Drive Shack Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

DEBT OBLIGATIONS

DEBT OBLIGATIONS

6 Months Ended

Jun. 30, 2013

8.	DEBT OBLIGATIONS

The following table presents certain information regarding Newcastle’s debt obligations and related hedges at June 30, 2013:

																	Collateral
							Unhedged								Face												Aggregate
							Weighted			Weighted			Weighted		Amount		Outstanding						Weighted		Floating		Notional
		Outstanding				Final	Average			Average			Average		of Floating		Face		Amortized				Average		Rate		Amount of
	Month	Face		Carrying		Stated	Funding			Funding			Maturity		Rate		Amount		Cost		Carrying		Maturity		Face		Current
Debt Obligation/Collateral	Issued	Amount		Value		Maturity	Cost (A)			Cost (B)			(Years)		Debt		(C)		Basis (C)		Value (C)		(Years)		Amount (C)		Hedges (D)

CDO Bonds Payable
CDO VI (E)	Apr 2005		91,797		91,797	Apr 2040		0.86	%		5.35	%		4.4		88,612		173,682		90,276		121,198		2.7		45,282		88,612
CDO VIII	Nov 2006		412,649		411,951	Nov 2052		0.83	%		2.07	%		2.0		405,049		615,697		441,282		472,096		2.2		329,038		105,749
CDO IX	May 2007		339,210		340,736	May 2052		0.58	%		0.58	%		1.7		339,210		586,272		455,114		464,062		2.4		298,092		—
			843,656		844,484						1.83	%		2.1		832,871		1,375,651		986,672		1,057,356		2.3		672,412		194,361
Other Bonds and Notes Payable
MH Loans Portfolio I (F)	Apr 2010		61,682		58,099	Jul 2035		6.39	%		6.39	%		4.1		—		110,589		94,909		94,909		6.3		746		—
MH Loans Portfolio II	May 2011		106,124		105,619	Dec 2033		4.53	%		4.53	%		3.8		—		140,828		138,895		138,895		5.5		23,186		—
			167,806		163,718						5.19	%		3.9		—		251,417		233,804		233,804		5.8		23,932		—
Repurchase Agreements (G)
FNMA/FHLMC securities (H)	Jun 2013		311,276		311,276	Jul 2013		0.39	%		0.39	%		0.1		311,276		311,659		335,165		335,814		3.7		311,659		—
			311,276		311,276						0.39	%		0.1		311,276		311,659		335,165		335,814		3.7		311,659		—
Mortgage Notes Payable
BPM Senior Living Facilities	Jul 2012		88,400		88,400	Aug 2019		3.44	%		3.44	%		5.7		23,400		N/A		132,547		132,547		N/A		—		23,400
Utah Senior Living Facilities	Nov 2012		16,000		16,000	Oct 2017	LIBOR+3.75		% (I)		4.75	%		4.3		16,000		N/A		21,387		21,387		N/A		—		—
Courtyards Senior living facilities	Dec 2012		16,125		16,125	Oct 2017	LIBOR+3.75		% (I)		4.75	%		4.3		16,125		N/A		20,607		20,607		N/A		—		—
			120,525		120,525						3.79	%		5.3		55,525		N/A		174,541		174,541		N/A		—		23,400
Corporate
Junior subordinated notes payable	Mar 2006		51,004		51,240	Apr 2035		7.574	% (J)		7.40	%		21.8		—		—		—		—		—		—		—
			51,004		51,240						7.40	%		21.8		—		—		—		—		—		—		—
Subtotal debt obligations			1,494,267		1,491,243						2.25	%		2.8	$	1,199,672	$	1,938,727	$	1,730,182	$	1,801,515		3.0	$	1,008,003	$	217,761
Financing on subprime mortgage loans subject to call option (K)			406,217		406,217
Total debt obligations		$	1,900,484	$	1,897,460

(A)	Weighted average, including floating and fixed rate classes and including the amortization of deferred financing costs.
(B)	Including the effect of applicable hedges.
(C)	Excluding (i) restricted cash held in CDOs to be used for principal and interest payments of CDO debt, and (ii) operating cash in senior living entities.
(D)	Including a $23.4 million notional amount of interest rate cap agreement for the mortgage notes payable and an $88.6 million notional amount of interest rate swap agreement in CDO VI, which was an economic hedge not designated as a hedge for accounting purposes.
(E)	This CDO was not in compliance with its applicable over collateralization tests as of June 30, 2013. Newcastle is not receiving cash flows from this CDO (other than senior management fees and cash flows on senior classes of bonds that were repurchased), since net interest is being used to repay debt, and expects this CDO to remain out of compliance for the foreseeable future.
(F)	Excluding $20.5 million face amount of other bonds payable relating to MH loans Portfolio I sold to certain Newcastle CDOs, which were eliminated in consolidation.
(G)	These repurchase agreements had $0.01 million of associated accrued interest payable at June 30, 2013. $311.3 million face amount of these repurchase agreements were renewed subsequent to June 30, 2013.
(H)	The counterparties on these repurchase agreements are Bank of America ($264.9 million), Citi ($17.9 million), and Nomura ($28.5 million). Interest rates on these repurchase agreements are fixed, but will be reset on a short-term basis.
(I)	These financings have a LIBOR floor of 1%.
(J)	LIBOR + 2.25% after April 2016.
(K)	Issued in April 2006 and July 2007. See Note 5 regarding the securitizations of Subprime Portfolios I and II.

Each CDO financing is subject to tests that measure the amount of over collateralization and excess interest in the transaction. Failure to satisfy these tests would cause the principal and/or interest cashflow that would otherwise be distributed to more junior classes of securities (including those held by Newcastle) to be redirected to pay down the most senior class of securities outstanding until the tests are satisfied. As a result, Newcastle’s cash flow and liquidity are negatively impacted upon such a failure. As of June 30, 2013, CDO VI was not in compliance with its over collateralization tests.

In the first six months of 2013, Newcastle repurchased $10.9 million face amount of CDO bonds payable for $9.7 million. As a result, Newcastle extinguished $10.9 million face amount of CDO bonds payable and recorded a gain on extinguishment of debt of $1.2 million.

Newcastle’s non-CDO financings contain various customary loan covenants. Newcastle was in compliance with all of the covenants in its non-CDO financings as of June 30, 2013.

In June 2013, Newcastle completed the sale of 100% of the assets in CDO IV. Newcastle sold $153.4 million face amount of collateral at an average price of 95% of par, or $145.2 million. Subsequently, Newcastle paid off $71.9 million of outstanding third party debt and terminated the CDO. This transaction resulted in approximately $73.1 million of proceeds to Newcastle of which approximately $5.3 million was received in Newcastle CDO VIII. Newcastle recovered par on $59.5 million of CDO debt which had been repurchased in the past at an average price of 52% of par and $8.0 million of proceeds on its subordinated interests. This transaction has also decreased Newcastle’s comprehensive income by $0.6 million and resulted in a net gain on sale of assets of $4.2 million and a $0.8 million gain on hedge termination.

In June 2013, Newcastle completed the purchase of $116.8 million aggregate face amount of securities that are collateralized by certain Newcastle CDO VIII Class I notes for an aggregate purchase of approximately $103.1 million, or an average price of 88.3% of par. Simultaneously, Newcastle financed the purchase with $60.0 million received pursuant to a master repurchase agreement with the seller of the securities. The terms of the repurchase agreement included a rate of one-month LIBOR plus 150 bps and a 30-day maturity. The repurchase agreement includes various customary default events, including a default if Newcastle’s market capitalization declines by 50% from the market capitalization observed at the last trading day of the previous quarter. An event of default under the master repurchase agreement, if one occurs, would require Newcastle to immediately pay off the outstanding debt or the lender would have the right to liquidate the collateral. The purchase of the securities and the repurchase agreement are treated as a linked transaction and accordingly recorded on a net basis as a non-hedge derivative instrument, with changes in market value recorded on the statement of income.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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