Annual report pursuant to Section 13 and 15(d)

REAL ESTATE SECURITIES

v2.4.1.9
REAL ESTATE SECURITIES
 12 Months Ended
Dec. 31, 2014
Investments, Debt and Equity Securities [Abstract]  
REAL ESTATE SECURITIES
5. REAL ESTATE SECURITIES
The following is a summary of Newcastle’s real estate securities at December 31, 2014 and 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
Asset Type
 
Outstanding
Face Amount
 
Before
Impairment
 
Other-Than-
Temporary-
Impairment
 
After
Impairment
 
Gains
 
Losses
 
Carrying Value
(A)
 
Number of
Securities
 
Rating
(B)
 
Coupon
 
Yield
 
Life
(Years)
(C)
 
Principal
Subordination
(D)
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CMBS
 
$
214,026

 
$
218,900

 
$
(75,574
)
 
$
143,326

 
$
35,441

 
$
(4
)
 
$
178,763

 
32

 
B
 
5.86
%
 
11.00
%
 
2.6

 
10.4
%
Non-Agency RMBS
 
67,475

 
79,808

 
(54,589
)
 
25,219

 
19,816

 
—

 
45,035

 
28

 
CCC
 
1.21
%
 
9.66
%
 
7.7

 
21.8
%
ABS-Franchise
 
8,464

 
7,647

 
(7,647
)
 
—

 
—

 
—

 
—

 
1

 
C
 
6.69
%
 
0.00
%
 
—

 
0.0
%
CDO (E)
 
14,413

 
—

 
—

 
—

 
7,956

 
—

 
7,956

 
2

 
CCC-
 
1.46
%
 
0.00
%
 
11.5

 
13.7
%
Debt Security Total/Average (F)
 
$
304,378

 
$
306,355

 
$
(137,810
)
 
$
168,545

 
$
63,213

 
$
(4
)
 
$
231,754

 
63

 
B-
 
4.64
%
 
10.80
%
 
4.1

 
 
Equity Securities
 
 
 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
 
 
 
 
 
 
 
 
 
Total Securities, Available-for-Sale
 
 
 
$
306,355

 
$
(137,810
)
 
$
168,545

 
$
63,213

 
$
(4
)
 
$
231,754

 
64

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA/FHLMC
 
390,771

 
403,216

 
—

 
403,216

 
4,473

 
—

 
407,689

 
9

 
AAA
 
3.5
%
 
2.94
%
 
5.6

 
N/A

Total Securities, Pledged as Collateral
 
$
390,771

 
$
403,216

 
$
—

 
$
403,216

 
$
4,473

 
$
—

 
$
407,689

 
9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CMBS
 
$
333,121

 
$
309,341

 
$
(81,463
)
 
$
227,878

 
$
56,881

 
$
(290
)
 
$
284,469

 
50

 
BB-
 
5.54
%
 
13.50
%
 
2.6

 
9.6
%
REIT Debt
 
29,200

 
28,667

 
—

 
28,667

 
2,519

 
—

 
31,186

 
5

 
BB+
 
5.89
%
 
6.86
%
 
1.8

 
N/A

Non-Agency RMBS
 
96,762

 
103,535

 
(62,860
)
 
40,675

 
16,907

 
(1
)
 
57,581

 
34

 
CCC+
 
1.07
%
 
12.20
%
 
4.4

 
25.9
%
ABS-Franchise
 
8,464

 
7,647

 
(7,647
)
 
—

 
—

 
—

 
—

 
1

 
C
 
6.69
%
 
0.00
%
 
—

 
0.0
%
CDO
 
188,364

 
71,857

 
(14,861
)
 
56,996

 
2,761

 
—

 
59,757

 
11

 
CCC-
 
3.21
%
 
7.56
%
 
1.2

 
19.1
%
Total/Average Securities, Available-for-Sale (F)
 
$
655,911

 
$
521,047

 
$
(166,831
)
 
$
354,216

 
$
79,068

 
$
(291
)
 
$
432,993

 
101

 
B
 
4.24
%
 
11.86
%
 
2.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA/FHLMC (G)
 
514,994

 
548,456

 
(817
)
 
547,639

 
3,631

 
—

 
551,270

 
64

 
AAA
 
2.90
%
 
1.25
%
 
3.6

 
N/A
Total Securities, Pledged as Collateral
 
$
514,994

 
$
548,456

 
$
(817
)
 
$
547,639

 
$
3,631

 
$
—

 
$
551,270

 
64

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(A)
See Note 10 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 resent credit ratings available as of the reporting date and may not be current.
(C)
The weighted average life 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)
Represents non-consolidated CDO securities, excluding eight securities with zero value which had an aggregate face amount of $113.3 million.
(F)
As of December 31, 2014 and 2013, the total outstanding face amount of fixed rate securities was $0.6 billion and $0.4 billion, respectively, and of floating rate securities were $0.1 billion and $0.8 billion, respectively.
(G)
Amortized cost basis and carrying value include no principal receivable as of December 31, 2014 and principal receivable of $4.8 million as of December 31, 2013.

Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the years ended December 31, 2014, 2013 and 2012, Newcastle recorded other-than-temporary impairment charges (“OTTI”) of $0.0 million, $5.2 million and $19.3 million, respectively, 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 (gross of $0.0 million, $0.0 million and $0.4 million of other-than-temporary impairment recognized (reversed) in other comprehensive income in 2014, 2013 and 2012, respectively). 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 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. The following table summarizes Newcastle’s securities in an unrealized loss position as of December 31, 2014.
 
 
 
Amortized Cost Basis
 
Gross Unrealized
 
 
 
 
 
Weighted Average
Securities in
an Unrealized
Loss Position
Outstanding
Face
Amount
 
Before
Impairment
 
Other-than-
Temporary
Impairment
 
After
Impairment
 
Gains
 
Losses
 
Carrying
Value
 
Number
of
Securities
 
Rating
 
Coupon
 
Yield
 
Life
(Years)
Less Than    
   Twelve        
      Months
$
5,903

 
$
9,394

 
$
(4,174
)
 
$
5,220

 
$
—

 
$
(4
)
 
5,216

 
2

 
CCC
 
5.53
%
 
12.23
%
 
3.4

Twelve or     
   More        
      Months
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—
 
—
 
—
 
—

Total
$
5,903

 
$
9,394

 
$
(4,174
)
 
$
5,220

 
$
—

 
$
(4
)
 
5,216

 
2

 
CCC
 
5.53
%
 
12.23
%
 
3.4

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, 2014
 
 
 
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
3,882

 
3,884

 
(4,174
)
 
(3
)
Non-credit impaired securities
1,334

 
1,336

 
—

 
(1
)
Total debt securities in an unrealized loss position
$
5,216

 
$
5,220

 
$
(4,174
)
 
$
(4
)
 
(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:
 
2014
 
2013
Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income
$
(2,873
)
 
$
(4,770
)
 
 
 
 
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
(4,174
)
 
(89
)
 
 
 
 
Additions for credit losses on securities for which an OTTI was previously recognized without any portion of OTTI recognized in other comprehensive income
—

 
(2,874
)
 
 
 
 
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
2,873

 
4,739

 
 
 
 
Reduction for increases in cash flows expected to be collected that are recognized over the remaining life of the security
—

 
1

 
 
 
 
Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income
$
(4,174
)
 
$
(2,873
)
The table below summarizes the geographic distribution of the collateral securing the CMBS and ABS at December 31, 2014:
 
 
CMBS
 
ABS
Geographic Location
 
Outstanding Face Amount
 
Percentage
 
Outstanding Face Amount
 
Percentage
Northeastern U.S.
 
$
57,463

 
26.8
%
 
$
19,791

 
26.1
%
Southeastern U.S.
 
47,764

 
22.3
%
 
16,448

 
21.7
%
Midwestern U.S.
 
35,604

 
16.6
%
 
10,017

 
13.2
%
Western U.S.
 
30,827

 
14.4
%
 
21,672

 
28.5
%
Southwestern U.S.
 
27,530

 
12.9
%
 
8,011

 
10.5
%
Other
 
10,825

 
5.1
%
 
—

 
0.0
%
Foreign
 
4,013

 
1.9
%
 
—

 
0.0
%
 
 
$
214,026

 
100.0
%
 
$
75,939

 
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.

In January 2014, Newcastle sold $503.0 million face amount of the remaining agency FNMA/FHLMC ARM securities at an average price of 105.82% for total proceeds of $532.2 million and repaid $516.1 million of associated repurchase agreements. Newcastle recognized a net gain of approximately $1.9 million on the sale of these securities.

In May 2014, Newcastle sold $68.3 million face amount of CMBS securities at an average price of 105.2% for total proceeds of $71.9 million and repaid $71.9 million of associated CDO bonds payable and other term loan financings.  Newcastle recognized a net gain of approximately $15.0 million on the sale of these securities.
In May 2014, Newcastle sold $54.2 million outstanding face amount of the Sorin CDO security at an average price of 93.0% for total proceeds of $50.4 million and repaid $50.4 million of associated CDO bonds payable and other term loan financings. Newcastle recognized a net gain of approximately $0.7 million on the sale of this security.
In November 2014, Newcastle purchased 9 agency FNMA/FHLMC fixed-rate securities with $391.9 million face amount for total proceeds of $404.6 million. Newcastle financed this transaction with repurchase financing of $383.4 million. Newcastle also entered into TBAs to economically hedge the market risk of the whole pools, but did not apply hedge accounting.
During the fourth quarter of 2014, Newcastle sold $53.9 million outstanding face amount of twelve securities at an average price of 99.1% of total proceeds of $53.4 million. Newcastle recognized a net gain of approximately $5.7 million on the sale of these securities.
Securities Pledged as Collateral
These government agency securities were sold under agreements to repurchase which will be treated as collateralized financing transactions, unless they meet sales treatment. Although being pledged as collateral, securities financed through a repurchase agreement remains on Newcastle's consolidated balance sheet as an asset and cash received from the purchaser is recorded on Newcastle's consolidated balance sheet as a liability.