Quarterly report pursuant to Section 13 or 15(d)

INFORMATION REGARDING BUSINESS SEGMENTS

 v2.3.0.11
INFORMATION REGARDING BUSINESS SEGMENTS
6 Months Ended
Jun. 30, 2011
INFORMATION REGARDING BUSINESS SEGMENTS

2. INFORMATION REGARDING BUSINESS SEGMENTS

Newcastle conducts its business through the following segments: (i) investments financed with non-recourse collateralized debt obligations (“CDOs”), (ii) investments financed with other non-recourse debt, (iii) investments and debt repurchases financed with recourse debt, (iv) unlevered investments, and (v) corporate. With respect to the first two nonrecourse segments, 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.

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.

Summary financial data on Newcastle’s segments is given below, together with a reconciliation to the same data for Newcastle as a whole:

 

     Non-Recourse (A)                                
     CDOs     Other Non-
Recourse (B)
    Recourse
(C)
    Unlevered
(D)
    Corporate     Inter-segment
Elimination (E)
    Total  

Six Months Ended June 30, 2011

              

Interest income

   $ 111,399      $ 35,006      $ 597      $ 1,015      $ 63      $ (1,734   $ 146,346   

Interest expense

     47,285        25,990        242        —          1,906        (1,508     73,915   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense)

     64,114        9,016        355        1,015        (1,843     (226     72,431   

Impairment (reversal)

     (44,158     1,797        —          (3,912     —          —          (46,273

Other income (loss)

     98,234        1,490        —          4,634        —          —          104,358   

Expenses

     639        1,636        —          115        11,864        —          14,254   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     205,867        7,073        355        9,446        (13,707     (226     208,808   

Income (loss) from discontinued operations

     —          (185     —          (41     —          226        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     205,867        6,888        355        9,405        (13,707     —          208,808   

Preferred dividends

     —          —          —          —          (2,790     —          (2,790
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) applicable to common stockholders

   $ 205,867      $ 6,888      $ 355      $ 9,405      $ (16,497   $ —        $ 206,018   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2011

              

Interest income

   $ 56,571      $ 17,525      $ 450      $ 522      $ 43      $ (968   $ 74,143   

Interest expense

     22,672        12,835        144        —          954        (855     35,750   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense)

     33,899        4,690        306        522        (911     (113     38,393   

Impairment (reversal)

     (5,913     643        —          (3,797     —          —          (9,067

Other income (loss)

     55,127        (337     —          4,099        —          —          58,889   

Expenses

     326        892        —          70        6,116        —          7,404   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     94,613        2,818        306        8,348        (7,027     (113     98,945   

Income (loss) from discontinued operations

     —          97        —          (20     —          113        190   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     94,613        2,915        306        8,328        (7,027     —          99,135   

Preferred dividends

     —          —          —          —          (1,395     —          (1,395
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) applicable to common stockholders

   $ 94,613      $ 2,915      $ 306      $ 8,328      $ (8,422   $ —        $ 97,740   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2011

              

Investments

   $ 2,489,435      $ 771,825      $ 194,460      $ 19,247      $ —        $ (96,950   $ 3,378,017   

Cash and restricted cash

     171,255        —          —          4        100,834        —          272,093   

Derivitve assets

     5,534        —          —          —          —          —          5,534   

Other assets

     27,567        156        278        2,250        912        (5     31,158   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     2,693,791        771,981        194,738        21,501        101,746        (96,955     3,686,802   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Debt

     (2,468,431     (715,431     (107,216     —          (51,251     96,955        (3,245,374

Derivative liabilities

     (126,501     —          —          —          —          —          (126,501

Other liabilities

     (45,540     (2,061     (85,284     (60     (12,615     —          (145,560
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     (2,640,472     (717,492     (192,500     (60     (63,866     96,955        (3,517,435
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock

     —          —          —          —          (61,583     —          (61,583
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

GAAP book value

   $ 53,319      $ 54,489      $ 2,238      $ 21,441      $ (23,703   $ —        $ 107,784   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     CDOs (A)     Other
Non-Recourse
(A) (B)
    Recourse     Unlevered     Unallocated     Total  

Six Months Ended June 30, 2010

            

Interest income

   $ 105,721      $ 36,806      $ 976      $ 742      $ 30      $ 144,275   

Interest expense

     56,174        29,901        645        356        1,654        88,730   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense)

     49,547        6,905        331        386        (1,624     55,545   

Impairment

     (60,308     (34,229     (60     (15,930     —          (110,527

Other income (loss)

     115,730        (3,781     (663     (1,014     (345     109,927   

Other operating expenses

     789        1,626        4        10        13,764        16,193   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     224,796        35,727        (276     15,292        (15,733     259,806   

Income (loss) from discontinued operations

     —          —          —          (27     —          (27
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     224,796        35,727        (276     15,265        (15,733     259,779   

Preferred dividends

     —          —          —          —          (4,663     (4,663

Excess of carrying amount of exchanged preferred stock over fair value of consideration paid

     —          —          —          —          43,043        43,043   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) applicable to common stockholders

   $ 224,796      $ 35,727      $ (276   $ 15,265      $ 22,647      $ 298,159   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2010

            

Interest income

   $ 54,778      $ 18,760      $ 117      $ 519      $ 9      $ 74,183   

Interest expense

     27,308        14,862        18        356        597        43,141   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense)

     27,470        3,898        99        163        (588     31,042   

Impairment

     (29,462     3,063        —          (16,096     —          (42,495

Other income (loss)

     56,008        (2,383     —          104        (345     53,384   

Other operating expenses

     437        948        —          9        6,186        7,580   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     112,503        (2,496     99        16,354        (7,119     119,341   

Income (loss) from discontinued operations

     —          —          —          13        —          13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     112,503        (2,496     99        16,367        (7,119     119,354   

Preferred dividends

     —          —          —          —          (1,395     (1,395

Excess of carrying amount of exchanged preferred stock over fair value of consideration paid

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) applicable to common stockholders

   $ 112,503      $ (2,496   $ 99      $ 16,367      $ (8,514   $ 117,959   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Assets held within CDOs and other non-recourse structures are 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. 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 non-recourse segment:

 

     June 30, 2011  
     Investments      Debt  
     Outstanding
Face  Amount
     Carrying
Value
     Outstanding
Face Amount
     Carrying
Value
 

Manufactured housing loan portfolio I

   $ 143,255       $ 118,788       $ 115,017       $ 105,384   

Manufactured housing loan portfolio II

     191,009         187,717         155,793         154,254   

Subprime mortgage loans subject to call options

     406,217         404,239         406,217         404,239   

Real estate securities

     71,278         52,746         50,000         45,516   

Operating real estate

     N/A         8,335         6,038         6,038   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 811,759       $ 771,825       $ 733,065       $ 715,431   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(C) The $107.2 million of recourse debt is comprised of (i) $103.6 million of repurchase agreement secured by $108.9 million carrying value of FNMA/FHLMC securities and (ii) $3.6 million of repurchase agreement secured by $35.7 million face amount of senior notes issued by Newcastle CDO VI, which was repurchased by Newcastle in December 2010 and eliminated in consolidation. $85.3 million of Investments and Other Liabilities represent FNMA/FHLMC securities purchased but not yet settled at June 30, 2011.
(D) The following table summarizes the investments in the unlevered segment:

 

     June 30, 2011  
     Outstanding
Face Amount
     Carrying
Value
     Number of
Investments
 

Real estate securities

   $ 124,036       $ 3,218         20   

Real estate related loans

     69,634         6,634         4   

Residential mortgage loans

     7,566         3,371         228   

Other investments

     N/A         6,024         1   
  

 

 

    

 

 

    

 

 

 
   $ 201,236       $ 19,247         253   
  

 

 

    

 

 

    

 

 

 

 

(E) Represents the elimination of investments and financings and their related income and expenses between segments as the corresponding inter-segment investments and financings are presented on a gross basis within each segment.

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 as described below), 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 are also considered VIEs, but Newcastle does not control their activities and no longer receives a significant portion of their returns. These subprime securitizations were not consolidated under the current or prior guidance.

In addition, Newcastle’s investments in CMBS, CDO securities and loans may be deemed to be variable interests in VIEs, depending on their structure. Newcastle is not obligated to provide, nor has it provided, any financial support to these VIEs. Newcastle monitors these investments and, to the extent Newcastle determines that it potentially owns a majority of the currently controlling class, it analyzes them for potential consolidation. As of June 30, 2011, Newcastle has not consolidated these potential VIEs due to the determination that, based on the nature of Newcastle’s investments and the provisions governing these structures, Newcastle does not have the power to direct the activities that most significantly impact their economic performance.

In April 2011, Newcastle sold its retained interests in Newcastle CDO VII, a non-consolidated VIE of Newcastle. As a result of the sale of Newcastle’s retained interests in CDO VII and the subsequent liquidation of the VIE, CDO VII has been removed from our non-consolidated VIE disclosure as of June 30, 2011.

On June 17, 2011, Newcastle deconsolidated a non-recourse financing structure, CDO V. Newcastle determined that it does not currently have the power to direct the relevant activities of CDO V as an event of default had occurred and Newcastle may be removed as the collateral manager by a single party. The deconsolidation has reduced Newcastle’s gross assets by $301.6 million, reduced liabilities by $357.0 million and increased equity by $55.4 million. The deconsolidation also reduced revenues and expenses from June 17, 2011 onwards, but its impact was not material to net income applicable to common stockholders.

Newcastle had variable interests in the following unconsolidated VIE at June 30, 2011, in addition to the subprime securitizations which are described in Note 4:

 

Entity

   Gross Assets (A)      Debt (B)      Carrying Value of Newcastle’s
Investment (C)
 

Newcastle CDO V

   $ 337,618       $ 336,875       $ —     

 

(A) Face amount.
(B) Includes $35.2 million face amount of debt owned by Newcastle at June 30, 2011.
(C) Represents Newcastle’s maximum exposure to loss from this entity.