Annual report pursuant to Section 13 and 15(d)

REAL ESTATE SECURITIES

v2.4.0.6
REAL ESTATE SECURITIES
 12 Months Ended
Dec. 31, 2012
RealEstateSecuritiesAbstract  
REAL ESTATE SECURITIES
4.      REAL ESTATE SECURITIES
 
The following is a summary of Newcastle’s real estate securities at December 31, 2012 and 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.
 
         
Amortized Cost Basis
    
Gross Unrealized
                
Weighted Average
  
Asset Type
  
Outstanding Face Amount
    
Before Impairment
    
Other-Than-Temporary-Impairment (A)
    
After Impairment
    
Gains
    
Losses
    
Carrying Value (B)
    
Number of
Securities
    
 
Rating (C)
    
Coupon
    
Yield
    
Maturity (Years) (D)
    
Principal Subordination (E)
  
December 31, 2012
                                                                              
CMBS-Conduit
   $ 340,978     $ 315,554     $ (98,481 )   $ 217,073     $ 47,776     $ (10,081 )   $ 254,768       53    
BB-
       5.55 %     10.81 %     3.3       9.8 %
CMBS- Single Borrower
     125,123       123,638       (12,364 )     111,274       4,482       (3,002 )     112,754       22    
BB
       4.89 %     5.92 %     2.9       9.2 %
CMBS-Large Loan
     8,891       8,619       -       8,619       250       -       8,869       1    
BBB-
       6.08 %     12.41 %     0.6       4.8 %
REIT Debt
     62,700       62,069       -       62,069       4,105       -       66,174       10    
BBB-
       5.72 %     5.89 %     1.8       N/A  
ABS-Subprime (F)
     558,215       390,509       (68,708 )     321,801       34,565       (391 )     355,975       69    
CC
       0.76 %     7.50 %     6.4       13.3 %
ABS-Franchise
     10,098       9,386       (7,839 )     1,547       237       (309 )     1,475       3    
CCC-
       5.93 %     3.40 %     4.7       3.0 %
FNMA/FHLMC
     768,619       818,866       -       818,866       3,860       (2,191 )     820,535       58    
AAA
       3.05 %     1.40 %     3.5       N/A  
CDO (G)
     203,477       82,399       (14,861 )     67,538       3,487       -       71,025       13    
BB
       2.83 %     7.07 %     1.6       20.9 %
Total/Average (H)
   $ 2,078,101     $ 1,811,040     $ (202,253 )   $ 1,608,787     $ 98,762     $ (15,974 )   $ 1,691,575       229    
BBB-
       3.04 %     4.69 %     4.0          
                                                                                                       
December 31, 2011
                                                                                                      
CMBS-Conduit
   $ 1,344,819     $ 1,143,910     $ (202,164 )   $ 941,746     $ 91,583     $ (76,424 )   $ 956,905       169    
BB+
       5.61 %     11.03 %     4.2       10.8 %
CMBS- Single Borrower
     186,088       180,874       (12,364 )     168,510       3,121       (14,366 )     157,265       33    
BB
       5.05 %     6.25 %     3.6       6.7 %
CMBS-Large Loan
     14,970       14,190       -       14,190       519       (61 )     14,648       2    
BBB+
       5.15 %     8.89 %     1.2       7.5 %
REIT Debt
     137,393       136,704       (773 )     135,931       5,060       (5,695 )     135,296       20    
BB+
       5.83 %     5.72 %     2.4       N/A  
ABS-Subprime
     246,014       209,838       (86,815 )     123,023       14,481       (8,882 )     128,622       63       B       1.22 %     10.16 %     6.9       32.5 %
ABS-Manufactured Housing
     30,232       29,454       -       29,454       1,247       (154 )     30,547       7    
BBB+
       6.61 %     7.54 %     4.2       41.6 %
ABS-Franchise
     23,115       21,598       (11,133 )     10,465       215       (3,120 )     7,560       7    
BB+
       3.58 %     4.56 %     11.0       21.9 %
FNMA/FHLMC
     232,355       243,385       -       243,385       1,715       (185 )     244,915       31    
AAA
       2.37 %     1.63 %     4.6       N/A  
CDO
     206,150       82,486       (14,861 )     67,625       149       (11,788 )     55,986       13    
CCC+
       3.03 %     8.05 %     1.5       21.4 %
Total/Average (H)
   $ 2,421,136       2,062,439       (328,110 )     1,734,329       118,090       (120,675 )     1,731,744       345    
BB+
       4.60 %     8.54 %     4.2          
 
(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 9 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 $1.3 million from Securitization Trust 2006 (Note 5) and (ii) $456.0 million non-agency RMBS purchased during the year ended December 31, 2012 with an aggregate face amount of $433.5 million and a carrying value of $289.8 million as of December 31, 2012.
(G)
Includes two CDO bonds issued by a third party with a carrying value of $61.2 million, four CDO bonds issued by CDO V (which has been deconsolidated and held as an investment by Newcastle) with a carrying value of $6.0 million and seven CDO bonds issued by C-BASS with a carrying value of $3.9 million .
(H)
As of December 31, 2012 and 2011, the total outstanding face amount of fixed rate securities was $0.5 billion and $1.7 billion, respectively, and of floating rate securities was $1.5 billion and $0.7 billion, respectively.
 
Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the years ended December 31, 2012, 2011 and 2010, Newcastle recorded other-than-temporary impairment charges (“OTTI”) of $19.3 million, $12.9 million and $101.4 million, respectively, with respect to real estate securities (gross of $0.4 million, ($2.9) million and $2.4 million of other-than-temporary impartment recognized (reversed) in Other Comprehensive Income in 2012, 2011 and 2010, respectively). 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 as of each balance sheet date on Newcastle’s securities were primarily the result of changes in market factors, rather than issuer-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.  Such market factors include changes in market interest rates and credit spreads, or certain macroeconomic events, including market disruptions and supply changes, which did not directly impact our ability to collect amounts contractually due.   Management continually evaluates the credit status of each of Newcastle’s securities and the collateral supporting those securities. This evaluation includes a review of the credit of the issuer of the security (if applicable), the credit rating of the security, the key terms of the security (including credit support), debt service coverage and loan to value ratios, the performance of the pool of underlying loans and the estimated value of the collateral supporting such loans, including the effect of local, industry and broader economic trends and factors. These factors include loan default expectations and loss severities, which are analyzed in connection with a particular security’s credit support, as well as prepayment rates. The result of this evaluation is considered when determining management’s estimate of cash flows and in relation to the amount of the unrealized loss and the period elapsed since it was incurred. Significant judgment is required in this analysis. The following table summarizes Newcastle’s securities in an unrealized loss position as of December 31, 2012.
 
         
Amortized Cost Basis
    
Gross Unrealized
                
Weighted Average
  
Securities in
  
Outstanding
          
Other-than-
                            
Number
                          
an Unrealized
  
Face
    
Before
    
Temporary
    
After
                
Carrying
    
of
                      
Maturity
  
Loss Position
  
Amount
    
Impairment
    
Impairment
    
Impairment
    
Gains
    
Losses
    
Value
    
Securities
    
Rating
    
Coupon
    
Yield
    
(Years)
  
Less Than
                                                                        
Twelve Months
   $ 424,370     $ 443,457     $ (4,698 )   $ 438,759     $ -     $ (2,761 )   $ 435,998       28    
AA+
       3.21 %     1.58 %     3.2  
Twelve or
                                                                                              
More Months
     149,668       143,985       (236 )     143,749       -       (13,213 )     130,536       26       B+       4.84 %     6.28 %     2.0  
Total
   $ 574,038     $ 587,442     $ (4,934 )   $ 582,508     $ -     $ (15,974 )   $ 566,534       54       A+       3.63 %     2.74 %     2.9  
 
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:
 
   
December 31, 2012
  
         
Amortized Cost Basis
    
Unrealized Losses
  
   
Fair Value
    
After Impairment
    
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
     1,607       1,849       (4,770 )     (242 )
Non credit impaired securities
     564,927       580,659       -       (15,732 )
Total debt securities in an unrealized loss position
   $ 566,534     $ 582,508     $ (4,770 )   $ (15,974 )
 
(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:
 
   
2012
    
2011
  
Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income
   $ (20,207 )   $ (60,688 )
                 
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
     (4,581 )     (574 )
                 
Additions for credit losses on securities for which an OTTI was previously recognized without any portion of OTTI recognized in other comprehensive income
     -       (16,269 )
                 
Reduction for credit losses on securities for which no OTTI was recognized in other comprehensive income at the current measurement date
     14,771       12,998  
                 
Reduction for securities sold during the period
     1,498       37,833  
                 
Reduction for securities deconsolidated during the period
     3,736       6,254  
                 
Reduction for increases in cash flows expected to be collected that are recognized over the remaining life of the security
     13       239  
                 
Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income
   $ (4,770 )   $ (20,207 )
 
The securities are encumbered by various debt obligations, as described in Note 10, at December 31, 2012.
 
The table below summarizes the geographic distribution of the collateral securing our CMBS and ABS at December 31, 2012:
 
   
CMBS
    
ABS
  
Geographic Location
  
Outstanding Face Amount
    
Percentage
    
Outstanding Face Amount
    
Percentage
  
Western U.S.
   $ 114,027       24.0 %   $ 191,778       33.7 %
Northeastern U.S.
     99,579       21.0 %     124,322       21.9 %
Southeastern U.S.
     88,675       18.6 %     127,642       22.5 %
Midwestern U.S.
     63,553       13.4 %     61,569       10.8 %
Southwestern U.S.
     74,830       15.8 %     56,728       10.0 %
Other
     14,678       3.1 %     6,274       1.1 %
Foreign
     19,650       4.1 %     -       0.0 %
    $ 474,992       100.0 %   $ 568,313       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.