Quarterly report pursuant to Section 13 or 15(d)

REAL ESTATE SECURITIES

v2.4.0.8
REAL ESTATE SECURITIES
 9 Months Ended
Sep. 30, 2014
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 September 30, 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)
CMBS-Conduit
 
$
157,778

 
$
161,688

 
$
(63,210
)
 
$
98,478

 
$
34,030

 
$
—

 
$
132,508

 
26

 
B+
 
5.52
%
 
12.08
%
 
2.3

 
12.4
%
CMBS- Single Borrower
 
79,396

 
79,044

 
(12,364
)
 
66,680

 
3,672

 
(4
)
 
70,348

 
12

 
BB-
 
6.33
%
 
7.25
%
 
2.3

 
2.2
%
CMBS-Large Loan
 
3,229

 
3,229

 
—

 
3,229

 
—

 
—

 
3,229

 
1

 
BBB-
 
3.36
%
 
3.36
%
 
0.2

 
4.4
%
REIT Debt
 
29,200

 
28,856

 
—

 
28,856

 
1,437

 
—

 
30,293

 
5

 
BB+
 
5.89
%
 
6.88
%
 
0.8

 
N/A

Non-Agency RMBS
 
87,113

 
97,879

 
(59,987
)
 
37,892

 
22,339

 
—

 
60,231

 
33

 
CCC+
 
1.04
%
 
10.75
%
 
6.2

 
26.8
%
ABS-Franchise
 
8,464

 
7,647

 
(7,647
)
 
—

 
—

 
—

 
—

 
1

 
C
 
6.69
%
 
0.00
%
 
—

 
0.0
%
CDO (E)
 
21,377

 
6,394

 
—

 
6,394

 
7,327

 
—

 
13,721

 
3

 
B-
 
1.10
%
 
10.11
%
 
7.7

 
27.1
%
Debt Security Total / Average (F)
 
$
386,557

 
$
384,737

 
$
(143,208
)
 
$
241,529

 
$
68,805

 
$
(4
)
 
$
310,330

 
81

 
B
 
4.47
%
 
9.75
%
 
3.3

 
 

Equity Securities
 
 

—

 
—

 
—

 
309

 
—

 
309

 
1

 
 
 
 
 
 
 
 
 
 
Total
 
 

$
384,737

 
$
(143,208
)
 
$
241,529

 
$
69,114

 
$
(4
)
 
$
310,639

 
82

 
 
 
 
 
 
 
 
 
 
   
(A)
See Note 12 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. 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 $112.5 million.
(F)
The total outstanding face amount was $262.6 million for fixed rate securities and $124.0 million for floating rate securities.
 
Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the nine months ended September 30, 2014, Newcastle recorded no other-than-temporary impairment charges (“OTTI”) with respect to real estate securities. Based on management’s analysis of the securities, the performance of the underlying loans and changes in market factors, Newcastle noted no adverse changes in the expected cash flows on certain of these securities. 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 September 30, 2014.
 
 
 
 
 
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
 
$
3,237

 
$
3,237

 
$
—

 
$
3,237

 
$
—

 
$
(4
)
 
$
3,233

 
1

 
BBB-

 
5.78
%
 
5.78
%
 
0.1

Twelve or More
Months
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—
%
 
—
%
 
—

Total
 
$
3,237

 
$
3,237

 
$
—

 
$
3,237

 
$
—

 
$
(4
)
 
$
3,233

 
1

 
BBB-

 
5.78
%
 
5.78
%
 
0.1
 
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:
 
September 30, 2014
 
 
 
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
—

 
—

 
—

 
—

Non credit impaired securities
3,233

 
3,237

 
—

 
(4
)
Total debt securities in an unrealized loss position
$
3,233

 
$
3,237

 
$
—

 
$
(4
)
   
(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 for the nine months ended September 30, 2014: 
Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income
$
(2,873
)
 
 

Additions for credit losses on securities for which an OTTI was not previously recognized
—

 
 

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
—

 
 

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

 
 

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

 
 

Reduction for securities sold/written off 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
$
—

 
The table below summarizes the geographic distribution of the collateral securing Newcastle’s CMBS and asset backed securities (“ABS”) at September 30, 2014:
 
CMBS
 
ABS
Geographic Location
Outstanding Face Amount
 
Percentage
 
Outstanding Face Amount
 
Percentage
Western U.S.
$
40,073

 
16.7
%
 
$
29,606

 
31.0
%
Northeastern U.S.
51,078

 
21.2
%
 
23,194

 
24.2
%
Southeastern U.S.
47,340

 
19.7
%
 
19,477

 
20.4
%
Midwestern U.S.
33,008

 
13.7
%
 
12,310

 
12.9
%
Southwestern U.S.
51,696

 
21.5
%
 
10,382

 
10.9
%
Other
10,825

 
4.5
%
 
608

 
0.6
%
Foreign
6,383

 
2.7
%
 
—

 
0.0
%
 
$
240,403

 
100.0
%
 
$
95,577

 
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 January 2014, Newcastle sold $503.0 million face amount of the remaining FNMA/FHLMC securities at an average price of 105.82% for total proceeds of $532.2 million and repaid $516.1 million of associated repurchase agreements. Newcastle recognized a net gain of approximately $1.9 million on the sale of these securities.
 
In May 2014, Newcastle sold $68.3 million face amount of CMBS securities at an average price of 105.2% for total proceeds of $71.9 million and repaid $71.9 million of associated CDO bonds payable and other term loan financings.  Newcastle recognized a net gain of approximately $15.0 million on the sale of these securities.
 
In May 2014, Newcastle sold $54.2 million outstanding face amount of the Sorin CDO security at an average price of 93.0% for total proceeds of $50.4 million and repaid $50.4 million of associated CDO bonds payable and other term loan financings. Newcastle recognized a net gain of approximately $0.7 million on the sale of this security.