Quarterly report pursuant to Section 13 or 15(d)

REAL ESTATE SECURITIES

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REAL ESTATE SECURITIES
 6 Months Ended
Jun. 30, 2012
Notes to Financial Statements  
REAL ESTATE SECURITIES

 

3. REAL ESTATE SECURITIES

 

The following is a summary of Newcastle’s real estate securities at June 30, 2012, 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                       Weighted Average  
    Outstanding            Other- Than- Temporary                   Number                   Maturity     Principal  
    Face     Before     Impairment     After     Gross Unrealized      Carrying     of      Rating               (Years)     Subordination  
Asset Type   Amount     Impairment     (A)     Impairment     Gains     Losses     Value (B)     Securities     (C)   Coupon     Yield     (D)     (E)  
CMBS-Conduit   $ 1,279,728     $ 1,098,922     $ (168,256 )   $ 930,666     $ 112,293     $ (46,483 )   $ 996,476       159     BB+     5.55 %     10.71 %     3.9       11.7 %
CMBS- Single Borrower     175,346       170,879       (12,364 )     158,515       3,869       (10,426 )     151,958       31     BB     5.24 %     6.54 %     3.2       6.8 %
CMBS-Large Loan     14,938       14,404       —       14,404       434       (50 )     14,788       2     BBB+     5.06 %     8.89 %     0.7       10.1 %
REIT Debt     120,288       119,542       —       119,542       5,685       (2,130 )     123,097       18     BB+     5.72 %     5.72 %     2.2       N/A  
ABS-Subprime (F)     421,669       321,385       (76,547 )     244,838       13,935       (6,033 )     252,740       70     CCC     0.89 %     8.91 %     5.5       24.7 %
ABS-Manufactured Housing     27,722       26,890       —       26,890       2,138       (74 )     28,954       7     BBB+     6.59 %     7.38 %     3.7       42.9 %
ABS-Franchise     11,121       10,835       (8,451 )     2,384       34       (391 )     2,027       4     CCC-     5.56 %     5.45 %     4.9       3.2 %
FNMA/FHLMC     377,220       400,531       —       400,531       3,127       (266 )     403,392       37     AAA     2.48 %     1.39 %     4.7       N/A  
CDO (G)     206,124       83,374       (14,861 )     68,513       25       (3,570 )     64,968       13     CCC+     3.03 %     7.76 %     1.2       21.0 %
Total / Average (H)   $ 2,634,156       2,246,762     $ (280,479 )   $ 1,966,283     $ 141,540     $ (69,423 )   $ 2,038,400       341      BB+     4.16 %     7.79 %     3.9          

  

(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. Newcastle used an implied AAA rating for the FNMA/FHLMC securities. Ratings provided were determined by third party rating agencies as of a particular date, may not be current and are subject to change 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 and residual interests that is subordinate to Newcastle’s investments.
(F) Includes (i) the retained bonds with a face amount of $4.0 million and a carrying value of $1.1 million from Securitization Trust 2006 (Note 4) and (ii) 10 non-agency RMBS purchased during the three months ended June 30, 2012 with an aggregate face amount of $177.4 million and a carrying value of $119.5 million as of June 30, 2012.
(G) Includes two CDO bonds issued by a third party with a carrying value of $58.3 million, four CDO bonds issued by CDO V (which has been deconsolidated) and held as investments by Newcastle with a carrying value of $4.0 million and seven CDO bonds issued by C-BASS with a carrying value of $2.8 million.
(H) The total outstanding face amount of fixed rate securities was $1.6 billion, and of floating rate securities was $1.0 billion.

 

Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the six months ended June 30, 2012, Newcastle recorded other-than-temporary impairment charges (“OTTI”) of $16.7 million (gross of $3.1 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. Newcastle performed analyses in relation to such securities, using management’s best estimate of their cash flows, which support its belief that the carrying values of such securities were fully recoverable over their expected holding period. The following table summarizes Newcastle’s securities in an unrealized loss position as of June 30, 2012.

  

          Amortized Cost Basis                     Weighted Average  
Securities in an Unrealized   Outstanding           Other- than-           Gross           Number                          
Loss   Face     Before     Temporary     After     Unrealized     Carrying     of                       Maturity  
Position   Amount     Impairment     Impairment     Impairment     Gains     Losses     Value     Securities     Rating     Coupon     Yield     (Years)  
Less Than Twelve Months   $ 283,224     $ 274,738     $ (11,209 )   $ 263,529     $ —     $ (4,980 )     258,549       27        A       3.14 %     3.66 %     5.1  
Twelve or More Months     704,267       644,904       (16,707 )     628,197       —       (64,443 )     563,754       96        BB       4.43 %     6.90 %     3.1  
Total   $ 987,491     $ 919,642     $ (27,916 )   $ 891,726     $ —     $ (69,423 )   $ 822,303       123        BBB-       4.06 %     5.94 %     3.7  

 

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, 2012  
          Amortized Cost Basis     Unrealized Losses  
    Fair Value     After Impairment     Credit (B)     Non-Credit (C)  
Securities Newcastle intends to sell   $ 4,456     $ 4,456     $ (11,502 )     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     48,274       52,063       (26,752 )     (3,789 )
Non credit impaired securities     774,029       839,663       —       (65,634 )
Total debt securities in an unrealized loss position   $ 826,759     $ 896,182     $ (38,254 )   $ (69,423 )

 

(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, 2012:

 

Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income   $ (20,207 )
         
Additions for credit losses on securities for which an OTTI was not previously recognized     (6,800 )
         
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     (242 )
         
Additions for credit losses on securities for which an OTTI was previously recognized without any portion of OTTI recognized in other comprehensive income     (8,669 )
         
Reduction for credit losses on securities for which no OTTI was recognized in other comprehensive income at the current measurement date     7,188  
         
Reduction for securities sold during the period     1,498  
         
Reduction for increases in cash flows expected to be collected that are recognized over the remaining life of the security     480  
         
Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income   $ (26,752 )

 

As of June 30, 2012, Newcastle had $63.4 million of restricted cash and net receivables from brokers, dealers and clearing organizations 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, 2012 (in thousands):

 

    CMBS     ABS  
Geographic Location   Outstanding Face Amount     Percentage     Outstanding Face Amount     Percentage  
Western U.S.   $ 574,813       39.1 %   $ 125,608       27.3 %
Northeastern U.S.     253,261       17.2 %     94,256       20.4 %
Southeastern U.S.     293,247       20.0 %     116,819       25.4 %
Midwestern U.S.     156,504       10.7 %     61,673       13.4 %
Southwestern U.S.     122,175       8.3 %     53,022       11.5 %
Other     16,823       1.1 %     9,134       2.0 %
Foreign     53,189       3.6 %     —       0.0 %
    $ 1,470,012       100.0 %   $ 460,512       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.