REAL ESTATE SECURITIES |
The following is a summary of Newcastle’s real estate securities at June 30, 2013, 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.
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Amortized Cost Basis
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Gross Unrealized
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Weighted Average |
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Outstanding Face
|
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Before
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After
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Carrying Value
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Rating
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Maturity
|
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Asset Type
|
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Amount
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Impairment
|
|
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Impairment
|
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Impairment
|
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Gains
|
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Losses
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(A)
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Securities
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(B)
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Coupon
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Yield
|
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(Years) (C)
|
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(D)
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CMBS-Conduit
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$ |
255,555 |
|
|
$ |
226,609 |
|
|
$ |
(82,947 |
) |
|
$ |
143,662 |
|
|
$ |
53,142 |
|
|
$ |
(3,342 |
) |
|
$ |
193,462 |
|
|
|
35 |
|
B+ |
|
|
5.52 |
% |
|
|
13.90 |
% |
|
|
3.9 |
|
|
|
9.2 |
% |
CMBS- Single Borrower
|
|
|
92,008 |
|
|
|
90,959 |
|
|
|
(12,364 |
) |
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|
78,595 |
|
|
|
4,297 |
|
|
|
— |
|
|
|
82,892 |
|
|
|
15 |
|
BB
|
|
|
5.68 |
% |
|
|
7.16 |
% |
|
|
3.1 |
|
|
|
6.3 |
% |
CMBS-Large Loan
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|
|
5,114 |
|
|
|
5,024 |
|
|
|
— |
|
|
|
5,024 |
|
|
|
90 |
|
|
|
— |
|
|
|
5,114 |
|
|
|
1 |
|
BBB-
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6.07 |
% |
|
|
12.20 |
% |
|
|
0.4 |
|
|
|
5.7 |
% |
REIT Debt
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29,200 |
|
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|
28,549 |
|
|
|
— |
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|
28,549 |
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|
|
2,510 |
|
|
|
— |
|
|
|
31,059 |
|
|
|
5 |
|
BB+
|
|
|
5.89 |
% |
|
|
6.85 |
% |
|
|
2.1 |
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|
N/A |
|
Non-Agency RMBS (E)
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107,869 |
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105,091 |
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(62,860 |
) |
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42,231 |
|
|
|
16,892 |
|
|
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(1 |
) |
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|
59,122 |
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|
34 |
|
CCC
|
|
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1.09 |
% |
|
|
12.76 |
% |
|
|
4.8 |
|
|
|
24.8 |
% |
ABS-Franchise
|
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|
8,464 |
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7,647 |
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|
|
(7,647 |
) |
|
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— |
|
|
|
199 |
|
|
|
— |
|
|
|
199 |
|
|
|
1 |
|
C |
|
|
6.69 |
% |
|
|
0.00 |
% |
|
|
4.4 |
|
|
|
0.0 |
% |
FNMA/FHLMC (H)
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|
311,659 |
|
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|
335,164 |
|
|
|
— |
|
|
|
335,164 |
|
|
|
1,821 |
|
|
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(1,171 |
) |
|
|
335,814 |
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|
39 |
|
AAA
|
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2.82 |
% |
|
|
1.28 |
% |
|
|
3.7 |
|
|
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N/A |
|
CDO (F)
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201,336 |
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81,354 |
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(14,861 |
) |
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66,493 |
|
|
|
2,947 |
|
|
|
— |
|
|
|
69,440 |
|
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|
13 |
|
CCC+
|
|
|
2.89 |
% |
|
|
8.01 |
% |
|
|
1.3 |
|
|
|
21.3 |
% |
Total / Average (G)
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$ |
1,011,205 |
|
|
$ |
880,397 |
|
|
$ |
(180,679 |
) |
|
$ |
699,718 |
|
|
$ |
81,898 |
|
|
$ |
(4,514 |
) |
|
$ |
777,102 |
|
|
|
143 |
|
BB+
|
|
|
3.73 |
% |
|
|
6.22 |
% |
|
|
3.3 |
|
|
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(A)
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See Note 9 regarding the estimation of fair value, which is equal to carrying value for all securities.
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(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. Newcastle used an implied AAA rating for the FNMA/FHLMC securities. 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.
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(C)
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The weighted average maturity is based on the timing of expected principal reduction on the assets.
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(D)
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Percentage of the outstanding face amount of securities and residual interests that is subordinate to Newcastle’s investments.
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(E)
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Includes the retained bond with a face amount of $4.0 million and a carrying value of $2.2 million from Securitization Trust 2006 (Note 5).
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(F)
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Includes two CDO bonds issued by a third party with a carrying value of $60.0 million, four CDO bonds issued by CDO V (which has been deconsolidated) and held as investments by Newcastle with a carrying value of $5.4 million and seven CDO bonds issued by C-BASS with a carrying value of $4.0 million.
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(G)
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The total outstanding face amount was $0.4 billion for fixed rate securities and $0.6 billion for floating rate securities.
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(H)
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Amortized cost basis and carrying value include principal receivable of $6.5 million.
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On June 27, 2013 Newcastle sold FNMA/FHLMC securities with an aggregate face amount of approximately $22.7 million to New Residential for approximately $1.2 million, net of related financing. New Residential purchased the securities on the same terms as they were purchased by Newcastle.
Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the six months ended June 30, 2013, Newcastle recorded other-than-temporary impairment charges (“OTTI”) of $4.4 million with respect to real estate securities, of which $3.8 million was recorded on certain real estate securities included in the spin-off of New Residential as Newcastle determined it did not have the intent to hold the securities past May 15, 2013. For the other $0.6 million, based on management’s analysis of the 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 June 30, 2013.
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Amortized Cost Basis |
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Gross Unrealized
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Weighted Average
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Securities in
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Outstanding
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Other-than-
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Number
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an Unrealized
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Face
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Before
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Temporary
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After
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Carrying
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of
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Maturity
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Loss Position
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Amount
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Impairment
|
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Impairment
|
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Impairment
|
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Gains
|
|
|
Losses
|
|
|
Value
|
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Securities
|
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|
Rating
|
|
|
Coupon
|
|
|
Yield
|
|
|
(Years)
|
|
|
|
$ |
178,771 |
|
|
$ |
188,976 |
|
|
$ |
(1 |
) |
|
$ |
188,975 |
|
|
$ |
— |
|
|
$ |
(1,214 |
) |
|
$ |
187,761 |
|
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|
16 |
|
|
AAA
|
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|
3.00 |
% |
|
|
1.30 |
% |
|
|
3.2 |
|
|
|
|
12,000 |
|
|
|
11,785 |
|
|
|
— |
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|
11,785 |
|
|
|
— |
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(3,300 |
) |
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|
8,485 |
|
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2 |
|
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B- |
|
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|
5.37 |
% |
|
|
5.72 |
% |
|
|
3.3 |
|
Total
|
|
$ |
190,771 |
|
|
$ |
200,761 |
|
|
$ |
(1 |
) |
|
$ |
200,760 |
|
|
$ |
— |
|
|
$ |
(4,514 |
) |
|
$ |
196,246 |
|
|
|
18 |
|
|
AA+
|
|
|
|
3.15 |
% |
|
|
1.56 |
% |
|
|
3.2 |
|
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:
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June 30, 2013 |
|
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Amortized
|
|
|
|
|
|
|
|
|
|
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Cost Basis
|
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Unrealized Losses
|
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Fair Value
|
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After Impairment
|
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Credit (B)
|
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Non-Credit (C)
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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:
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Credit impaired securities
|
|
|
23 |
|
|
|
24 |
|
|
|
(1 |
) |
|
|
(1 |
) |
Non credit impaired securities
|
|
|
196,223 |
|
|
|
200,736 |
|
|
|
— |
|
|
|
(4,513 |
) |
Total debt securities in an unrealized loss position
|
|
$ |
196,246 |
|
|
$ |
200,760 |
|
|
$ |
(1 |
) |
|
$ |
(4,514 |
) |
(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 six months ended June 30, 2013:
Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income
|
|
$ |
(4,770 |
) |
Additions for credit losses on securities for which an OTTI was not previously recognized
|
|
|
(3,757 |
) |
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
|
|
|
(89 |
) |
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
|
|
|
120 |
|
Reduction for securities sold during the period
|
|
|
4,739 |
|
Reduction for securities transferred to New Residential
|
|
|
3,756 |
|
Reduction for securities deconsolidated during the period
|
|
|
— |
|
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
|
|
$ |
(1 |
) |
The table below summarizes the geographic distribution of the collateral securing Newcastle’s CMBS and ABS at June 30, 2013:
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CMBS
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ABS
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Geographic Location
|
|
Outstanding Face Amount
|
|
|
Percentage
|
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|
Outstanding Face Amount
|
|
|
Percentage
|
|
Western U.S.
|
|
$ |
76,197 |
|
|
|
21.6 |
% |
|
$ |
35,327 |
|
|
|
30.4 |
% |
Northeastern U.S.
|
|
|
66,704 |
|
|
|
18.9 |
% |
|
|
24,374 |
|
|
|
21.0 |
% |
Southeastern U.S.
|
|
|
69,233 |
|
|
|
19.6 |
% |
|
|
23,275 |
|
|
|
20.0 |
% |
Midwestern U.S.
|
|
|
56,056 |
|
|
|
15.9 |
% |
|
|
15,543 |
|
|
|
13.3 |
% |
Southwestern U.S.
|
|
|
66,881 |
|
|
|
19.0 |
% |
|
|
11,598 |
|
|
|
10.0 |
% |
Other
|
|
|
12,716 |
|
|
|
3.6 |
% |
|
|
6,216 |
|
|
|
5.3 |
% |
Foreign
|
|
|
4,890 |
|
|
|
1.4 |
% |
|
|
— |
|
|
|
0.0 |
% |
|
|
$ |
352,677 |
|
|
|
100.0 |
% |
|
$ |
116,333 |
|
|
|
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.
|