| INFORMATION REGARDING BUSINESS SEGMENTS |
2. INFORMATION REGARDING BUSINESS SEGMENTS
Newcastle conducts its business through the following segments: (i) investments financed with non-recourse collateralized debt
obligations (CDOs), (ii) investments financed with other non-recourse debt, (iii) investments and debt repurchases financed with recourse debt, (iv) unlevered investments, and (v) corporate. With respect to the first
two nonrecourse segments, subject to the passing of certain periodic coverage tests, Newcastle is generally entitled to receive the 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 Newcastles segments is given below, together with a reconciliation to
the same data for Newcastle as a whole:
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
| |
|
Non-Recourse (A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
CDOs |
|
|
Other Non-
Recourse (B) |
|
|
Recourse
(C) |
|
|
Unlevered
(D)
|
|
|
Corporate |
|
|
Inter-segment
Elimination (E) |
|
|
Total |
|
| Six Months Ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income
|
|
$ |
111,399 |
|
|
$ |
35,006 |
|
|
$ |
597 |
|
|
$ |
1,015 |
|
|
$ |
63 |
|
|
$ |
(1,734 |
) |
|
$ |
146,346 |
|
| Interest expense
|
|
|
47,285 |
|
|
|
25,990 |
|
|
|
242 |
|
|
|
|
|
|
|
1,906 |
|
|
|
(1,508 |
) |
|
|
73,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest income (expense)
|
|
|
64,114 |
|
|
|
9,016 |
|
|
|
355 |
|
|
|
1,015 |
|
|
|
(1,843 |
) |
|
|
(226 |
) |
|
|
72,431 |
|
| Impairment (reversal)
|
|
|
(44,158 |
) |
|
|
1,797 |
|
|
|
|
|
|
|
(3,912 |
) |
|
|
|
|
|
|
|
|
|
|
(46,273 |
) |
| Other income (loss)
|
|
|
98,234 |
|
|
|
1,490 |
|
|
|
|
|
|
|
4,634 |
|
|
|
|
|
|
|
|
|
|
|
104,358 |
|
| Expenses
|
|
|
639 |
|
|
|
1,636 |
|
|
|
|
|
|
|
115 |
|
|
|
11,864 |
|
|
|
|
|
|
|
14,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) from continuing operations
|
|
|
205,867 |
|
|
|
7,073 |
|
|
|
355 |
|
|
|
9,446 |
|
|
|
(13,707 |
) |
|
|
(226 |
) |
|
|
208,808 |
|
| Income (loss) from discontinued operations
|
|
|
|
|
|
|
(185 |
) |
|
|
|
|
|
|
(41 |
) |
|
|
|
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss)
|
|
|
205,867 |
|
|
|
6,888 |
|
|
|
355 |
|
|
|
9,405 |
|
|
|
(13,707 |
) |
|
|
|
|
|
|
208,808 |
|
| Preferred dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,790 |
) |
|
|
|
|
|
|
(2,790 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) applicable to common stockholders
|
|
$ |
205,867 |
|
|
$ |
6,888 |
|
|
$ |
355 |
|
|
$ |
9,405 |
|
|
$ |
(16,497 |
) |
|
$ |
|
|
|
$ |
206,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income
|
|
$ |
56,571 |
|
|
$ |
17,525 |
|
|
$ |
450 |
|
|
$ |
522 |
|
|
$ |
43 |
|
|
$ |
(968 |
) |
|
$ |
74,143 |
|
| Interest expense
|
|
|
22,672 |
|
|
|
12,835 |
|
|
|
144 |
|
|
|
|
|
|
|
954 |
|
|
|
(855 |
) |
|
|
35,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest income (expense)
|
|
|
33,899 |
|
|
|
4,690 |
|
|
|
306 |
|
|
|
522 |
|
|
|
(911 |
) |
|
|
(113 |
) |
|
|
38,393 |
|
| Impairment (reversal)
|
|
|
(5,913 |
) |
|
|
643 |
|
|
|
|
|
|
|
(3,797 |
) |
|
|
|
|
|
|
|
|
|
|
(9,067 |
) |
| Other income (loss)
|
|
|
55,127 |
|
|
|
(337 |
) |
|
|
|
|
|
|
4,099 |
|
|
|
|
|
|
|
|
|
|
|
58,889 |
|
| Expenses
|
|
|
326 |
|
|
|
892 |
|
|
|
|
|
|
|
70 |
|
|
|
6,116 |
|
|
|
|
|
|
|
7,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) from continuing operations
|
|
|
94,613 |
|
|
|
2,818 |
|
|
|
306 |
|
|
|
8,348 |
|
|
|
(7,027 |
) |
|
|
(113 |
) |
|
|
98,945 |
|
| Income (loss) from discontinued operations
|
|
|
|
|
|
|
97 |
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
113 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss)
|
|
|
94,613 |
|
|
|
2,915 |
|
|
|
306 |
|
|
|
8,328 |
|
|
|
(7,027 |
) |
|
|
|
|
|
|
99,135 |
|
| Preferred dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,395 |
) |
|
|
|
|
|
|
(1,395 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) applicable to common stockholders
|
|
$ |
94,613 |
|
|
$ |
2,915 |
|
|
$ |
306 |
|
|
$ |
8,328 |
|
|
$ |
(8,422 |
) |
|
$ |
|
|
|
$ |
97,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investments
|
|
$ |
2,489,435 |
|
|
$ |
771,825 |
|
|
$ |
194,460 |
|
|
$ |
19,247 |
|
|
$ |
|
|
|
$ |
(96,950 |
) |
|
$ |
3,378,017 |
|
| Cash and restricted cash
|
|
|
171,255 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
100,834 |
|
|
|
|
|
|
|
272,093 |
|
| Derivitve assets
|
|
|
5,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,534 |
|
| Other assets
|
|
|
27,567 |
|
|
|
156 |
|
|
|
278 |
|
|
|
2,250 |
|
|
|
912 |
|
|
|
(5 |
) |
|
|
31,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets
|
|
|
2,693,791 |
|
|
|
771,981 |
|
|
|
194,738 |
|
|
|
21,501 |
|
|
|
101,746 |
|
|
|
(96,955 |
) |
|
|
3,686,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Debt
|
|
|
(2,468,431 |
) |
|
|
(715,431 |
) |
|
|
(107,216 |
) |
|
|
|
|
|
|
(51,251 |
) |
|
|
96,955 |
|
|
|
(3,245,374 |
) |
| Derivative liabilities
|
|
|
(126,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126,501 |
) |
| Other liabilities
|
|
|
(45,540 |
) |
|
|
(2,061 |
) |
|
|
(85,284 |
) |
|
|
(60 |
) |
|
|
(12,615 |
) |
|
|
|
|
|
|
(145,560 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities
|
|
|
(2,640,472 |
) |
|
|
(717,492 |
) |
|
|
(192,500 |
) |
|
|
(60 |
) |
|
|
(63,866 |
) |
|
|
96,955 |
|
|
|
(3,517,435 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,583 |
) |
|
|
|
|
|
|
(61,583 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| GAAP book value
|
|
$ |
53,319 |
|
|
$ |
54,489 |
|
|
$ |
2,238 |
|
|
$ |
21,441 |
|
|
$ |
(23,703 |
) |
|
$ |
|
|
|
$ |
107,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
CDOs (A) |
|
|
Other
Non-Recourse
(A) (B) |
|
|
Recourse |
|
|
Unlevered |
|
|
Unallocated |
|
|
Total |
|
| Six Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income
|
|
$ |
105,721 |
|
|
$ |
36,806 |
|
|
$ |
976 |
|
|
$ |
742 |
|
|
$ |
30 |
|
|
$ |
144,275 |
|
| Interest expense
|
|
|
56,174 |
|
|
|
29,901 |
|
|
|
645 |
|
|
|
356 |
|
|
|
1,654 |
|
|
|
88,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest income (expense)
|
|
|
49,547 |
|
|
|
6,905 |
|
|
|
331 |
|
|
|
386 |
|
|
|
(1,624 |
) |
|
|
55,545 |
|
| Impairment
|
|
|
(60,308 |
) |
|
|
(34,229 |
) |
|
|
(60 |
) |
|
|
(15,930 |
) |
|
|
|
|
|
|
(110,527 |
) |
| Other income (loss)
|
|
|
115,730 |
|
|
|
(3,781 |
) |
|
|
(663 |
) |
|
|
(1,014 |
) |
|
|
(345 |
) |
|
|
109,927 |
|
| Other operating expenses
|
|
|
789 |
|
|
|
1,626 |
|
|
|
4 |
|
|
|
10 |
|
|
|
13,764 |
|
|
|
16,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) from continuing operations
|
|
|
224,796 |
|
|
|
35,727 |
|
|
|
(276 |
) |
|
|
15,292 |
|
|
|
(15,733 |
) |
|
|
259,806 |
|
| Income (loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss)
|
|
|
224,796 |
|
|
|
35,727 |
|
|
|
(276 |
) |
|
|
15,265 |
|
|
|
(15,733 |
) |
|
|
259,779 |
|
| Preferred dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,663 |
) |
|
|
(4,663 |
) |
| Excess of carrying amount of exchanged preferred stock over fair value of consideration paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,043 |
|
|
|
43,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) applicable to common stockholders
|
|
$ |
224,796 |
|
|
$ |
35,727 |
|
|
$ |
(276 |
) |
|
$ |
15,265 |
|
|
$ |
22,647 |
|
|
$ |
298,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income
|
|
$ |
54,778 |
|
|
$ |
18,760 |
|
|
$ |
117 |
|
|
$ |
519 |
|
|
$ |
9 |
|
|
$ |
74,183 |
|
| Interest expense
|
|
|
27,308 |
|
|
|
14,862 |
|
|
|
18 |
|
|
|
356 |
|
|
|
597 |
|
|
|
43,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest income (expense)
|
|
|
27,470 |
|
|
|
3,898 |
|
|
|
99 |
|
|
|
163 |
|
|
|
(588 |
) |
|
|
31,042 |
|
| Impairment
|
|
|
(29,462 |
) |
|
|
3,063 |
|
|
|
|
|
|
|
(16,096 |
) |
|
|
|
|
|
|
(42,495 |
) |
| Other income (loss)
|
|
|
56,008 |
|
|
|
(2,383 |
) |
|
|
|
|
|
|
104 |
|
|
|
(345 |
) |
|
|
53,384 |
|
| Other operating expenses
|
|
|
437 |
|
|
|
948 |
|
|
|
|
|
|
|
9 |
|
|
|
6,186 |
|
|
|
7,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) from continuing operations
|
|
|
112,503 |
|
|
|
(2,496 |
) |
|
|
99 |
|
|
|
16,354 |
|
|
|
(7,119 |
) |
|
|
119,341 |
|
| Income (loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss)
|
|
|
112,503 |
|
|
|
(2,496 |
) |
|
|
99 |
|
|
|
16,367 |
|
|
|
(7,119 |
) |
|
|
119,354 |
|
| Preferred dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,395 |
) |
|
|
(1,395 |
) |
| Excess of carrying amount of exchanged preferred stock over fair value of consideration paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) applicable to common stockholders
|
|
$ |
112,503 |
|
|
$ |
(2,496 |
) |
|
$ |
99 |
|
|
$ |
16,367 |
|
|
$ |
(8,514 |
) |
|
$ |
117,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (A) |
Assets held within CDOs and other non-recourse structures are not available to satisfy obligations outside of such financings, except to the extent Newcastle receives
net cash flow distributions from such structures. Furthermore, creditors or beneficial interest holders of these structures have no recourse to the general credit of Newcastle. Therefore, Newcastles exposure to the economic losses from such
structures is limited to its invested equity in them and economically their book value cannot be less than zero. Therefore, impairment recorded in excess of Newcastles 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 non-recourse segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, 2011 |
|
| |
|
Investments |
|
|
Debt |
|
| |
|
Outstanding
Face
Amount
|
|
|
Carrying
Value |
|
|
Outstanding
Face Amount |
|
|
Carrying
Value |
|
| Manufactured housing loan portfolio I
|
|
$ |
143,255 |
|
|
$ |
118,788 |
|
|
$ |
115,017 |
|
|
$ |
105,384 |
|
| Manufactured housing loan portfolio II
|
|
|
191,009 |
|
|
|
187,717 |
|
|
|
155,793 |
|
|
|
154,254 |
|
| Subprime mortgage loans subject to call options
|
|
|
406,217 |
|
|
|
404,239 |
|
|
|
406,217 |
|
|
|
404,239 |
|
| Real estate securities
|
|
|
71,278 |
|
|
|
52,746 |
|
|
|
50,000 |
|
|
|
45,516 |
|
| Operating real estate
|
|
|
N/A |
|
|
|
8,335 |
|
|
|
6,038 |
|
|
|
6,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
811,759 |
|
|
$ |
771,825 |
|
|
$ |
733,065 |
|
|
$ |
715,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (C) |
The $107.2 million of recourse debt is comprised of (i) $103.6 million of repurchase agreement secured by $108.9 million carrying value of FNMA/FHLMC securities
and (ii) $3.6 million of repurchase agreement secured by $35.7 million face amount of senior notes issued by Newcastle CDO VI, which was repurchased by Newcastle in December 2010 and eliminated in consolidation. $85.3 million of Investments and
Other Liabilities represent FNMA/FHLMC securities purchased but not yet settled at June 30, 2011. |
| (D) |
The following table summarizes the investments in the unlevered segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, 2011 |
|
| |
|
Outstanding
Face Amount |
|
|
Carrying
Value |
|
|
Number of
Investments |
|
| Real estate securities
|
|
$ |
124,036 |
|
|
$ |
3,218 |
|
|
|
20 |
|
| Real estate related loans
|
|
|
69,634 |
|
|
|
6,634 |
|
|
|
4 |
|
| Residential mortgage loans
|
|
|
7,566 |
|
|
|
3,371 |
|
|
|
228 |
|
| Other investments
|
|
|
N/A |
|
|
|
6,024 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
201,236 |
|
|
$ |
19,247 |
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (E) |
Represents the elimination of investments and financings and their related income and expenses between segments as the corresponding inter-segment investments and
financings are presented on a gross basis within each segment. |
Variable Interest Entities (VIEs)
The VIEs in which Newcastle has a significant interest include (i) Newcastles CDOs, in which Newcastle has been determined
to be the primary beneficiary and therefore consolidates them (with the exception of CDO V as described below), 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. Newcastles CDOs and
manufactured housing loan financings are held in special purpose entities whose debt is treated as non-recourse secured borrowings of Newcastle. Newcastles subprime securitizations are also considered VIEs, but Newcastle does not control their
activities and no longer receives a significant portion of their returns. These subprime securitizations were not consolidated under the current or prior guidance. In addition, Newcastles investments in CMBS, CDO securities and loans may be deemed to be variable interests in VIEs, depending on their structure. Newcastle is not obligated to provide, nor has it
provided, any financial support to these VIEs. Newcastle monitors these investments and, to the extent Newcastle determines that it potentially owns a majority of the currently controlling class, it analyzes them for potential consolidation. As of
June 30, 2011, Newcastle has not consolidated these potential VIEs due to the determination that, based on the nature of Newcastles investments and the provisions governing these structures, Newcastle does not have the power to direct the
activities that most significantly impact their economic performance. In April 2011, Newcastle sold its retained interests in Newcastle CDO
VII, a non-consolidated VIE of Newcastle. As a result of the sale of Newcastles retained interests in CDO VII and the subsequent liquidation of the VIE, CDO VII has been removed from our non-consolidated VIE disclosure as of June 30,
2011. On June 17, 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. The deconsolidation has reduced Newcastles gross assets by $301.6
million, reduced liabilities by $357.0 million and increased equity by $55.4 million. The deconsolidation also reduced revenues and expenses from June 17, 2011 onwards, but its impact was not material to net income applicable to common
stockholders. Newcastle had variable interests in the following unconsolidated VIE at June 30, 2011, in addition to the subprime
securitizations which are described in Note 4:
|
|
|
|
|
|
|
|
|
|
|
|
|
| Entity
|
|
Gross Assets (A) |
|
|
Debt (B) |
|
|
Carrying Value of Newcastles
Investment (C) |
|
| Newcastle CDO V
|
|
$ |
337,618 |
|
|
$ |
336,875 |
|
|
$ |
|
|
| (B) |
Includes $35.2 million face amount of debt owned by Newcastle at June 30, 2011. |
| (C) |
Represents Newcastles maximum exposure to loss from this entity. |
|