Quarterly report pursuant to Section 13 or 15(d)

REAL ESTATE SECURITIES

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REAL ESTATE SECURITIES
 3 Months Ended
Mar. 31, 2013
RealEstateSecuritiesAbstract  
REAL ESTATE SECURITIES
3. REAL ESTATE SECURITIES
 
The following is a summary of Newcastle’s real estate securities at March 31, 2013, 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
  
               
Other-Than-
                            
Number
                      
Maturity
    
Principal
  
Asset Type
  
Outstanding Face
Amount
    
Before Impairment
    
Temporary Impairment
    
After Impairment
    
Gains
    
Losses
    
Carrying Value (A)
    
of Securities
    
Rating
(B)
    
Coupon
    
Yield
    
(Years) (C)
    
Subordination (D)
  
CMBS-Conduit
   $ 338,056     $ 314,424     $ (99,020 )   $ 215,404     $ 54,263     $ (6,752 )   $ 262,915       52     B+       5.54 %     10.33 %     3.2       9.5 %
CMBS- Single Borrower
     124,709       123,409       (12,364 )     111,045       5,818       (1,609 )     115,254       22    
BB
       4.89 %     5.93 %     2.5       9.5 %
CMBS-Large Loan
     5,819       5,643       —       5,643       205       —       5,848       1    
BBB-
       6.08 %     12.16 %     0.7       2.0 %
REIT Debt
     50,700       50,055       —       50,055       4,064       —       54,119       8    
BBB-
       5.75 %     6.10 %     1.8       N/A  
Non-Agency RMBS (E)
     904,784       604,616       (68,708 )     535,908       49,218       (1,226 )     583,900       93    
CC
       0.75 %     6.55 %     7.3       10.0 %
ABS-Franchise
     10,036       9,329       (7,839 )     1,490       219       (325 )     1,384       3    
CCC-
       5.95 %     3.47 %     4.7       2.7 %
FNMA/FHLMC
     1,309,855       1,396,400       —       1,396,400       6,130       (2,102 )     1,400,428       83    
AAA
       3.23 %     1.42 %     4.1       N/A  
CDO (F)
     202,232       81,608       (14,861 )     66,747       4,878       —       71,625       13    
CCC+
       2.86 %     8.12 %     1.4       21.4 %
Total / Average (G)
   $ 2,946,191     $ 2,585,484     $ (202,792 )   $ 2,382,692     $ 124,795     $ (12,014 )   $ 2,495,473       275    
BBB-
       2.84 %     3.92 %     4.7          
 
(A)
See Note 9 regarding the estimation of fair value, which is equal to carrying value for all securities.
 
(B)
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.
 
(C)
The weighted average maturity is based on the timing of expected principal reduction on the assets.
 
(D)
Percentage of the outstanding face amount of securities and residual interests that is subordinate to Newcastle’s investments.
 
(E)
Includes (i) the retained bond with a face amount of $4.0 million and a carrying value of $1.4 million from Securitization Trust 2006 (Note 4) and (ii) 53 non-agency RMBS purchased since April 2012 with an aggregate face amount of $784.3 million and a carrying value of $518.6 million as of March 31, 2013, of which an aggregate face amount of $644.7 million and a carrying value of $440.1 million is serviced by Nationstar. The total UPB of the loans underlying these Nationstar serviced non-Agency RMBS was approximately $8.3 billion as of March 31, 2013.
 
(F)
Includes two CDO bonds issued by a third party with a carrying value of $62.5 million, four CDO bonds issued by CDO V (which has been deconsolidated) and held as investments by Newcastle with a carrying value of $5.3 million and seven CDO bonds issued by C-BASS with a carrying value of $3.9 million.
 
(G)
The total outstanding face amount of fixed rate securities was $0.5 billion, and of floating rate securities was $2.4 billion.

 

 
Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the three months ended March 31, 2013, Newcastle recorded other-than-temporary impairment charges (“OTTI”) of $0.4 million (net of a $0.1 million reversal 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 March 31, 2013.
 
         
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
   $ 562,897     $ 509,420     $ (5,236 )   $ 504,184     $ —     $ (3,230 )   $ 500,954       34  
 BBB
     2.44 %     2.15 %     5.9  
Twelve or More Months
     119,054       118,953       (236 )     118,717       —       (8,784 )     109,933       24  
 BB-
     4.44 %     4.63 %     1.5  
Total
   $ 681,951     $ 628,373     $ (5,472 )   $ 622,901     $ —     $ (12,014 )   $ 610,887       58  
 BBB
     2.79 %     2.62 %     5.1  
 
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:
   
March 31, 2013
  
         
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
     1,155       1,274       (5,355 )     (119 )
Non credit impaired securities
     609,732       621,627       —       (11,895 )
Total debt securities in an unrealized loss position
   $ 610,887     $ 622,901     $ (5,355 )   $ (12,014 )
 
(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 three months ended March 31, 2013:
 
Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income
  $ (4,770 )
         
Additions for credit losses on securities for which an OTTI was not previously recognized
     —  
         
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
    (594 )
         
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
    —  
         
Reduction for securities sold during the period
     —  
         
Reduction for securities deconsolidated during the period
     —  
         
Reduction for increases in cash flows expected to be collected that are recognized over the remaining life of the security
    9  
         
Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income
  $ (5,355 )
 
The table below summarizes the geographic distribution of the collateral securing Newcastle’s CMBS and ABS at March 31, 2013 (in thousands):
   
CMBS
    
ABS
  
Geographic Location
  
Outstanding Face
Amount
    
Percentage
    
Outstanding Face Amount
    
Percentage
  
Western U.S.
   $ 114,446       24.4 %   $ 331,852       36.3 %
Northeastern U.S.
     96,067       20.5 %     206,507       22.6 %
Southeastern U.S.
     86,896       18.5 %     192,309       21.0 %
Midwestern U.S.
     63,588       13.6 %     104,717       11.4 %
Southwestern U.S.
     72,915       15.6 %     73,155       8.0 %
Other
     14,730       3.1 %     6,280       0.7 %
Foreign
     19,942       4.3 %     —       0.0 %
    $ 468,584       100.0 %   $ 914,820       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.
 
Newcastle evaluates the credit quality of its real estate securities, as of the acquisition date, for evidence of credit quality deterioration. As a result, we identified a population of real estate securities for which it was determined that it was probable that we would be unable to collect all contractually required payments. For securities acquired during the three months ended March 31, 2013, the face amount of these real estate securities was $368.7 million with an aggregate purchase price of approximately $222.8 million and total expected cash flows of $280.4 million.
 
The following is the outstanding face amount and carrying value for such securities in which,as of the acquisition date it was determined probable that Newcastle would be unable to collect all contractually required payments, at December 31, 2012 and March 31, 2013.

 
   
Outstanding
Face Amount
    
Carrying Value
  
December 31, 2012
   $ 342,013     $ 212,129  
      March 31, 2013
   $ 692,140     $ 436,458  
 

 
The following is a summary of the changes in accretable yield (a portion of the discount) for these securities during the three months ended March 31, 2013.
   
For the three months
ended March 31, 2013
  
Balance at December 31, 2012
   $ 89,636  
Additions
     57,568  
Accretion
     (4,248 )
Reclassifications from nonaccretable difference
     49,553  
Disposals
     —  
Balance at March 31, 2013
   $ 192,509