Drive Shack Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

REAL ESTATE SECURITIES

REAL ESTATE SECURITIES

9 Months Ended

Sep. 30, 2015

Investments, Debt and Equity Securities [Abstract]

The following is a summary of Newcastle’s real estate securities at September 30, 2015, 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							Gross Unrealized								Weighted Average
Asset Type	Outstanding Face Amount		Before Impairment		Other-Than- Temporary Impairment			After Impairment		Gains		Losses			Carrying Value (A)		Number of Securities	Rating (B)	Coupon		Yield		Life (Years) (C)	Principal Subordination (D)
CMBS	$	70,284	$	80,167	$	(55,372	)	$	24,795	$	17,802	$	(35	)	$	42,562	16	B	5.00	%	20.57	%	1.6	25.9	%
Non-Agency RMBS	16,688		23,461		(20,667		)	2,794		7,036		(67		)	9,763		9	CC	1.59	%	11.32	%	11.0	9.1	%
ABS-Franchise	8,464		7,647		(7,647		)	—		—		—			—		1	C	6.69	%	—	%	—	0.0	%
CDO (E)	14,575		—		—			—		9,183		—			9,183		2	C	1.53	%	—	%	8.1	24.2	%
Debt Security Total / Average (F)	$	110,011	$	111,275	$	(83,686	)	$	27,589	$	34,021	$	(102	)	$	61,508	28	CCC+	4.15	%	19.64	%	3.8
Equity Securities			87		(87		)	—		—		—			—		2
Total Securities, Available-for-Sale			$	111,362	$	(83,773	)	$	27,589	$	34,021	$	(102	)	$	61,508	30

FNMA/FHLMC	354,806		370,472		—			370,472		—		(130		)	370,342		2	AAA	3.50	%	2.83	%	8.0	N/A
Total Securities, Pledged as Collateral (F)	$	354,806	$	370,472	$	—		$	370,472	$	—	$	(130	)	$	370,342	2


(A)	See Note 13 regarding the estimation of fair value, which is equal to carrying value for all securities.

(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 uses 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.


(C)	The weighted average life is based on the timing of expected principal reduction on the assets.


(D)	Percentage of the outstanding face amount of securities and interests that is subordinate to Newcastle’s investments.


(E)	Represents non-consolidated CDO securities, excluding 8 securities with zero value, which had an aggregate face amount of $115.5 million.


(F)	The total outstanding face amount was $423.2 million for fixed rate securities and $41.6 million for floating rate securities.

Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the nine months ended September 30, 2015, Newcastle recorded other-than-temporary impairment charges (“OTTI”) of $2.4 million with respect to real estate securities (gross of less than $0.1 million of other-than-temporary impairment recognized in other comprehensive income). 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 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 September 30, 2015.



			Amortized Cost Basis
Securities in	Outstanding				Other-than-												Number	Weighted Average
an Unrealized	Face		Before		Temporary			After		Gross Unrealized					Carrying		of						Life
Loss Position	Amount		Impairment		Impairment			Impairment		Gains		Losses			Value		Securities	Rating	Coupon		Yield		(Years)
Less Than Twelve Months	$	358,555	$	374,899	$	(3,010	)	$	371,889	$	—	$	(230	)	$	371,659	4	AAA	3.50	%	2.84	%	7.9
Twelve or More Months	192		192		—			192		—		(2		)	190		1	B-	5.16	%	5.16	%	0.1
Total	$	358,747	$	375,091	$	(3,010	)	$	372,081	$	—	$	(232	)	$	371,849	5	AAA	3.50	%	2.84	%	7.9

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:



	September 30, 2015
			Amortized
			Cost Basis		Unrealized Losses
	Fair Value		After 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	1,315		1,416		(3,010		)	(100		)
Non credit impaired securities	370,534		370,665		—			(132		)
Total debt securities in an unrealized loss position	$	371,849	$	372,081	$	(3,010	)	$	(232	)


(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 flows 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 nine months ended September 30, 2015:



Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income	$	(4,174	)

Additions for credit losses on securities for which an OTTI was not previously recognized	(1,567		)

Additions for credit losses on securities for which an OTTI was previously recognized without any portion of OTTI recognized in other comprehensive income	(1,443		)

Reduction for credit losses on securities for which no OTTI was recognized in other comprehensive income at the current measurement date	4,174

Reduction for securities sold/written off 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	$	(3,010	)

The table below summarizes the geographic distribution of the collateral securing Newcastle’s CMBS and asset backed securities (“ABS”) at September 30, 2015:



	CMBS				ABS
Geographic Location	Outstanding Face Amount		Percentage		Outstanding Face Amount		Percentage
Western U.S.	$	10,373	14.8	%	$	8,560	34.0	%
Northeastern U.S.	12,753		18.1	%	5,507		21.9	%
Southeastern U.S.	17,676		25.1	%	5,945		23.6	%
Midwestern U.S.	21,715		30.9	%	3,358		13.4	%
Southwestern U.S.	7,767		11.1	%	1,768		7.0	%
Other	—		—	%	14		0.1	%
Foreign	—		—	%	—		—	%
	$	70,284	100.0	%	$	25,152	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.

In March 2015, Newcastle sold $380.4 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 104.72% for total proceeds of $398.4 million and repaid $385.6 million of repurchase agreements associated with these securities and recognized a gain of approximately $5.9 million.

Additionally, in March 2015, Newcastle purchased $389.1 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 104.77% for total proceeds of $407.6 million. This transaction was financed with repurchase financing of $386.1 million.

In May 2015, Newcastle sold $98.6 million face amount of CMBS securities at an average price of 104.03% of par for total proceeds of $102.6 million and recognized a gain of $14.0 million. Newcastle also sold $42.8 million face amount of non-Agency RMBS securities at an average price of 85.54% of par for total proceeds of $36.7 million and recognized a gain of $14.1 million. The proceeds from these CMBS and non-Agency sales were used to repay the associated outstanding notes in CDO VI, CDO VIII and CDO IX.

Additionally in May 2015, Newcastle received a $25.0 million par paydown of CMBS securities held in CDO IX. These funds were used to repay the associated outstanding notes in CDO IX.

In May 2015, Newcastle also sold $3.9 million face amount of unencumbered non-Agency RMBS at an average price of 24.11% of par for total proceeds of $0.9 million and recognized a gain of $0.8 million.

In June 2015, Newcastle entered into a trade to sell $380.4 million face amount of agency RMBS at an average price of 103.13% of par for total proceeds of approximately $392.3 million and recognized a loss of $5.9 million. This transaction settled in July 2015 and Newcastle repaid $375.7 million of outstanding repurchase agreement liabilities in connection with this sale.

In June 2015, Newcastle entered into a trade to purchase $201.9 million face amount of agency RMBS at an average price of 102.87% of par for total proceeds of approximately $207.7 million. This transaction settled in July 2015 and was financed with $196.7 million of repurchase agreements.

In July 2015, Newcastle settled on a trade to purchase $403.9 million face amount of agency RMBS at an average price of 102.88% of par for total proceeds of approximately $415.6 million. This transaction was financed with $393.8 million of repurchase agreements.

In September 2015, Newcastle sold $250.4 million face amount of agency RMBS at an average price of 103.83% of par for total proceeds of approximately $260.0 million and recognized a gain of $2.5 million. Newcastle repaid $250.1 million of outstanding repurchase agreement liabilities in connection with this sale.

In September 2015, Newcastle entered into a trade to sell $348.9 million face amount of agency RMBS at an average price of 104.32% of par for total proceeds of approximately $364.0 million and recognized a gain of $5.1 million. Newcastle repaid $345.9 million of outstanding repurchase agreement liabilities in connection with this sale. Newcastle settled on this trade in October 2015.

In September 2015, Newcastle entered into a trade to purchase $354.8 million face amount of agency RMBS at an average price of 104.42% of par for total proceeds of approximately $370.5 million. This transaction was financed with $352.6 million of repurchase agreements and the trade settled in October 2015.

Securities Pledged as Collateral

These government agency securities were sold under agreements to repurchase which will be treated as collateralized financing transactions. Although being pledged as collateral, securities financed through a repurchase agreement remains on Newcastle's consolidated balance sheet as an asset and cash received from the purchaser is recorded on Newcastle's consolidated balance sheet as a liability.

- Definition

The entire disclosure for investments in certain debt and equity securities.

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