Quarterly report pursuant to Section 13 or 15(d)

SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES

v2.4.1.9
SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES
 3 Months Ended
Mar. 31, 2015
Segment Reporting [Abstract]  
SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES
4.   SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES
 
Newcastle conducts its business through the following segments: (i) debt investments financed with collateralized debt obligations (“CDOs”), (ii) other debt investments (“Other Debt”), (iii) investment in golf properties and facilities (“Golf”) and (iv) corporate. With respect to the CDOs and other debt segments, Newcastle is generally entitled to receive 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 Agreement.
 

Summary financial data on Newcastle's segments is given below, together with reconciliation to the same data for Newcastle as a whole:
 
Debt Investments (A)
 
 
 
 
 
Discontinued
 
 
 
 
 
CDOs
 
Other Debt (B)
 
Golf
 
Corporate
 
Operations
 
Eliminations
 
Total
Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
15,922

 
$
12,595

 
$
35

 
$
4

 
$
—

 
$
(1,478
)
 
$
27,078

Interest expense
(2,583
)
 
(9,579
)
 
(5,097
)
 
(946
)
 
—

 
1,478

 
(16,727
)
Inter-segment elimination
(1,478
)
 
—

 
1,478

 
—

 
—

 
—

 
—

Net interest income (expense)
11,861

 
3,016

 
(3,584
)
 
(942
)
 
—

 
—

 
10,351

Impairment (reversal)
337

 
68

 
—

 
—

 
—

 
—

 
405

Operating revenues
—

 
—

 
60,826

 
—

 
—

 
—

 
60,826

Other income, net
530

 
(37
)
 
8

 
—

 
—

 
—

 
501

Loan and security servicing expense
96

 
—

 
—

 
—

 
—

 
—

 
96

Operating expenses - golf (C)
—

 
—

 
52,971

 
—

 
—

 
—

 
52,971

Repairs and maintenance expenses - golf
—

 
—

 
1,966

 
—

 
—

 
—

 
1,966

Cost of sales - golf
—

 
—

 
6,053

 
—

 
—

 
—

 
6,053

General and administrative expense
—

 
—

 
249

 
1,428

 
—

 
—

 
1,677

Acquisition and transaction expenses (D)
—

 
—

 
36

 
—

 
—

 
—

 
36

Management fee to affiliate
—

 
—

 
—

 
2,668

 
—

 
—

 
2,668

Depreciation and amortization
—

 
—

 
6,753

 
—

 
—

 
—

 
6,753

Income tax expense
—

 
—

 
46

 
—

 
—

 
—

 
46

Income (loss) from continuing operations
11,958

 
2,911

 
(10,824
)
 
(5,038
)
 
—

 
—

 
(993
)
Income from discontinued operations, net of tax
—

 
—

 
—

 
—

 
115

 
—

 
115

Net income (loss)
11,958

 
2,911

 
(10,824
)
 
(5,038
)
 
115

 
—

 
(878
)
Preferred dividends
—

 
—

 
—

 
(1,395
)
 
—

 
—

 
(1,395
)
Net loss attributable to noncontrolling interests
—

 
—

 
181

 
—

 
—

 
—

 
181

Income (loss) applicable to common stockholders
$
11,958

 
$
2,911

 
$
(10,643
)
 
$
(6,433
)
 
$
115

 
$
—

 
$
(2,092
)



 
Debt Investments (A)
 
 
 
 
 
Discontinued
 
 
 
CDOs
 
Other Debt (B)
 
Golf
 
Corporate
 
Operations
 
Total
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Investments, net (E)
$
440,436

 
$
834,633

 
$
316,049

 
$
—

 
$
—

 
$
1,591,118

Cash and restricted cash
14,149

 
3,778

 
11,933

 
48,016

 
—

 
77,876

Other assets
1,575

 
2,100

 
33,637

 
136

 
—

 
37,448

Assets of discontinued operations
—

 
—

 
—

 
—

 
6,883

 
6,883

Total assets
456,160

 
840,511

 
361,619

 
48,152

 
6,883

 
1,713,325

Debt, net (E)
277,464

 
792,337

 
162,806

 
51,230

 
—

 
1,283,837

Other liabilities
1,386

 
6,352

 
158,406

 
16,246

 
—

 
182,390

Liabilities of discontinued operations
—

 
—

 
—

 
—

 
502

 
502

Total liabilities
278,850

 
798,689

 
321,212

 
67,476

 
502

 
1,466,729

Preferred stock
—

 
—

 
—

 
61,583

 
—

 
61,583

Noncontrolling interests
—

 
—

 
(145
)
 
—

 
—

 
(145
)
Equity attributable to common stockholders
$
177,310

 
$
41,822

 
$
40,552

 
$
(80,907
)
 
$
6,381

 
$
185,158

 
 
 
 
 
 
 
 
 
 
 
 
Additions to investments in real estate excluding intangibles and other liabilities, net of other assets acquired
$
—

 
$
—

 
$
385

 
$
—

 
$
—

 
$
385

 
Debt Investments (A)
 
 
 
 
 
Discontinued
 
 
 
 
 
CDOs
 
Other Debt (B)
 
Golf
 
Corporate
 
Operations
 
Eliminations
 
Total
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
30,722

 
$
16,952

 
$
41

 
$
11

 
$
—

 
$
(1,274
)
 
$
46,452

Interest expense
(6,128
)
 
(12,663
)
 
(3,698
)
 
(955
)
 
—

 
1,274

 
(22,170
)
Inter-segment elimination
(1,274
)
 
1,274

 
—

 
—

 
—

 
—

 
—

Net interest income (expense)
23,320

 
5,563

 
(3,657
)
 
(944
)
 
—

 
—

 
24,282

Impairment (reversal)
432

 
814

 
—

 
—

 
—

 
—

 
1,246

Operating revenues
—

 
—

 
62,632

 
—

 
—

 
—

 
62,632

Other income, net
13,610

 
2,198

 
—

 
—

 
—

 
—

 
15,808

Loan and security servicing expense
156

 
701

 
—

 
—

 
—

 
—

 
857

Operating expenses - golf (C)
—

 
—

 
57,129

 
—

 
—

 
—

 
57,129

Repairs and maintenance expenses - golf
—

 
—

 
2,518

 
—

 
—

 
—

 
2,518

Cost of sales - golf
—

 
—

 
5,956

 
—

 
—

 
—

 
5,956

General and administrative expense
—

 
—

 
307

 
2,095

 
—

 
—

 
2,402

Acquisition and transaction expenses (D)
—

 
—

 
775

 
387

 
—

 
—

 
1,162

Management fee to affiliate
—

 
—

 
—

 
5,893

 
—

 
—

 
5,893

Depreciation and amortization
—

 
—

 
5,826

 
37

 
—

 
—

 
5,863

Income tax expense
—

 
—

 
140

 
—

 
—

 
—

 
140

Income (loss) from continuing operations
36,342

 
6,246

 
(13,676
)
 
(9,356
)
 
—

 
—

 
19,556

Income from discontinued operations
—

 
—

 
—

 
—

 
(15,299
)
 
—

 
(15,299
)
Net income (loss)
36,342

 
6,246

 
(13,676
)
 
(9,356
)
 
(15,299
)
 
—

 
4,257

Preferred dividends
—

 
—

 
—

 
(1,395
)
 
—

 
—

 
(1,395
)
Net loss attributable to non-controlling interests
—

 
—

 
139

 
$
—

 
522

 
—

 
661

Income (loss) applicable to common stockholders
$
36,342

 
$
6,246

 
$
(13,537
)
 
$
(10,751
)
 
$
(14,777
)
 
$
—

 
$
3,523

(A)
Assets held within non-recourse structures, including all of the assets in the CDO segment, are not available to satisfy obligations outside of such financings, except to the extent net cash flow distributions are received from such structures. Furthermore, creditors or beneficial interest holders of these structures generally have no recourse to the general credit of Newcastle. Therefore, the exposure to the economic losses from such structures generally is limited to 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)
The following table summarizes the investments and debt in the other debt segment:
 
March 31, 2015
 
Investments
 
Debt
Non-Recourse
Outstanding
Face Amount
 
Carrying
Value
 
Outstanding
Face Amount
 
Carrying
Value
Subprime mortgage loans subject to call options
$
406,217

 
$
406,217

 
$
406,217

 
$
406,217

Other
 
 
 
 
 
 
 
Unlevered real estate securities (F)
52,327

 
12,252

 
—

 
—

Levered real estate securities
389,056

 
409,037

 
386,120

 
386,120

Other investments
N/A

 
6,555

 
—

 
—

Residential mortgage loans
931

 
572

 
—

 
—

 
$
848,531

 
$
834,633

 
$
792,337

 
$
792,337


(C)
Operating expenses-golf includes rental expenses recorded under operating leases for carts and equipment in the amount of $1.1 million and $1.4 million for the three months ended March 31, 2015 and 2014, respectively.
(D)
Includes all transaction related and spin-off related expenses.
(E)
Net of $36.6 million of inter-segment eliminations.
(F)
Excludes eight securities with a zero value, which had an aggregate face amount of $113.8 million.

Variable Interest Entities (“VIEs”)

The consolidated variable interest entities ("VIEs") in which Newcastle has a significant interest include Newcastle’s CDOs, in which Newcastle has been determined to be the primary beneficiary and therefore consolidates them (with the exception of CDO V), 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. Newcastle’s CDOs are held in special purpose entities whose debt is treated as non-recourse secured borrowings of Newcastle.

The following table presents certain assets of VIEs, which are included in the Consolidated Balance Sheets. The assets in the table below include those assets that can only be used to settle obligations of consolidated VIEs, and are in excess of those obligations. Additionally, the assets in the table below exclude intercompany balances that eliminate in consolidation.


 
March 31, 2015
 
 
 
(Unaudited)
 
December 31, 2014

Assets of consolidated VIEs that can only be used to settle obligations of consolidated VIEs
 
 
 
Real estate securities, available-for-sale
$
219,475

 
$
219,490

Real estate related and other loans, held-for-sale, net
197,251

 
230,200

Residential mortgage loans, held-for-sale, net
3,164

 
3,211

Subprime mortgage loans subject to call option
406,217

 
406,217

Other investments
20,546

 
20,308

Restricted cash
14,149

 
11,790

Receivables and other assets
1,575

 
1,927

Assets of discontinued operations
6,883

 
6,803

Total assets of consolidated VIEs that can only be used to settle obligations of consolidated VIEs
$
869,260

 
$
899,946


The following table presents certain liabilities of consolidated VIEs, which are included in the Consolidated Balance Sheets above. The liabilities in the table below include liabilities of consolidated VIEs due to third parties only, and exclude intercompany balances that eliminate in consolidation. The liabilities also exclude amounts where creditors or beneficial interest holders have recourse to the general credit of Newcastle.

 
March 31, 2015
 
 
 
(Unaudited)
 
December 31, 2014
Liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of Newcastle
 
 
 
CDO bonds payable
$
216,464

 
$
227,673

Other bonds and notes payable
25,317

 
27,069

Financing of subprime mortgage loans subject to call option
406,217

 
406,217

Accounts payable, accrued expenses and other liabilities
1,386

 
2,391

Liabilities of discontinued operations
502

 
447

Total liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of Newcastle
$
649,886

 
$
663,797


Newcastle’s subprime securitizations and CDO V are also considered VIEs, but Newcastle does not control the decisions that most significantly impact their economic performance and, 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 deconsolidation of an entity that otherwise would have been consolidated. 

As of March 31, 2015, 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 VIEs at March 31, 2015, in addition to the subprime securitizations which are described in Note 6:
Entity
 
Gross Assets (A)
 
Debt (A) (B)
 
Carrying Value of Newcastle's Investment (C)
Newcastle CDO V
 
$
115,835

 
$
143,480

 
$
8,538


(A)
Face amount.
(B)
Newcastle CDO V includes $42.4 million face amount of debt owned by Newcastle with a carrying value of $8.5 million at March 31, 2015.
(C)
This amount represents Newcastle’s maximum exposure to loss from this entity.