Quarterly report pursuant to Section 13 or 15(d)

SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES

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SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES
 9 Months Ended
Sep. 30, 2013
Segment Reporting And Variable Interest Entities  
SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES

4.   SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES

 

As previously stated in Note 1, Newcastle conducts its business through the following segments: (i) investments in senior housing assets financed with non-recourse debt (“non-recourse senior housing”), (ii) investments financed with non-recourse collateralized debt obligations (“non-recourse CDOs”), (iii) unlevered investments in de-consolidated Newcastle CDO debt (“unlevered CDOs”), (iv) investments financed with other non-recourse debt (“non-recourse other”), (v) investments and debt repurchases financed with recourse debt (“recourse”), (vi) other unlevered investments (“unlevered other”), (vii) equity method investment in Local Media Group, (viii) corporate and (ix) prior to the spin-off, investments in excess mortgage servicing rights and consumer loans (“Excess MSRs and consumer loans”). With respect to the non-recourse CDOs and non-recourse other segments, subject to the passing of certain periodic coverage tests, Newcastle is generally entitled to receive the net cash flows from these structures on a periodic basis.

 

The corporate segment consists primarily of interest income on short-term investments, general and administrative expenses, interest expense on the junior subordinated notes payable and management fees pursuant to the management agreements.

 

Summary financial data on Newcastle's segments is given below, together with reconciliation to the same data for Newcastle as a whole:

  

    Non-Recourse Senior Housing     Non-Recourse CDOs (A)     Unlevered CDOs (B)     Non-Recourse Other (A) (C)     Recourse (D)     Unlevered Other (E)     Equity Method Investment
 in Local
Media Group		     Corporate     Excess
 MSRs and
Consumer Loans		     Inter-segment Elimination (F)     Total  
Nine Months Ended September 30, 2013                                                                  
Interest income   $ 2     $ 95,254     $ 383     $ 49,027     $ 14,771     $ 15,519     $ —     $ 141     $ —     $ (3,455 )   $ 171,642  
Interest expense     5,358       18,876       —       37,710       3,910       —       —       2,864       —       (3,455 )     65,263  
Net interest income (expense)     (5,356 )     76,378       383       11,317       10,861       15,519       —       (2,723 )     —       —       106,379  
Impairment (reversal)     —       (389 )     —       (38 )     3,738       (10,335 )     —       —       —       —       (7,024 )
Other revenues     50,880       —       —       1,545       —       —       —       —       —       —       52,425  
Other income (loss)     46       16,496       205       —       25       3,798       1,045       —       —       —       21,615  
Property operating expenses     31,827       —       —       749       —       —       —       —       —       —       32,576  
Depreciation and amortization     15,715       —       —       164       —       —       —       2       —       —       15,881  
Other operating expenses     12,619       563       —       2,078       59       290       —       35,740       —       —       51,349  
Income (loss) from continuing operations     (14,591 )     92,700       588       9,909       7,089       29,362       1,045       (38,465 )     —       —       87,637  
Income (loss) from discontinued operations     —       —       —       —       —       (35 )     —       —       33,378       —       33,343  
Net income (loss)     (14,591 )     92,700       588       9,909       7,089       29,327       1,045       (38,465 )     33,378       —       120,980  
Preferred dividends     —       —       —       —       —       —       —       (4,185 )     —       —       (4,185 )
Income (loss) applicable to common stockholders   $ (14,591 )   $ 92,700     $ 588     $ 9,909     $ 7,089     $ 29,327     $ 1,045     $ (42,650 )   $ 33,378     $ —     $ 116,795  
                                                                                         
Three Months Ended September 30, 2013                                                                                        
Interest income   $ 2     $ 27,027     $ 57     $ 16,254     $ 1,206     $ 4,425     $ —     $ 39     $ —     $ (1,524 )   $ 47,486  
Interest expense     2,880       4,926       —       12,853       462       —       —       958       —       (1,524 )     20,555  
Net interest income (expense)     (2,878 )     22,101       57       3,401       744       4,425       —       (919 )     —       —       26,931  
Impairment (reversal)     —       (12,375 )     —       535       —       (1,158 )     —       —       —       —       (12,998 )
Other revenues     24,370       —       —       542       —       —       —       —       —       —       24,912  
Other income (loss)     (74 )     4,821       60       —       —       1,903       1,045       —       —       —       7,755  
Property operating expenses     15,542       —       —       262       —       —       —       —       —       —       15,804  
Depreciation and amortization     7,676       —       —       54       —       —       —       2       —       —       7,732  
Other operating expenses     7,545       179       —       668       12       52       —       8,974       —       —       17,430  
Income (loss) from continuing operations     (9,345 )     39,118       117       2,424       732       7,434       1,045       (9,895 )     —       —       31,630  
Income (loss) from discontinued operations     —       —       —       —       —       (6 )     —       —       (2,380 )     —       (2,386 )
Net income (loss)     (9,345 )     39,118       117       2,424       732       7,428       1,045       (9,895 )     (2,380 )     —       29,244  
Preferred dividends     —       —       —       —       —       —       —       (1,395 )     —       —     $ (1,395 )
Income (loss) applicable to common stockholders   $ (9,345 )   $ 39,118     $ 117     $ 2,424     $ 732     $ 7,428     $ 1,045     $ (11,290 )   $ (2,380 )   $ —     $ 27,849  
September 30, 2013                                                                                        
                                                                                         
Investments   $ 443,780     $ 1,044,704     $ 5,058     $ 688,274     $ 387,608     $ 255,194     $ 57,384     $ —     $ —     $ (59,361 )   $ 2,822,641  
Cash and restricted cash     35,244       1,827       —       —       —       —       —       56,890       —       —       93,961  
Derivative assets     —       —       —       —       43,172       —       —       —       —       —       43,172  
Other assets     15,226       3,420       5       77       1,306       1,893       —       5,117       —       (41 )     27,003  
Total assets     494,250       1,049,951       5,063       688,351       432,086       257,087       57,384       62,007       —       (59,402 )     2,986,777  
   Debt     (335,238 )     (718,473 )     —       (619,376 )     (376,886 )     —       —       (51,239 )     —       59,361       (2,041,851 )
Derivative liabilities     —       (17,115 )     —       —       —       —       —       —       —       —       (17,115 )
Other liabilities     (15,582 )     (5,700 )     —       (1,413 )     (64 )     (768 )     (185 )     (36,785 )     (2,380 )     41       (62,836 )
Total liabilities     (350,820 )     (741,288 )     —       (620,789 )     (376,950 )     (768 )     (185 )     (88,024 )     (2,380 )     59,402       (2,121,802 )
Preferred stock     —       —       —       —       —       —       —       (61,583 )     —       —       (61,583 )
GAAP book value   $ 143,430     $ 308,663     $ 5,063     $ 67,562     $ 55,136     $ 256,319     $ 57,199     $ (87,600 )   $ (2,380 )   $ —     $ 803,392  
                                                                                         
Additions to investments in real estate   $ 277,614     $ —     $ —     $ 129     $ —     $ —     $ —     $ —     $ —     $ —     $ 277,743  

 

    Non-Recourse
 Senior Housing		     Non-Recourse CDOs (A)     Unlevered CDOs (B)     Non-Recourse Other (A)     Recourse     Unlevered
Other		     Corporate     Excess MSRs
and Consumer
 Loans		     Inter-segment Elimination (F)     Total  
                                                             
Nine Months Ended September 30, 2012                                                            
Interest income   $ —     $ 161,490     $ 339     $ 54,753     $ 4,981     $ 7,234     $ 135     $ —     $ (5,167 )   $ 223,765  
Interest expense     692       49,334       —       38,935       1,387       —       2,857       —       (5,167 )     88,038  
Net interest income (expense)     (692 )     112,156       339       15,818       3,594       7,234       (2,722 )     —       —       135,727  
Impairment (reversal)     —       3,173       —       3,202       —       58       —       —       —       6,433  
Other revenues     7,548       —       —       1,547       —       —       —       —       —       9,095  
Other income (loss)     (21 )     256,358       259       —       —       1,066       —       —       —       257,662  
Property operating expenses     4,742       —       —       758       —       —       —       —       —       5,500  
Depreciation and amortization     2,370       —       —       19       —       —       —       —       —       2,389  
Other operating expenses     4,848       713       1       2,523       —       35       23,618       —       —       31,738  
Income (loss) from continuing operations     (5,125 )     364,628       597       10,863       3,594       8,207       (26,340 )     —       —       356,424  
Income (loss) from discontinued operations     —       —       —       —       —       (48 )     —       20,755       —       20,707  
Net income (loss)     (5,125 )     364,628       597       10,863       3,594       8,159       (26,340 )     20,755       —       377,131  
Preferred dividends     —       —       —       —       —       —       (4,185 )     —       —       (4,185 )
Income (loss) applicable to common stockholders   $ (5,125 )   $ 364,628     $ 597     $ 10,863     $ 3,594     $ 8,159     $ (30,525 )   $ 20,755       —     $ 372,946  
                                                                                 
Three Months Ended September 30, 2012                                                                                
Interest income   $ —       51,050     $ 109       18,290     $ 3,213     $ 2,383     $ 32     $ —       (2,130 )     72,947  
Interest expense     692       14,694       —       13,375       826       —       954       —       (2,130 )     28,411  
      Net interest income (expense)     (692 )     36,356       109       4,915       2,387       2,383       (922 )     —       —       44,536  
Impairment (reversal)     —       3,962       —       499       —       553       —       —       —       5,014  
Other revenues     7,548       —       —       523       —               —       —       —       8,071  
Other income (loss)     (21 )     231,825       83       —       —       2,121       —       —       —       234,008  
Property operating expenses     4,742       —       —       301       —               —       —       —       5,043  
Depreciation and amortization     2,370       —       —       15       —               —       —       —       2,385  
Other operating expenses     1,650       230       —       823       —       10       9,213       —       —       11,926  
Income (loss) from continuing operations     (1,927 )     263,989       192       3,800       2,387       3,941       (10,135 )     —       —       262,247  
Income (loss) from discontinued operations     —       —       —       —       —       (17 )     —       10,991       —       10,974  
Net income (loss)     (1,927 )     263,989       192       3,800       2,387       3,924       (10,135 )     10,991       —       273,221  
Preferred dividends     —       —       —       —       —       —       (1,395 )     —       —       (1,395 )
Income (loss) applicable to common stockholders   $ (1,927 )   $ 263,989     $ 192     $ 3,800     $ 2,387     $ 3,924     $ (11,530 )   $ 10,991     $ —     $ 271,826  

 

See notes on next page.

(A) Assets held within CDOs and other non-recourse structures are not available to satisfy obligations outside of such financings, except to the extent Newcastle receives net cash flow distributions from such structures. Furthermore, creditors or beneficial interest holders of these structures have no recourse to the general credit of Newcastle. Therefore, Newcastle’s exposure to the economic losses from such structures is limited to its invested equity in them and economically their book value cannot be less than zero. Therefore, impairment recorded in excess of Newcastle’s investment, which results in negative GAAP book value for a given non-recourse financing structure, cannot economically be incurred and will eventually be reversed through amortization, sales at gains, or as gains at the deconsolidation or termination of such non-recourse financing structure.

(B) Represents unlevered investments in CDO securities issued by Newcastle. This CDO has been de-consolidated as Newcastle does not have the power to direct the relevant activities of the CDO.

(C) The following table summarizes the investments and debt in the other non-recourse segment:

 

    September 30, 2013  
    Investments     Debt  
    Outstanding     Carrying     Outstanding     Carrying  
    Face Amount     Value     Face Amount*     Value*  
Manufactured housing loan portfolio I   $ 106,304     $ 91,488     $ 78,179     $ 70,185  
Manufactured housing loan portfolio II     134,641       132,728       99,979       99,568  
Subprime mortgage loans subject to call option     406,217       406,217       406,217       406,217  
Real estate securities     58,525       51,209       41,105       37,406  
Other commercial real estate      N/A       6,632       6,000       6,000  
    $ 705,687     $ 688,274     $ 631,480     $ 619,376  

  

* An aggregate face amount of $67.6 million (carrying value of $59.4 million) of debt represents financing provided by the CDO segment (and included as investments in the CDO segment), which is eliminated upon consolidation.

  (D) The $376.9 million of recourse debt is composed of (i) a $361.8 million repurchase agreement secured by $387.6 million carrying value of FNMA/FHLMC securities, and (ii) a $15.1 million repurchase agreement secured by $25.0 million face amount of senior notes issued by Newcastle CDO IX, which was repurchased by Newcastle and eliminated in consolidation.
  (E) The following table summarizes the investments in the unlevered other segment:

 

    September 30, 2013  
    Outstanding
Face Amount		     Carrying
Value		     Number of
Investments		  
Real estate securities   $ 130,775     $ 3,529       20  
Real estate related and other loans     544,714       210,669       2  
Residential mortgage loans     46,577       34,917       288  
Other investments      N/A       6,079       1  
    $ 722,066     $ 255,194       311  

 

  (F) Represents the elimination of investments and financings and their related income and expenses between the CDO segment and other non-recourse segment as the corresponding inter-segment investments and financings are presented on a gross basis within each of these segments.

 

Variable Interest Entities (“VIEs”)

 

The VIEs in which Newcastle has a significant interest include (i) Newcastle’s CDOs, in which Newcastle has been determined to be the primary beneficiary and therefore consolidates them (with the exception of CDO V and CDO VIII Repack), since it has the power to direct the activities that most significantly impact the CDOs’ economic performance and would absorb a significant portion of their expected losses and receive a significant portion of their expected residual returns, and (ii) the manufactured housing loan financing structures, which are similar to the CDOs in analysis. Newcastle’s CDOs and manufactured housing loan financings are held in special purpose entities whose debt is treated as non-recourse secured borrowings of Newcastle.

 

Newcastle’s subprime securitizations and the Local Media Group investment are also considered VIEs, but Newcastle does not control the decisions that most significantly impact their economic performance and, for the subprime securitizations, no longer receives a significant portion of their returns, and therefore does not consolidate them.

 

In addition, Newcastle’s investments in RMBS, commercial mortgage backed securities (“CMBS”), CDO securities and real estate related and other loans may be deemed to be variable interests in VIEs, depending on their structure. Newcastle monitors these investments and analyzes the potential need to consolidate the related securitization entities pursuant to the VIE consolidation requirements. These analyses require considerable judgment in determining whether an entity is a VIE and determining the primary beneficiary of a VIE since they involve subjective determinations of significance, with respect to both power and economics. The result could be the consolidation of an entity that otherwise would not have been consolidated or the de-consolidation of an entity that otherwise would have been consolidated.

As of September 30, 2013, Newcastle has not consolidated these potential VIEs. This determination is based, in part, on the assessment that Newcastle does not have the power to direct the activities that most significantly impact the economic performance of these entities, such as if Newcastle owned a majority of the currently controlling class. In addition, Newcastle is not obligated to provide, and has not provided, any financial support to these entities.

 

Newcastle had variable interests in the following unconsolidated VIE at September 30, 2013, in addition to the subprime securitizations which are described in Note 6 and the Local Media Group investment which is described in Note 2:

 

Entity   Gross Assets (A)     Debt (A) (B)     Carrying Value of Newcastle's Investment (C)  
Newcastle CDO V   $ 208,193     $ 233,972     $ 5,058  
                         
CDO VIII Repack (D)   $ 207,624     $ 207,624     $ 103,140  

  

(A) Face amount.

(B) Newcastle CDO V includes $42.9 million face amount of debt owned by Newcastle with a carrying value of $5.1 million at September 30, 2013. CDO VIII Repack includes $116.8 million face amount of debt owned by Newcastle with a carrying value of $103.1 million at September 30, 2013.

(C) This amount represents Newcastle’s maximum exposure to loss from this entity.

(D) See Notes 9 and 10 for information about the securitization that is collateralized by certain Newcastle CDO VIII Class I notes.