Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE

v2.4.0.8
FAIR VALUE
 6 Months Ended
Jun. 30, 2014
Fair Value Disclosures [Abstract]  
FAIR VALUE
12.    FAIR VALUE
 
Fair Value Summary Table
 
The carrying values and fair values of Newcastle’s assets and liabilities at June 30, 2014 were as follows: 
 
Principal Balance or Notional Amount
 
Carrying
Value
 
Estimated
Fair Value
 
Fair Value Method (A)
 
Weighted Average
Yield/Funding Cost (B)
 
Weighted Average
Life (Years)
Assets
 
 
 
 
 
 
 
 
 
 
 
Financial instruments:
 
 
 
 
 
 
 
 
 
 
 
Real estate securities, available-for-sale (C)*
$
389,120
 
$
311,268
 
$
311,268
 
Broker quotations, counterparty quotations,  pricing services,  pricing models
 
15.16
%
 
2.8
Real estate related and other loans, held-for-sale, net
392,311
 
289,112
 
302,449
 
Broker quotations, counterparty quotations, pricing services,  pricing models
 
12.27
%
 
1.6
Residential mortgage loans, held-for-sale, net
43,229
 
32,083
 
39,699
 
Broker/counterparty quotations
 
7.22
%
 
5.7
Subprime mortgage loans subject to call option (D)
406,217
 
406,217
 
(D)
 
(D)
 
9.09
%
 
(D)
Restricted cash*
 
3,703
 
3,703
 
 
 
 
 
 
Cash and cash equivalents*
 
77,922
 
77,922
 
 
 
 
 
 
Investments in senior housing real estate, net
 
 
1,547,409
 
 
 
 
 
 
 
 
Investments in other real estate, net
 
 
263,500
 
 
 
 
 
 
 
 
Intangibles
 
 
197,129
 
 
 
 
 
 
 
 
Other investments
 
 
26,123
 
 
 
 
 
 
 
 
Receivables and other assets
 
 
109,538
 
 
 
 
 
 
 
 
 
 
 
$
3,264,004
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Financial instruments:
 
 
 
 
 
 
 
 
 
 
 
CDO bonds payable (G)
$
262,492
 
$
263,581
 
$
155,227
 
Pricing models
 
4.16
%
 
3.1
Other bonds and notes payable (G)
89,168
 
82,053
 
81,446
 
Broker quotations, pricing models
 
0.41
%
 
1.7
Repurchase agreements
102,677
 
102,677
 
102,677
 
Market comparables
 
1.88
%
 
0.1
Mortgage notes payable
1,103,748
 
1,104,182
 
1,112,491
 
Pricing models
 
4.98
%
 
6.3
Credit facilities and obligations under capital leases, golf
156,569
 
156,578
 
156,578
 
Pricing models
 
5.24
%
 
3.5
Financing of subprime mortgage loans subject to call option (D)
406,217
 
406,217
 
(D)
 
(D)
 
9.09
%
 
(D)
Junior subordinated notes payable
51,004
 
51,234
 
33,900
 
Pricing models
 
7.39
%
 
20.8
Interest rate swaps, treated as hedges (E)(F)*
84,048
 
3,882
 
3,882
 
Counterparty quotations
 
N/A
 
(E)
Non-hedge derivatives (E)(F)*
158,258
 
3,463
 
3.463
 
Counterparty quotations
 
N/A
 
(E)
Dividends payable, accrued expenses and other liabilities
 
 
298,534
 
 
 
 
 
 
 
 
Liabilities of discontinued operations
 
 
—
 
 
 
 
 
 
 
 
 
 
 
$
2,472,401
 
 
 
 
 
 
 
 
*Measured at fair value on a recurring basis. 
(A)
Methods are listed in order of priority. In the case of real estate securities and real estate related and other loans, broker quotations are obtained if available and practicable, otherwise counterparty quotations or pricing service valuations are obtained or, finally, internal pricing models are used. Internal pricing models are only used for (i) securities and loans that are not traded in an active market, and, therefore, have little or no price transparency, and for which significant unobservable inputs must be used in estimating fair value, or (ii) loans or debt obligations which are private and untraded.
(B)
The weighted average yield and weighted average funding cost are disclosed for financial instrument assets and liabilities, respectively.
(C)
Excludes nine CDO securities with a zero value, which had an aggregate face amount of $116.1 million.
(D)
These two items results from an option, not an obligation, to repurchase loans from Newcastle’s subprime mortgage loan securitizations (Note 6), are noneconomic until such option is exercised, and are equal and offsetting. 
(E)
As of June 30, 2014, all derivative liabilities, which represent three interest rate swaps, were held within Newcastle’s nonrecourse structures. An aggregate notional balance of $242.3 million is only subject to the credit risks of the respective CDO structures. As they are senior to all the debt obligations of the respective CDOs and the fair value of each of the CDOs’ total investments exceeded the fair value of each of the CDOs’ derivative liabilities, no credit valuation adjustments were recorded. Newcastle’s interest rate swap counterparties include Bank of America and Bank of New York Mellon. Newcastle’s derivatives are included in accounts payable, accrued expenses and other liabilities in the consolidated balance sheets.
(F)
Interest rate swaps, treated as hedges:
 
Year of Maturity
 
Weighted Average Month of Maturity
 
Aggregate Notional Amount
 
Weighted Average Fixed Pay Rate
 
Aggregate Fair Value
Interest rate swap agreements which receive 1-Month LIBOR:
 
 
 
 
 
 
 
 
 
 
2016
 
Apr
 
$
84,048
 
5.04
%
 
$
3,882
Non-hedge derivatives:
 
Year of Maturity
 
Weighted Average Month of Maturity
 
Aggregate Notional Amount
 
Weighted Average Fixed Pay Rate
 
Aggregate Fair Value
Interest rate swap agreements which receive 1-Month LIBOR:
 
 
 
 
 
 
 
 
 
 
2015
 
Mar
 
$
158,258
 
4.85
%
 
$
3,463
(G)
Newcastle notes that the unrealized gain on the liabilities within such structures cannot be fully realized. Assets held within CDOs and other nonrecourse structures are generally not available to satisfy obligations outside of such financings, except to the extent Newcastle receives net cash flow distributions from such structures. Furthermore, creditors or beneficial interest holders of these structures have no recourse to the general credit of Newcastle. Therefore, Newcastle’s exposure to the economic losses from such structures is limited to its invested equity in them and economically their book value cannot be less than zero. As a result, the fair value of Newcastle’s net investments in these non-recourse financing structures is equal to the present value of their expected future net cash flows.
 
Valuation Hierarchy
 
The methodologies used for valuing such instruments have been categorized into three broad levels, which form a hierarchy.
 
Level 1 - Quoted prices in active markets for identical instruments.
Level 2 - Valuations based principally on other observable market parameters, including
•
Quoted prices in active markets for similar instruments,
•
Quoted prices in less active or inactive markets for identical or similar instruments,
•
Other observable inputs (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates), and
•
Market corroborated inputs (derived principally from or corroborated by observable market data).
Level 3 - Valuations based significantly on unobservable inputs.
 
Newcastle follows this hierarchy for its financial instruments measured at fair value on a recurring basis. The classifications are based on the lowest level of input that is significant to the fair value measurement.
 
Newcastle has various processes and controls in place to ensure that fair value is reasonably estimated. With respect to the broker and pricing service quotations, to ensure these quotes represent a reasonable estimate of fair value, Newcastle’s quarterly procedures include a comparison to quotations from different sources, outputs generated from its internal pricing models and transactions.
 
Newcastle has completed with respect to these or similar securities, as well as on its knowledge and experience of these markets. With respect to fair value estimates generated based on Newcastle’s internal pricing models, Newcastle’s management validates the inputs and outputs of the internal pricing models by comparing them to available independent third party market parameters, where available, and models for reasonableness. Newcastle believes its valuation methods and the assumptions used are appropriate and consistent with other market participants. The board of directors has reviewed Newcastle’s process for determining the valuations of its investments based on information provided by the Manager and has concluded such process is reasonable and appropriate.
 
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. For Newcastle’s investments in real estate securities, real estate related and other loans and residential mortgage loans categorized within Level 3 of the fair value hierarchy, the significant unobservable inputs include the discount rates, assumptions relating to prepayments, default rates and loss severities. Significant increases (decreases) in any of the discount rates, default rates or loss severities in isolation would result in a significantly lower (higher) fair value measurement. The impact of changes in prepayment speeds would have differing impacts on fair value, depending on the seniority of the investment. Generally, a change in the default assumption is generally accompanied by directionally similar changes in the assumptions used for the loss severity and the prepayment speed.
 
The following table summarizes such financial assets and liabilities measured at fair value on a recurring basis at June 30, 2014:
 
Principal Balance or
 
 
 
Fair Value
 
 Notional Amount
 
Carrying Value
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
Real estate securities, available-for-sale:
 
 
 
 
 
 
 
 
 
CMBS
$
243,612
 
$
207,360
 
$
—
 
$
207,360
 
$
207,360
REIT debt
29,200
 
30,683
 
30,683
 
—
 
30,683
Non-Agency RMBS
90,781
 
60,508
 
—
 
60,508
 
60,508
ABS - other real estate
8,464
 
—
 
—
 
—
 
—
CDO (A)
17,063
 
12,717
 
—
 
12,717
 
12,717
Real estate securities total
$
389,120
 
$
311,268
 
$
30,683
 
$
280,585
 
$
311,268
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
 
 
 
 
Interest rate swaps, treated as hedges
$
84,048
 
$
3,882
 
$
3,882
 
$
—
 
$
3,882
Interest rate swaps, not treated as hedges
158,258
 
3,463
 
3,463
 
—
 
3,463
Derivative liabilities total
$
242,306
 
$
7,345
 
$
7,345
 
$
—
 
$
7,345
 
(A)
Represents non-consolidated CDO securities, excluding nine securities with a zero value, which had an aggregate face amount of $116.1 million.
 
Newcastle’s investments in instruments measured at fair value on a recurring basis using Level 3 inputs changed during the six months ended ended June 30, 2014 as follows:
 
 
CMBS
 
ABS
 
 
 
 
 
 
 
Conduit
 
Other
 
Subprime
 
Other
 
Equity/Other Securities
 
Linked Transactions
 
Total
Balance at December 31, 2013
$
198,935
 
$
85,534
 
57,581
 
$
—
 
$
59,757
 
$
43,662
 
$
445,469
Total gains (losses) (A)
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in net income (B)
15,402
 
—
 
—
 
—
 
717
 
12,498
 
28,617
Included in other comprehensive income (loss)
(13,800
)
 
189
 
4,725
 
—
 
3,587
 
—
 
(5,299
)
Amortization included in interest income
9,330
 
332
 
2,539
 
48
 
1,749
 
—
 
13,998
Purchases, sales and repayments
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases
—
 
—
 
—
 
—
 
—
 
—
 
—
Proceeds from sales
(72,438
)
 
—
 
—
 
—
 
(50,390
)
 
—
 
(122,828
)
Proceeds from repayments
(4,123
)
 
(12,001
)
 
(4,337
)
 
(48
)
 
(2,703
)
 
(56,160
)
 
(79,372
)
Balance at June 30, 2014
$
133,306
 
$
74,054
 
60,508
 
$
—
 
$
12,717
 
$
—
 
$
280,585
(A)
None of the gains (losses) recorded in earnings during the period is attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting date.
(B)
These gains (losses) are recorded in the following line items in the consolidated statements of income:
 
Six Months Ended June 30, 2014
Gain (loss) on settlement of investments, net
$
16,119
Other income (loss), net
12,498
OTTI
—
Total
$
28,617
 
 
Gain (loss) on settlement of investments, net, from investments transferred into Level 3 during the period
$
—
 
Securities Valuation
 
As of June 30, 2014, Newcastle’s securities valuation methodology and results are further detailed as follows:
 
 
 
 
 
Fair Value
 
OutstandingFace
 
AmortizedCost
 
Multiple
 
Single
 
InternalPricing
 
 
Asset Type
Amount (A)
 
Basis (B)
 
Quotes (C)
 
Quote (D)
 
Models (E)
 
Total
CMBS
$
243,612
 
$
164,381
 
$
164,907
 
$
42,453
 
$
—
 
$
207,360
REIT debt
29,200
 
28,791
 
30,683
 
—
 
—
 
30,683
Non-Agency RMBS
90,781
 
38,875
 
60,508
 
—
 
—
 
60,508
ABS - other real estate
8,464
 
—
 
—
 
—
 
—
 
—
CDO (F)
17,063
 
6,368
 
—
 
6,744
 
5,973
 
12,717
Total
$
389,120
 
$
238,415
 
$
256,098
 
$
49,197
 
$
5,973
 
$
311,268
(A)
Net of incurred losses.
(B)
Net of discounts (or gross of premiums) and after OTTI, including impairment taken during the period ended June 30, 2014.
(C)
Management generally obtained pricing service quotations or broker quotations from at least two sources, one of which was generally the seller (the party that sold us the security). Management selected one of the quotes received as being most representative of fair value and did not use an average of the quotes. Even if Newcastle receives two or more quotes on a particular security that come from non-selling brokers or pricing services, it does not use an average because management believes using an actual quote more closely represents a transactable price for the security than an average level. Furthermore, in some cases there is a wide disparity between the quotes Newcastle receives. Management believes using an average of the quotes in these cases would generally not represent the fair value of the asset. Based on Newcastle’s own fair value analysis using internal models, management selects one of the quotes which are believed to more accurately reflect fair value. Newcastle never adjusts quotes received. These quotations are generally received via email and contain disclaimers which state that they are “indicative” and not “actionable” – meaning that the party giving the quotation is not bound to actually purchase the security at the quoted price.
(D)
Management was unable to obtain quotations from more than one source on these securities. The one source was generally the seller (the party that sold us the security) or a pricing service.
(E)
Securities whose fair value was estimated based on internal pricing models are further detailed as follows:
 
 
 
 
 
Impairment
 
Unrealized
 
Weighted Average Significant Input
 
AmortizedCostBasis (B)
 
Fair Value
 
RecordedIn CurrentPeriod
 
Gains(Losses) inAccumulatedOCI
 
DiscountRate
 
PrepaymentSpeed (G)
 
CumulativeDefaultRate
 
LossSeverity
CDO
—
 
5,973
 
—
 
5,973
 
10.0
%
 
3.6
%
 
25.4
%
 
73.7
%
Total
$
—
 
$
5,973
 
$
—
 
$
5,973
 
 
 
 
 
 
 
 
At June 30, 2014, there was no ABS or CMBS fair value based on model mark assumptions.
 
All of the assumptions listed have some degree of market observability, based on Newcastle’s knowledge of the market, relationships with market participants, and use of common market data sources. Collateral prepayment, default and loss severity projections are in the form of “curves” or “vectors” that vary for each monthly collateral cash flow projection. Methods used to develop these projections vary by asset class (e.g., CMBS projections are developed differently than home equity ABS projections) but conform to industry conventions.  Newcastle uses assumptions that generate its best estimate of future cash flows of each respective security.
 
The prepayment vector specifies the percentage of the collateral balance that is expected to voluntarily pay off at each point in the future. The prepayment vector is based on projections from a widely published investment bank model which considers factors such as collateral FICO score, loan-to-value ratio, debt-to-income ratio, and vintage on a loan level basis. This vector is scaled up or down to match recent collateral-specific prepayment experience, as obtained from remittance reports and market data services.
 
Loss severities are based on recent collateral-specific experience with additional consideration given to collateral characteristics. Collateral age is taken into consideration because severities tend to initially increase with collateral age before eventually stabilizing. Newcastle typically uses projected severities that are higher than the historic experience for collateral that is relatively new to account for this effect. Collateral characteristics such as loan size, lien position, and location (state) also effect loss severity. Newcastle considers whether a collateral pool has experienced a significant change in its composition with respect to these factors when assigning severity projections.
 
Default rates are determined from the current “pipeline” of loans that are more than 90 days delinquent, in foreclosure, or are REO. These significantly delinquent loans determine the first 24 months of the default vector. Beyond month 24, the default vector transitions to a steady-state value that is generally equal to or greater than that given by the widely published investment bank model.
 
The discount rates Newcastle uses are derived from a range of observable pricing on securities backed by similar collateral and offered in a live market. As the markets in which Newcastle transacts have become less liquid, Newcastle has had to rely on fewer data points in this analysis.
 
(F)
Represents non-consolidated CDO securities, excluding nine securities with a zero value, which had an aggregate face amount of $116.1 million.
(G)
Projected annualized average prepayment rate.
 
Loan Valuation
 
Loans which Newcastle does not have the ability or intent to hold into the foreseeable future are classified as held-for-sale. As a result, these held-for-sale loans are carried at the lower of amortized cost or fair value and are therefore recorded at fair value on a non-recurring basis. These loans were written down to fair value at the time of the impairment, based on broker quotations, pricing service quotations or internal pricing models. All the loans were within Level 3 of the fair value hierarchy. For real estate related and other loans, the most significant inputs used in the valuations are the amount and timing of expected future cash flows, market yields and the estimated collateral value of such loan investments.  For residential mortgage loans, significant inputs include management’s expectations of prepayment speeds, default rates, loss severities and discount rates that market participants would use in determining the fair values of similar pools of residential mortgage loans.
 
The following tables summarize certain information for real estate related and other loans and residential mortgage loans held-for-sale as of June 30, 2014:
 
 
 
 
 
 
 
Valuation
 
Significant Input
 
 
Outstanding
 
 
 
 
 
Allowance/
 
Range
 
Weighted Average
 
 
Face
 
Carrying
 
Fair
 
(Reversal) In
 
Discount
 
Loss
 
Discount
 
Loss
 
Loan Type
Amount
 
Value
 
Value
 
Current Year
 
Rate
 
Severity
 
Rate
 
Severity
 
Mezzanine
$
157,046
 
$
124,628
 
$
127,673
 
$
—
 
5.0% - 9.0%
 
0.0% - 100%
 
7.4
%
 
19.0
%
 
Bank Loan
164,973
 
97,684
 
107,969
 
5,227
 
22.5% - 31.0%
 
0.0% - 100%
 
23.1
%
 
27.8
%
B-Note
69,912
 
66,420
 
66,420
 
(3,269
)
 
3.0% - 12.0%
 
0.0
%
 
5.6
%
 
0.0
%
 
Whole Loan
380
 
380
 
387
 
—
 
4.0
%
 
0.0
%
 
4.0
%
 
0.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Real Estate Related and other Loans Held-for-Sale, Net
$
392,311
 
$
289,112
 
$
302,449
 
$
1,958
 
 
 
 
 
 
 
 
 
 
The following table summarizes certain information for residential mortgage loans held-for-sale as of June 30, 2014:
 
 
 
 
 
 
 
 
Valuation
 
Significant Input (Weighted Average)
 
 
Outstanding
 
 
 
 
 
Allowance/
 
 
 
 
 
 
 
 
 
 
Face
 
Carrying
 
Fair
 
(Reversal) In
 
Discount
 
Prepayment
 
Constant
 
Loss
Loan Type
 
Amount
 
Value (A)
 
Value (A)
 
Current Year (B)
 
Rate
 
Speed
 
Default Rate
 
Severity
Residential Loans
 
43,229
 
32,083
 
39,699
 
399
 
7.3
%
 
4.6
%
 
2.8
%
 
46.0
%
Total Residential Mortgage Loans, Held-for-Sale, Net
 
$
43,229
 
$
32,083
 
$
39,699
 
$
399
 
 
 
 
 
 
 
 
(A)
Carrying value and fair value include interest receivable of $0.1 million for the residential housing loans.
(B)
The valuation allowance (reversal) excludes $0.4 million related to the manufactured housing portfolio that was sold in May 2014.
 
Derivatives
 
Newcastle’s derivative instruments are comprised of interest rate swaps and linked transactions. Newcastle’s interest rate swaps are valued using counterparty quotations. These quotations are generally based on valuation models with model inputs that can generally be verified and which do not involve significant judgment. The significant observable inputs used in determining the fair value of Newcastle’s Level 2 interest rate swap derivative contracts are contractual cash flows and market based interest rate curves. The linked transactions, which are categorized into Level 3, are evaluated on a net basis considering their underlying components, the security acquired and the related repurchase financing agreement. The securities are valued using a similar methodology to the one described in “Securities Valuation” above and this value is netted against the carrying value of the repurchase agreement (which approximates fair value as described in “Liabilities for Which Fair Value is Only Disclosed” below), adjusted for net accrued interest receivable/payable on the securities and repurchase agreement of the linked transactions (see Note 10 for a discussion of Newcastle’s outstanding linked transactions).
 
Newcastle’s derivatives are recorded on its balance sheet as follows:
 
 
 
Fair Value
 
Balance sheet location
 
June 30, 2014
 
December 31, 2013
Derivative Assets
 
 
 
 
 
Linked transactions at fair value
Receivables and other assets
 
$
—
 
$
43,662
 
 
 
$
—
 
$
43,662
Derivative Liabilities
 
 
 
 
 
Interest rate swaps, designated as hedges
Accounts payable, accrued expenses and other liabilities
 
$
3,882
 
$
6,203
Interest rate swaps, not designated as hedges
Accounts payable, accrued expenses and other liabilities
 
3,463
 
7,592
 
 
 
$
7,345
 
$
13,795
 
In May 2014, the CDO VIII Class 1 notes were repaid in full and the repurchase agreement was terminated. Therefore, the associated linked transaction was effectively terminated. 
 
The following table summarizes information related to derivatives:
 
June 30, 2014
 
December 31, 2013
Cash flow hedges
 
 
 
Notional amount of interest rate swap agreements
$
84,048
 
$
105,031
Amount of (loss) recognized in OCI on effective portion
(4,072
)
 
(6,117
)
Deferred hedge gain (loss) related to anticipated financings, which have subsequently occurred, net of amortization
134
 
170
Deferred hedge gain (loss) related to dedesignation, net of amortization
(35
)
 
(45
)
Expected reclassification of deferred hedges from AOCI into earnings over the next 12 months
56
 
53
Expected reclassification of current hedges from AOCI into earnings over the next 12 months
(2,419
)
 
(3,915
)
 
 
 
 
Non-hedge Derivatives
 
 
 
Notional amount of interest rate swap agreements
158,258
 
185,871
Notional amount of linked transactions (A)
—
 
116,806
 
(A)
This represents the current face amount of the underlying financed securities comprising linked transactions.
 
The following table summarizes gains (losses) recorded in relation to derivatives:
 
Income statement
 
Three Months Ended  June 30,
 
Six Months Ended  June 30,
 
 location
 
2014
 
2013
 
2014
 
2013
Cash flow hedges
 
 
 
 
 
 
 
 
 
Gain (loss) on the ineffective portion
Other income (loss)
 
$
259
 
$
—
 
$
259
 
$
—
Amount of gain (loss) reclassified from AOCI into income, related to effective portion
Interest expense
 
(1,178
)
 
(1,703
)
 
(2,457
)
 
(3,568
)
Deferred hedge gain reclassified from AOCI into income, related to anticipated financings
Interest expense
 
19
 
17
 
36
 
33
Deferred hedge gain (loss) reclassified from AOCI into income, related to effective portion of dedesignated hedges
Interest expense
 
(5
)
 
(16
)
 
(9
)
 
(32
)
Non-hedge derivatives gain (loss)
 
 
 
 
 
 
 
 
 
Interest rate swaps
Other income (loss)
 
2,029
 
2,282
 
4,104
 
5,408
Linked transactions
Other income (loss)
 
1,825
 
—
 
12,498
 
—
Linked transactions
Interest expense
 
(89
)
 
(8
)
 
(211
)
 
(8
)
 
Liabilities for Which Fair Value is Only Disclosed
 
The following table summarizes the level of the fair value hierarchy, valuation techniques and inputs used for estimating each class of liabilities not measured at fair value in the statement of financial position but for which fair value is disclosed:
Type of Liabilities Not Measured At Fair Value for Which Fair Value Is Disclosed
 
Fair Value Hierarchy
 
 
Valuation Techniques and Significant Inputs
CDO bonds payable
 
Level 3
 
Valuation technique is based on discounted cash flow.
Significant inputs include:
 
 
 
 
l
Underlying security and loan prepayment, default and cumulative loss expectations
 
 
 
 
l
Amount and timing of expected future cash flows
 
 
 
 
l
Market yields and credit spreads implied by comparisons to transactions of similar tranches of CDO debt by the varying levels of subordination
Other bonds and notes payable
 
Level 3
 
Valuation technique is based on discounted cash flow.
Significant inputs include:
 
 
 
 
l
Amount and timing of expected future cash flows
 
 
 
 
l
Interest rates
 
 
 
 
l
Market yields and credit spreads implied by comparisons to transactions of similar tranches of securitized debt by the varying levels of subordination
Repurchase agreements
 
Level 2
 
Valuation technique is based on market comparables. 
Significant variables include:
 
 
 
 
l
Amount and timing of expected future cash flows
 
 
 
 
l
Interest rates
 
 
 
 
l
Collateral funding spreads
Mortgage notes payable
 
Level 3
 
Valuation technique is based on discounted cash flows. 
Significant inputs include:
 
 
 
 
l
Amount and timing of expected future cash flows
 
 
 
 
l
Interest rates
 
 
 
 
l
Collateral funding spreads
Golf credit facilities
 
Level 3
 
Valuation technique is based on discounted cash flows. Significant inputs include:
 
 
 
 
l
Amount and timing of expected future cash flows
 
 
 
 
l
Interest rates
 
 
 
 
l
Credit spread of golf
Junior subordinated notes payable
 
Level 3
 
Valuation technique is based on discounted cash flow.
Significant inputs include:
 
 
 
 
l
Amount and timing of expected future cash flows
 
 
 
 
l
Interest rates
 
 
 
 
l
Market yields and the credit spread of Newcastle