Drive Shack Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

REAL ESTATE SECURITIES

REAL ESTATE SECURITIES

9 Months Ended

Sep. 30, 2016

Investments, Debt and Equity Securities [Abstract]

The following is a summary of Newcastle’s real estate securities at September 30, 2016, 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	$	10,308	$	10,308	$	(10,308	)	$	—	$	—	$	—	$	—	2	C	2.53	%	—	%	0.0	—	%
ABS - Non-Agency RMBS	4,000		2,269		(1,521		)	748		2,682		—		3,430		1	C	0.92	%	24.61	%	5.3	26.5	%
ABS - Small Business Loans	8,464		7,647		(7,647		)	—		—		—		—		1	C	6.69	%	—	%	0.0	—	%
Debt Security Total / Average (E)	$	22,772	$	20,224	$	(19,476	)	$	748	$	2,682	$	—	$	3,430	4	C	3.79	%	24.61	%	0.9
Equity Securities			—		—			—		—		—		—		1
Total Securities, Available-for-Sale			$	20,224	$	(19,476	)	$	748	$	2,682	$	—	$	3,430	5

FNMA/FHLMC	632,206		663,456		—			663,456		103		—		663,559		10	AAA	3.26	%	2.87	%	6.3	N/A
Total Securities, Pledged as Collateral (E)	$	632,206	$	663,456	$	—		$	663,456	$	103	$	—	$	663,559	10


(A)	See Note 13 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. Newcastle uses an implied AAA rating for the Fannie Mae/Freddie Mac (“FNMA/FHLMC”) securities. 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 cash flows on the assets.


(D)	Percentage of the outstanding face amount of securities and interests that is subordinate to Newcastle’s investments.


(E)	The total outstanding face amount was $640.7 million for fixed rate securities and $14.3 million for floating rate securities. Excludes 11 CDO securities with zero value, which had an aggregate face amount of $154.0 million.

Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the nine months ended September 30, 2016, Newcastle recorded other-than-temporary impairment charges (“OTTI”) of $0.1 million with respect to real estate securities (gross of less than $0.1 million of other-than-temporary impairment recognized in other comprehensive income). Based on management’s analysis of the securities, the performance of the underlying loans and changes in market factors, Newcastle noted adverse changes in the expected cash flows on certain of these securities and concluded that they were other-than-temporarily impaired. Any remaining 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 that the carrying values of such securities were fully recoverable over their expected holding period. Newcastle had no securities in an unrealized loss position as of September 30, 2016.

The following table summarizes the activity related to credit losses on debt securities for the nine months ended September 30, 2016:



Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income	$	(3,010	)

Additions for credit losses on securities for which an OTTI was not previously recognized	—

Additions to credit losses on securities for which OTTI was previously recognized and a portion of an OTTI was recognized in other comprehensive income	(110		)

Reduction for securities deconsolidated during the period	3,120

Reduction for securities sold/written off during the period	—

Reduction for increases in cash flows expected to be collected that are recognized over the remaining life of the security	—

Ending balance of credit losses on debt securities for which a portion of OTTI was recognized in other comprehensive income	$	—

The table below summarizes the geographic distribution of the collateral securing Newcastle’s CMBS and asset-backed securities (“ABS”) at September 30, 2016:



	CMBS				ABS (A)
Geographic Location	Outstanding Face Amount		Percentage		Outstanding Face Amount		Percentage
Western U.S.	$	—	—	%	$	1,309	10.5	%
Northeastern U.S.	—		—	%	9,086		72.9	%
Southeastern U.S.	10,308		100.0	%	1,058		8.5	%
Midwestern U.S.	—		—	%	424		3.4	%
Southwestern U.S.	—		—	%	587		4.7	%
	$	10,308	100.0	%	$	12,464	100.0	%


(A)	Includes ABS - Non Agency RMBS and ABS - Small Business Loans.

Geographic concentrations of investments expose Newcastle to the risk of economic downturns within the relevant regions, particularly given the current unfavorable market conditions. These market conditions may make regions more vulnerable to downturns in certain market factors. Any such downturn in a region where Newcastle holds significant investments could have a material, negative impact on Newcastle.

In January 2016, Newcastle settled on a trade to sell $350.3 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 103.2% of par for total proceeds of $361.3 million and repaid $348.6 million of repurchase agreements associated with these securities.

In January 2016, Newcastle settled on a trade to purchase $102.7 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 103.2% of par for total proceeds of $105.9 million. This transaction was financed with $102.2 million of repurchase agreements.

In January 2016, Newcastle settled on a trade to purchase $250.1 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 103.2% of par for total proceeds of approximately $258.1 million. This transaction was financed with $249.1 million of repurchase agreements.

In April 2016, Newcastle settled on a trade to sell $347.5 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 104.9% of par for total proceeds of $364.3 million and recognized a gain on sale of securities of approximately $5.9 million at trade date. Newcastle repaid $352.0 million of repurchase agreements associated with these securities.

In April 2016, Newcastle settled on a trade to purchase $363.1 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 105.0% of par for total proceeds of $381.1 million. This transaction was financed with $366.4 million of repurchase agreements.

In June 2016, Newcastle sold a CDO bond with a face amount of $10.0 million at a price of 7.25% of par for total proceeds of $0.7 million and reported a gain on sale of $0.7 million, as this bond was previously written down to zero.

In July 2016, Newcastle settled on a trade to sell $353.6 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 105.5% of par for total proceeds of $373.1 million and recognized a gain on sale of securities of approximately $1.8 million at trade date. Newcastle repaid $361.1 million of repurchase agreements associated with these securities.

In July 2016, Newcastle settled on a trade to purchase $428.9 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 105.7% of par for total proceeds of $453.1 million. This transaction was financed with $434.9 million of repurchase agreements.

In August 2016, Newcastle settled on a trade to purchase $249.6 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 103.9% of par for total proceeds of $259.3 million. This transaction was financed with $248.7 million of repurchase agreements.

In August 2016, Newcastle settled on a trade to purchase $116.8 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 105.7% of par for total proceeds of $123.5 million. This transaction was financed with $118.6 million of repurchase agreements.

In August 2016, Newcastle settled on a trade to sell $14.8 million face amount of two CDO securities at an average price of 67.3% of par for total proceeds of $9.9 million and recognized a gain on the sale of approximately $9.9 million.

In September 2016, Newcastle settled on a trade to purchase $35.6 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 103.8% of par for total proceeds of $37.0 million. This transaction was financed with $35.4 million of repurchase agreements.

In September 2016, Newcastle entered into a trade to purchase $632.2 million face amount of agency FNMA fixed-rate securities at an average price of 104.9% of par for total proceeds of $663.5 million. The trade is recorded in payables to brokers, dealers and clearing organizations on the Consolidated Balance Sheets. This transaction was financed with $628.2 million of repurchase agreements. This trade settled in October 2016 (see Note 22).

In September 2016, Newcastle entered into a trade to sell $817.2 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 105.0% of par for total proceeds of $858.2 million and recognized a gain on sale of securities of approximately $0.1 million. The trade is recorded in receivables from brokers, dealers and clearing organizations on the Consolidated Balance Sheets. Newcastle repaid $831.7 million of repurchase agreements associated with these securities. This trade settled in October 2016 (see Note 22).

Securities Pledged as Collateral

Securities pledged as collateral relate to government agency securities that were sold under agreements to repurchase which will be treated as collateralized financing transactions. Although being pledged as collateral, securities financed through a repurchase agreement remains as an asset and cash received from the purchaser is recorded as a liability on Newcastle’s Consolidated Balance Sheets.

- Definition

The entire disclosure for investments in certain debt and equity securities.

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