133

Restricted cash
4,314

 
5,889

Receivables and other assets
137,444

 
141,887

Assets of discontinued operations

 
690,746

Total Assets
$
3,520,609

 
$
4,852,563

 
 
 
 
 
 
 
 
Liabilities and Equity
 

 
 

Liabilities
 

 
 

CDO bonds payable
$
408,813

 
$
544,525

Other bonds and notes payable
221,305

 
230,279

Repurchase agreements
74,863

 
556,347

Mortgage notes payable
1,091,823

 
1,076,828

Credit facilities, golf
152,961

 
152,498

Financing of subprime mortgage loans subject to call option
406,217

 
406,217

Junior subordinated notes payable
51,236

 
51,237

Dividends payable
36,075

 
36,075

Accounts payable, accrued expenses and other liabilities
271,841

 
277,166

Liabilities of discontinued operations

 
295,267

Total Liabilities
$
2,715,134

 
$
3,626,439

 
 
 
 
 
 

 
 

 
 
 
 
Equity
 
 
 
Preferred stock, $0.01 par value, 100,000,000 shares authorized, 1,347,321 shares of 9.75% Series B Cumulative Redeemable Preferred Stock, 496,000 shares  of 8.05% Series C Cumulative Redeemable Preferred Stock, and 620,000 shares of 8.375% Series D Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, issued and outstanding as of March 31, 2014 and December 31, 2013
$
61,583

 
$
61,583

Common stock, $0.01 par value, 1,000,000,000 shares authorized, 351,453,495 shares issued and outstanding, at March 31, 2014 and December 31, 2013
3,515

 
3,515

Additional paid-in capital
2,970,786

 
2,970,786

Accumulated deficit
(2,310,496
)
 
(1,947,913
)
Accumulated other comprehensive income
79,860

 
76,874

Total Newcastle Stockholders' Equity
805,248

 
1,164,845

Noncontrolling interests
227

 
61,279

Total Equity
$
805,475

 
$
1,226,124

 
 
 
 
Total Liabilities and Equity
$
3,520,609

 
$
4,852,563

 
Statement continues on the next page.

1



NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
The following table presents certain assets of consolidated variable interest entities (“VIEs”), which are included in the Consolidated Balance Sheets above. The assets in the table below include those assets that can only be used to settle obligations of consolidated VIEs, and are in excess of those obligations. Additionally, the assets in the table below exclude intercompany balances that eliminate in consolidation.


 
March 31, 2014
 
December 31, 2013
 
(Unaudited)
 
Assets of consolidated VIEs that can only be used to settle obligations of
    consolidated VIEs
 

 
 

Real estate securities, available-for-sale
$
431,617

 
$
426,695

Real estate related and other loans, held-for-sale, net
313,250

 
437,530

Residential mortgage loans, held-for-sale, net
215,991

 
223,628

Subprime mortgage loans subject to call option
406,217

 
406,217

Investments in other real estate, net of accumulated depreciation
6,573

 
6,597

Other investments
19,556

 
19,308

Restricted cash
1,338

 
2,377

Receivables and other assets
4,046

 
3,727

Total assets of consolidated VIEs that can only be used to settle obligations
    of consolidated VIEs
$
1,398,588

 
$
1,526,079


 
The following table presents certain liabilities of consolidated VIEs, which are included in the Consolidated Balance Sheets above. The liabilities in the table below include liabilities of consolidated VIEs due to third parties only, and exclude intercompany balances that eliminate in consolidation. The liabilities also exclude amounts where creditors or beneficial interest holders have recourse to the general credit of Newcastle.


 
March 31, 2014
 
December 31, 2013
 
(Unaudited)
 
Liabilities of consolidated VIEs for which creditors or beneficial interest
    holders do not have recourse to the general credit of Newcastle
 

 
 

CDO bonds payable
$
408,813

 
$
544,525

Other bonds and notes payable
221,305

 
230,279

Financing of subprime mortgage loans subject to call option
406,217

 
406,217

Derivative liabilities
10,514

 
13,795

Accounts payable, accrued expenses and other liabilities
1,745

 
6,766

Total liabilities of consolidated VIEs for which creditors or beneficial
    interest holders do not have recourse to the general credit of Newcastle
$
1,048,594

 
$
1,201,582

 

See notes to consolidated financial statements.

2



NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(dollars in thousands, except share data)
 
Three Months Ended March 31,
 
2014
 
2013
Interest income
$
46,452

 
$
61,332

Interest expense
35,855

 
22,710

Net interest income
10,597

 
38,622

Impairment/(Reversal)
 

 
 

Valuation allowance (reversal) on loans
1,246

 
2,234

Other-than-temporary impairment on securities

 
422

Portion of other-than-temporary impairment on securities recognized in other comprehensive income (loss), net of the reversal of other comprehensive loss into net income (loss)

 
117

Total impairment (reversal)
1,246

 
2,773

Net interest income after impairment/reversal
9,351

 
35,849

Operating Revenues
 

 
 

Rental income
52,890

 
12,887

Care and ancillary income
5,461

 
613

Golf course operations
40,389

 

Sales of food and beverages - golf
13,539

 

Other golf revenue
9,350

 

Total operating revenues
121,629

 
13,500

Other Income
 

 
 

Gain (loss) on settlement of investments, net
2,332

 
(3
)
Gain on extinguishment of debt

 
1,206

Other income, net
13,474

 
4,567

Total other income
15,806

 
5,770

Expenses
 

 
 

Loan and security servicing expense
857

 
1,034

Property operating expenses
23,804

 
8,670

Operating expenses - golf
58,338

 

Cost of sales - golf
5,956

 

General and administrative expense
9,212

 
3,906

Management fee to affiliate
8,037

 
9,565

Depreciation and amortization
30,359

 
4,079

Total expenses
136,563

 
27,254

Income from continuing operations before income tax
10,223

 
27,865

Income tax expense
295

 

Income from continuing operations
9,928

 
27,865

Income (loss) from discontinued operations, net of tax
(5,305
)
 
10,148

Net Income
4,623

 
38,013

Preferred dividends
(1,395
)
 
(1,395
)
Net loss attributable to noncontrolling interests
661

 

Income Applicable to Common Stockholders
$
3,889

 
$
36,618


Continued on next page.

3



NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(dollars in thousands, except share data)

Income Per Share of Common Stock
 

 
 

Basic
$
0.01

 
$
0.16

Diluted
$
0.01

 
$
0.15

Income from continuing operations per share of common stock, after preferred dividends and noncontrolling interests
 

 
 

Basic
$
0.03

 
$
0.11

Diluted
$
0.03

 
$
0.11

Income (loss) from discontinued operations per share of common stock
 

 
 

Basic
$
(0.02
)
 
$
0.05

Diluted
$
(0.02
)
 
$
0.04

Weighted Average Number of Shares of Common Stock Outstanding
 

 
 

Basic
351,453,495

 
235,136,756

Diluted
363,066,769

 
240,079,144

Dividends Declared per Share of Common Stock
$
0.10

 
$
0.22







See notes to consolidated financial statements.

4



NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(dollars in thousands, except share data)
 
Three Months Ended 
 March 31,
 
2014
 
2013
Net income
$
4,623

 
$
38,013

Other comprehensive income (loss):
 

 
 

Net unrealized gain on securities
4,588

 
29,454

Reclassification of net realized (gain) loss on securities into earnings
(2,334
)
 
539

Net unrecognized gain and pension prior service cost (discontinued operations)
9

 

Net unrealized gain on derivatives designated as cash flow hedges
1,203

 
1,841

Reclassification of net realized (gain) loss on derivatives designated as cash flow hedges into earnings
(13
)
 

Other comprehensive income
3,453

 
31,834

Total comprehensive income
$
8,076

 
$
69,847

Comprehensive income attributable to Newcastle stockholders' equity
$
8,737

 
$
69,847

Comprehensive loss attributable to noncontrolling interests
$
(661
)
 
$

  
See notes to consolidated financial statements.

5



NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2014
(dollars in thousands, except share data)
 
Newcastle Stockholders
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Additional Paid-
 
Accumulated
 
Accumulated Other Comp.
 
Total Newcastle Stockholders'
 
Noncontrolling
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
in Capital
 
Deficit
 
Income (Loss)
 
Equity
 
Interests
 
(Deficit)
Equity - December 31, 2013
2,463,321

 
$
61,583

 
351,453,495

 
$
3,515

 
$
2,970,786

 
$
(1,947,913
)
 
$
76,874

 
$
1,164,845

 
$
61,279

 
$
1,226,124

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends declared

 

 

 

 

 
(36,540
)
 

 
(36,540
)
 

 
(36,540
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Spin-off of New Media

 

 

 

 

 
(331,327
)
 
(467
)
 
(331,794
)
 
(60,391
)
 
(392,185
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)


 


 


 


 


 


 


 


 


 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 

 

 

 
5,284

 

 
5,284

 
(661
)
 
4,623

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income

 

 

 

 

 

 
3,453

 
3,453

 

 
3,453

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8,737

 
(661
)
 
8,076

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity - March 31, 2014
2,463,321

 
$
61,583

 
351,453,495

 
$
3,515

 
$
2,970,786

 
$
(2,310,496
)
 
$
79,860

 
$
805,248

 
$
227

 
$
805,475

 
See notes to consolidated financial statements

6



NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands, except share data)
 
Three Months Ended March 31,
 
2014
 
2013
Cash Flows From Operating Activities
 
 
 
Net income
$
4,623

 
$
38,013

Adjustments to reconcile net income to net cash provided by operating activities
(inclusive of amounts related to discontinued operations):
 

 
 

Depreciation and amortization
34,955

 
4,079

Accretion of discount and other amortization
(8,639
)
 
(8,539
)
Interest income in CDOs redirected for reinvestment or CDO bond paydown
(328
)
 
(536
)
Interest income on investments accrued to principal balance
(7,214
)
 
(6,181
)
Interest expense on debt accrued to principal balance
109

 
109

Valuation allowance on loans
1,246

 
2,234

Other-than-temporary impairment on securities

 
539

Change in fair value of investments in excess mortgage servicing rights

 
(1,858
)
Change in fair value of investments in equity method investees

 
(969
)
Straight-lining of rental income
(6,107
)
 

Equity in earnings from equity method investments
39

 

Distributions of earnings from equity method investees

 
1,344

(Gain)/loss on settlement of investments (net)
(2,332
)
 
3

Unrealized gain on non-hedge derivatives and hedge ineffectiveness
(12,748
)
 
(3,126
)
Gain on extinguishment of debt

 
(1,206
)
Change in:
 

 
 

Restricted cash
2,018

 
995

Receivables and other assets
8,434

 
(2,277
)
Accounts payable, accrued expenses and other liabilities
(9,419
)
 
1,995

Net cash provided by operating activities
4,637

 
24,619

Cash Flows From Investing Activities
 

 
 

Principal repayments from repurchased CDO debt
4,398

 
8,656

Principal repayments from CDO securities
601

 
1,290

Principal repayments from non-Agency RMBS

 
17,472

Return of investments in excess mortgage servicing rights

 
10,272

Principal repayments from loans and non-CDO securities (excluding non-Agency RMBS)
25,435

 
74,944

Principal repayment from security accounted for as a linked transaction
26,709

 

Purchase of real estate securities

 
(871,127
)
Purchase of real estate related and other loans

 
(101,313
)
Proceeds from sale of investments
532,236

 

Acquisition of investments in real estate
(22,800
)
 

Additions to investments in real estate
(3,578
)
 
(259
)
Contributions to equity method investees

 
(109,588
)
Distributions of capital from equity method investees

 
6,625

Deposits paid on investments
(2,448
)
 
(2,700
)
Net cash provided by (used in) investing activities
560,553

 
(965,728
)
 
Continued on next page

7



NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands, except share data)
 
Three Months Ended March 31,
 
2014
 
2013
Cash Flows From Financing Activities
 
 
 
Repurchases of CDO bonds payable
$

 
$
(9,722
)
Repayments of other bonds and notes payable
(8,384
)
 
(9,922
)
Borrowings under repurchase agreements
34,713

 
1,379,928

Borrowings under repurchase agreements accounted for as linked transactions
970

 

Repayments of repurchase agreements
(516,197
)
 
(835,777
)
Repayments under repurchase agreements accounted for as linked transactions
(7,366
)
 

Repayments of credit facilities, media and golf
(4,248
)
 

Margin deposits under repurchase agreements
(12,277
)
 
(62,100
)
Return of margin deposits under repurchase agreements
11,867

 
56,788

Borrowings under mortgage notes payable
17,250

 

Repayment of mortgage notes payable
(2,739
)
 

Issuance of common stock

 
764,759

Costs related to issuance of common stock

 
(592
)
New Media spin-off
(23,845
)
 

Common stock dividends paid
(35,145
)
 
(37,954
)
Preferred stock dividends paid
(1,395
)
 
(1,395
)
Payment of financing costs
(2,285
)
 
(30
)
Net cash provided by (used in) financing activities
(549,081
)
 
1,243,983

Net Increase in Cash and Cash Equivalents
16,109

 
302,874

Cash and Cash Equivalents of Continuing Operations, Beginning of Period
74,133

 
231,898

Cash and Cash Equivalents of Discontinued Operations, Beginning of Period
31,811

 

Cash and Cash Equivalents, End of Period
$
122,053

 
$
534,772

Supplemental Disclosure of Cash Flow Information
 

 
 

Cash paid during the period for income taxes
$
76

 
$

Cash paid during the period for interest expense
$
20,477

 
$
12,953

Supplemental Schedule of Non-Cash Investing and Financing Activities
 

 
 

Preferred stock dividends declared but not paid
$
930

 
$
930

Common stock dividends declared but not paid
$
35,145

 
$
55,666

Reduction of Assets and Liabilities relating to the spin-off of New Media
 

 
 

Property, plant and equipment, net
$
266,385

 
$

Goodwill and intangibles, net
$
271,350

 
$

Restricted cash
$
6,477

 
$

Receivables and other assets
$
101,940

 
$

Credit facilities, media
$
177,955

 
$

Accounts payable, accrued expenses and other liabilities
$
99,857

 
$

 

See notes to consolidated financial statements

8

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)
 


1.   GENERAL
 
Newcastle Investment Corp. (and its subsidiaries, “Newcastle”) is a Maryland corporation that was formed in 2002. Newcastle focuses on opportunistically investing in, and actively managing, a variety of real estate-related and other investments. Newcastle is organized and conducts its operations to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. As such, Newcastle will generally not be subject to U.S. federal corporate income tax on that portion of its net income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by prescribed dates and complies with various other requirements. Newcastle's common stock is traded on the New York Stock Exchange under the symbol "NCT".

On February 13, 2014, Newcastle completed the spin-off of New Media Investment Group Inc. ("New Media"), and established New Media as a separate, publicly traded company (NYSE:NEWM). The spin-off was effected as a taxable pro rata distribution by Newcastle of all of the outstanding shares of common stock it held of New Media to Newcastle’s common stockholders of record at the close of business on February 6, 2014. The distribution ratio was 0.0722 shares of New Media common stock for each share of Newcastle common stock.

In December 2013, Newcastle restructured an investment in mezzanine debt issued by NGP Mezzanine, LLC (“NGP”), the indirect parent of NGP Realty Sub, L.P. (“National Golf”). National Golf owns 27 golf courses across 8 states, and leases these courses to American Golf Corporation (“American Golf”), an affiliated operating company. American Golf also leases an additional 54 golf courses and manages 11 courses, all owned by third parties. As part of the transaction, Newcastle acquired the equity of NGP and American Golf’s indirect parent, AGC Mezzanine Pledge LLC (“AGC”), and therefore is consolidating these entities.

As a result, Newcastle now conducts its business through the following segments: (i) investments in senior housing properties (“senior housing”), (ii) debt investments financed with collateralized debt obligations (“CDOs”), (iii) other debt investments (“other debt”), (iv) investments in golf courses and facilities (“Golf”) and (v) corporate. With respect to the CDOs and other debt investments, subject to the passing of certain periodic coverage tests, Newcastle is generally entitled to receive the net cash flows from these structures on a periodic basis.

Newcastle is party to a management agreement (the "Management Agreement") with FIG LLC (the "Manager"), a subsidiary of Fortress Investment Group LLC (“Fortress”), under which the Manager advises Newcastle on various aspects of its business and manages its day-to-day operations, subject to the supervision of Newcastle's board of directors. For its services, the Manager is entitled to an annual management fee and incentive compensation, both as defined in, and in accordance with the terms of, the Management Agreement.

Newcastle has its senior housing properties managed pursuant to property management agreements (the “Senior Housing Management Agreements”) with third parties (collectively, the “Senior Housing Managers”). Currently, the Senior Housing Managers are affiliates or subsidiaries of either Holiday Acquisition Holdings LLC (“Holiday”), a portfolio company that is majority owned by private equity funds managed by an affiliate of Newcastle’s Manager, or FHC Property Management LLC (together with its subsidiaries, “Blue Harbor”), an affiliate of Newcastle’s Manager.

 
Approximately 6.4 million shares of Newcastle’s common stock were held by Fortress, through its affiliates, and its principals at March 31, 2014. In addition, Fortress, through its affiliates, held options to purchase approximately 25.7 million shares of Newcastle’s common stock at March 31, 2014.
 
The accompanying consolidated financial statements and related notes of Newcastle have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of Newcastle's financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with Newcastle's consolidated financial statements for the year ended December 31, 2013


9

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)
 


and notes thereto included in Newcastle’s Annual Report on Form 10-K filed with the SEC. Capitalized terms used herein, and not otherwise defined, are defined in Newcastle’s consolidated financial statements for the year ended December 31, 2013.

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

Recently Adopted Accounting Policies

The following accounting policies have been adopted in connection with Golf.

REVENUE RECOGNITION

Revenue from green fees, cart rentals, food and beverage sales, merchandise sales and other income (consisting primarily of range income, banquets, and club and other rental income) are generally recognized at the time of sale, when services are rendered and collection is reasonably assured.

Revenue from membership dues is recognized in the month earned. Membership dues received in advance are included in deferred revenues and recognized as revenue ratably over the appropriate period, which is generally twelve months or less. The monthly dues are generally structured to cover the club operating costs and membership services.

Private country club members generally pay an advance initiation fee upon their acceptance as a member to the country club. Initiation fees at most private clubs are deposits which are generally refundable 30 years after the date of acceptance as a member. Revenue related to membership deposits is recognized over the expected life of an active membership. For membership deposits, the difference between the amount paid by the member and the present value of the refund obligation is deferred and recognized on a straight-line basis over the expected life of an active membership.

The present value of the refund obligation is recorded as a membership deposit liability in the consolidated balance sheets and accretes over the nonrefundable term (30 years) using the effective interest method. This accretion is recorded as interest expense in the consolidated statements of income.

EXPENSE RECOGNITION

Operating Leases and Other Operating Expenses - Other operating expenses for the Golf business consist primarily of equipment leases, utilities, repairs and maintenance, supplies, seed, soil and fertilizer, and marketing. Many of the golf courses and related facilities are leased under long-term operating leases. In addition to minimum payments, certain leases require payment of the excess of various percentages of gross revenue or net operating income over the minimum rental payments. The leases generally require the payment of taxes assessed against the leased property and the cost of insurance and maintenance. The majority of lease terms range from 10 to 20 years, and typically, the leases contain renewal options. Certain leases include minimum scheduled increases in rental payments at various times during the term of the lease. These scheduled rent increases are recognized on a straight-line basis over the term of the lease, resulting in an accrual, which is included in accounts payable, accrued expenses and other liabilities, for the amount by which the cumulative straight-line rent exceeds the contractual cash rent.

Recent Accounting Pronouncements
 
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.  ASU 2014-08 changes the criteria for reporting a discontinued operation.  Under the new pronouncement, a disposal of a part of an organization that has a major effect on its operations and financial results is a discontinued operation.  This update is effective for Newcastle in the first quarter of 2015. Newcastle is currently evaluating the new guidance to determine the impact it may have to its consolidated financial statements.
 
The FASB has recently issued or discussed a number of proposed standards on such topics as consolidation, financial statement presentation, revenue recognition, leases, financial instruments and hedging. Some of the proposed changes are significant and could have a material impact on Newcastle’s reporting. Newcastle has not yet fully evaluated the potential impact of these proposals, but will make such an evaluation as the standards are finalized.
 

10

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)
 


2.   ACQUISITIONS
 
Acquisitions of Senior Housing properties

In January 2014, Newcastle completed the acquisitions of two senior housing properties for an aggregate purchase price of approximately $22.8 million plus acquisition costs. Each of these acquisitions was accounted for as a business combination, under which all assets acquired and liabilities assumed are recognized at their acquisition-date fair value with acquisition-related costs being expensed as incurred. Newcastle has retained Holiday to manage these properties. Pursuant to the property management agreements with Holiday, Newcastle pays management fees equal to either (i) 5% of the property’s effective gross income (as defined in the agreements) or (ii) 6% of the property’s effective gross income (as defined in the agreements) for the first two years and 7% thereafter. In addition, Newcastle will reimburse Holiday for certain expenses, primarily the compensation expense associated with the on-site employees.

The following table summarizes the allocation of the purchase price to the fair value of identifiable assets acquired and liabilities assumed at the date of acquisition, in accordance with the acquisition method of accounting:
Allocation of Purchase Price (A)
 
Investments in Real Estate
$
20,630

Resident Lease Intangibles
2,370

Other Assets, net of other Liabilities
(200
)
Total purchase price
$
22,800

 
 
Mortgage Notes Payable (B)
(17,250
)
Net assets acquired
$
5,550

Total acquisition related costs (C)
$
258


(A)
Due to the timing of the acquisition, Newcastle is still obtaining additional information relating to the purchase price allocation. Therefore, the review process of the purchase price allocation is not complete. Newcastle expects to complete this process within twelve months of the acquisition.
(B)
See Note 10.
(C)
Acquisition related costs are expensed as incurred and included within general and administrative expense on the consolidated statements of income.

 


11

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)
 


3.   SPIN-OFF OF NEW RESIDENTIAL AND NEW MEDIA

On May 15, 2013, Newcastle completed the spin-off of New Residential from Newcastle.

On February 13, 2014, Newcastle completed the spin-off of New Media from Newcastle.

The following table presents the carrying value of the assets and liabilities of New Media, immediately preceding the February 13, 2014 spin-off.
Assets
 

Property, plant and equipment, net
$
266,385

Intangibles, net
144,664

Goodwill
126,686

Cash and cash equivalents
23,845

Restricted cash
6,477

Receivables and other assets
101,940

Total Assets
$
669,997

 
 

Liabilities
 

Credit facilities - media
$
177,955

Accounts payable, accrued expenses and other liabilities
99,857

Total Liabilities
$
277,812

 
 

Net Assets
$
392,185

 
As a result of the May 15, 2013 spin-off and the February 13, 2014 spin-off, for all periods presented, the assets, liabilities and results of operations of those components of Newcastle’s operations that (i) were part of the spin-off, and (ii) represent operations in which Newcastle has no significant continuing involvement, are presented separately in discontinued operations in Newcastle’s consolidated financial statements.


12

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)
 


Results from discontinued operations were as follows:
 
Three Months Ended 
 March 31,
 
2014
 
2013
Interest Income
$

 
$
10,035

Interest Expense
2,096

 

Net interest income (loss)
(2,096
)
 
10,035

 
 
 
 
Media income
68,213

 

 
 
 
 
Change in fair value of investments in excess mortgage servicing rights

 
1,858

Change in fair value of investments in equity method investees

 
969

Other income

 
2,827

 
 
 
 
Media operating expenses
65,826

 

Property operating costs

 
7

General and administrative expenses
1,904

 
2,707

Depreciation and amortization
4,596

 

Income tax (benefit) expense
(915
)
 

Total expenses
71,411

 
2,714

 
 
 
 
Net income attributable to noncontrolling interest
522

 

 
 
 
 
Income (loss) from discontinued operations
$
(4,772
)
 
$
10,148


The May 15, 2013 spin-off resulted in a $1.2 billion reduction in the basis upon which Newcastle’s management fees are computed (and an equivalent reduction in the basis upon which the incentive compensation threshold is computed), as well as a reduction in the strike price of Newcastle’s then outstanding options (see Note 13).

The February 13, 2014 spin-off resulted in a $0.4 billion reduction in the basis upon which Newcastle’s management fees are computed (and an equivalent reduction in the basis upon which the incentive compensation threshold is computed), as well as a reduction in the strike price of Newcastle’s then outstanding options (see Note 13).
 

4.   SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES
 
Newcastle conducts its business through the following segments: (i) investments in senior housing properties (“senior housing”), (ii) debt investments financed with collateralized debt obligations (“CDOs”), (iii) other debt investments (“other debt”), (iv) investment in golf courses and facilities (“golf”) and (v) corporate. With respect to the CDOs and other debt segments, Newcastle is generally entitled to receive net cash flows from these structures on a periodic basis.

The corporate segment consists primarily of interest income on short term investments, general and administrative expenses, interest expense on the junior subordinated notes payable and management fees pursuant to the Management Agreement.
 

13

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)
 

Summary financial data on Newcastle's segments is given below, together with reconciliation to the same data for Newcastle as a whole:
 
Senior
 
Debt Investments (A)
 
 
 
 
 
Inter-segment Elimination and
 
 
 
Housing (A)
 
CDOs
 
Other Debt (B)
 
Golf
 
Corporate
 
Discontinued Operations (C)
 
Total
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$

 
$
30,722

 
$
16,952

 
$
41

 
$
11

 
$
(1,274
)
 
$
46,452

Interest expense
13,701

 
6,128

 
12,663

 
3,682

 
955

 
(1,274
)
 
35,855

Net interest income (expense)
(13,701
)
 
24,594

 
4,289

 
(3,641
)
 
(944
)
 

 
10,597

Impairment (reversal)

 
432

 
814

 

 

 

 
1,246

Operating revenues
57,810

 

 
541

 
63,278

 

 

 
121,629

Other income (loss)
(2
)
 
13,610

 
2,198

 

 

 

 
15,806

Property operating expenses
23,520

 

 
284

 

 

 

 
23,804

Operating expenses - golf

 

 

 
58,338

 

 

 
58,338

Cost of sales - golf

 

 

 
5,956

 

 

 
5,956

Depreciation and amortization
22,835

 

 
57

 
7,430

 
37

 

 
30,359

Other operating expenses
7,792

 
156

 
702

 
1,081

 
8,375

 

 
18,106

Income tax expense
155

 

 

 
140

 

 

 
295

Income (loss) from continuing operations
(10,195
)
 
37,616

 
5,171

 
(13,308
)
 
(9,356
)
 

 
9,928

Income (loss) from discontinued operations, net of tax

 

 

 

 

 
(5,305
)
 
(5,305
)
Net income (loss)
(10,195
)
 
37,616

 
5,171

 
(13,308
)
 
(9,356
)
 
(5,305
)
 
4,623

Preferred dividends

 

 

 

 
(1,395
)
 

 
(1,395
)
Net loss attributable to noncontrolling interests

 

 

 
139

 

 
522

 
661

Income (loss) applicable to common stockholders
$
(10,195
)
 
$
37,616

 
$
5,171

 
$
(13,169
)
 
$
(10,751
)
 
$
(4,783
)
 
$
3,889

 
Senior
 
Debt Investments (A)
 
 
 
 
 
Inter-segment Elimination and
 
 
 
Housing (A)
 
CDOs
 
Other Debt (B)
 
Golf
 
Corporate
 
Discontinued Operations (C)
 
Total
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments
$
1,465,735

 
$
807,388

 
$
718,082

 
$
351,906

 
$

 
$
(86,313
)
 
$
3,256,798

Cash and restricted cash
36,095

 
1,304

 
752

 
12,916

 
75,300

 

 
126,367

Other assets
63,969

 
36,733

 
1,350

 
34,455

 
1,089

 
(152
)
 
137,444

Total assets
1,565,799

 
845,425

 
720,184

 
399,277

 
76,389

 
(86,465
)
 
3,520,609

Debt
1,091,823

 
543,859

 
624,240

 
182,373

 
51,236

 
(86,313
)
 
2,407,218

Other liabilities
69,440

 
10,918

 
2,123

 
181,165

 
44,422

 
(152
)
 
307,916

Total liabilities
1,161,263

 
554,777

 
626,363

 
363,538

 
95,658

 
(86,465
)
 
2,715,134

Preferred stock

 

 

 

 
61,583

 

 
61,583

Noncontrolling interests

 

 

 
227

 

 

 
227

GAAP book value
$
404,536

 
$
290,648

 
$
93,821

 
$
35,512

 
$
(80,852
)
 
$

 
$
743,665

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additions to investments in real estate
$
24,640

 
$

 
$
33

 
$
1,892

 
$

 
$

 
$
26,565



14

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)
 

 
Senior
 
Debt Investments (A)
 
 
 
 
 
Inter-segment Elimination and
 
 
 
Housing (A)
 
CDOs
 
Other Debt (B)
 
Golf
 
Corporate
 
Discontinued Operations (C)
 
Total
Three Months Ended March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$

 
$
31,828

 
$
30,298

 
$

 
$
72

 
$
(866
)
 
$
61,332

Interest expense
1,232

 
7,135

 
14,257

 

 
952

 
(866
)
 
22,710

Net interest income (expense)
(1,232
)
 
24,693

 
16,041

 

 
(880
)
 

 
38,622

Impairment (reversal)

 
3,182

 
(409
)
 

 

 

 
2,773

Operating revenues
12,997

 

 
503

 

 

 

 
13,500

Other income (loss)
8

 
4,572

 
1,190

 

 

 

 
5,770

Property operating expenses
8,423

 

 
247

 

 

 

 
8,670

Depreciation and amortization
4,022

 

 
57

 

 

 

 
4,079

Other operating expenses
2,081

 
194

 
855

 

 
11,375

 

 
14,505

Income (loss) from continuing operations
(2,753
)
 
25,889

 
16,984

 

 
(12,255
)
 

 
27,865

Income (loss) from discontinued operations

 

 

 

 

 
10,148

 
10,148

Net income (loss)
(2,753
)
 
25,889

 
16,984

 

 
(12,255
)
 
10,148

 
38,013

Preferred dividends

 

 

 

 
(1,395
)
 

 
(1,395
)
Income (loss) applicable to common stockholders
$
(2,753
)
 
$
25,889

 
$
16,984

 
$

 
$
(13,650
)
 
10,148

 
$
36,618



15

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)
 

(A)
Assets held within non-recourse structures, including all of the assets in the senior housing and CDO segments, are not available to satisfy obligations outside of such financings, except to the extent net cash flow distributions are received from such structures. Furthermore, creditors or beneficial interest holders of these structures generally have no recourse to the general credit of Newcastle. Therefore, the exposure to the economic losses from such structures generally is limited to invested equity in them and economically their book value cannot be less than zero. Therefore, impairment recorded in excess of Newcastle’s investment, which results in negative GAAP book value for a given non-recourse financing structure, cannot economically be incurred and will eventually be reversed through amortization, sales at gains, or as gains at the deconsolidation or termination of such non-recourse financing structure.
(B)
The following table summarizes the investments and debt in the other debt segment:

 
March 31, 2014
 
Investments
 
Debt
Non-Recourse
Outstanding
Face Amount
 
Carrying
Value
 
Outstanding
Face Amount*
 
Carrying
Value*
Manufactured housing loan portfolio I
$
98,925

 
$
89,113

 
$
70,943

 
$
63,325

Manufactured housing loan portfolio II
123,611

 
123,277

 
88,785

 
88,524

Subprime mortgage loans subject to call options
406,217

 
406,217

 
406,217

 
406,217

Real estate securities
54,446

 
50,226

 
38,253

 
34,811

Operating real estate
N/A

 
6,573

 
6,000

 
6,000

Subtotal
683,199

 
675,406

 
610,198

 
598,877

Other
 
 
 
 
 
 
 
Unlevered real estate securities
128,032

 
4,129

 

 

Other investments
N/A

 
6,239

 

 

Residential mortgage loans
44,183

 
32,308

 
25,363

 
25,363

 
$
855,414

 
$
718,082

 
$
635,561

 
$
624,240


*An aggregate face amount of $133.6 million (carrying values of $86.3 million) of debt represents intersegment financing, which is eliminated upon consolidation.

(C)
Represents the elimination of investments and financings and their related income and expenses between the CDO segment, the other debt segment and the golf segment as the corresponding inter-segment investments and financings are presented on a gross basis within each of these segments. In addition, includes the results of discontinued segments.

Variable Interest Entities (“VIEs”)
 
The VIEs in which Newcastle has a significant interest include (i) Newcastle’s CDOs, in which Newcastle has been determined to be the primary beneficiary and therefore consolidates them (with the exception of CDO V and CDO VIII Repack), since it has the power to direct the activities that most significantly impact the CDOs’ economic performance and would absorb a significant portion of their expected losses and receive a significant portion of their expected residual returns, and (ii) the manufactured housing loan financing structures, which are similar to the CDOs in analysis. Newcastle’s CDOs and manufactured housing loan financings are held in special purpose entities whose debt is treated as non-recourse secured borrowings of Newcastle.
 
Newcastle’s subprime securitizations, CDO V and the CDO VIII Repack are also considered VIEs, but Newcastle does not control the decisions that most significantly impact their economic performance and, no longer receives a significant portion of their returns, and therefore does not consolidate them.

In addition, Newcastle’s investments in RMBS, commercial mortgage backed securities (“CMBS”), CDO securities and real estate related and other loans may be deemed to be variable interests in VIEs, depending on their structure. Newcastle monitors these investments and analyzes the potential need to consolidate the related securitization entities pursuant to the VIE consolidation requirements. These analyses require considerable judgment in determining whether an entity is a VIE and determining the primary beneficiary of a VIE since they involve subjective determinations of significance, with respect to both power and economics. The result could be the consolidation of an entity that otherwise would not have been consolidated or the de-consolidation of an entity that otherwise would have been consolidated. 

As of March 31, 2014, Newcastle has not consolidated these potential VIEs. This determination is based, in part, on the assessment that Newcastle does not have the power to direct the activities that most significantly impact the economic performance of these

16

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)
 

entities, such as if Newcastle owned a majority of the currently controlling class. In addition, Newcastle is not obligated to provide, and has not provided, any financial support to these entities.
 
Newcastle had variable interests in the following unconsolidated VIEs at March 31, 2014, in addition to the subprime securitizations which are described in Note 6:
Entity
 
Gross Assets (A)
 
Debt (A) (B)
 
Carrying Value of Newcastle's Investment (C)
Newcastle CDO V
 
$
177,764

 
$
204,882

 
$
3,278

 
 
 
 
 
 
 
CDO VIII Repack
 
$
90,097

 
$
90,097

 
$
88,272

  
(A)
Face amount.
(B)
Newcastle CDO V includes $40.3 million face amount of debt owned by Newcastle with a carrying value of $3.3 million at March 31, 2014. CDO VIII Repack includes $90.1 million face amount of debt owned by Newcastle with a carrying value of $88.3 million at March 31, 2014.
(C)
This amount represents Newcastle’s maximum exposure to loss from this entity.




17

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)
 

5. REAL ESTATE SECURITIES
 
The following is a summary of Newcastle’s real estate securities at March 31, 2014, all of which are classified as available-for-sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income, except for securities that are other-than-temporarily impaired.
 
 
 
 
Amortized Cost Basis
 
Gross Unrealized
 
 
 
 
 
Weighted Average
Asset Type
 
Outstanding Face Amount
 
Before Impairment
 
Other-Than- Temporary Impairment
 
After Impairment
 
Gains
 
Losses
 
Carrying
 Value (A)
 
Number of Securities
 
Rating (B)
 
Coupon
 
Yield
 
Life
(Years) (C)
 
Principal Subordination (D)
CMBS-Conduit
 
$
235,635

 
$
217,189

 
$
(68,980
)
 
$
148,209

 
$
52,221

 
$
(97
)
 
$
200,333

 
33

 
BB-
 
5.47
%
 
18.84
%
 
2.5

 
10.2
%
CMBS- Single Borrower
 
91,349

 
90,813

 
(12,364
)
 
78,449

 
4,345

 
(15
)
 
82,779

 
15

 
BB
 
5.60
%
 
7.15
%
 
2.1

 
7.8
%
CMBS-Large Loan
 
3,229

 
3,229

 

 
3,229

 

 

 
3,229

 
1

 
BBB-
 
6.63
%
 
6.63
%
 
0.1

 
4.4
%
REIT Debt
 
29,200

 
28,729

 

 
28,729

 
2,228

 

 
30,957

 
5

 
BB+
 
5.89
%
 
6.87
%
 
1.3

 
N/A

Non-Agency RMBS
 
93,221

 
99,881

 
(59,987
)
 
39,894

 
21,639

 
(9
)
 
61,524

 
33

 
CCC+
 
1.04
%
 
11.90
%
 
4.7

 
26.2
%
ABS-Franchise
 
8,464

 
7,647

 
(7,647
)
 

 

 

 

 
1

 
C
 
6.69
%
 
0.00
%
 

 
0.0
%
CDO (E)
 
71,632

 
55,851

 

 
55,851

 
4,350

 

 
60,201

 
2

 
BB+
 
0.51
%
 
7.59
%
 
3.2

 
49.1
%
Total / Average (F)
 
$
532,730

 
$
503,339

 
$
(148,978
)
 
$
354,361

 
$
84,783

 
$
(121
)
 
$
439,023

 
90

 
B+
 
4.10
%
 
12.62
%
 
2.8

 
 

  
(A)
See Note 12 regarding the estimation of fair value, which is equal to carrying value for all securities.
(B)
Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. For each security rated by multiple rating agencies, the lowest rating is used. Ratings provided were determined by third party rating agencies, represent the most recent credit ratings available as of the reporting date and may not be current.
(C)
The weighted average life is based on the timing of expected principal reduction on the assets.
(D)
Percentage of the outstanding face amount of securities and residual interests that is subordinate to Newcastle’s investments.
(E)
Represents non-consolidated CDO securities, excluding nine securities with a zero value, which had an aggregate face amount of $115.3 million.
(F)
The total outstanding face amount was $340.6 million for fixed rate securities and $192.1 million for floating rate securities.



18

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014
(dollars in tables in thousands, except share data)
 


Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the three months ended March 31, 2014, Newcastle recorded no other-than-temporary impairment charges (“OTTI”) with respect to real estate securities. Based on management’s analysis of the securities, the performance of the underlying loans and changes in market factors, Newcastle noted no adverse changes in the expected cash flows on certain of these securities. Unrealized losses on Newcastle’s securities were primarily the result of changes in market factors, rather than issue-specific credit impairment. Newcastle performed analyses in relation to such securities, using management’s best estimate of their cash flows, which support its belief that the carrying values of such securities were fully recoverable over their expected holding period. The following table summarizes Newcastle’s securities in an unrealized loss position as of March 31, 2014.
 
 
 
 
 
Amortized Cost Basis
 
 
 
 
 
 
 
 
Securities in
 
Outstanding
 
 
 
Other-than-
 
 
 
 
 
 
 
 
 
Number
 
Weighted Average
an Unrealized
 
Face
 
Before
 
Temporary
 
After
 
Gross Unrealized
 
Carrying
 
of
 
 
 
 
 
 
 
Life
Loss Position
 
Amount
 
Impairment
 
Impairment
 
Impairment
 
Gains
 
Losses
 
Value
 
Securities
 
Rating
 
Coupon
 
Yield
 
(Years)
Less Than Twelve
Months
 
$
15,084

 
$
15,590

 
$
(1,443
)
 
$
14,147

 
$

 
$
(24
)
 
$
14,123

 
5

 
BBB
 
2.31
%
 
4.97
%
 
2.4

Twelve or More
Months
 
6,700

 
6,519

 

 
6,519

 

 
(97
)
 
6,422

 
2

 
B+
 
5.98
%
 
6.63
%
 
4.4

Total
 
$
21,784

 
$
22,109

 
$
(1,443
)
 
$
20,666

 
$

 
$
(121
)
 
$
20,545

 
7

 
BB+
 
3.43
%
 
5.50
%
 
3.0

 
Newcastle performed an assessment of all of its debt securities that are in an unrealized loss position (unrealized loss position exists when a security’s amortized cost basis, excluding the effect of OTTI, exceeds its fair value) and determined the following:
 
March 31, 2014
 
 
 
Amortized
 
 
 
 
 
 
 
Cost Basis
 
Unrealized Losses
 
Fair Value
 
After Impairment
 
Credit (B)
 
Non-Credit (C)
Securities Newcastle intends to sell
$

 
$

 
$

 
$          N/A

Securities Newcastle is more likely than not to be required to sell (A)

 

 

 
N/A

Securities Newcastle has no intent to sell and is not more likely than not to be required to sell:
 

 
 

 
 

 
 

Credit impaired securities
1,358

 
1,367

 

 
(9
)
Non credit impaired securities
19,187

 
19,299

 

 
(112
)
Total debt securities in an unrealized loss position
$
20,545