Current report filing

FAIR VALUE OF FINANCIAL INSTRUMENTS

v2.4.0.8
FAIR VALUE OF FINANCIAL INSTRUMENTS
12 Months Ended
Dec. 31, 2013
Fair Value Of Financial Instruments  
FAIR VALUE OF FINANCIAL INSTRUMENTS
13.     FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value may be based upon broker quotations, counterparty quotations or pricing services quotations, which provide valuation estimates based upon reasonable market order indications or a good faith estimate thereof and are subject to significant variability based on market conditions, such as interest rates, credit spreads and market liquidity. A significant portion of Newcastle’s loans, securities and debt obligations are currently not traded in active markets and therefore have little or no price transparency. As a result, Newcastle has estimated the fair value of these illiquid instruments based on internal pricing models rather than quotations. The determination of estimated cash flows used in pricing models is inherently subjective and imprecise. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant change to estimated fair values. It should be noted that minor changes in assumptions or estimation methodologies can have a material effect on these derived or estimated fair values, and that the fair values reflected below are indicative of the interest rate and credit spread environments as of December 31, 2013 and do not take into consideration the effects of subsequent changes in market or other factors.

Newcastle has various processes and controls in place to ensure that fair value is reasonably estimated. With respect to the broker and pricing service quotations, to ensure these quotes represent a reasonable estimate of fair value, Newcastle’s quarterly procedures include a comparison to the outputs generated from its internal pricing models and transactions Newcastle has completed with respect to these or similar securities, as well as on its knowledge and experience of these markets. With respect to fair value estimates generated based on Newcastle’s internal pricing models, Newcastle’s management validates the inputs and outputs of the internal pricing models by comparing them to available independent third party market parameters and models for reasonableness. Newcastle believes its valuation methods and the assumptions used are appropriate and consistent with other market participants.

  

 

Fair Value Summary Table

The carrying values and estimated fair values of Newcastle’s assets and liabilities at December 31, 2013 and 2012 were as follows:

                                                   
    December 31, 2013   December 31, 2012  
    Principal
Balance or
Notional
Amount
  Carrying
Value
  Estimated
Fair Value
  Fair Value Method (A)   Weighted
Average
Yield/Funding
Cost
  Weighted
Average
Maturity
(Years)
  Carrying
Value
  Estimated
Fair Value
 
Assets                                                  
Financial instruments:                                                  
Real estate securities, available-for-sale*   $ 1,170,905   $ 984,263   $ 984,263     Broker quotations, counterparty quotations, pricing services, pricing models     5.44 %   2.9   $ 1,691,575   $ 1,691,575  
Real estate related and other loans, held-for-sale, net     567,829     437,530     456,535     Broker quotations, counterparty quotations, pricing services, pricing models     13.92 %   1.1     843,132     853,102  
Residential mortgage loans, held-for-investment, net     277,624     255,450     252,039     Pricing models     8.50 %   5.4     292,461     297,030  
Residential mortgage loans, held-for-sale, net     3,129     2,185     2,185     Pricing models     19.34 %   4.4     2,471     2,471  
Subprime mortgage loans subject to call option (B)     406,217     406,217     406,217     (B)     9.09 %   (B )   405,814     405,814  
Restricted cash*           5,889     5,889                       2,064     2,064  
Cash and cash equivalents*           74,133     74,133                       231,898     231,898  
Non-hedge derivative assets(D)(E)* 116,806     43,662     43,662     Counterparty quotations     N/A     (D )   165     165  
Investments in senior housing real estate, net           1,362,900                             162,801        
Investments in other real estate, net           266,170                             6,672        
Intangibles           199,725                             19,086        
Other investments           25,468                             24,907        
Receivables and other assets           98,225                             17,197        
Assets of discontinued operations           690,746                             245,069        
          $ 4,852,563                           $ 3,945,312        
Liabilities                                                  
Financial instruments:                                                  
CDO bonds payable (F)   $ 543,516   $ 544,525   $ 395,689     Pricing models     2.26 %   1.9   $ 1,091,354   $ 781,856  
Other bonds and notes payable (F)     243,745     230,279     235,464     Broker quotations, pricing models     3.50 %   3.1     183,390     190,302  
Repurchase agreements     556,347     556,347     556,347     Market comparables     0.52 %   0.1     929,435     929,435  
Mortgage notes payable     1,077,163     1,076,828     1,075,390     Pricing models     4.75 %   6.8     120,525     120,525  
Credit facilities, golf     152,498     152,498     152,498     (G)     5.19 %   4.0              
Financing of subprime mortgage loans subject to call option (B)     406,217     406,217     406,217     (B)     9.09 %   (B )   405,814     405,814  
Junior subordinated notes payable     51,004     51,237     35,479     Pricing models     7.39 %   21.3     51,243     31,545  
Interest rate swaps, treated as hedges (C)(E)*     105,031     6,203     6,203     Counterparty quotations     N/A     (C )   12,175     12,175  
Non-hedge derivatives(D)(E)*     185,871     7,592     7,592     Counterparty quotations     N/A     (D )   19,401     19,401  
Dividends payable, accounts payable, accrued expenses and other liabilities           299,446                             58,435        
Liabilities of discontinued operations           295,267                             480        
          $ 3,626,439                           $ 2,872,252        

*Measured at fair value on a recurring basis.

 

  (A) Methods are listed in order of priority. In the case of real estate securities and real estate related and other loans, broker quotations are obtained if available and practicable, otherwise counterparty quotations or pricing service valuations are obtained or, finally, internal pricing models are used. Internal pricing models are only used for (i) securities and loans that are not traded in an active market, and, therefore, have little or no price transparency, and for which significant unobservable inputs must be used in estimating fair value, or (ii) loans or debt obligations which are private and untraded.
     
  (B) These two items results from an option, not an obligation, to repurchase loans from Newcastle’s subprime mortgage loan securitizations (Note 7), are noneconomic until such option is exercised, and are equal and offsetting.
     
  (C) Represents derivative agreements as follows:
                             
Year of Maturity   Weighted Average
Month of Maturity
  Aggregate Notional
Amount
  Weighted Average Fixed
Pay Rate / Cap Rate
  Aggregate Fair Value
Asset / (Liability)
   
                             
Interest rate swap agreements which receive 1-Month LIBOR:                            
2016     Apr   $ 105,031     5.04% $ (6,203 )  
     
  (D) This represents a linked transaction entered into in June 2013 with $116.8 million face amount of underlying financial securities. This derivative agreement was not designated as a hedge for accounting purposes as of December 31, 2013.
     
  (E) Newcastle’s derivatives fall into two categories. As of December 31, 2013, all derivatives liabilities, which represent three interest rate swaps, were held within Newcastle’s nonrecourse structures. An aggregate notional balance of $290.9 million, is only subject to the credit risks of the respective CDO structures. As they are senior to all the debt obligations of the respective CDOs and the fair value of each of the CDOs’ total investments exceeded the fair value of each of the CDOs’ derivative liabilities, no credit valuation adjustments were recorded. A derivative asset with an aggregate notional balance of $116.8 million, represents linked transactions with $116.8 million face amount of underlying financed securities. Newcastle’s interest rate swap counterparties include Bank of America and Bank of New York Mellon. Newcastle’s derivatives are included in other assets or other liabilities in the consolidated balance sheets, as applicable.
     
  (F) Newcastle notes that the unrealized gain on the liabilities within such structures cannot be fully realized. Assets held within CDOs and other non- recourse structures are generally 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. As a result, the fair value of Newcastle’s net investments in these non-recourse financing structures is equal to the present value of their expected future net cash flows.
     
  (G) These credit facilities were entered into late in the fourth quarter of 2013 and Newcastle believes their terms are market terms as of December 31, 2013.

Refer to Note 15 for a discussion of the fair value of the New Media pension plan assets.

Valuation Hierarchy

The methodologies used for valuing such instruments have been categorized into three broad levels, which form a hierarchy.

Level 1 - Quoted prices in active markets for identical instruments.

Level 2 - Valuations based principally on other observable market parameters, including

Quoted prices in active markets for similar instruments,
Quoted prices in less active or inactive markets for identical or similar instruments,
Other observable inputs (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates), and
Market corroborated inputs (derived principally from or corroborated by observable market data).

Level 3 - Valuations based significantly on unobservable inputs.

Newcastle follows this hierarchy for its financial instruments measured at fair value on a recurring basis. The classifications are based on the lowest level of input that is significant to the fair value measurement.

 

Newcastle has various processes and controls in place to ensure that fair value is reasonably estimated. With respect to the broker and pricing service quotations, to ensure these quotes represent a reasonable estimate of fair value, Newcastle’s quarterly procedures include a comparison to quotations from different sources, outputs generated from its internal pricing models and transactions Newcastle has completed with respect to these or similar securities, as well as on its knowledge and experience of these markets. With respect to fair value estimates generated based on Newcastle’s internal pricing models, Newcastle’s management validates the inputs and outputs of the internal pricing models by comparing them to available independent third party market parameters, where available, and models for reasonableness. Newcastle believes its valuation methods and the assumptions used are appropriate and consistent with other market participants. The board of directors has reviewed Newcastle’s process for determining the valuations of its investments based on information provided by the Manager and has concluded such process is reasonable and appropriate.

Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. For Newcastle’s investments in real estate securities, real estate related and other loans and residential mortgage loans categorized within Level 3 of the fair value hierarchy, the significant unobservable inputs include the discount rates, assumptions relating to prepayments, default rates and loss severities. Significant increases (decreases) in any of the discount rates, default rates or loss severities in isolation would result in a significantly lower (higher) fair value measurement. The impact of changes in prepayment speeds would have differing impacts on fair value, depending on the seniority of the investment. Generally, a change in the default assumption is generally accompanied by directionally similar changes in the assumptions used for the loss severity and the prepayment speed.

The following table summarizes financial assets and liabilities measured at fair value on a recurring basis at December 31, 2013:

                                 
                Fair Value  
    Principal Balance or
Notional Amount
  Carrying Value   Level 2   Level 3   Total  
Assets:                                
Real estate securities, available for sale:                                
CMBS   $ 333,121   $ 284,469   $   $ 284,469   $ 284,469  
REIT debt     29,200     31,186     31,186         31,186  
Non-Agency RMBS     96,762     57,581         57,581     57,581  
ABS - other real estate     8,464                  
FNMA / FHLMC     514,994     551,270     551,270         551,270  
CDO     188,364     59,757         59,757     59,757  
Real estate securities total   $ 1,170,905     984,263     582,456     401,807     984,263  
                                 
Derivative assets:                                
Linked transactions at fair value   $ 116,806   $ 43,662   $   $ 43,662   $ 43,662  
Derivative assets total   $ 116,806   $ 43,662   $   $ 43,662   $ 43,662  
Liabilities:                                
Derivative Liabilities:                                
Interest rate swaps, treated as hedges   $ 105,031   $ 6,203   $ 6,203   $   $ 6,203  
Interest rate swaps, not treated as hedges     185,871     7,592     7,592         7,592  
Derivative liabilities total   $ 290,902   $ 13,795   $ 13,795   $   $ 13,795  

 

Newcastle’s investments in instruments measured at fair value on a recurring basis using Level 3 inputs changed as follows:

                                             
    Level 3 Assets  
    CMBS   ABS   Equity/Other   Linked        
    Conduit   Other   Subprime   Other   Securities   Transactions   Total  
                         

 

                 
Balance at December 31, 2011   $ 956,905   $ 171,913   $ 128,622   $ 38,107   $ 55,986   $   $ 1,351,533  
CDO X Deconsolidation (A)     (767,660 )   (40,172 )   (86,704 )   (26,174 )           (920,710 )
Total gains (losses) (B)                                            
Included in net income (loss) (C)     (4,947 )   (396 )   828     (4,092 )           (8,607 )
Included in other comprehensive income (loss)     22,537     12,515     28,573     1,739     15,125         80,489  
Amortization included in interest income     33,538     1,777     17,691     288     5,657         58,951  
Purchases, sales and settlements                                            
Purchases     116,087         315,475                 431,562  
Proceeds from sales     (43,259 )       (3,295 )   (3,743 )           (50,297 )
Proceeds from repayments     (58,432 )   (24,015 )   (45,215 )   (4,650 )   (5,743 )       (138,055 )
Balance at December 31, 2012   $ 254,769   $ 121,622   $ 355,975   $ 1,475   $ 71,025   $   $ 804,866  
Spin-off of New Residential (A)             (560,783 )               (560,783 )
Total gains (losses) (B)                                            
Included in net income (loss) (C)     348     (331 )   2,372     (82 )   1,638     1,168     5,113  
Included in other comprehensive income (loss)     14,999     2,168     24,755     73     (726 )       41,269  
Amortization included in interest income     11,880     969     17,981     331     5,265         36,426  
Purchases, sales and settlements                                            
Purchases             267,160             43,172     310,332  
Proceeds from sales     (73,576 )   (31,989 )   (11,181 )   (1,359 )   (8,156 )       (126,261 )
Proceeds from repayments     (9,485 )   (6,905 )   (38,698 )   (438 )   (9,289 )   (678 )   (65,493 )
Balance at December 31, 2013   $ 198,935   $ 85,534   $ 57,581   $   $ 59,757   $ 43,662   $ 445,469  
   
(A) CDO X was deconsolidated on September 12, 2012 and the spin-off of New Residential occurred on May 15, 2013.
(B) None of the gains (losses) recorded in earnings during the periods is attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting dates.
(C) These gains (losses) are recorded in the following line items in the consolidated statements of income:
                 
      Year Ended December 31,  
      2013   2012  
  Gain (loss) on settlement of investments, net   $ 5,367   $ 10,196  
  Other income (loss), net     1,168      
  OTTI     (1,422 )   (18,803 )
  Total   $ 5,113   $ (8,607 )
  Gain (loss) on sale of investments, net, from investments transferred into Level 3 during the period   $   $  

 

 
Securities Valuation
                                       
As of December 31, 2013, Newcastle’s securities valuation methodology and results are further detailed as follows:  
   
                Fair Value  
    Outstanding   Amortized           Internal        
    Face   Cost   Multiple   Single   Pricing        
Asset Type   Amount (A)   Basis (B)   Quotes (C)   Quote (D)   Models (E)   Total  
                                       
CMBS   $ 333,121   $ 227,878   $ 240,358   $ 42,341   $ 1,770   $ 284,469  
REIT debt     29,200     28,667     31,186             31,186  
Non-Agency RMBS     96,762     40,675     57,581             57,581  
ABS - other real estate     8,464                      
FNMA / FHLMC     514,994     547,639     551,270             551,270  
CDO     188,364     56,996         57,755     2,002     59,757  
Total   $ 1,170,905   $ 901,855   $ 880,395   $ 100,096   $ 3,772   $ 984,263  
   
(A) Net of incurred losses.
(B) Net of discounts (or gross premiums) and after OTTI, including impairment taken during the period ended December 31, 2013.
(C) Management generally obtained pricing service quotations or broker quotations from at least two sources, one of which was generally the seller (the party that sold the security). Management selected one of the quotes received as being most representative of fair value and did not use an average of the quotes. Even if Newcastle receives two or more quotes on a particular security that come from non-selling brokers or pricing services, it does not use an average because management believes using an actual quote more closely represents a transactable price for the security than an average level. Furthermore, in some cases there is a wide disparity between the quotes Newcastle receives. Management believes using an average of the quotes in these cases would generally not represent the fair value of the asset. Based on Newcastle’s own fair value analysis using internal models, management selects one of the quotes which is believed to more accurately reflect fair value. Newcastle never adjusts quotes received. These quotations are generally received via email and contain disclaimers which state that they are “indicative” and not “actionable” – meaning that the party giving the quotation is not bound to actually purchase the security at the quoted price.
 
(D) Management was unable to obtain quotations from more than one source on these securities. The one source was generally the seller (the party that sold the security) or a pricing service.
 
(E) Securities whose fair value was estimated based on internal pricing models are further detailed as follows:
                                                   
                      Unrealized
Gains (Losses)
in Accumulated
OCI
                         
Asset Type   Amortized
Cost
Basis (B)
  Fair
Value
  Impairment
Recorded in
Current Year
    Weighted Average Significant Input  
      Discount
Rate
  Prepayment
Speed (F)
  Cumulative
Default Rate
  Loss
Severity
 
                                                   
CMBS - conduit   $ 738   $ 1,770   $ 76   $ 1,032     8.0 %   N/A     99.5 %   27.6 %
CDO         2,002         2,002     35.0 %   3.5 %   17.5 %   73.5 %
Total   $ 738   $ 3,772   $ 76   $ 3,034                          
   
 
  All of the assumptions listed have some degree of market observability, based on Newcastle’s knowledge of the market, relationships with market participants, and use of common market data sources. Collateral prepayment, default and loss severity projections are in the form of “curves” or “vectors” that vary for each monthly collateral cash flow projection. Methods used to develop these projections vary by asset class (e.g., CMBS projections are developed differently than home equity ABS projections) but conform to industry conventions. Newcastle uses assumptions that generate its best estimate of future cash flows of each respective security.
   
  The prepayment vector specifies the percentage of the collateral balance that is expected to voluntarily pay off at each point in the future. The prepayment vector is based on projections from a widely published investment bank model, which considers factors such as collateral FICO score, loan-to-value ratio, debt-to-income ratio, and vintage on a loan level basis. This vector is scaled up or down to match recent collateral-specific prepayment experience, as obtained from remittance reports and market data services.
   
  Loss severities are based on recent collateral-specific experience with additional consideration given to collateral characteristics. Collateral age is taken into consideration because severities tend to initially increase with collateral age before eventually stabilizing. Newcastle typically uses projected severities that are higher than the historic experience for collateral that is relatively new to account for this effect. Collateral characteristics such as loan size, lien position, and location (state) also effect loss severity. Newcastle considers whether a collateral pool has experienced a significant change in its composition with respect to these factors when assigning severity projections.
   
  Default rates are determined from the current “pipeline” of loans that are more than 90 days delinquent, in foreclosure, or are REO. These significantly delinquent loans determine the first 24 months of the default vector. Beyond month 24, the default vector transitions to a steady-state value that is generally equal to or greater than that given by the widely published investment bank model.
   
  The discount rates Newcastle uses are derived from a range of observable pricing on securities backed by similar collateral and offered in a live market. As the markets in which Newcastle transacts have become less liquid, Newcastle has had to rely on fewer data points in this analysis.
   
(F) Projected annualized average prepayment rate.

 

Loan Valuation

Loans which Newcastle does not have the ability or intent to hold into the foreseeable future are classified as held-for-sale. As a result, these held-for-sale loans are carried at the lower of amortized cost or fair value and are therefore recorded at fair value on a non-recurring basis. These loans were written down to fair value at the time of the impairment, based on broker quotations, pricing service quotations or internal pricing models. All the loans were within Level 3 of the fair value hierarchy. For real estate related and other loans, the most significant inputs used in the valuations are the amount and timing of expected future cash flows, market yields and the estimated collateral value of such loan investments. For residential mortgage loans, significant inputs include management’s expectations of prepayment speeds, default rates, loss severities and discount rates that market participants would use in determining the fair values of similar pools of residential mortgage loans.

The following tables summarize certain information for real estate related and other loans and residential mortgage loans held-for-sale as of December 31, 2013:

                                                   
                      Valuation   Significant Input  
    Outstanding               Allowance/   Range   Weighted Average  
    Face   Carrying   Fair   (Reversal) In   Discount   Loss   Discount   Loss  
Loan Type   Amount   Value   Value   Current Year   Rate   Severity   Rate   Severity  
Mezzanine   $ 172,197   $ 139,720   $ 143,217   $ (14,246 )   3.4% - 9.0 %   0.0% - 100.0 %   6.6 %   17.3 %
Bank Loan     256,594     166,710     180,945     (3,610 )   13.1% - 33.8 %   0.0% - 100.0 %   24.2 %   23.1 %
B-Note     109,323     101,385     102,645     (1,623 )   5.0% - 12.0 %   0.0 %   10.1 %   0.0 %
Whole Loan     29,715     29,715     29,728         3.7% - 4.0 %   0.0% - 15.5 %   3.7 %   15.1 %
Total Real Estate Related and Other Loans Held for Sale, Net   $ 567,829   $ 437,530   $ 456,535   $ (19,479 )                        

 

                                                   
                      Valuation                          
    Outstanding               Allowance/   Significant Input (Weighted Average)  
    Face   Carrying   Fair   (Reversal) In   Discount   Prepayment   Constant   Loss  
Loan Type   Amount   Value   Value   Current Year   Rate   Speed   Default Rate   Severity  
Non-securitized Manufactured Housing Loans Portfolio I   $ 501   $ 130   $ 130   $ (58 )   81.8 %   5.0 %   11.6 %   65.0 %
Non-securitized Manufactured Housing Loans Portfolio II     2,628     2,055     2,055     (47 )   15.4 %   5.0 %   3.5 %   60.0 %
Total Residential Mortgage Loans Held for Sale, Net   $ 3,129   $ 2,185   $ 2,185   $ (105 )                        

Loans which Newcastle has the intent and ability to hold into the foreseeable future are classified as held-for-investment. Loans held-for-investment are carried at the aggregate unpaid principal balance adjusted for any unamortized premium or discount, deferred fees or expenses, an allowance for loan losses, charge-offs and write-downs for impaired loans.

 

The following table summarizes certain information for residential mortgage loans held-for-investment as of December 31, 2013:

                                                   
                            Significant Input (Weighted Average)  
                      Valuation                          
                      Allowance/                          
    Outstanding   Carrying       (Reversal) In   Discount   Prepayment   Constant        
Loan Type   Face Amount   Value   Fair Value   Current Year   Rate   Speed   Default Rate   Loss Severity  
Securitized Manufactured Housing Loans Portfolio I   $ 102,681   $ 91,924   $ 89,674   $ (5,465 )   9.4 %   6.0 %   3.0 %   65.0 %
Securitized Manufactured Housing Loans Portfolio II     128,975     128,117     123,471     840     8.1 %   7.0 %   3.5 %   60.0 %
Residential Loans     45,968     35,409     38,894     (826 )   7.5 %   4.6 %   2.8 %   45.9 %
Total Residential Mortgage Loans, Held-for-Investment, Net   $ 277,624   $ 255,450   $ 252,039   $ (5,451 )                        

Derivatives

Newcastle’s derivative instruments are comprised of interest rate swaps and linked transactions. Newcastle’s interest rate swaps are valued using counterparty quotations. These quotations are generally based on valuation models with model inputs that can generally be verified and which do not involve significant judgment. The significant observable inputs used in determining the fair value of Newcastle’s Level 2 interest rate swap derivative contracts are contractual cash flows and market based interest rate curves. The linked transactions, which are categorized into Level 3, are evaluated on a net basis considering their underlying components, the security acquired and the related repurchase financing agreement. The securities are valued using a similar methodology to the one described in “Securities Valuation” above and this value is netted against the carrying value of the repurchase agreement (which approximates fair value as described in “Liabilities for Which Fair Value is Only Disclosed” below), adjusted for net accrued interest receivable/payable on the securities and repurchase agreement of the linked transactions (see Note 14 for a discussion of Newcastle’s outstanding linked transactions).

Newcastle’s derivatives are recorded on its balance sheet as follows:

                   
        Fair Value  
        December 31,  
    Balance sheet location   2013   2012  
Derivative Assets                  
Linked transaction at fair value   Receivables and other assets   $ 43,662   $  
Interest rate caps, not designated as hedges   Receivables and other assets         165  
        $ 43,662   $ 165  
Derivative Liabilities                  
Interest rate swaps, designated as hedges   Accounts payable, accrued expenses and other liabilities   $ 6,203   $ 12,175  
                   
Interest rate swaps, not designated as hedges   Accounts payable, accrued expenses and other liabilities     7,592     19,401  
        $ 13,795   $ 31,576  

 

The following table summarizes information related to derivatives:
               
    December 31,  
    2013   2012  
Cash flow hedges              
Notional amount of interest rate swap agreements   $ 105,031   $ 154,450  
Amount of (loss) recognized in other comprehensive income on effective portion     (6,117 )   (12,050 )
Deferred hedge gain (loss) related to anticipated financings, which have subsequently occurred, net of amortization     170     237  
               
Deferred hedge gain (loss) related to designation, net of amortization     (45 )   (210 )
Expected reclassification of deferred hedges from accumulated other comprehensive income (“AOCI”) into earnings over the next 12 months     53     4  
Expected reclassification of current hedges from AOCI into earnings over the next 12 months     (3,915 )   (6,259 )
               
Non-hedge Derivatives              
Notional amount of interest rate swap agreements     185,871     294,203  
Notional amount of interest rate cap agreements         23,400  
Notional amount of linked transactions (A)     116,806      

 

(A) This represents the current face amount of the underlying financial securities comprising linked transactions.

The following table summarizes gains (losses) recorded in relation to derivatives:

                         
    Income Statement Location   Year Ended December 31,  
Cash flow hedges       2013   2012   2011  
Gain (loss) on the ineffective portion   Other income (loss)   $   $ 483   $  (917 )
    Gain (loss) on sale of                    
Loss immediately recognized at dedesignation   investments, Other income (loss)     (110 )   (7,036 )   (13,939 )
Amount of loss reclassified from AOCI into income, related to effective portion   Interest expense     (6,128 )   (30,631 )   (63,350 )
Deferred hedge gain reclassified from AOCI into income, related to anticipated financings   Interest expense     67     61     58  
Deferred hedge (loss) gain reclassified from AOCI into income, related to effective portion of dedesignated hedges   Interest expense     (56 )   1,189     2,259  
                         
Non-hedge derivatives gain (loss)                        
Interest rate swaps   Other income (loss)     10,577     9,101     3,284  
Linked transactions   Other income (loss)     (236 )        

The following table presents both gross and net information about linked transactions:

               
    As of December 31,  
    2013   2012  
Real estate securities-available for sale (A)   $ 104,308   $  
Repurchase agreements (B)     (60,646 )    
Net assets recognized as linked transactions   $ 43,662   $  
     
  (A) Represents the fair value of the securities accounted for as part of linked transactions.
  (B) Represents the carrying value, which approximates fair value, of the repurchase agreements accounted for as part of linked transactions.

 

 

Liabilities for Which Fair Value is Only Disclosed

The following table summarizes the level of the fair value hierarchy, valuation techniques and inputs used for estimating each class of liabilities not measured at fair value in the statement of financial position but for which fair value is disclosed:

             
Type of Liabilities          
Not Measured At Fair          
Value for Which          
Fair Value Is Disclosed   Fair Value Hierarchy   Valuation Techniques and Significant Inputs  
           
CDO bonds payable   Level 3   Valuation technique is based on discounted cash flow. Significant inputs include:  
        Underlying security and loan prepayment, default and cumulative loss expectations  
        Amount and timing of expected future cash flows  
        Market yields and credit spreads implied by comparisons to transactions of similar tranches of CDO debt by the varying levels of subordination  
             
Other bonds and notes payable   Level 3   Valuation technique is based on discounted cash flow. Significant inputs include:  
        Amount and timing of expected future cash flows  
        Interest rates  
        Broker quotations  
        Market yields and credit spreads implied by comparisons to transactions of similar tranches of securitized debt by the varying levels of subordination  
             
Repurchase agreements   Level 2   Valuation technique is based on market comparables. Significant variables include:  
        Amount and timing of expected future cash flows  
        Interest rates  
        Collateral funding spreads  
             
Mortgage notes payable   Level 3   Valuation technique is based on discounted cash flows. Significant inputs include:  
        Amount and timing of expected future cash flows  
        Interest rates  
        Collateral funding spreads  
             
Media Credit Facilities   Level 3   Valuation technique is based on discounted cash flow. Significant inputs include:  
        Amount and timing of expected future cash flows  
        Interest rates  
        Credit spread of New Media  
             
Golf Credit Facilities   Level 3   Valuation technique is based on discounted cash flow. Significant inputs include:  
        Amount and timing of expected future cash flows  
        Interest rates  
        Credit spread of Golf  
             
Junior subordinated notes payable   Level 3   Valuation technique is based on discounted cash flow. Significant inputs include:  
        Amount and timing of expected future cash flows  
        Interest rates  
        Market yields and the credit spread of Newcastle