Quarterly report pursuant to Section 13 or 15(d)

SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES

v2.4.0.8
SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES
 3 Months Ended
Mar. 31, 2014
Segment Reporting And Variable Interest Entities  
SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES
4.   SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES
 
Newcastle conducts its business through the following segments: (i) investments in senior housing properties (“senior housing”), (ii) debt investments financed with collateralized debt obligations (“CDOs”), (iii) other debt investments (“other debt”), (iv) investment in golf courses and facilities (“golf”) and (v) 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:
 
Senior
 
Debt Investments (A)
 
 
 
 
 
Inter-segment Elimination and
 
 
 
Housing (A)
 
CDOs
 
Other Debt (B)
 
Golf
 
Corporate
 
Discontinued Operations (C)
 
Total
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
—

 
$
30,722

 
$
16,952

 
$
41

 
$
11

 
$
(1,274
)
 
$
46,452

Interest expense
13,701

 
6,128

 
12,663

 
3,682

 
955

 
(1,274
)
 
35,855

Net interest income (expense)
(13,701
)
 
24,594

 
4,289

 
(3,641
)
 
(944
)
 
—

 
10,597

Impairment (reversal)
—

 
432

 
814

 
—

 
—

 
—

 
1,246

Operating revenues
57,810

 
—

 
541

 
63,278

 
—

 
—

 
121,629

Other income (loss)
(2
)
 
13,610

 
2,198

 
—

 
—

 
—

 
15,806

Property operating expenses
23,520

 
—

 
284

 
—

 
—

 
—

 
23,804

Operating expenses - golf
—

 
—

 
—

 
58,338

 
—

 
—

 
58,338

Cost of sales - golf
—

 
—

 
—

 
5,956

 
—

 
—

 
5,956

Depreciation and amortization
22,835

 
—

 
57

 
7,430

 
37

 
—

 
30,359

Other operating expenses
7,792

 
156

 
702

 
1,081

 
8,375

 
—

 
18,106

Income tax expense
155

 
—

 
—

 
140

 
—

 
—

 
295

Income (loss) from continuing operations
(10,195
)
 
37,616

 
5,171

 
(13,308
)
 
(9,356
)
 
—

 
9,928

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

 
—

 
—

 
—

 
—

 
(5,305
)
 
(5,305
)
Net income (loss)
(10,195
)
 
37,616

 
5,171

 
(13,308
)
 
(9,356
)
 
(5,305
)
 
4,623

Preferred dividends
—

 
—

 
—

 
—

 
(1,395
)
 
—

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

 
—

 
—

 
139

 
—

 
522

 
661

Income (loss) applicable to common stockholders
$
(10,195
)
 
$
37,616

 
$
5,171

 
$
(13,169
)
 
$
(10,751
)
 
$
(4,783
)
 
$
3,889

 
Senior
 
Debt Investments (A)
 
 
 
 
 
Inter-segment Elimination and
 
 
 
Housing (A)
 
CDOs
 
Other Debt (B)
 
Golf
 
Corporate
 
Discontinued Operations (C)
 
Total
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments
$
1,465,735

 
$
807,388

 
$
718,082

 
$
351,906

 
$
—

 
$
(86,313
)
 
$
3,256,798

Cash and restricted cash
36,095

 
1,304

 
752

 
12,916

 
75,300

 
—

 
126,367

Other assets
63,969

 
36,733

 
1,350

 
34,455

 
1,089

 
(152
)
 
137,444

Total assets
1,565,799

 
845,425

 
720,184

 
399,277

 
76,389

 
(86,465
)
 
3,520,609

Debt
1,091,823

 
543,859

 
624,240

 
182,373

 
51,236

 
(86,313
)
 
2,407,218

Other liabilities
69,440

 
10,918

 
2,123

 
181,165

 
44,422

 
(152
)
 
307,916

Total liabilities
1,161,263

 
554,777

 
626,363

 
363,538

 
95,658

 
(86,465
)
 
2,715,134

Preferred stock
—

 
—

 
—

 
—

 
61,583

 
—

 
61,583

Noncontrolling interests
—

 
—

 
—

 
227

 
—

 
—

 
227

GAAP book value
$
404,536

 
$
290,648

 
$
93,821

 
$
35,512

 
$
(80,852
)
 
$
—

 
$
743,665

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additions to investments in real estate
$
24,640

 
$
—

 
$
33

 
$
1,892

 
$
—

 
$
—

 
$
26,565

 
 
Senior
 
Debt Investments (A)
 
 
 
 
 
Inter-segment Elimination and
 
 
 
Housing (A)
 
CDOs
 
Other Debt (B)
 
Golf
 
Corporate
 
Discontinued Operations (C)
 
Total
Three Months Ended March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
—

 
$
31,828

 
$
30,298

 
$
—

 
$
72

 
$
(866
)
 
$
61,332

Interest expense
1,232

 
7,135

 
14,257

 
—

 
952

 
(866
)
 
22,710

Net interest income (expense)
(1,232
)
 
24,693

 
16,041

 
—

 
(880
)
 
—

 
38,622

Impairment (reversal)
—

 
3,182

 
(409
)
 
—

 
—

 
—

 
2,773

Operating revenues
12,997

 
—

 
503

 
—

 
—

 
—

 
13,500

Other income (loss)
8

 
4,572

 
1,190

 
—

 
—

 
—

 
5,770

Property operating expenses
8,423

 
—

 
247

 
—

 
—

 
—

 
8,670

Depreciation and amortization
4,022

 
—

 
57

 
—

 
—

 
—

 
4,079

Other operating expenses
2,081

 
194

 
855

 
—

 
11,375

 
—

 
14,505

Income (loss) from continuing operations
(2,753
)
 
25,889

 
16,984

 
—

 
(12,255
)
 
—

 
27,865

Income (loss) from discontinued operations
—

 
—

 
—

 
—

 
—

 
10,148

 
10,148

Net income (loss)
(2,753
)
 
25,889

 
16,984

 
—

 
(12,255
)
 
10,148

 
38,013

Preferred dividends
—

 
—

 
—

 
—

 
(1,395
)
 
—

 
(1,395
)
Income (loss) applicable to common stockholders
$
(2,753
)
 
$
25,889

 
$
16,984

 
$
—

 
$
(13,650
)
 
10,148

 
$
36,618

(A)
Assets held within non-recourse structures, including all of the assets in the senior housing and CDO segments, 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, 2014
 
Investments
 
Debt
Non-Recourse
Outstanding
Face Amount
 
Carrying
Value
 
Outstanding
Face Amount*
 
Carrying
Value*
Manufactured housing loan portfolio I
$
98,925

 
$
89,113

 
$
70,943

 
$
63,325

Manufactured housing loan portfolio II
123,611

 
123,277

 
88,785

 
88,524

Subprime mortgage loans subject to call options
406,217

 
406,217

 
406,217

 
406,217

Real estate securities
54,446

 
50,226

 
38,253

 
34,811

Operating real estate
N/A

 
6,573

 
6,000

 
6,000

Subtotal
683,199

 
675,406

 
610,198

 
598,877

Other
 
 
 
 
 
 
 
Unlevered real estate securities
128,032

 
4,129

 
—

 
—

Other investments
N/A

 
6,239

 
—

 
—

Residential mortgage loans
44,183

 
32,308

 
25,363

 
25,363

 
$
855,414

 
$
718,082

 
$
635,561

 
$
624,240


*An aggregate face amount of $133.6 million (carrying values of $86.3 million) of debt represents intersegment financing, which is eliminated upon consolidation.
 

(C)
Represents the elimination of investments and financings and their related income and expenses between the CDO segment, the other debt segment and the golf segment as the corresponding inter-segment investments and financings are presented on a gross basis within each of these segments. In addition, includes the results of discontinued segments.

 
Variable Interest Entities (“VIEs”)
 
The VIEs in which Newcastle has a significant interest include (i) Newcastle’s CDOs, in which Newcastle has been determined to be the primary beneficiary and therefore consolidates them (with the exception of CDO V and CDO VIII Repack), 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, and (ii) the manufactured housing loan financing structures, which are similar to the CDOs in analysis. Newcastle’s CDOs and manufactured housing loan financings are held in special purpose entities whose debt is treated as non-recourse secured borrowings of Newcastle.
 
Newcastle’s subprime securitizations, CDO V and the CDO VIII Repack 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 de-consolidation of an entity that otherwise would have been consolidated. 
 

As of March 31, 2014, 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, 2014, 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
 
$
177,764

 
$
204,882

 
$
3,278

 
 
 
 
 
 
 
CDO VIII Repack
 
$
90,097

 
$
90,097

 
$
88,272

  
(A)
Face amount.
(B)
Newcastle CDO V includes $40.3 million face amount of debt owned by Newcastle with a carrying value of $3.3 million at March 31, 2014. CDO VIII Repack includes $90.1 million face amount of debt owned by Newcastle with a carrying value of $88.3 million at March 31, 2014.
(C)
This amount represents Newcastle’s maximum exposure to loss from this entity.