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

3 Months Ended

Mar. 31, 2016

Investments, Debt and Equity Securities [Abstract]

The following is a summary of Newcastle’s real estate securities at March 31, 2016, 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	$	10,308	$	10,308	$	(10,308	)	$	—	$	—	$	—	$	—	2	C	2.45	%	—	%	0.0	—	%
Non-Agency RMBS	4,000		2,207		(1,521		)	686		2,161		—		2,847		1	C	0.82	%	24.47	%	10.6	24.0	%
ABS - Small Business Loans	8,464		7,647		(7,647		)	—		—		—		—		1	C	6.69	%	—	%	0.0	—	%
CDO (E)	14,699		—		—			—		9,791		—		9,791		2	C	1.84	%	—	%	4.0	26.6	%
Debt Security Total / Average (F)	$	37,471	$	20,162	$	(19,476	)	$	686	$	11,952	$	—	$	12,638	6	C	2.99	%	24.47	%	2.7
Equity Securities			—		—			—		—		—		—		1
Total Securities, Available-for-Sale			$	20,162	$	(19,476	)	$	686	$	11,952	$	—	$	12,638	7

FNMA/FHLMC	363,080		381,124		—			381,124		82		—		381,206		4	AAA	3.50	%	2.99	%	6.3	N/A
Total Securities, Pledged as Collateral (F)	$	363,080	$	381,124	$	—		$	381,124	$	82	$	—	$	381,206	4


(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 Fannie Mae/Freddie Mac (“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 13 securities with zero value, which had an aggregate face amount of $192.0 million.


(F)	The total outstanding face amount was $371.6 million for fixed rate securities and $29.0 million for floating rate securities.

Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the three months ended March 31, 2016, Newcastle recorded other-than-temporary impairment charges (“OTTI”) of $0.1 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. Newcastle had no securities in an unrealized loss position as of March 31, 2016.

The following table summarizes the activity related to credit losses on debt securities for the three months ended March 31, 2016:



Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income	$	(3,010	)

Additions for credit losses on securities for which an OTTI was not previously recognized	—

Additions to credit losses on securities for which OTTI was previously recognized and a portion of an OTTI was recognized in other comprehensive income	(110		)

Reduction for securities deconsolidated during the period	3,120

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 OTTI was recognized in other comprehensive income	$	—

The table below summarizes the geographic distribution of the collateral securing Newcastle’s CMBS and asset backed securities (“ABS”) at March 31, 2016:



	CMBS				ABS
Geographic Location	Outstanding Face Amount		Percentage		Outstanding Face Amount		Percentage
Western U.S.	$	—	—	%	$	1,335	10.7	%
Northeastern U.S.	—		—	%	3,797		30.5	%
Southeastern U.S.	10,308		100.0	%	1,039		8.3	%
Midwestern U.S.	—		—	%	5,713		45.8	%
Southwestern U.S.	—		—	%	580		4.7	%
	$	10,308	100.0	%	$	12,464	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 January 2016, Newcastle settled on a trade to sell $350.3 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 103.2% for total proceeds of $361.3 million and repaid $348.6 million of repurchase agreements associated with these securities.

In January 2016, Newcastle settled on a trade to purchase $102.7 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 103.2% for total proceeds of $105.9 million. This transaction was financed with $102.2 million of repurchase agreements.

In January 2016, Newcastle settled on a trade to purchase $250.1 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 103.2% of par for total proceeds of approximately $258.1 million. This transaction was financed with $249.1 million of repurchase agreements.

In March 2016, Newcastle entered into a trade to sell $347.5 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 104.9% for total proceeds of $364.3 million and recognized a gain on sale of securities of approximately $5.9 million. Newcastle repaid $352.0 million of repurchase agreements associated with these securities. This trade settled in April 2016 (see Note 22).

In March 2016, Newcastle entered into a trade to purchase $363.1 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 105.0% for total proceeds of $381.1 million. This transaction was financed with $366.4 million of repurchase agreements. This trade settled in April 2016 (see Note 22).

For a discussion of real estate securities deconsolidated during the period, see Variable Interest Entities in Note 2.

Securities Pledged as Collateral

Securities pledged as collateral relate to government agency securities that 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 Sheets as an asset and cash received from the purchaser is recorded on Newcastle’s Consolidated Balance Sheets as a liability.

- Definition

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

+ References + Details