Quarterly report pursuant to Section 13 or 15(d)

REAL ESTATE SECURITIES

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REAL ESTATE SECURITIES
 3 Months Ended
Mar. 31, 2012
Real Estate Securities  
REAL ESTATE SECURITIES

3. REAL ESTATE SECURITIES

 

The following is a summary of Newcastle’s real estate securities at March 31, 2012, 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                             Weighted Average  
            Other- Than-         Gross Unrealized                                    
Asset Type   Outstanding Face Amount     Before
Impairment		     Temporary Impairment (A)     After Impairment     Gains     Losses     Carrying Value (B)     Number of Securities     Rating (C)     Coupon     Yield     Maturity
(Years) (D)		     Principal Subordination (E)  
CMBS-Conduit   $ 1,301,842     $ 1,112,189     $ (170,023 )   $ 942,166     $ 123,177     $ (53,746 )   $ 1,011,597       161       BB+       5.58 %     10.95 %     4.1       11.2 %
CMBS- Single Borrower     185,438       180,581       (12,364 )     168,217       4,183       (11,416 )     160,984       33       BB       5.03 %     6.24 %     3.2       6.7 %
CMBS-Large Loan     14,964       14,305       —       14,305       608       (49 )     14,864       2       BBB+       5.07 %     8.86 %     1.0       10.1 %
REIT Debt     120,288       119,552       —       119,552       6,051       (2,746 )     122,857       18       BB+       5.72 %     5.72 %     2.4       N/A  
ABS-Subprime (F)     255,524       205,060       (78,232 )     126,828       12,827       (7,622 )     132,033       63       B       1.14 %     9.46 %     7.0       32.4 %
ABS-Manufactured Housing     29,045       28,173       —       28,173       2,227       (77 )     30,323       7       BBB+       6.61 %     7.35 %     3.9       42.3 %
ABS-Franchise     22,696       19,988       (9,635 )     10,353       194       (3,819 )     6,728       6       C       3.55 %     4.90 %     13.7       21.8 %
FNMA/FHLMC     226,808       237,607       —       237,607       3,193       (176 )     240,624       32       AAA       2.41 %     1.55 %     4.6       N/A  
CDO (G)     206,323       83,204       (14,861 )     68,343       88       (3,552 )     64,879       13       CCC+       3.01 %     7.94 %     1.4       22.1 % 
 Total / Average (H)   $ 2,362,928       2,000,659     $ (285,115 )   $ 1,715,544     $ 152,548     $ (83,203 )   $ 1,784,889       335        BB+       4.53 %     8.48 %     4.1          

  

(A) Represents the cumulative impairment against amortized cost basis recorded through earnings, net of the effect of the cumulative adjustment as a result of the adoption of new accounting guidance on impairment in 2009.
   
(B) See Note 6 regarding the estimation of fair value, which is equal to carrying value for all securities.
   
(C) 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. Newcastle used an implied AAA rating for the FNMA/FHLMC securities. Ratings provided were determined by third party rating agencies as of a particular date, may not be current and are subject to change at any time.
   
(D) The weighted average maturity is based on the timing of expected principal reduction on the assets.
   
(E) Percentage of the outstanding face amount of securities and residual interests that is subordinate to Newcastle’s investments.
   
(F) Includes the retained bonds with a face amount of $4.0 million and a carrying value of $1.0 million from Securitization Trust 2006 (Note 4).
   
(G) Includes two CDO bonds issued by a third party with a carrying value of $58.1 million, four CDO bonds issued by CDO V (which has been deconsolidated) and held as investments by Newcastle with a carrying value of $4.0 million and seven CDO bonds issued by C-BASS with a carrying value of $2.8 million.
   
(H) The total outstanding face amount of fixed rate securities was $1.6 billion, and of floating rate securities was $736 million.

 

Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the three months ended March 31, 2012, Newcastle recorded other-than-temporary impairment charges (“OTTI”) of $5.9 million (gross of $3.9 million of other-than-temporary impairment recognized in other comprehensive income) with respect to real estate securities. Based on management’s analysis of these securities, the performance of the underlying loans and changes in market factors, Newcastle noted adverse changes in the expected cash flows on certain of these securities and concluded that they were other-than-temporarily impaired. Any remaining 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 its belief 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 March 31, 2012.

  

          Amortized Cost Basis     Gross Unrealized                  Weighted Average  
Securities in an Unrealized Loss Position    Outstanding Face Amount      Before Impairment     Other- than- Temporary Impairment     After Impairment     Gains     Losses      Carrying Value      Number of Securities      Rating     Coupon     Yield      Maturity (Years)  
Less Than Twelve Months   $ 228,157     $ 194,327     $ (15,264 )   $ 179,063     $ —     $ (15,321 )     163,742       27        BB       4.59 %     8.56 %     4.3  
Twelve or More Months     616,685       580,011       (2,721 )     577,290       —       (67,882 )     509,408       89        BB       4.45 %     6.49 %     3.3  
Total   $ 844,842     $ 774,338     $ (17,985 )   $ 756,353     $ —     $ (83,203 )   $ 673,150       116        BB       4.49 %     6.98 %     3.6  

 

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:

 

    March 31, 2012  
          Amortized Cost Basis After     Unrealized Losses  
    Fair Value     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     37,244       42,883       (17,379 )     (5,639 )
 Non credit impaired securities     635,906       713,470       —       (77,564 )
Total debt securities in an unrealized loss position   $ 673,150     $ 756,353     $ (17,379 )   $ (83,203 )

 

(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 three months ended March 31, 2012:

 

Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income   $ (20,207 )
         
Additions for credit losses on securities for which an OTTI was not previously recognized     (462 )
         
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     (75 )
         
Additions for credit losses on securities for which an OTTI was previously recognized without any portion  of OTTI recognized in other comprehensive income     (7,489 )
         
Reduction for credit losses on securities for which no OTTI was recognized in other comprehensive income  at the current measurement date     9,299  
         
Reduction for securities sold during the period     1,498  
         
Reduction for increases in cash flows expected to be collected that are recognized over the remaining life  of the security     57  
         
Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in other  comprehensive income   $ (17,379 )

 

As of March 31, 2012, Newcastle had $97.6 million of restricted cash held in CDO financing structures pending its reinvestment in real estate securities and loans.

 

The table below summarizes the geographic distribution of the collateral securing Newcastle’s CMBS and ABS at March 31, 2012 (in thousands):

 

    CMBS     ABS  
Geographic Location   Outstanding Face
Amount		     Percentage     Outstanding Face
 Amount		     Percentage  
Western U.S.   $ 589,565       39.3 %   $ 80,001       26.0 %
Northeastern U.S.     257,609       17.2 %     59,249       19.3 %
Southeastern U.S.     296,367       19.7 %     76,282       24.8 %
Midwestern U.S.     158,212       10.5 %     48,690       15.9 %
Southwestern U.S.     126,838       8.4 %     33,265       10.8 %
Other     16,899       1.1 %     9,778       3.2 %
Foreign     56,754       3.8 %     —       0.0 %
    $ 1,502,244       100.0 %   $ 307,265       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.