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
 6 Months Ended
Jun. 30, 2013
Segment Reporting And Variable Interest Entities  
SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES
3. SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES

As previously stated in Note 1, Newcastle conducts its business through the following segments: (i) investments in senior living assets financed with non-recourse debt (“non-recourse senior living”), (ii) investments financed with non-recourse collateralized debt obligations (“non-recourse CDOs”), (iii) unlevered investments in deconsolidated Newcastle CDO debt (“unlevered CDOs”), (iv) investments financed with other non-recourse debt (“non-recourse other”), (v) investments and debt repurchases financed with recourse debt (“recourse”), (vi) other unlevered investments (“unlevered other”), (vii) corporate and (viii) prior to the spin-off, investments in excess mortgage servicing rights and consumer loans (“Excess MSRs and consumer loans”). With respect to the non-recourse CDOs and non-recourse other 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 Newcastle’s segments is given below, together with reconciliation to the same data for Newcastle as a whole:
 
   
Non-Recourse Senior
    
Non-Recourse
    
Unlevered
    
Non-Recourse
          
Unlevered
          
Excess MSRs and Consumer
   
Inter-segment
        
   
Living
    
CDOs (A)
    
CDOs (B)
    
Other (A) (C)
    
Recourse (D)
    
Other (E)
    
Corporate
    
Loans
    
Elimination (F)
    
Total
  
Six Months Ended June 30, 2013
                                                            
Interest income
   $ —     $ 68,227     $ 326     $ 32,774     $ 13,565     $ 11,093     $ 102     $ —     $ (1,931 )   $ 124,156  
Interest expense
     2,478       13,950       —       24,858       3,447       —       1,906       —       (1,931 )     44,708  
Net interest income (expense)
     (2,478 )     54,277       326       7,916       10,118       11,093       (1,804 )     —       —       79,448  
                                                                                 
Impairment (reversal)
     —       11,986       —       (573 )     3,028       (9,177 )     —       —       —       5,974  
Other revenues
     26,510       —       —       1,003       —       —       —       —       —       27,513  
Other income (loss)
     120       11,675       145       —       25       1,895       —       —       —       13,860  
Property operating expenses
     16,285       —       —       487       —       —       —       —       —       16,772  
Depreciation and amortization
     8,039       —       —       110       —       —       —       —       —       8,149  
Other operating expenses
     5,074       384       —       1,410       47       238       26,766       —       —       33,919  
Income (loss) from continuing operations
     (5,246 )     53,582       471       7,485       6,358       21,927       (28,570 )     —       —       56,007  
Income (loss) from discontinued operations
     —       —       —       —       —       (29 )     —       35,758       —       35,729  
Net income (loss)
     (5,246 )     53,582       471       7,485       6,358       21,898       (28,570 )     35,758       —       91,736  
Preferred dividends
     —       —       —       —       —       —       (2,790 )     —       —       (2,790 )
Income (loss) applicable to common stockholders
   $ (5,246 )   $ 53,582     $ 471     $ 7,485     $ 6,358     $ 21,898     $ (31,360 )   $ 35,758     $ —     $ 88,946  
                                                                                 
Three Months Ended June 30, 2013
                                                                                
Interest income
   $ —     $ 36,638     $ 87     $ 16,467     $ 6,280     $ 4,387     $ 30     $ —     $ (1,065 )   $ 62,824  
Interest expense
     1,246       6,819       —       12,475       1,569       —       954       —       (1,065 )     21,998  
Net interest income (expense)
     (1,246 )     29,819       87       3,992       4,711       4,387       (924 )     —       —       40,826  
                                                                                 
Impairment (reversal)
     —       8,803       —       (1,421 )     3,738       (7,919 )     —       —       —       3,201  
Other revenues
     13,513       —       —       500       —       —       —       —       —       14,013  
Other income (loss)
     112       7,178       71       —       25       704       —       —       —       8,090  
Property operating expenses
     8,169       —       —       240       —       —       —       —       —       8,409  
Depreciation and amortization
     4,017       —       —       53       —       —       —       —       —       4,070  
Other operating expenses
     2,686       190       —       691       5       143       15,392       —       —       19,107  
Income (loss) from continuing operations
     (2,493 )     28,004       158       4,929       993       12,867       (16,316 )     —       —       28,142  
Income (loss) from discontinued operations
     —       —       —       —       —       (13 )     —       25,594       —       25,581  
Net income (loss)
     (2,493 )     28,004       158       4,929       993       12,854       (16,316 )     25,594       —       53,723  
Preferred dividends
     —       —       —       —       —       —       (1,395 )     —       —     $ (1,395 )
Income (loss) applicable to common stockholders
   $ (2,493 )   $ 28,004     $ 158     $ 4,929     $ 993     $ 12,854     $ (17,711 )   $ 25,594     $ —     $ 52,328  
                                                                                 
June 30, 2013
                                                                                
Investments
   $ 174,541     $ 1,118,367     $ 5,440     $ 699,660     $ 335,815     $ 229,665     $ —     $ —     $ (61,010 )   $ 2,502,478  
Cash and restricted cash
     11,302       7,173       —       —       —       —       259,750       —       —       278,225  
Derivative assets
     298       —       —       —       43,172       —       —       —       —       43,470  
Other assets
     9,020       4,794       5       117       2,408       2,375       2,596       —       (154 )     21,161  
Total assets
     195,161       1,130,334       5,445       699,777       381,395       232,040       262,346       —       (61,164 )     2,845,334  
Debt
     (120,525 )     (844,484 )     —       (630,945 )     (311,276 )     —       (51,240 )     —       61,010       (1,897,460 )
Derivative liabilities
     —       (20,197 )     —       —       —       —       —       —       —       (20,197 )
Other liabilities
     (5,983 )     (5,715 )     —       (1,378 )     (34 )     (776 )     (50,319 )     —       154       (64,051 )
Total liabilities
     (126,508 )     (870,396 )     —       (632,323 )     (311,310 )     (776 )     (101,559 )     —       61,164       (1,981,708 )
Preferred stock
     —       —       —       —       —       —       (61,583 )     —       —       (61,583 )
GAAP book value
   $ 68,653     $ 259,938     $ 5,445     $ 67,454     $ 70,085     $ 231,264     $ 99,204     $ —     $ —     $ 802,043  
                                                                                 
Additions to investments in real estate
   $ 705     $ —     $ —     $ 129     $ —     $ —     $ —     $ —     $ —     $ 834  
  
   
Non-Recourse
Senior
    
Non-Recourse
    
Unlevered
    
Non-Recourse
          
Unlevered
          
Excess MSRs
and Consumer
    
Inter-segment
        
   
Living
    
CDOs (A)
    
CDOs (B)
    
Other (A)
    
Recourse
    
Other
    
Corporate
    
Loans
    
Elimination (F)
    
Total
  
                                                             
Six Months Ended June 30, 2012
                                                            
Interest income
   $ —     $ 110,440     $ 230     $ 36,463     $ 1,768     $ 4,851     $ 103     $ —     $ (3,037 )   $ 150,818  
Interest expense
     —       34,640       —       25,334       561       —       1,903       —       (2,811 )     59,627  
Net interest income (expense)
     —       75,800       230       11,129       1,207       4,851       (1,800 )     —       (226 )     91,191  
Impairment (reversal)
     —       (789 )     —       2,703       —       (495 )     —       —       —       1,419  
Other revenues
     —       —       —       1,024       —       —       —       —       —       1,024  
Other income (loss)
     —       24,533       176       —       —       (1,055 )     —       —       —       23,654  
Property operating expenses
     —       —       —       457       —       —       —       —       —       457  
Depreciation and amortization
     —       —       —       4       —       —       —       —       —       4  
Other operating expenses
     —       483       1       1,926       —       25       17,603       —       (226 )     19,812  
Income (loss) from continuing operations
     —       100,639       405       7,063       1,207       4,266       (19,403 )     —       —       94,177  
Income (loss) from discontinued operations
     —       —       —       —       —       (31 )     —       9,764       —       9,733  
Net income (loss)
     —       100,639       405       7,063       1,207       4,235       (19,403 )     9,764       —       103,910  
Preferred dividends
     —       —       —       —       —       —       (2,790 )     —       —       (2,790 )
Income (loss) applicable to common stockholders
   $ —     $ 100,639     $ 405     $ 7,063     $ 1,207     $ 4,235     $ (22,193 )   $ 9,764       —     $ 101,120  
                                                                                 
Three Months Ended June 30, 2012
                                                                                
Interest income
     —       56,038     $ 115       18,037     $ 954     $ 4,328     $ 52     $ —       (1,568 )   $ 77,956  
Interest expense
     —       17,004       —       12,671       293       —       949       —       (1,455 )     29,462  
Net interest income (expense)
     —       39,034       115       5,366       661       4,328       (897 )     —       (113 )     48,494  
Impairment (reversal)
     —       7,742       —       1,055       —       (298 )     —       —       —       8,499  
Other revenues
     —       —       —       515       —               —       —       —       515  
Other income (loss)
     —       (5,380 )     84       —       —       414       —       —       —       (4,882 )
Property operating expenses
     —       —       —       231       —               —       —       —       231  
Depreciation and amortization
     —       —       —       2       —               —       —       —       2  
Other operating expenses
     —       242       —       970       —       12       10,465       —       (113 )     11,576  
Income (loss) from continuing operations
     —       25,670       199       3,623       661       5,028       (11,362 )     —       —       23,819  
Income (loss) from discontinued operations
     —       —       —       —       —       (14 )     —       6,634       —       6,620  
Net income (loss)
     —       25,670       199       3,623       661       5,014       (11,362 )     6,634       —       30,439  
Preferred dividends
     —       —       —       —       —       —       (1,395 )     —       —       (1,395 )
Income (loss) applicable to common stockholders
   $ —     $ 25,670     $ 199     $ 3,623     $ 661     $ 5,014     $ (12,757 )   $ 6,634     $ —     $ 29,044  
 
(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, Newcastle’s 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 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)
Represents unlevered investments in CDO securities issued by Newcastle. This CDO has been deconsolidated as Newcastle does not have the power to direct the relevant activities of the CDO.
   
(C)
The following table summarizes the investments and debt in the other non-recourse segment:
 
    June 30, 2013  
   
Investments
    
Debt
  
   
Outstanding
    
Carrying
    
Outstanding
    
Carrying
  
   
Face Amount
    
Value
    
Face Amount*
    
Value*
  
Manufactured housing loan portfolio I
   $ 110,589     $ 94,909     $ 82,177     $ 73,989  
Manufactured housing loan portfolio II
     140,828       138,895       106,124       105,619  
Subprime mortgage loans subject to call option
     406,217       406,217       406,217       406,217  
Real estate securities
     61,217       52,953       42,989       39,120  
Other commercial real estate
     N/A       6,686       6,000       6,000  
    $ 718,851     $ 699,660     $ 643,507     $ 630,945  
 
  *
An aggregate face amount of $69.5 million (carrying value of $61.0 million) of debt represents financing provided by the CDO segment (and included as investments in the CDO segment), which is eliminated upon consolidation.
   
(D)
The $311.3 million of recourse debt represents repurchase agreements secured by $335.8 million carrying value of FNMA/FHLMC securities.
   
(E)
The following table summarizes the investments in the unlevered other segment:
 
    June 30, 2013  
   
Outstanding
     Carrying     Number of  
   
Face Amount
     Value     Investments  
Real estate securities
   $ 137,805     $ 8,029       21  
Real estate related and other loans
     459,850       177,362       2  
Residential mortgage loans
     51,456       38,250       303  
Other investments
     N/A       6,024       1  
    $ 649,111     $ 229,665       327  
 
(F)
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) Newcastle’s CDOs, in which Newcastle has been determined to be the primary beneficiary and therefore consolidates them (with the exception of CDO V), 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 are also considered VIEs, but Newcastle does not control their activities and no longer receives a significant portion of their returns and therefore does not consolidate them.

In addition, Newcastle’s investments in RMBS, CMBS, CDO securities and 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 June 30, 2013, 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 perrformance 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 VIE at June 30, 2013, in addition to the subprime securitizations which are described in Note 5:
 
Entity
  
Gross Assets (A)
  
Debt (A) (B)
  
Carrying Value of Newcastle's Investment (C)
Newcastle CDO V
  
 $              223,280
  
 $     239,362
  
 $                                     5,440
             
CDO VIII Repack (D)
 $              292,015
  
 $     292,015
  
 $                                 103,140
 
(A)
Face amount.
(B)
Newcastle CDO V includes $42.6 million face amount of debt owned by Newcastle with a carrying value of $5.4 million at June 30, 2013. CDO VIII Repack includes $116.8 million face amount of debt owned by Newcastle with a carrying value of $103.1 million at June 30, 2013.
(C) 
This amount represents Newcastle’s maximum exposure to loss from this entity.
(D) 
See Notes 8 and 9 for information about the securitization that is collateralized by certain Newcastle CDO VIII Class I notes.