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

Annual report pursuant to Section 13 and 15(d)

DEBT OBLIGATIONS

DEBT OBLIGATIONS

12 Months Ended

Dec. 31, 2015

The following table presents certain information regarding Newcastle's debt obligations and related hedges:



	December 31, 2015																					December 31, 2014
													Collateral
Debt Obligation/Collateral	Month Issued	Outstanding Face Amount		Carrying Value		Final Stated Maturity	Weighted Average Coupon (A)	Weighted Average Funding Cost (B)		Weighted Average Life (Years)	Face Amount of Floating Rate Debt		Outstanding Face Amount (C)		Amortized Cost Basis (C)		Carrying Value (C)		Weighted Average Life (Years)	Floating Rate Face Amount (C)		Outstanding Face Amount		Carrying Value
CDO Bonds Payable
CDO VI (D)	Apr 2005	$	92,933	$	92,933	Apr 2040	1.12%	1.12	%	4.1	$	89,183	$	69,838	$	25,124	$	46,392	3.9	$	12,477	$	92,462	$	92,462
CDO VIII	Nov 2006	—		—		—	—%	—	%	0.0	—		—		—		—		0.0	—		71,813		71,717
CDO IX	May 2007	—		—		—	—%	—	%	0.0	—		—		—		—		0.0	—		62,578		63,494
		92,933		92,933				1.12	%	4.1	89,183		69,838		25,124		46,392		3.9	12,477		226,853		227,673
Other Bonds & Notes Payable
NCT 2013-VI IMM-1 (E)	Nov 2013	4,984		4,672		Apr 2040	LIBOR+0.25%	21.78	%	0.4	4,984		N/A		N/A		N/A		N/A	N/A		31,060		27,069
Mezzanine Note Payable	Oct 2015	11,660		11,490		Oct 2016	LIBOR+3.00%	6.38	%	0.8	11,660		19,433		19,433		19,433		0.5	19,433		—		—
		16,644		16,162				10.83	%	0.7	16,644		19,433		19,433		19,433		0.5	19,433		31,060		27,069
Repurchase Agreements (F)
CDO Securities	Dec 2013	—		—		—	—%	—	%	0.0	—		N/A		N/A		N/A		N/A	N/A		55,894		55,894
FNMA/FHLMC securities	Dec 2015	348,625		348,625		Jan 2016	0.71%	0.71	%	0.1	—		350,280		365,265		365,265		7.7	—		385,282		385,282
Golf Loans (G)	Aug 2015	70,000		69,833		Feb 2016	LIBOR + 3.50%	5.13	%	0.4	70,000		N/A		N/A		N/A		N/A	—		—		—
		418,625		418,458				1.45	%	0.2	70,000		350,280		365,265		365,265		7.7	—		441,176		441,176



	December 31, 2015																						December 31, 2014
														Collateral
Debt Obligation/Collateral	Month Issued	Outstanding Face Amount		Carrying Value		Final Stated Maturity	Weighted Average Coupon (A)		Weighted Average Funding Cost (B)		Weighted Average Life (Years)	Face Amount of Floating Rate Debt		Outstanding Face Amount (C)		Amortized Cost Basis (C)		Carrying Value (C)		Weighted Average Life (Years)	Floating Rate Face Amount (C)		Outstanding Face Amount		Carrying Value
Golf Credit Facilities
First Lien Loan (G)	Dec 2013	—		—		—	—		—	%	0.0	—		N/A		N/A		N/A		N/A	N/A		49,923		49,800
Second Lien Loan (G)	Dec 2013	—		—		—%	—%		—	%	0.0	—		N/A		N/A		N/A		N/A	N/A		105,575		105,315
Vineyard II	Dec 1993	200		200		Dec 2043	2.11%		2.11	%	28.0	200		N/A		N/A		N/A		N/A	N/A		200		200
Capital Leases (Equipment)	May 2014 - Dec 2015	11,058		11,058		Jun 2021	3.83% to 11.54%		6.46	%	4.5	—		N/A		N/A		N/A		N/A	N/A		6,159		6,159
		11,258		11,258					6.38	%	4.9	200		N/A		N/A		N/A		N/A	N/A		161,857		161,474
Corporate
Junior subordinated notes payable	Mar 2006	51,004		51,225		Apr 2035	7.57%	(H)	7.36	%	19.3	—		N/A		N/A		N/A		N/A	N/A		51,004		51,231
		51,004		51,225					7.36	%	19.3	—		N/A		N/A		N/A		N/A	N/A		51,004		51,231
Subtotal debt obligation		590,464		590,036					2.26	%	2.6	$	176,027	$	439,551	$	409,822	$	431,090	6.7	$	31,910	911,950		908,623
Financing on subprime mortgage loans subject to call option	(I)	380,806		380,806																			406,217		406,217
Total debt obligation		$	971,270	$	970,842																		$	1,318,167	$	1,314,840

See notes on next page.


(A)	Weighted average, including floating and fixed rate classes.


(B)	Including the effect of applicable hedges and deferred financing cost.


(C)	Excluding restricted cash held in CDOs to be used for principal and interest payments of CDO debt.


(D)	This CDO was not in compliance with its applicable over collateralization tests as of December 31, 2015. Newcastle is not receiving cash flows from this CDO (other than senior management fees and cash flows on senior classes of bonds that were repurchased), because net interest is being used to repay debt, and expects this CDO to remain out of compliance for the forseeable future.


(E)	Represents financings of previously repurchased Newcastle CDO bonds for which the collateral is eliminated in consolidation.

(F)

These repurchase agreements had $0.5 million accrued interest payable at December 31, 2015. The counterparties on these repurchase agreements are Nomura ($48.6 million), Morgan Stanley ($53.7 million), Citi ($246.3 million) and Credit Suisse ($70.0 million). Newcastle has margin exposure on $418.6 million of repurchase agreements related to the financing of FNMA/FHLMC securities and Golf loans. To the extent that the value of the collateral underlying these repurchase agreements declines, Newcastle may be required to post margin, which could significantly impact its liquidity. $348.6 million of repurchase agreements were repaid in 2016 as part of the sale of the FNMA/FHLMC securities.


(G)	The golf repurchase agreement is collateralized by assets of the Golf business. The carrying amount of the golf repurchase agreement is reported net of deferred financing costs of $0.2 million as of December 31, 2015. The First Lien Loan and Second Lien Loan are reported net of deferred financing costs of $0.4 million as of December 31, 2014.


(H)	LIBOR +2.25% after April 2016.


(I)	Issued in April 2006 and July 2007, and secured by the general credit of Newcastle. See Note 6 regarding the securitizations of Subprime Portfolio I and II.

Certain of the debt obligations included above are obligations of consolidated subsidiaries of Newcastle which own the related collateral. In some cases, including the CDO and Other Bonds Payable, such collateral is not available to other creditors of Newcastle.

CDO Bonds Payable

Each CDO financing is subject to tests that measure the amount of over collateralization and excess interest in the transaction. Failure to satisfy these tests would cause the principal and/or interest cashflow that would otherwise be distributed to more junior classes of securities (including those held by Newcastle) to be redirected to pay down the most senior class of securities outstanding until the tests are satisfied. As a result, cash flow and liquidity are negatively impacted upon such a failure. As of December 31, 2015, CDO VI was not in compliance with its over collateralization tests.

In June 2011, Newcastle deconsolidated a non-recourse financing structure, CDO V. Newcastle determined that it does not currently have the power to direct the relevant activities of CDO V as an event of default had occurred and Newcastle may be removed as the collateral manager by a single party. So long as the event of default continues, Newcastle will not be permitted to purchase or sell any collateral in CDO V. If Newcastle is removed as the collateral manager of CDO V, it would no longer receive the senior management fees from such CDO. As of February 29, 2016, Newcastle has not been removed as collateral manager. Newcastle does not expect the failure of these additional tests to have a material negative impact on its cash flows, business, results of operations or financial condition.

In June 2013, Newcastle completed the sale of 100% of the assets in CDO IV. Newcastle sold $153.4 million face amount of collateral at an average price of 95% of par, or $145.2 million. Subsequently, Newcastle paid off $71.9 million of outstanding third party debt and terminated the CDO. This transaction resulted in approximately $73.1 million of proceeds to Newcastle of which approximately $5.3 million was received in Newcastle CDO VIII. Newcastle recovered par on $59.5 million of CDO debt which had been repurchased in the past at an average price of 52% of par and $8.0 million of proceeds on its subordinated interests. This transaction has also decreased Newcastle’s comprehensive income by $0.6 million and resulted in a net gain on sale of assets of $4.2 million and a $0.8 million gain on hedge termination.

In June 2013, Newcastle completed the purchase of $116.8 million aggregate face amount of securities that are collateralized by certain Newcastle CDO VIII Class I notes for an aggregate purchase of approximately $103.1 million, or an average price of 88.3% of par. Simultaneously, Newcastle financed the purchase with $60.0 million received pursuant to a master repurchase agreement with the seller of the securities (“CDO VIII Repack”). The terms of the repurchase agreement included a rate of one-month LIBOR plus 150 bps and a 30-day maturity. The purchase of the securities and the repurchase agreement were treated as a linked transaction and accordingly recorded on a net basis as a non-hedge derivative instrument, with changes in market value recorded on the statement of operations. In May 2014, the CDO VIII Class I notes were repaid in full and the repurchase agreement was terminated.

During the second quarter of 2015, approximately $60.3 million of Newcastle CDO VIII notes were repaid primarily due to the sale of securities and loans. See Notes 5 and 6. As a result of the repayment of the Newcastle CDO VIII notes, Newcastle also repaid $13.3 million of repurchase agreements associated with Newcastle CDO VIII.

During the second quarter of 2015, approximately $51.4 million of Newcastle CDO IX notes were repaid primarily due to the sales and paydown of securities and loans. See Notes 5 and 6. As a result of the repayment of the Newcastle CDO IX notes, Newcastle also repaid $22.3 million of repurchase agreements associated with Newcastle CDO IX.

In June 2015, Newcastle repurchased $11.5 million face amount of CDO bonds payable issued by Newcastle CDO VIII at a price of 95.50% of par for total proceeds of $11.0 million. As a result, Newcastle extinguished $11.5 million face amount of CDO bonds payable and recorded a gain on extinguishment of debt of $0.5 million.

As of December 31, 2015, CDO VI was not in compliance with its applicable over collateralization tests and, consequently, Newcastle was not receiving cash flows from this CDO currently (other than senior management fees and interest distributions from senior classes of bonds Newcastle owns). Based upon Newcastle’s current calculations, Newcastle expects this CDO to remain out of compliance for the foreseeable future.

Other Bonds and Notes Payable

In October 2015, Newcastle financed an unencumbered real estate related loan with a face amount of $19.4 million with a mezzanine note payable for $11.7 million. This note payable bears interest at one month LIBOR + 3.00%, matures in October 2016 and is subject to customary margin provisions.

Repurchase Agreements

In July 2014, Newcastle financed an additional $20.0 million face amount of previously repurchased CDO bonds payable with repurchase agreements for $12.0 million. These repurchase agreements bore interest at one-month LIBOR + 1.65%, matured in January 2015 and were subject to customary margin provisions.

In November 2014, Newcastle financed $391.9 million face amount of purchased FNMA/FHLMC securities with repurchase agreements with carrying value of $385.3 million as of December 31, 2014. These repurchase agreements bore interest at 0.36%, matured in February 2015 and were subject to customary margin provisions.

In March 2015, Newcastle sold Agency RMBS with a face amount of approximately $380.4 million at an average price of 104.72% for a gain of $5.9 million, and repaid associated repurchase agreements. Also in March 2015, Newcastle financed $389.1 million face amount of purchased FNMA/FHLMC securities with repurchase agreements with carrying value of $386.1 million as of March 31, 2015. These repurchase agreements bore interest at 0.37%, matured in April 2015 and were subject to customary margin provisions.

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

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.

Golf Credit Facilities and Repurchase Agreement

In December 2013, the Golf business entered into two loan agreements (“First Lien Loan” and “Second Lien Loan”) with General Electric Capital Corporation (“GECC”). In August 2015, Newcastle acquired from GECC $51.4 million outstanding face amount of the First Lien Loan at a price of 90.0% of par, or $46.3 million, and $105.6 million outstanding face amount of the Second Lien Loan at a price of 90.0% of par, or $95.0 million. The purchases were funded with $71.3 million cash and a $70.0 million repurchase agreement. The repurchase agreement was extended, and bears interest at LIBOR + 4.00% and matures on May 31, 2016 (see Note 17 for additional information). Newcastle recorded a gain on extinguishment of debt of $15.4 million.

The Golf business is obligated under a $0.2 million loan with the City of Escondido, California (“Vineyard II”). The principal amount of the loan is payable in five equal installments upon reaching the "Achievement Date”, which is the date on which the previous 36-month period equals or exceeds 240,000 rounds of golf played on the property. As of December 31, 2015, 240,000 rounds of golf have not been achieved within an applicable 36-month period. The interest rate is adjusted annually and is equal to 1% plus an Index amount, as defined in the loan agreement. As of December 31, 2015, the interest rate is 2.11%.

Capital Leases - Equipment

The Golf business leases certain golf carts and other equipment under capital lease agreements. The agreements typically provide for minimum rentals plus executory costs. Lease terms range from 36-66 months. Certain leases include bargain purchase options at lease expiration.

The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as of December 31, 2015 are as follows:



2016	$	2,848
2017	2,844
2018	2,837
2019	2,720
2020	1,425
Thereafter	128
Total minimum lease payments	12,802
Less: imputed interest	1,744
Present value of net minimum lease payments	$	11,058

Maturity Table

Newcastle’s debt obligations (gross of $0.4 million of discounts at December 31, 2015) have contractual maturities as follows:



	Nonrecourse		Recourse		Total
2016	$	13,858	$	418,625	$	432,483
2017	2,339		—		2,339
2018	2,488		—		2,488
2019	2,534		—		2,534
2020	1,372		—		1,372
Thereafter	479,050		51,004		530,054
Total	$	501,641	$	469,629	$	971,270

Debt Covenants

Newcastle’s non-CDO financings and Golf credit facilities contain various customary loan covenants. Newcastle was in compliance with all of these covenants as of December 31, 2015.