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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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Recourse
(A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDOs |
|
|
Other
Non-
Recourse (B) |
|
|
Recourse
(C) |
|
|
Unlevered
(D) |
|
|
Corporate |
|
|
Inter-segment
Elimination (E) |
|
|
Total |
|
Nine
Months Ended September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
$ |
164,523 |
|
|
$ |
54,421 |
|
|
$ |
1,626 |
|
|
$ |
2,053 |
|
|
$ |
99 |
|
|
$ |
(3,983 |
) |
|
$ |
218,739 |
|
Interest
expense |
|
|
67,173 |
|
|
|
39,660 |
|
|
|
455 |
|
|
|
|
|
|
|
2,859 |
|
|
|
(3,645 |
) |
|
|
106,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense) |
|
|
97,350 |
|
|
|
14,761 |
|
|
|
1,171 |
|
|
|
2,053 |
|
|
|
(2,760 |
) |
|
|
(338 |
) |
|
|
112,237 |
|
Impairment
(reversal) |
|
|
(27,904 |
) |
|
|
7,012 |
|
|
|
|
|
|
|
(3,731 |
) |
|
|
|
|
|
|
|
|
|
|
(24,623 |
) |
Other
income (loss) |
|
|
115,425 |
|
|
|
2,561 |
|
|
|
|
|
|
|
5,174 |
|
|
|
|
|
|
|
|
|
|
|
123,160 |
|
Expenses |
|
|
779 |
|
|
|
2,679 |
|
|
|
|
|
|
|
4 |
|
|
|
17,958 |
|
|
|
|
|
|
|
21,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations |
|
|
239,900 |
|
|
|
7,631 |
|
|
|
1,171 |
|
|
|
10,954 |
|
|
|
(20,718 |
) |
|
|
(338 |
) |
|
|
238,600 |
|
Income
(loss) from discontinued operations |
|
|
|
|
|
|
(131 |
) |
|
|
|
|
|
|
(56 |
) |
|
|
|
|
|
|
338 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) |
|
|
239,900 |
|
|
|
7,500 |
|
|
|
1,171 |
|
|
|
10,898 |
|
|
|
(20,718 |
) |
|
|
|
|
|
|
238,751 |
|
Preferred
dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,185 |
) |
|
|
|
|
|
|
(4,185 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) applicable to common stockholders |
|
$ |
239,900 |
|
|
$ |
7,500 |
|
|
$ |
1,171 |
|
|
$ |
10,898 |
|
|
$ |
(24,903 |
) |
|
$ |
|
|
|
$ |
234,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
$ |
53,403 |
|
|
$ |
18,816 |
|
|
$ |
1,029 |
|
|
$ |
1,038 |
|
|
$ |
36 |
|
|
$ |
(1,929 |
) |
|
$ |
72,393 |
|
Interest
expense |
|
|
19,909 |
|
|
|
13,329 |
|
|
|
213 |
|
|
|
|
|
|
|
953 |
|
|
|
(1,817 |
) |
|
|
32,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense) |
|
|
33,494 |
|
|
|
5,487 |
|
|
|
816 |
|
|
|
1,038 |
|
|
|
(917 |
) |
|
|
(112 |
) |
|
|
39,806 |
|
Impairment
(reversal) |
|
|
17,550 |
|
|
|
3,919 |
|
|
|
|
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
21,650 |
|
Other
income (loss) |
|
|
18,262 |
|
|
|
|
|
|
|
|
|
|
|
540 |
|
|
|
|
|
|
|
|
|
|
|
18,802 |
|
Expenses |
|
|
250 |
|
|
|
933 |
|
|
|
|
|
|
|
(111 |
) |
|
|
6,094 |
|
|
|
|
|
|
|
7,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations |
|
|
33,956 |
|
|
|
635 |
|
|
|
816 |
|
|
|
1,508 |
|
|
|
(7,011 |
) |
|
|
(112 |
) |
|
|
29,792 |
|
Income
(loss) from discontinued operations |
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
112 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) |
|
|
33,956 |
|
|
|
689 |
|
|
|
816 |
|
|
|
1,493 |
|
|
|
(7,011 |
) |
|
|
|
|
|
|
29,943 |
|
Preferred
dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,395 |
) |
|
|
|
|
|
|
(1,395 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) applicable to common stockholders |
|
$ |
33,956 |
|
|
$ |
689 |
|
|
$ |
816 |
|
|
$ |
1,493 |
|
|
$ |
(8,406 |
) |
|
$ |
|
|
|
$ |
28,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
$ |
2,375,681 |
|
|
$ |
793,546 |
|
|
$ |
222,557 |
|
|
$ |
23,595 |
|
|
$ |
|
|
|
$ |
(144,603 |
) |
|
$ |
3,270,776 |
|
Cash
and restricted cash |
|
|
178,121 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
205,172 |
|
|
|
|
|
|
|
383,301 |
|
Derivative
assets |
|
|
2,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,383 |
|
Other
assets |
|
|
23,719 |
|
|
|
99 |
|
|
|
640 |
|
|
|
2,171 |
|
|
|
300 |
|
|
|
(336 |
) |
|
|
26,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets |
|
|
2,579,904 |
|
|
|
793,645 |
|
|
|
223,197 |
|
|
|
25,774 |
|
|
|
205,472 |
|
|
|
(144,939 |
) |
|
|
3,683,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt |
|
|
(2,437,058 |
) |
|
|
(759,112 |
) |
|
|
(212,164 |
) |
|
|
|
|
|
|
(51,250 |
) |
|
|
144,603 |
|
|
|
(3,314,981 |
) |
Derivative
liabilities |
|
|
(132,056 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132,056 |
) |
Other
liabilities |
|
|
(43,631 |
) |
|
|
(2,817 |
) |
|
|
(19 |
) |
|
|
(65 |
) |
|
|
(21,295 |
) |
|
|
336 |
|
|
|
(67,491 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities |
|
|
(2,612,745 |
) |
|
|
(761,929 |
) |
|
|
(212,183 |
) |
|
|
(65 |
) |
|
|
(72,545 |
) |
|
|
144,939 |
|
|
|
(3,514,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,583 |
) |
|
|
|
|
|
|
(61,583 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
book value |
|
$ |
(32,841 |
) |
|
$ |
31,716 |
|
|
$ |
11,014 |
|
|
$ |
25,709 |
|
|
$ |
71,344 |
|
|
$ |
|
|
|
$ |
106,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Recourse |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDOs
(A) |
|
|
Other
(A) |
|
|
Recourse |
|
|
Unlevered |
|
|
Corporate |
|
|
Total |
|
Nine
Months Ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
$ |
168,150 |
|
|
$ |
54,952 |
|
|
$ |
976 |
|
|
$ |
1,189 |
|
|
$ |
48 |
|
|
$ |
225,315 |
|
Interest
expense |
|
|
83,209 |
|
|
|
44,462 |
|
|
|
645 |
|
|
|
356 |
|
|
|
2,605 |
|
|
|
131,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense) |
|
|
84,941 |
|
|
|
10,490 |
|
|
|
331 |
|
|
|
833 |
|
|
|
(2,557 |
) |
|
|
94,038 |
|
Impairment |
|
|
(146,833 |
) |
|
|
(35,323 |
) |
|
|
(60 |
) |
|
|
(23,630 |
) |
|
|
|
|
|
|
(205,846 |
) |
Other
income (loss) |
|
|
153,919 |
|
|
|
(5,417 |
) |
|
|
(663 |
) |
|
|
(905 |
) |
|
|
(345 |
) |
|
|
146,589 |
|
Other
operating expenses |
|
|
1,134 |
|
|
|
2,394 |
|
|
|
4 |
|
|
|
17 |
|
|
|
19,829 |
|
|
|
23,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations |
|
|
384,559 |
|
|
|
38,002 |
|
|
|
(276 |
) |
|
|
23,541 |
|
|
|
(22,731 |
) |
|
|
423,095 |
|
Income
(loss) from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186 |
|
|
|
|
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) |
|
|
384,559 |
|
|
|
38,002 |
|
|
|
(276 |
) |
|
|
23,727 |
|
|
|
(22,731 |
) |
|
|
423,281 |
|
Preferred
dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,058 |
) |
|
|
(6,058 |
) |
Excess
of carrying amount of exchanged preferred stock over fair value of consideration paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,043 |
|
|
|
43,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) applicable to common stockholders |
|
$ |
384,559 |
|
|
$ |
38,002 |
|
|
$ |
(276 |
) |
|
$ |
23,727 |
|
|
$ |
14,254 |
|
|
$ |
460,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
$ |
62,429 |
|
|
$ |
18,146 |
|
|
$ |
|
|
|
$ |
447 |
|
|
$ |
18 |
|
|
$ |
81,040 |
|
Interest
expense |
|
|
27,035 |
|
|
|
14,561 |
|
|
|
|
|
|
|
|
|
|
|
951 |
|
|
|
42,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense) |
|
|
35,394 |
|
|
|
3,585 |
|
|
|
|
|
|
|
447 |
|
|
|
(933 |
) |
|
|
38,493 |
|
Impairment |
|
|
(86,525 |
) |
|
|
(1,094 |
) |
|
|
|
|
|
|
(7,700 |
) |
|
|
|
|
|
|
(95,319 |
) |
Other
income (loss) |
|
|
38,189 |
|
|
|
(1,636 |
) |
|
|
|
|
|
|
109 |
|
|
|
|
|
|
|
36,662 |
|
Other
operating expenses |
|
|
345 |
|
|
|
768 |
|
|
|
|
|
|
|
7 |
|
|
|
6,065 |
|
|
|
7,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations |
|
|
159,763 |
|
|
|
2,275 |
|
|
|
|
|
|
|
8,249 |
|
|
|
(6,998 |
) |
|
|
163,289 |
|
Income
(loss) from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
213 |
|
|
|
|
|
|
|
213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) |
|
|
159,763 |
|
|
|
2,275 |
|
|
|
|
|
|
|
8,462 |
|
|
|
(6,998 |
) |
|
|
163,502 |
|
Preferred
dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,395 |
) |
|
|
(1,395 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) applicable to common stockholders |
|
$ |
159,763 |
|
|
$ |
2,275 |
|
|
$ |
|
|
|
$ |
8,462 |
|
|
$ |
(8,393 |
) |
|
$ |
162,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011 |
|
|
|
Investments |
|
|
Debt |
|
|
|
Outstanding
Face Amount |
|
|
Carrying
Value |
|
|
Outstanding
Face Amount* |
|
|
Carrying
Value* |
|
Manufactured
housing loan portfolio I |
|
$ |
139,116 |
|
|
$ |
115,357 |
|
|
$ |
111,052 |
|
|
$ |
101,443 |
|
Manufactured
housing loan portfolio II |
|
|
184,615 |
|
|
|
180,926 |
|
|
|
149,622 |
|
|
|
148,181 |
|
Residential
mortgage loans |
|
|
57,612 |
|
|
|
40,806 |
|
|
|
56,079 |
|
|
|
55,008 |
|
Subprime
mortgage loans subject to call options |
|
|
406,217 |
|
|
|
404,476 |
|
|
|
406,217 |
|
|
|
404,476 |
|
Real
estate securities |
|
|
69,121 |
|
|
|
44,238 |
|
|
|
48,504 |
|
|
|
44,004 |
|
Operating
real estate |
|
|
N/A |
|
|
|
7,743 |
|
|
|
6,000 |
|
|
|
6,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
856,681 |
|
|
$ |
793,546 |
|
|
$ |
777,474 |
|
|
$ |
759,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
An aggregate face amount of $158.8 million (carrying value of
$144.6 million) of debt represents financing provided by the CDO segment (and included as investments in the CDO segment),
which is eliminated upon consolidation. |
(C) |
The $212.2 million of recourse
debt is comprised of (i) $209.3 million of repurchase agreement secured by $222.6 million carrying value of FNMA/FHLMC
securities and (ii) $2.9 million of repurchase agreement secured by $32.5 million face amount of senior notes issued
by Newcastle CDO VI, which was repurchased by Newcastle in December 2010 and eliminated in consolidation.
|
(D) |
The following table summarizes the investments in the unlevered
segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011 |
|
|
|
Outstanding
Face Amount |
|
|
Carrying
Value |
|
|
Number
of
Investments |
|
Real
estate securities |
|
$ |
165,669 |
|
|
$ |
7,906 |
|
|
|
24 |
|
Real
estate related loans |
|
|
69,634 |
|
|
|
6,634 |
|
|
|
4 |
|
Residential
mortgage loans |
|
|
6,182 |
|
|
|
3,031 |
|
|
|
193 |
|
Other
investments |
|
|
N/A |
|
|
|
6,024 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
241,485 |
|
|
$ |
23,595 |
|
|
|
222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(E) |
Represents the elimination of investments and financings and their
related income and expenses between the CDO segment and other non-recourse segment as the corresponding inter-segment investments
and financings are presented on a gross basis within each of these segments. |
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 September 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.
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 September 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 |
|
$ |
324,653 |
|
|
$ |
324,712 |
|
|
$ |
4,562 |
|
(B) |
Includes $41.7 million face amount of debt owned by Newcastle
at September 30, 2011. |
(C) |
This amount represents Newcastles maximum exposure to loss
from this entity, which was the fair value at September 30, 2011 for $6.1 million face amount of CDO V Class I notes.
Newcastle repurchased these notes in the quarter ended September 30, 2011 and recorded these as investments in Real Estate
Securities. |
|