Quarterly report pursuant to Section 13 or 15(d)

REAL ESTATE SECURITIES

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REAL ESTATE SECURITIES
 6 Months Ended
Jun. 30, 2013
RealEstateSecuritiesAbstract  
REAL ESTATE SECURITIES
4.
REAL ESTATE SECURITIES
 
The following is a summary of Newcastle’s real estate securities at June 30, 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  
   
Outstanding Face
    
Before
    
Other-Than- Temporary
   
After
                
Carrying Value
    
Number of
  
Rating
              
Maturity
    
Principal Subordination
  
Asset Type
  
Amount
    
Impairment
    
Impairment
    
Impairment
    
Gains
    
Losses
    
(A)
    
Securities
  
(B)
  
Coupon
    
Yield
    
(Years) (C)
    
(D)
  
CMBS-Conduit
   $ 255,555     $ 226,609     $ (82,947 )   $ 143,662     $ 53,142     $ (3,342 )   $ 193,462       35   B+     5.52 %     13.90 %     3.9       9.2 %
CMBS- Single Borrower
     92,008       90,959       (12,364 )     78,595       4,297       —       82,892       15  
BB
     5.68 %     7.16 %     3.1       6.3 %
CMBS-Large Loan
     5,114       5,024       —       5,024       90       —       5,114       1  
BBB-
     6.07 %     12.20 %     0.4       5.7 %
REIT Debt
     29,200       28,549       —       28,549       2,510       —       31,059       5  
BB+
     5.89 %     6.85 %     2.1       N/A  
Non-Agency RMBS (E)
     107,869       105,091       (62,860 )     42,231       16,892       (1 )     59,122       34  
CCC
     1.09 %     12.76 %     4.8       24.8 %
ABS-Franchise
     8,464       7,647       (7,647 )     —       199       —       199       1   C     6.69 %     0.00 %     4.4       0.0 %
FNMA/FHLMC (H)
     311,659       335,164       —       335,164       1,821       (1,171 )     335,814       39  
AAA
     2.82 %     1.28 %     3.7       N/A  
CDO (F)
     201,336       81,354       (14,861 )     66,493       2,947       —       69,440       13  
CCC+
     2.89 %     8.01 %     1.3       21.3 %
Total / Average (G)
   $ 1,011,205     $ 880,397     $ (180,679 )   $ 699,718     $ 81,898     $ (4,514 )   $ 777,102       143  
BB+
     3.73 %     6.22 %     3.3          
 
 
(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, represent the most recent credit ratings available as of the reporting date and may not be current.
(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 the retained bond with a face amount of $4.0 million and a carrying value of $2.2 million from Securitization Trust 2006 (Note 5).
(F)
Includes two CDO bonds issued by a third party with a carrying value of $60.0 million, four CDO bonds issued by CDO V (which has been deconsolidated) and held as investments by Newcastle with a carrying value of $5.4 million and seven CDO bonds issued by C-BASS with a carrying value of $4.0 million.
(G)
The total outstanding face amount was $0.4 billion for fixed rate securities and $0.6 billion for floating rate securities.
(H)
Amortized cost basis and carrying value include principal receivable of $6.5 million.
 
On June 27, 2013 Newcastle sold FNMA/FHLMC securities with an aggregate face amount of approximately $22.7 million to New Residential for approximately $1.2 million, net of related financing. New Residential purchased the securities on the same terms as they were purchased by Newcastle.

Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the six months ended June 30, 2013, Newcastle recorded other-than-temporary impairment charges (“OTTI”) of $4.4 million with respect to real estate securities, of which $3.8 million was recorded on certain real estate securities included in the spin-off of New Residential as Newcastle determined it did not have the intent to hold the securities past May 15, 2013. For the other $0.6 million, based on management’s analysis of the 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, 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
   $ 178,771     $ 188,976     $ (1 )   $ 188,975     $ —     $ (1,214 )   $ 187,761       16    
AAA
       3.00 %     1.30 %     3.2  
Twelve or More Months
     12,000       11,785       —       11,785       —       (3,300 )     8,485       2     B-       5.37 %     5.72 %     3.3  
Total
   $ 190,771     $ 200,761     $ (1 )   $ 200,760     $ —     $ (4,514 )   $ 196,246       18    
AA+
       3.15 %     1.56 %     3.2  
 
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, 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
     23       24       (1 )     (1 )
Non credit impaired securities
     196,223       200,736       —       (4,513 )
Total debt securities in an unrealized loss position
   $ 196,246     $ 200,760     $ (1 )   $ (4,514 )
 
(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, 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
     (3,757 )
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
     (89 )
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
     120  
Reduction for securities sold during the period
     4,739  
Reduction for securities transferred to New Residential
     3,756  
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
     —  
Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income
   $ (1 )
 
The table below summarizes the geographic distribution of the collateral securing Newcastle’s CMBS and ABS at June 30, 2013:
 
   
CMBS
    
ABS
  
Geographic Location
  
Outstanding Face Amount
    
Percentage
    
Outstanding Face Amount
    
Percentage
  
Western U.S.
   $ 76,197       21.6 %   $ 35,327       30.4 %
Northeastern U.S.
     66,704       18.9 %     24,374       21.0 %
Southeastern U.S.
     69,233       19.6 %     23,275       20.0 %
Midwestern U.S.
     56,056       15.9 %     15,543       13.3 %
Southwestern U.S.
     66,881       19.0 %     11,598       10.0 %
Other
     12,716       3.6 %     6,216       5.3 %
Foreign
     4,890       1.4 %     —       0.0 %
    $ 352,677       100.0 %   $ 116,333       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.