Drive Shack Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

REAL ESTATE SECURITIES

REAL ESTATE SECURITIES

12 Months Ended

Dec. 31, 2015

Investments, Debt and Equity Securities [Abstract]

The following is a summary of Newcastle’s real estate securities at December 31, 2015 and 2014, 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, 2015
CMBS	$	67,669	$	78,416	$	(55,372	)	$	23,044	$	16,673	$	(33	)	$	39,684	16	B	4.97	%	14.78	%	2.1	26.1	%
Non-Agency RMBS	16,477		23,403		(20,667		)	2,736		6,958		(75		)	9,619		9	CC	1.89	%	11.95	%	11.0	9.7	%
ABS-Franchise	8,464		7,647		(7,647		)	—		—		—			—		1	C	6.69	%	—	%	0	—	%
CDO ^(E)	14,632		—		—			—		9,731		—			9,731		2	C	1.80	%	—	%	7.2	25.1	%
Debt Security Total/Average ^(F)	$	107,242	$	109,466	$	(83,686	)	$	25,780	$	33,362	$	(108	)	$	59,034	28	CCC+	4.20	%	14.48	%	4.0
Equity Securities			—		—			—		—		—			—		2
Total Securities, Available-for-Sale			$	109,466	$	(83,686	)	$	25,780	$	33,362	$	(108	)	$	59,034	30

Agency RMBS (FNMA/FHLMC)	102,660		105,940		—			105,940		23		—			105,963		3	AAA	3.50	%	2.99	%	7.8	N/A
Total Securities, Pledged as Collateral	$	102,660	$	105,940	$	—		$	105,940	$	23	$	—		$	105,963	3

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	—	%
CDO ^(E)	14,413		—		—			—		7,956		—			7,956		2	CCC-	1.46	%	—	%	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

Agency RMBS (FNMA/FHLMC)	390,771		403,216		—			403,216		4,473		—			407,689		9	AAA	3.50	%	2.94	%	5.6	N/A
Total Securities, Pledged as Collateral	$	390,771	$	403,216	$	—		$	403,216	$	4,473	$	—		$	407,689	9


(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 $116.0 million and $113.3 million as of December 31, 2015 and 2014, respectively.


(F)	As of December 31, 2015 and 2014, the total outstanding face amount of fixed rate securities was $168.5 million and $600.9 million, respectively, and of floating rate securities were $41.4 million and $94.2 million, respectively.

Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the years ended December 31, 2015, 2014 and 2013, Newcastle recorded other-than-temporary impairment charges (“OTTI”) of $2.4 million, $0.0 million and $5.2 million, respectively, (gross of less than $0.1 million, $0.0 million and $0.0 million of other-than-temporary impairment recognized (reversed) in other comprehensive income in 2015, 2014 and 2013, respectively). During the year ended December 31, 2013, $3.8 million of the OTTI recorded was 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. 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 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, 2015.



			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	$	3,699	$	4,389	$	(3,010	)	$	1,379	$	—	$	(108	)	$	1,271	2	CC	3.46	%	11.20	%	7.4
Twelve or More Months	—		—		—			—		—		—			—		—	—	—		—		0
Total	$	3,699	$	4,389	$	(3,010	)	$	1,379	$	—	$	(108	)	$	1,271	2	CC	3.46	%	11.20	%	7.4

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, 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	1,271		1,379		(3,010		)	(108		)
Non-credit impaired securities	—		—		—			—
Total debt securities in an unrealized loss position	$	1,271	$	1,379	$	(3,010	)	$	(108	)


(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:



	2015			2014
Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income	$	(4,174	)	$	(2,873	)

Additions for credit losses on securities for which an OTTI was not previously recognized	(1,567		)	—

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		)

Additions for credit losses on securities for which an OTTI was previously recognized without any portion of OTTI recognized in other comprehensive income	(1,443		)	—

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

Reduction for securities sold during the period	—			2,873

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

Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income	$	(3,010	)	$	(4,174	)

The table below summarizes the geographic distribution of the collateral securing the CMBS and ABS at December 31, 2015:



	CMBS				ABS
Geographic Location	Outstanding Face Amount		Percentage		Outstanding Face Amount		Percentage
Northeastern U.S.	$	12,303	18.2	%	$	7,922	31.8	%
Southeastern U.S.	16,954		25.0	%	3,798		15.2	%
Midwestern U.S.	21,105		31.2	%	7,630		30.6	%
Western U.S.	9,857		14.6	%	4,184		16.8	%
Southwestern U.S.	7,450		11.0	%	1,407		5.6	%
	$	67,669	100.0	%	$	24,941	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, Newcastle sold $380.4 million face amount of agency RMBS fixed-rate securities at an average price of 104.72% of par for total proceeds of $398.4 million, and repaid $385.6 million of repurchase agreements associated with these securities and recognized a gain of approximately $5.9 million.

Additionally, in March 2015, Newcastle purchased $389.1 million face amount of agency RMBS fixed-rate securities at an average price of 104.77% of par for total proceeds of $407.6 million. This transaction was financed with repurchase financing of $386.1 million.

In May 2015, Newcastle sold $98.6 million face amount of CMBS securities at an average price of 104.03% of par for total proceeds of $102.6 million, and recognized a gain of $14.0 million. Newcastle also sold $42.8 million face amount of non-Agency RMBS securities at an average price of 85.54% of par for total proceeds of $36.7 million, and recognized a gain of $14.1 million. The proceeds from these CMBS and non-Agency RMBS sales were used to repay the associated outstanding notes in CDO VI, CDO VIII and CDO IX.

Additionally in May 2015, Newcastle received a $25.0 million par paydown of CMBS securities held in CDO IX. These funds were used to repay the associated outstanding notes in CDO IX.

In May 2015, Newcastle also sold $3.9 million face amount of unencumbered non-Agency RMBS at an average price of 24.11% of par for total proceeds of $0.9 million and recognized a gain of $0.8 million.

In July 2015, Newcastle sold $380.4 million face amount of agency RMBS at an average price of 103.13% of par for total proceeds of approximately $392.3 million and recognized a loss of $5.9 million. Newcastle repaid $375.7 million of outstanding repurchase agreement liabilities in connection with this sale.

In July 2015, Newcastle purchased $201.9 million face amount of agency RMBS at an average price of 102.87% of par for total proceeds of approximately $207.7 million. This transaction was financed with $196.7 million of repurchase agreements.

In July 2015, Newcastle settled on a trade to purchase $403.9 million face amount of agency RMBS at an average price of 102.88% of par for total proceeds of approximately $415.6 million. This transaction was financed with $393.8 million of repurchase agreements.

In September 2015, Newcastle sold $250.4 million face amount of agency RMBS at an average price of 103.83% of par for total proceeds of approximately $260.0 million, and recognized a gain of $2.5 million. Newcastle repaid $250.1 million of outstanding repurchase agreement liabilities in connection with this sale.

In October 2015, Newcastle sold $348.9 million face amount of agency RMBS at an average price of 104.32% of par for total proceeds of approximately $364.0 million, and recognized a gain of $5.1 million. Newcastle repaid $345.9 million of outstanding repurchase agreement liabilities in connection with this sale.

In October 2015, Newcastle purchased $354.8 million face amount of agency RMBS at an average price of 104.42% of par for total proceeds of approximately $370.5 million. This transaction was financed with $352.6 million of repurchase agreements.

In December 2015, Newcastle entered into a trade to sell $350.3 million face amount of agency RMBS at an average price of 103.2% of par for total proceeds of approximately $361.3 million, and recognized a loss of $3.9 million. Newcastle repaid $348.6 million of outstanding repurchase agreement liabilities in connection with this sale. This trade settled in January 2016.

In December 2015, Newcastle entered into a trade to purchase $102.7 million face amount of agency RMBS at an average price of 103.2% of par for total proceeds of approximately $105.9 million. This transaction was financed with $102.2 million of repurchase agreements. This trade settled in January 2016.

Securities Pledged as Collateral

These government agency securities were sold under agreements to repurchase which are treated as collateralized financing transactions. Although being pledged as collateral, securities financed through a repurchase agreement remains on Newcastle's Consolidated Balance Sheets as an asset and cash received from the purchaser is recorded on Newcastle's Consolidated Balance Sheets as a liability.

- Definition

The entire disclosure for investments in certain debt and equity securities.

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