Quarterly report pursuant to Section 13 or 15(d)

REAL ESTATE SECURITIES

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REAL ESTATE SECURITIES
 6 Months Ended
Jun. 30, 2011
REAL ESTATE SECURITIES

3. REAL ESTATE SECURITIES

The following is a summary of Newcastle’s real estate securities at June 30, 2011, 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.

 

Asset Type

   Outstanding
Face
Amount		     Amortized Cost Basis                 Carrying
Value (B)		     Number
of
Securities		     Weighted Average  
    Before
Impairment		     Other-Than-
Temporary
Impairment
(A)		     After
Impairment		                     Rating
(C)		   Coupon     Yield     Maturity
(Years)
(D)		     Principal
Subordination
(E)		  
          Gross Unrealized                
          Gains     Losses                

CMBS-Conduit

   $ 1,224,367      $ 1,043,674      $ (235,513 )    $ 808,161      $ 141,515      $ (44,984 )    $ 904,692        165      BB     5.68 %      10.97 %      3.8        10.4 % 

CMBS- Single Borrower

     273,242        266,556        (12,364 )      254,192        4,558        (14,844 )      243,906        44      BB     5.04 %      6.20 %      3.6        7.8 % 

CMBS-Large Loan

     7,555        7,552        —          7,552        —          (378 )      7,174        2      A     1.63 %      1.79 %      1.0        11.7 % 

REIT Debt

     172,393        171,683        —          171,683        11,171        (3,399 )      179,455        26      BB+     5.94 %      5.81 %      3.2        N/A   

ABS-Subprime (F)

     264,944        226,937        (86,643 )      140,294        16,234        (3,535 )      152,993        63      B+     1.26 %      10.35 %      6.2        29.7 % 

ABS-Manufactured Housing

     32,727        31,779        —          31,779        1,771        (295 )      33,255        7      BBB+     6.63 %      7.40 %      3.8        40.6 % 

ABS-Franchise

     24,399        21,944        (10,745 )      11,199        740        (1,981 )      9,958        7      BB+     3.49 %      9.13 %      8.3        32.6 % 

FNMA/FHLMC

     185,273        194,067        —          194,067        603        (210 )      194,460        21      AAA     2.89 %      1.52 %      4.6        N/A   

CDO (G)

     193,463        72,332        (14,861 )      57,471        —          (2,250 )      55,221        12      CCC+     2.81 %      7.28 %      1.6        N/A   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

  

 

 

    

 

 

    

 

 

    

Debt Security Total /Average (H)

     2,378,363        2,036,524        (360,126 )      1,676,398        176,592        (71,876 )      1,781,114        347      BB+     4.66 %      8.33 %      3.9     
 

 

 

                  

 

  

 

 

    

 

 

    

 

 

    

Equity Securities

       1,388        (276 )      1,112        1,412        —          2,524        2             
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

            

Total

     $ 2,037,912      $ (360,402 )    $ 1,677,510      $ 178,004      $ (71,876 )    $ 1,783,638      $ 349             
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

            

 

(A) Represents the cumulative impairment against amortized cost basis recorded through earnings, net of the effect of the cumulative adjustment as a result of the adoption of new accounting guidance on impairment in 2009.
(B) See Note 6 regarding the estimation of fair value, which is equal to carrying value for all securities.
(C) 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. FNMA/FHLMC securities have an implied AAA rating. Ratings provided were determined by third party rating agencies as of a particular date, may not be current and are subject to change (including a “negative watch” assignment) at any time.
(D) The weighted average maturity is based on the timing of expected principal reduction on the assets.
(E) Percentage of the outstanding face amount of securities that is subordinate to Newcastle’s investments.
(F) Includes the retained bonds with a face amount of $4.0 million and a carrying value of $1.0 million from Securitization Trust 2006 (Note 4).
(G) Includes seven CDO bonds issued by C-BASS with a carrying value of $2.5 million, two CDOs bond issued by third parties with a carrying value of $52.7 million and three CDO bonds issued by CDO V, which has been deconsolidated, held as investments by Newcastle with a zero carrying value.
(H) The total outstanding face amount of fixed rate securities was $1.7 billion, and of floating rate securities was $0.7 billion.

 

Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the six months ended June 30, 2011, Newcastle recorded other-than-temporary impairment charges (“OTTI”) of $8.9 million (gross of ($0.7) million of other-than-temporary impairment recognized in other comprehensive income) with respect to real estate securities. Based on management’s analysis of these 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. The following table summarizes Newcastle’s securities in an unrealized loss position as of June 30, 2011.

 

          Amortized Cost Basis     Gross Unrealized                 Weighted Average  

Securities in

an Unrealized

Loss Position

   Outstanding
Face
Amount		     Before
Impairment		     Other-than-
Temporary
Impairment		     After
Impairment		     Gains     Losses     Carrying
Value		     Number
of
Securities		     Rating   Coupon     Yield     Maturity
(Years)		  

Less Than Twelve Months

   $ 417,850      $ 378,802      $ (4,104 )    $ 374,698      $ —        $ (14,775 )      359,923        45      BBB+     3.72 %      6.00 %      5.5   

Twelve or More Months

     445,512        442,506        (5,366 )      437,140        —          (57,101 )      380,039        82      BB     5.13 %      5.50 %      2.5   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

  

 

 

    

 

 

    

 

 

  

Total

   $ 863,362      $ 821,308      $ (9,470 )    $ 811,838      $ —        $ (71,876 )    $ 739,962        127      BBB-     4.45 %      5.73 %      3.9   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

  

 

 

    

 

 

    

 

 

  

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:

 

     June 30, 2011  
     Fair Value      Amortized
Cost Basis 		     Unrealized Losses  
           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

      30,811         34,986         (8,755 )      (4,176 ) 

Non credit impaired securities

      709,151         776,852         —          (67,700 ) 
  

 

 

     

 

 

     

 

 

    

 

 

  

Total debt securities in an unrealized loss position

    $ 739,962       $ 811,838       $ (8,755 )    $ (71,876 ) 
  

 

 

     

 

 

     

 

 

    

 

 

  

 

(A) Newcastle may, at times, be more likely than not to be required to sell certain securities for liquidity purposes. While the amount of the securities to be sold may be an estimate, and the securities to be sold have not yet been identified, Newcastle must make its best estimate, which is subject to significant judgment regarding future events, and may differ materially from actual future sales.
(B) This amount is required to be recorded as other-than-temporary impairment through earnings. In measuring the portion of credit losses, Newcastle’s management estimates the expected cash flow for each of the securities. This evaluation includes a review of the credit status and the performance of the collateral supporting those securities, including the credit of the issuer, key terms of the securities and the effect of local, industry and broader economic trends. Significant inputs in estimating the cash flows include management’s expectations of prepayment speeds, default rates and loss severities. Credit losses are measured as the decline in the present value of the expected future cash flows discounted at the investment’s effective interest rate.
(C) This amount represents unrealized losses on securities that are due to non-credit factors and is required to be recorded through other comprehensive income.

 

The following table summarizes the activity related to credit losses on debt securities for the six months ended June 30, 2011:

 

Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income

      $(60,688)   

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

      (2,558)   

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

      (952)   

Additions for credit losses on securities for which an OTTI was previously recognized without any portion of OTTI recognized in other comprehensive income

      —     

Reduction for credit losses on securities for which no OTTI was recognized in other comprehensive income at the current measurement date

      12,300   

Reduction for securities sold during the period

      36,737   

Reduction for securities deconsolidated during the period

      6,254   

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

      152   
  

 

 

  

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

      $(8,755)   
  

 

 

  

As of June 30, 2011, Newcastle had $168.0 million of restricted cash held in CDO financing structures pending its reinvestment in real estate securities and loans.

The table below summarizes the geographic distribution of the collateral securing Newcastle’s CMBS and ABS at June 30, 2011 (in thousands):

 

     CMBS     ABS  

Geographic Location

    Outstanding Face Amount      Percentage     Outstanding Face Amount      Percentage  

Western U.S.

    $ 412,041         27.4 %    $ 81,185         25.2 % 

Northeastern U.S.

      373,264         24.8 %      59,768         18.6 % 

Southeastern U.S.

      269,134         17.9 %      71,952         22.3 % 

Midwestern U.S.

      228,703         15.1 %      46,929         14.6 % 

Southwestern U.S.

      179,952         12.0 %      34,258         10.6 % 

Other

      16,358         1.1 %      27,978         8.7 % 

Foreign

      25,712         1.7 %      —           0.0 % 
  

 

 

     

 

 

    

 

 

     

 

 

  
   $ 1,505,164         100.0 %    $ 322,070         100.0 % 
  

 

 

     

 

 

    

 

 

     

 

 

  

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.