Quarterly report pursuant to Section 13 or 15(d)

REAL ESTATE SECURITIES

v2.4.1.9
REAL ESTATE SECURITIES
 3 Months Ended
Mar. 31, 2015
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 March 31, 2015, 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)
CMBS
 
$
209,371

 
$
207,761

 
$
(65,861
)
 
$
141,900

 
$
37,122

 
$
(293
)
 
$
178,729

 
30

 
 B
 
5.88
%
 
11.01
%
 
2.4

 
11.9
%
Non-Agency RMBS
 
64,720

 
80,421

 
(54,589
)
 
25,832

 
18,628

 
—

 
44,460

 
28

 
 CCC
 
1.24
%
 
10.08
%
 
7.7

 
22.4
%
ABS-Franchise
 
8,464

 
7,647

 
(7,647
)
 
—

 
—

 
—

 
—

 
1

 
 C
 
6.69
%
 
0.00
%
 
—

 
0.0
%
CDO (E)
 
14,466

 
—

 
—

 
—

 
8,538

 
—

 
8,538

 
2

 
 CCC-
 
1.47
%
 
0.00
%
 
11.1

 
15.1
%
Debt Security Total / Average (F)
 
$
297,021

 
$
295,829

 
$
(128,097
)
 
$
167,732

 
$
64,288

 
$
(293
)
 
$
231,727

 
61

 
B-
 
4.68
%
 
10.87
%
 
3.9

 
 

Equity Securities
 
 
 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
 
 
 
 
 
 
 
 
 
Total Securities, Available-for-Sale
 
 
 
$
295,829

 
$
(128,097
)
 
$
167,732

 
$
64,288

 
$
(293
)
 
$
231,727

 
62

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA/FHLMC
 
389,056

 
407,494

 
—

 
407,494

 
1,543

 
—

 
409,037

 
4

 
AAA
 
3.50
%
 
2.72
%
 
7.1

 
N/A

Total Securities, Pledged as Collateral (F)
 
$
389,056

 
$
407,494

 
$
—

 
$
407,494

 
$
1,543

 
$
—

 
$
409,037

 
4

 
 
 
 
 
 
 
 
 
 
  
(A)
See Note 13 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 uses an implied AAA rating for the FNMA/FHLMC securities. Ratings provided were determined by third party rating agencies, represent the most recent 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 interests that is subordinate to Newcastle’s investments.
(E)
Represents non-consolidated CDO securities, excluding eight securities with a zero value, which had an aggregate face amount of $113.8 million.
(F)
The total outstanding face amount was $0.6 billion for fixed rate securities and $0.1 billion for floating rate securities.


Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the three months ended March 31, 2015, Newcastle recorded other-than-temporary impairment charges (“OTTI”) of $0.3 million with respect to real estate securities (gross of $0.2 million of other-than-temporary impairment recognized in other comprehensive income). 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 on Newcastle’s securities were primarily the result of changes in market factors, rather than issue-specific credit impairment. Newcastle performed analyses in relation to such securities, using management’s best estimate of their cash flows, which support 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 March 31, 2015.

 
 
 
 
 
Amortized Cost Basis
 
 
 
 
 
 
 
 
Securities in
 
Outstanding
 
 
 
Other-than-
 
 
 
 
 
 
 
 
 
Number
 
Weighted Average
an Unrealized
 
Face
 
Before
 
Temporary
 
After
 
Gross Unrealized
 
Carrying
 
of
 
 
 
 
 
 
 
Life
Loss Position
 
Amount
 
Impairment
 
Impairment
 
Impairment
 
Gains
 
Losses
 
Value
 
Securities
 
Rating
 
Coupon
 
Yield
 
(Years)
Less Than Twelve
Months
 
$
3,823

 
$
3,818

 
$
(48
)
 
$
3,770

 
$
—

 
$
(293
)
 
$
3,477

 
3

 
CCC-

 
6.49
%
 
7.05
%
 
2.0

Twelve or More
Months
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—
%
 
—
%
 
—

Total
 
$
3,823

 
$
3,818

 
$
(48
)
 
$
3,770

 
$
—

 
$
(293
)
 
$
3,477

 
3

 
CCC-

 
6.49
%
 
7.05
%
 
2.0

 
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:
 
March 31, 2015
 
 
 
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
1,383

 
1,649

 
(48
)
 
(266
)
Non credit impaired securities
2,094

 
2,121

 
—

 
(27
)
Total debt securities in an unrealized loss position
$
3,477

 
$
3,770

 
$
(48
)
 
$
(293
)
 
(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 flows 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 for the three months ended March 31, 2015: 
Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income
$
(4,174
)
 
 

Additions for credit losses on securities for which an OTTI was not previously recognized
(48
)
 
 

Reduction for credit losses on securities for which no OTTI was recognized in other comprehensive income at the current measurement date
4,174

 
 

Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income
$
(48
)
 
The table below summarizes the geographic distribution of the collateral securing Newcastle’s CMBS and asset backed securities (“ABS”) at March 31, 2015:
 
CMBS
 
ABS
Geographic Location
Outstanding Face Amount
 
Percentage
 
Outstanding Face Amount
 
Percentage
Western U.S.
$
28,315

 
13.5
%
 
$
20,229

 
27.6
%
Northeastern U.S.
58,336

 
27.8
%
 
18,903

 
25.8
%
Southeastern U.S.
44,957

 
21.5
%
 
16,215

 
22.2
%
Midwestern U.S.
35,954

 
17.2
%
 
9,743

 
13.3
%
Southwestern U.S.
27,605

 
13.2
%
 
8,094

 
11.1
%
Other
10,825

 
5.2
%
 
—

 
—
%
Foreign
3,379

 
1.6
%
 
—

 
—
%
 
$
209,371

 
100.0
%
 
$
73,184

 
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 March 2015, we sold $380.4 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 104.72% for total proceeds of $398.4 million and repaid $385.6 million of repurchase agreements associated with these securities and we recognized a gain of approximately $5.9 million.

Additionally, in March 2015, we purchased $389.1 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 104.77% for total proceeds of $407.6 million. We financed this transaction with repurchase financing of $386.1 million.
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.