Quarterly report pursuant to Section 13 or 15(d)

INFORMATION REGARDING BUSINESS SEGMENTS

v2.3.0.15
INFORMATION REGARDING BUSINESS SEGMENTS
 9 Months Ended
Sep. 30, 2011
Notes to Financial Statements  
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  
Nine Months Ended September 30, 2011                                                        
Interest income   $ 164,523     $ 54,421     $ 1,626     $ 2,053     $ 99     $ (3,983 )    $ 218,739  
Interest expense     67,173       39,660       455       —         2,859       (3,645 )      106,502  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Net interest income (expense)     97,350       14,761       1,171       2,053       (2,760 )      (338 )      112,237  
Impairment (reversal)     (27,904 )      7,012       —         (3,731 )      —         —         (24,623 ) 
Other income (loss)     115,425       2,561       —         5,174       —         —         123,160  
Expenses     779       2,679       —         4       17,958       —         21,420  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Income (loss) from continuing operations     239,900       7,631       1,171       10,954       (20,718 )      (338 )      238,600  
Income (loss) from discontinued operations     —         (131 )      —         (56 )      —         338       151  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Net income (loss)     239,900       7,500       1,171       10,898       (20,718 )      —         238,751  
Preferred dividends     —         —         —         —         (4,185 )      —         (4,185 ) 
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Income (loss) applicable to common stockholders   $ 239,900     $ 7,500     $ 1,171     $ 10,898     $ (24,903 )    $ —       $ 234,566  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
               
Three Months Ended September 30, 2011                                                        
Interest income   $ 53,403     $ 18,816     $ 1,029     $ 1,038     $ 36     $ (1,929 )    $ 72,393  
Interest expense     19,909       13,329       213       —         953       (1,817 )      32,587  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Net interest income (expense)     33,494       5,487       816       1,038       (917 )      (112 )      39,806  
Impairment (reversal)     17,550       3,919       —         181       —         —         21,650  
Other income (loss)     18,262       —         —         540       —         —         18,802  
Expenses     250       933       —         (111 )      6,094       —         7,166  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Income (loss) from continuing operations     33,956       635       816       1,508       (7,011 )      (112 )      29,792  
Income (loss) from discontinued operations     —         54       —         (15 )      —         112       151  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Net income (loss)     33,956       689       816       1,493       (7,011 )      —         29,943  
Preferred dividends     —         —         —         —         (1,395 )      —         (1,395 ) 
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Income (loss) applicable to common stockholders   $ 33,956     $ 689     $ 816     $ 1,493     $ (8,406 )    $ —       $ 28,548  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
September 30, 2011                                                        
Investments   $ 2,375,681     $ 793,546     $ 222,557     $ 23,595     $ —       $ (144,603 )    $ 3,270,776  
Cash and restricted cash     178,121       —         —         8       205,172       —         383,301  
Derivative assets     2,383       —         —         —         —         —         2,383  
Other assets     23,719       99       640       2,171       300       (336 )      26,593  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total assets     2,579,904       793,645       223,197       25,774       205,472       (144,939 )     3,683,053  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Debt     (2,437,058 )      (759,112 )      (212,164 )      —         (51,250 )      144,603       (3,314,981 ) 
Derivative liabilities     (132,056 )      —         —         —         —         —         (132,056 ) 
Other liabilities     (43,631 )      (2,817 )      (19 )      (65 )      (21,295 )      336       (67,491 ) 
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total liabilities     (2,612,745 )      (761,929 )      (212,183 )      (65 )      (72,545 )      144,939       (3,514,528 ) 
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Preferred stock     —         —         —         —         (61,583 )      —         (61,583 ) 
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
GAAP book value   $ (32,841 )    $ 31,716     $ 11,014     $ 25,709     $ 71,344     $ —       $ 106,942  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  

 

 

 

                                                 
    Non-Recourse                          
    CDOs (A)     Other (A)     Recourse     Unlevered     Corporate     Total  
Nine Months Ended September 30, 2010                                                
Interest income   $ 168,150     $ 54,952     $ 976     $ 1,189     $ 48     $ 225,315  
Interest expense     83,209       44,462       645       356       2,605       131,277  
   
 
 
    
 
 
    
 
 
    
 
 
            
 
 
  
Net interest income (expense)     84,941       10,490       331       833       (2,557 )      94,038  
Impairment     (146,833 )      (35,323 )      (60 )      (23,630 )      —         (205,846 ) 
Other income (loss)     153,919       (5,417 )      (663 )      (905 )      (345 )      146,589  
Other operating expenses     1,134       2,394       4       17       19,829       23,378  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Income (loss) from continuing operations     384,559       38,002       (276 )      23,541       (22,731 )      423,095  
Income (loss) from discontinued operations     —         —         —         186       —         186  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Net income (loss)     384,559       38,002       (276 )      23,727       (22,731 )      423,281  
Preferred dividends     —         —         —         —         (6,058 )      (6,058 ) 
Excess of carrying amount of exchanged preferred stock over fair value of consideration paid     —         —         —         —         43,043       43,043  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Income (loss) applicable to common stockholders   $ 384,559     $ 38,002     $ (276 )    $ 23,727     $ 14,254     $ 460,266  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
             
Three Months Ended September 30, 2010                                                
Interest income   $ 62,429     $ 18,146     $ —       $ 447     $ 18     $ 81,040  
Interest expense     27,035       14,561       —         —         951       42,547  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Net interest income (expense)     35,394       3,585       —         447       (933 )      38,493  
Impairment     (86,525 )      (1,094 )      —         (7,700 )      —         (95,319 ) 
Other income (loss)     38,189       (1,636 )      —         109       —         36,662  
Other operating expenses     345       768       —         7       6,065       7,185  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Income (loss) from continuing operations     159,763       2,275       —         8,249       (6,998 )      163,289  
Income (loss) from discontinued operations     —         —         —         213       —         213  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Net income (loss)     159,763       2,275       —         8,462       (6,998 )      163,502  
Preferred dividends     —         —         —         —         (1,395 )      (1,395 ) 
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Income (loss) applicable to common stockholders   $ 159,763     $ 2,275     $ —       $ 8,462     $ (8,393 )    $ 162,107  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  

 

(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:

 

                                 
    September 30, 2011  
    Investments     Debt  
    Outstanding
Face Amount		     Carrying
Value		     Outstanding
Face Amount*		     Carrying
Value*		  
Manufactured housing loan portfolio I   $ 139,116     $ 115,357     $ 111,052     $ 101,443  
Manufactured housing loan portfolio II     184,615       180,926       149,622       148,181  
Residential mortgage loans     57,612       40,806       56,079       55,008  
Subprime mortgage loans subject to call options     406,217       404,476       406,217       404,476  
Real estate securities     69,121       44,238       48,504       44,004  
Operating real estate     N/A       7,743       6,000       6,000  
   
 
 
    
 
 
    
 
 
    
 
 
  
    $ 856,681     $ 793,546     $ 777,474     $ 759,112  
   
 
 
    
 
 
    
 
 
    
 
 
  

 

* An aggregate face amount of $158.8 million (carrying value of $144.6 million) of debt represents financing provided by the CDO segment (and included as investments in the CDO segment), which is eliminated upon consolidation.

 

(C)

The $212.2 million of recourse debt is comprised of (i) $209.3 million of repurchase agreement secured by $222.6 million carrying value of FNMA/FHLMC securities and (ii) $2.9 million of repurchase agreement secured by $32.5 million face amount of senior notes issued by Newcastle CDO VI, which was repurchased by Newcastle in December 2010 and eliminated in consolidation.

 
(D) The following table summarizes the investments in the unlevered segment:

 

                         
    September 30, 2011  
    Outstanding
Face Amount		     Carrying
Value		     Number of
Investments		  
Real estate securities   $ 165,669     $ 7,906       24  
Real estate related loans     69,634       6,634       4  
Residential mortgage loans     6,182       3,031       193  
Other investments     N/A       6,024       1  
   
 
 
    
 
 
    
 
 
  
    $ 241,485     $ 23,595       222  
   
 
 
    
 
 
    
 
 
  

 

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

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 September 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   $ 324,653     $ 324,712     $ 4,562  

 

(A) Face amount.

 

(B) Includes $41.7 million face amount of debt owned by Newcastle at September 30, 2011.

 

(C) This amount represents Newcastle’s maximum exposure to loss from this entity, which was the fair value at September 30, 2011 for $6.1 million face amount of CDO V Class I notes. Newcastle repurchased these notes in the quarter ended September 30, 2011 and recorded these as investments in Real Estate Securities.