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Section 1: 10-Q (10-Q)

SEC Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________ 
Commission File Number: 001-31458 
Newcastle Investment Corp.
(Exact name of registrant as specified in its charter)
Maryland
 
81-0559116
(State or other jurisdiction of incorporation
 
(I.R.S. Employer Identification No.)
or organization)
 
 
1345 Avenue of the Americas, New York, NY
 
10105
(Address of principal executive offices)
 
(Zip Code)
(212) 798-6100
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
S Yes  No £ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer £ Accelerated filer S Non-accelerated filer £ (Do not check if a smaller reporting company)
Smaller reporting company £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No S
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.
Common stock, $0.01 par value per share: 66,654,598 shares outstanding as of May 3, 2016.



CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments, the stability of our earnings, and our financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual outcome of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:

changes in global, national and local economic conditions, including, but not limited to, a prolonged economic slowdown and a downturn in the real estate market;
reductions in cash flows received from our investments;
the availability and cost of capital for future investments, particularly in a rising interest rate environment, and our ability to deploy capital accretively;
our ability to profit from opportunistic investments, such as our investment in golf, and to mitigate the risks associated with managing operating businesses and asset classes with which we have limited experience;
the relationship between yields on assets which are paid off and yields on assets in which such monies can be reinvested;
changes in our asset portfolio and investment strategy, and potential changes in our ability to make distributions to our stockholders;
adverse changes in the financing markets we access affecting our ability to finance our investments;
changing risk assessments by lenders that potentially lead to increased margin calls, not extending our repurchase agreements or other financings in accordance with their current terms or entering into new financings with us;
changes in interest rates and/or credit spreads, as well as the success of any hedging strategy we may undertake in relation to such changes;
the risks that default and recovery rates on our real estate securities and loan portfolios deteriorate compared to our underwriting estimates;
impairments in the value of the collateral underlying our investments and the relation of any such impairments to our judgments as to whether changes in the market value of our securities, loans or real estate are temporary or not and whether circumstances bearing on the value of such assets warrant changes in carrying values;
geographical concentrations with respect to our investments, including the mortgage loans underlying and collateral securing certain of our debt investments;
legislative/regulatory changes, including but not limited to, any modification of the terms of loans;
competition within the industries in which we have and/or may pursue additional investments;
the impact of any current or further legal proceedings and regulatory investigations and inquiries;
the impact of any material transactions with FIG LLC (the “Manager”) or one of its affiliates, including the impact of any actual, potential or predicted conflicts of interest;
our ability and willingness to maintain our qualification as a REIT; and
other risks detailed from time to time below, particularly under the heading “Risk Factors,” and in our other reports filed with or furnished to the Securities and Exchange Commission (the “SEC”).

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The factors noted above could cause our actual results to differ significantly from those contained in any forward-looking statement.

Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management’s views only as of the date of this report. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.



SPECIAL NOTE REGARDING EXHIBITS
 
In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Newcastle Investment Corp. (the “Company”) or the other parties to the agreements.  The agreements contain representations and warranties by each of the parties to the applicable agreement.  These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
 
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.  Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
 
The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading.
 





NEWCASTLE INVESTMENT CORP.  
FORM 10-Q
 
INDEX
 
 
PAGE
PART I.   FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.   
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
March 31, 2016
 
December 31, 2015
 
(Unaudited)
 
Assets
 

 
 

Real estate securities, available-for-sale
$
12,638

 
$
59,034

Real estate securities, pledged as collateral
381,206

 
105,963

Real estate related and other loans, held-for-sale, net
155,075

 
149,198

Residential mortgage loans, held-for-sale, net
446

 
532

Subprime mortgage loans subject to call option
372,874

 
380,806

Investments in real estate, net of accumulated depreciation
225,330

 
227,907

Intangibles, net of accumulated amortization
72,124

 
74,472

Other investments
20,965

 
20,595

Cash and cash equivalents
32,126

 
45,651

Restricted cash
3,898

 
4,469

Receivables from brokers, dealers and clearing organizations
364,320

 
361,341

Receivables and other assets
39,098

 
38,014

Total Assets
$
1,680,100

 
$
1,467,982

 
 
 
 
 
 
 
 
Liabilities and Equity
 

 
 

Liabilities
 

 
 

CDO bonds payable
$

 
$
92,933

Other bonds and notes payable
11,575

 
16,162

Repurchase agreements
420,374

 
418,458

Credit facilities and obligations under capital leases
11,324

 
11,258

Financing of subprime mortgage loans subject to call option
372,874

 
380,806

Junior subordinated notes payable
51,223

 
51,225

Dividends payable
8,929

 
8,929

Membership deposit liabilities
84,655

 
83,210

Payables to brokers, dealers and clearing organizations
381,125

 
105,940

Accounts payable, accrued expenses and other liabilities
85,262

 
88,939

Total Liabilities
$
1,427,341

 
$
1,257,860

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Equity
 
 
 
Preferred stock, $0.01 par value, 100,000,000 shares authorized, 1,347,321 shares of 9.75% Series B Cumulative Redeemable Preferred Stock, 496,000 shares  of 8.05% Series C Cumulative Redeemable Preferred Stock, and 620,000 shares of 8.375% Series D Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, issued and outstanding as of March 31, 2016 and December 31, 2015
$
61,583

 
$
61,583

Common stock, $0.01 par value, 1,000,000,000 shares authorized, 66,654,598 shares issued and outstanding at March 31, 2016 and December 31, 2015
667

 
667

Additional paid-in capital
3,172,370

 
3,172,370

Accumulated deficit
(2,993,513
)
 
(3,057,538
)
Accumulated other comprehensive income
12,033

 
33,297

Total Newcastle Stockholders’ Equity
253,140

 
210,379

Noncontrolling interests
(381
)
 
(257
)
Total Equity
$
252,759

 
$
210,122

 
 
 
 
Total Liabilities and Equity
$
1,680,100

 
$
1,467,982

 
See notes to Consolidated Financial Statements.

1



NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except share data)
 
Three Months Ended March 31,
 
2016
 
2015
Interest income
$
21,039

 
$
27,078

Interest expense
(13,534
)
 
(16,727
)
Net interest income
7,505

 
10,351

Impairment (Reversal)
 

 
 

Valuation allowance on loans
2,198

 
357

Other-than-temporary impairment on securities and other investments
56

 
344

Portion of other-than-temporary impairment on securities recognized in other comprehensive income (loss), net of the reversal of other comprehensive loss into net income
54

 
(296
)
Total impairment
2,308

 
405

Net interest income after impairment
5,197

 
9,946

Operating Revenues
 

 
 

Golf course operations
38,719

 
38,954

Sales of food and beverages - golf
13,561

 
13,012

Other golf revenue
9,878

 
8,860

Total operating revenues
62,158

 
60,826

Other Income (Loss)
 

 
 

Gain (loss) on settlement of investments, net
(1,666
)
 
1,015

Gain on deconsolidation
82,130

 

Other income (loss), net
(21
)
 
(514
)
Total other income
80,443

 
501

Expenses
 

 
 

Loan and security servicing expense
37

 
96

Operating expenses - golf
56,605

 
54,937

Cost of sales - golf
6,211

 
6,053

General and administrative expense
2,900

 
1,713

Management fee to affiliate
2,675

 
2,668

Depreciation and amortization
6,031

 
6,753

Total expenses
74,459

 
72,220

Income (loss) from continuing operations before income tax
73,339

 
(947
)
Income tax expense
44

 
46

Income (loss) from continuing operations
73,295

 
(993
)
Income from discontinued operations, net of tax

 
115

Net Income (loss)
73,295

 
(878
)
Preferred dividends
(1,395
)
 
(1,395
)
Net loss attributable to noncontrolling interests
124

 
181

Income (Loss) Applicable to Common Stockholders
$
72,024

 
$
(2,092
)

Continued on next page.

2



NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except share data)

 
Three Months Ended March 31,
 
2016
 
2015
Income (loss) Applicable to Common Stock, per share
 
 
 
Basic
$
1.08

 
$
(0.03
)
Diluted
$
1.05

 
$
(0.03
)
Income (loss) from continuing operations per share of common stock, after preferred dividends and noncontrolling interests
 

 
 

Basic
$
1.08

 
$
(0.03
)
Diluted
$
1.05

 
$
(0.03
)
Income (Loss) from discontinued operations per share of common stock
 

 
 

Basic
$

 
$

Diluted
$

 
$

Weighted Average Number of Shares of Common Stock Outstanding
 

 
 

Basic
66,654,598

 
66,424,508

Diluted
68,284,898

 
66,424,508

Dividends Declared per Share of Common Stock
$
0.12

 
$
0.12



See notes to Consolidated Financial Statements.

3



NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(dollars in thousands, except share data)
 
Three Months Ended March 31,
 
2016
 
2015
Net income (loss)
$
73,295

 
$
(878
)
Other comprehensive income (loss):
 

 
 

Net unrealized gain on available-for-sale securities
5,301

 
4,038

Reclassification of net realized gain on securities
into earnings
(5,863
)
 
(6,182
)
Reclassification of net realized gain on deconsolidation of CDO VI
(20,682
)
 

Net unrealized loss on derivatives designated as cash flow hedges

 
(33
)
Reclassification of net realized (gain) loss on derivatives designated as cash flow hedges into earnings
(20
)
 
689

Other comprehensive loss
(21,264
)
 
(1,488
)
Total comprehensive income (loss)
$
52,031

 
$
(2,366
)
Comprehensive income (loss) attributable to Newcastle
stockholders’ equity
$
52,155

 
$
(2,185
)
Comprehensive loss attributable to noncontrolling interests
$
(124
)
 
$
(181
)
  
See notes to Consolidated Financial Statements.

4



NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2016
(dollars in thousands, except share data)
 
Newcastle Stockholders
 
 
 
 
 
Preferred Stock
 
Common Stock
 

 

 

 

 

 

 
Shares
 
Amount
 
Shares
 
Amount
 
Additional Paid-
in Capital
 
Accumulated
Deficit
 
Accumulated Other Comp.
Income (Loss)
 
Total Newcastle Stockholders
Equity
 
Noncontrolling
Interests
 
Total Equity
(Deficit)
Equity (deficit) - December 31, 2015
2,463,321

 
$
61,583

 
66,654,598

 
$
667

 
$
3,172,370

 
$
(3,057,538
)
 
$
33,297

 
$
210,379

 
$
(257
)
 
$
210,122

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends declared

 

 

 

 

 
(9,394
)
 

 
(9,394
)
 

 
(9,394
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)


 


 


 


 


 


 


 


 


 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 

 

 

 
73,419

 

 
73,419

 
(124
)
 
73,295

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deconsolidation of net unrealized gain on securities

 

 

 

 

 

 
(20,682
)
 
(20,682
)
 

 
(20,682
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss

 

 

 

 

 

 
(582
)
 
(582
)
 

 
(582
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
52,155

 
(124
)
 
52,031

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity (deficit) - March 31, 2016
2,463,321

 
$
61,583

 
66,654,598

 
$
667

 
$
3,172,370

 
$
(2,993,513
)
 
$
12,033

 
$
253,140

 
$
(381
)
 
$
252,759

 










See notes to Consolidated Financial Statements.

5




NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands, except share data)
 
Three Months Ended March 31,
 
2016
 
2015
Cash Flows From Operating Activities
 
 
 
Net income (loss)
$
73,295

 
$
(878
)
Adjustments to reconcile net income to net cash (used in) provided by operating activities
(inclusive of amounts related to discontinued operations):
 

 
 

Depreciation and amortization
6,031

 
6,764

Accretion of discount and other amortization
3,098

 
(638
)
Net interest income on investments accrued to principal balance
(7,931
)
 
(4,840
)
Amortization of revenue on golf membership deposit liabilities
(185
)
 
(92
)
Amortization of prepaid golf member dues
(6,222
)
 
(6,196
)
Valuation allowance on loans
2,198

 
357

Other-than-temporary impairment on securities and other investments
110

 
48

Equity in earnings from equity method investments, net of distributions
(371
)
 
(314
)
Gain on deconsolidation
(82,130
)
 

(Gain) loss on settlement of investments, net
1,725

 
(1,043
)
Unrealized loss on non-hedge derivatives and hedge ineffectiveness
341

 
1,029

Loss on extinguishment of debt, net
232

 

Change in:
 

 
 

Restricted cash
(429
)
 
(1,570
)
Receivables and other assets
(1,313
)
 
(2,362
)
Accounts payable, accrued expenses and other liabilities
2,250

 
(2,333
)
Net cash used in operating activities
(9,301
)
 
(12,068
)
Cash Flows From Investing Activities
 

 
 

Principal repayments from investments
5,444

 
37,961

Purchase of real estate securities
(364,072
)
 
(407,627
)
Proceeds from sale of investments
361,341

 
398,395

Payments for settlement of TBAs
(7,536
)
 

Acquisition and additions of investments in real estate
(1,972
)
 
(421
)
Funds reserved for capital expenditures
(53
)
 

Net cash (used in) provided by investing activities
(6,848
)
 
28,308

Cash Flows From Financing Activities
 
 
 
Borrowings under debt obligations
363,741

 
391,244

Repayments of debt obligations
(352,211
)
 
(409,350
)
Margin deposits under repurchase agreements and derivatives
(9,406
)
 
(29,985
)
Return of margin deposits under repurchase agreements and derivatives
9,636

 
27,650

Golf membership deposits received
679

 
966

Common stock dividends paid
(7,999
)
 
(7,971
)
Preferred stock dividends paid
(1,395
)
 
(1,395
)
Payment of deferred financing costs
(263
)
 

Payments for settlement of derivative instruments

 
(4,872
)
Other financing activities
(158
)
 
(182
)
Net cash provided by (used in) financing activities
2,624

 
(33,895
)
Net (Decrease) Increase in Cash and Cash Equivalents
(13,525
)
 
(17,655
)
Cash and Cash Equivalents of Continuing Operations, Beginning of Period
45,651

 
73,727

Cash and Cash Equivalents of Discontinued Operations, Beginning of Period

 
135

Cash and Cash Equivalents, End of Period
$
32,126

 
$
56,207

 
 
 
 
Cash and Cash Equivalents of Continuing Operations, End of Period
$
32,126

 
$
56,002

Cash and Cash Equivalents of Discontinued Operations, End of Period
$

 
$
205

Supplemental Schedule of Non-Cash Investing and Financing Activities
 
 
 
Preferred stock dividends declared but not paid
$
930

 
$
930

Common stock dividends declared but not paid
$
7,999

 
$
7,971

Additions to capital lease assets and liabilities
$
718

 
$
243


See notes to Consolidated Financial Statements. 

6

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2016
(dollars in tables in thousands, except share data)
 


1.   ORGANIZATION
 
Newcastle Investment Corp. (and its subsidiaries, “Newcastle” or the “Company”) is a Maryland corporation that was formed in 2002. Newcastle focuses on opportunistically investing in, and actively managing, a variety of real estate related and other investments. Newcastle is organized and conducts its operations to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. As such, Newcastle will generally not be subject to U.S. federal corporate income tax on that portion of its net income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by prescribed dates and complies with various other requirements. However, certain of our activities are conducted through taxable REIT subsidiaries (“TRS”) and therefore are subject to federal and state income taxes at regular corporate tax rates. Newcastle’s common stock is traded on the New York Stock Exchange under the symbol “NCT.”

Newcastle conducts its business through the following segments: (i) debt investments financed with collateralized debt obligations (“CDOs”), (ii) other debt investments (“Other Debt”), (iii) investments in golf properties and facilities (“Golf”) and (iv) corporate.

Newcastle is party to a management agreement (the “Management Agreement”) with FIG LLC (the “Manager”), a subsidiary of Fortress Investment Group LLC (“Fortress”), pursuant to which the Manager provides for a management team and other professionals who are responsible for implementing Newcastle’s business strategy, subject to the supervision of Newcastle’s board of directors. For its services, the Manager is entitled to an annual management fee and incentive compensation, both as defined in, and in accordance with the terms of the Management Agreement. For further discussion of the Management Agreement, see Note 15.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The accompanying Consolidated Financial Statements and related notes of Newcastle have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of Newcastle’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with Newcastle’s Consolidated Financial Statements for the year ended December 31, 2015 and notes thereto included in Newcastle’s Annual Report on Form 10-K filed with the SEC on March 10, 2016. Capitalized terms used herein, and not otherwise defined, are defined in Newcastle’s Consolidated Financial Statements for the year ended December 31, 2015.

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

As of March 31, 2016, Newcastle’s significant accounting policies for these financial statements are summarized below and should be read in conjunction with the Summary of Significant Accounting Policies detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

REVENUE RECOGNITION

Golf Revenues - Revenue from green fees, cart rentals, food and beverage sales, merchandise sales and other activities (consisting primarily of range income, banquets, instruction, and club and other rental income) is generally recognized at the time of sale, when services are rendered and collection is reasonably assured.

Revenue from membership dues is recognized in the month earned. Membership dues received in advance are included in deferred revenues and recognized into revenue ratably over the appropriate period, which is generally 12 months or less. The monthly dues are generally structured to cover the club operating costs and membership services.


7

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2016
(dollars in tables in thousands, except share data)
 

EXPENSE RECOGNITION

Derivatives and Hedging Activities - All derivatives are recognized as either assets or liabilities on the balance sheet and measured at fair value. Newcastle reports the fair value of derivative instruments gross of cash paid or received pursuant to credit support agreements and fair value is reflected on a net counterparty basis when Newcastle believes a legal right of offset exists under an enforceable netting agreement. Fair value adjustments affect either equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. For those derivative instruments that are designated and qualify as hedging instruments, Newcastle designates the hedging instrument, based upon the exposure being hedged, as a cash flow hedge or a fair value hedge.

Derivative transactions are entered into by Newcastle solely for risk management purposes. In determining whether to hedge a risk, Newcastle may consider whether other assets, liabilities, firm commitments and anticipated transactions already offset or reduce the risk. All transactions undertaken as hedges are entered into with a view towards minimizing the potential for economic losses that could be incurred by Newcastle. As of March 31, 2016, Newcastle no longer has derivative instruments that are designated and qualify as hedging instruments. As of March 31, 2016, Newcastle no longer has interest rate swaps or caps.

Newcastle transacts in the To Be Announced mortgage backed securities (“TBA”) market. TBA contracts are forward contracts to purchase mortgage-backed securities that will be issued by a U.S. government sponsored enterprise in the future. Newcastle primarily engages in TBA transactions for purposes of managing interest rate risk and market risk associated with our investment strategies.  For example, Newcastle takes short positions in TBAs to offset - to varying degrees - changes in the values of our Agency residential mortgage backed securities (“RMBS”) investments for which we have exposure to interest rate volatility; therefore, these derivatives may, to some extent, be economically effective as hedges.

Newcastle typically does not take delivery of TBAs, but rather settles the associated receivable and payable with its trading counterparties on a net basis. As part of its TBA activities, Newcastle may “roll” its TBA positions, whereby we may sell (buy) securities for delivery (receipt) in an earlier month and simultaneously contract to repurchase (sell) similar securities at an agreed-upon price on a fixed date in a later month. Newcastle accounts for its TBA transactions as non-hedge instruments, with changes in market value recorded in the Statement of Operations. As of March 31, 2016, Newcastle held TBA contracts consisting of five short contracts totaling $713.0 million notional amount and three long contracts totaling $350.0 million notional amount of Agency RMBS. As of March 31, 2016 and December 31, 2015, Newcastle funded approximately $0.1 million and $1.0 million, respectively, for margin calls related to TBA contracts.
Newcastle’s derivative financial instruments contain credit risk to the extent that its bank counterparties may be unable to meet the terms of the agreements. Newcastle reduces such risk by limiting its counterparties to major financial institutions. In addition, the potential risk of loss with any one party resulting from this type of credit risk is monitored. Management does not expect any material losses as a result of default by other parties. Newcastle does not require collateral for the derivative financial instruments within its CDO financing structures.

Operating Leases and Other Operating Expenses - Other operating expenses for the Golf business consist primarily of equipment leases, utilities, repairs and maintenance, supplies, seed, soil and fertilizer, and marketing. Many of the golf properties and related facilities are leased under long-term operating leases. In addition to minimum payments, certain leases require payment of the excess of various percentages of gross revenue or net operating income over the minimum rental payments. The leases generally require the payment of taxes assessed against the leased property and the cost of insurance and maintenance. The majority of lease terms range from 10 to 20 years, and typically, the leases contain renewal options. Certain leases include scheduled increases or decreases in minimum rental payments at various times during the term of the lease. These scheduled rent increases or decreases are recognized on a straight-line basis over the term of the lease. Increases result in an accrual, which is included in accounts payable, accrued expenses and other liabilities, and decreases result in a receivable, which is included in receivables and other assets, for the amount by which the cumulative straight-line rent differs from the contractual cash rent.
BALANCE SHEET MEASUREMENT
Investments in CDO Servicing Rights - In February 2011, Newcastle, through one of its subsidiaries, purchased the management rights with respect to certain C-BASS Investment Management LLC (“C-BASS”) CDOs for $2.2 million pursuant to a bankruptcy proceeding. Newcastle initially recorded the cost of acquiring the collateral management rights as a servicing asset and subsequently amortizes this asset in proportion to, and over the period of, estimated net servicing income. Servicing assets are assessed for

8

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2016
(dollars in tables in thousands, except share data)
 

impairment on a quarterly basis, with impairment recognized as a valuation allowance. Key economic assumptions used in measuring any potential impairment of the servicing assets include the prepayment speeds of the underlying loans, default rates, loss severities and discount rates. During the three months ended March 31, 2016 and 2015, Newcastle recorded $0.1 million and $0.1 million, respectively, of servicing rights amortization and no servicing rights impairment. As of March 31, 2016 and December 31, 2015, Newcastle’s servicing assets had a carrying value of $0.6 million and $0.7 million, respectively, recorded in receivables and other assets.
Investments in Real Estate, Net - Real estate and related improvements are recorded at cost less accumulated depreciation. Costs that both materially add value to an asset and extend the useful life of an asset by more than a year are capitalized. With respect to golf course improvements (included in buildings and improvements), costs associated with original construction, significant replacements, permanent landscaping, sand traps, fairways, tee boxes or greens are capitalized. All other asset-related costs that do not meet these criteria, such as minor repairs and routine maintenance, are expensed as incurred.
Long-lived assets to be disposed of by sale, which meet certain criteria, are reclassified to real estate held-for-sale and measured at the lower of their carrying amount or fair value less costs of sale. A disposal of a component of an entity or a group of components of an entity are reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on Newcastle’s operations and financial results. Discontinued operations are retroactively reclassified to income (loss) from discontinued operations for all periods presented.

The Golf business leases certain golf carts and other equipment that are classified as capital leases. The value of capital leases is recorded as an asset on the balance sheet, along with a liability related to the associated payments. Depreciation of capital lease assets is calculated using the straight-line method over the shorter of the estimated useful lives and the expected lease terms. The cost of equipment under capital leases is included in investments in real estate in the Consolidated Balance Sheets. Payments under the leases are treated as reductions of the liability, with a portion being recorded as interest expense under the effective interest method.
Depreciation is calculated using the straight-line method based on the following estimated useful lives:
Buildings and improvements
10-30 years
Capital leases - equipment
4-7 years
Furniture, fixtures and equipment
3-7 years
Intangibles - Intangible assets and liabilities relating to the Golf business consist primarily of leasehold advantages (disadvantages), management contracts and membership base. A leasehold advantage (disadvantage) exists to Newcastle when it pays a contracted rent that is below (above) market rents at the date of the transaction. The value of a leasehold advantage (disadvantage) is calculated based on the differential between market and contracted rent, which is tax effected and discounted to present value based on an after-tax discount rate corresponding to each golf property and is amortized over the term of the underlying lease agreement. The management contract intangible represents Newcastle’s golf course management contracts for both leased and managed properties. The management contract intangible for leased and managed properties is valued utilizing a discounted cash flow methodology under the income approach and is amortized over the term of the underlying lease or management agreements, respectively. The membership base intangible represents Newcastle’s relationship with its private golf club members. The membership base intangible is valued using the multi-period excess earnings method under the income approach, and is amortized over the expected life of an active membership.

Amortization of leasehold intangible assets and liabilities are included within operating expenses - golf and amortization of all other intangible assets is included within depreciation and amortization in the Consolidated Statements of Operations.
Membership Deposit Liabilities - In our Golf business, private country club members generally pay an advance initiation fee deposit upon their acceptance as a member to the respective country club. Initiation fee deposits are refundable 30 years after the date of acceptance as a member. The difference between the initiation fee deposit paid by the member and the present value of the refund obligation is deferred and recognized into revenue in the Consolidated Statements of Operations on a straight-line basis over the expected life of an active membership, which is estimated to be seven years. The present value of the refund obligation is recorded as a membership deposit liability in the Consolidated Balance Sheets and accretes over a 30-year nonrefundable term using the effective interest method. This accretion is recorded as interest expense in the Consolidated Statements of Operations.


9

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2016
(dollars in tables in thousands, except share data)
 

Other Investment - Newcastle owns 23% of equity interests in a commercial real estate project which is recorded as an equity method investment. As of March 31, 2016 and December 31, 2015, the carrying value of this investment was $21.0 million and $20.6 million, respectively.  Newcastle evaluates its investment for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. The evaluation of recoverability is based on management’s assessment of the financial condition and near term prospects of the investee, the length of time and the extent to which the market value of the investment has been less than cost and the intent and ability of Newcastle to retain its investment.

Impairment of Real Estate and Finite-lived Intangible Assets - Newcastle periodically reviews the carrying amounts of its long-lived assets, including real estate and finite-lived intangible assets, to determine whether current events or circumstances indicate that such carrying amounts may not be recoverable. The assessment of recoverability is based on management’s estimates by comparing the sum of the estimated undiscounted cash flows generated by the underlying asset, or other appropriate grouping of assets, to its carrying value to determine whether an impairment existed at its lowest level of identifiable cash flows. If the carrying amount of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment is recognized to the extent the carrying value of such asset exceeds its fair value. Newcastle generally measures fair value by considering sale prices for similar assets or by discounting estimated future cash flows using an appropriate discount rate. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell.

Variable Interest Entities (“VIEs”) - Newcastle’s subprime securitizations (see Note 6), and CDO V are considered VIEs, but Newcastle does not control the decisions that most significantly impact their economic performance and no longer receives a significant portion of their returns. Newcastle deconsolidated CDO V as of June 17, 2011 as a result of an event of default which allowed Newcastle to be removed as collateral manager and prevents purchasing and selling of certain collateral within CDO V.

In March 2016, Newcastle sold to third parties $11.0 million face amount of NCT 2013-VI Class I-MM-2 at a price of 93.0% of par.  This tranche was previously held by Newcastle since issuance and was eliminated in consolidation.  By selling this tranche, Newcastle was no longer deemed the primary beneficiary of CDO VI. As a result of this sale, Newcastle deconsolidated CDO VI from its Consolidated Balance Sheet, which included $43.9 million carrying value of real estate securities available-for-sale, $93.1 million of CDO bonds payable, and $12.4 million of other bonds payable. In addition, Newcastle reclassified $20.7 million of related other comprehensive income into earnings, and recognized a total gain of approximately $82.1 million as a result of deconsolidating CDO VI. Newcastle continues to receive servicing fees as collateral manager, which are not considered variable interests in CDO VI.

The following table presents certain assets of consolidated VIEs which are included in the Consolidated Balance Sheets. The assets in the table below include only those assets that can be used to settle obligations of consolidated VIEs, and are in excess of those obligations. Additionally, the assets in the table below exclude intercompany balances that eliminate in consolidation.

 
March 31, 2016
 
 
 
(Unaudited)
 
December 31, 2015
Assets of consolidated VIEs that can only be used to settle obligations of consolidated VIEs
 
 
 
Real estate securities, available-for-sale
$

 
$
46,392

Subprime mortgage loans subject to call option
372,874

 
380,806

Restricted cash

 
128

Receivables and other assets

 
77

Total assets of consolidated VIEs that can only be used to settle obligations of consolidated VIEs
$
372,874

 
$
427,403


The following table presents certain liabilities of consolidated VIEs, which are included in the Consolidated Balance Sheets. The liabilities in the table below include third-party liabilities of consolidated VIEs due to third parties only, and exclude intercompany balances that eliminate in consolidation. The liabilities also exclude amounts where creditors or beneficial interest holders have recourse to the general credit of Newcastle.

10

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2016
(dollars in tables in thousands, except share data)
 

 
March 31, 2016
 
 
 
(Unaudited)
 
December 31, 2015
Liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of Newcastle
 
 
 
CDO bonds payable
$

 
$
92,933

Other bonds and notes payable

 
4,672

Financing of subprime mortgage loans subject to call option
372,874

 
380,806

Accounts payable, accrued expenses and other liabilities

 
29

Total liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of Newcastle
$
372,874

 
$
478,440


In addition, Newcastle’s investments in RMBS, commercial mortgage backed securities (“CMBS”), CDO securities and real estate related and other 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, which 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 March 31, 2016, 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 performance of these entities (e.g., if Newcastle were to own 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.

The following represents Newcastle's unconsolidated VIEs at March 31, 2016, in addition to the subprime securitizations which are described in Note 6:
Entity
Gross Assets (A)
 
Debt (B)
 
Carrying Value of Newcastles Investment (C)
Newcastle CDO V
$
79,732

 
$
106,429

 
$
9,791

Newcastle CDO VI
$
67,431

 
$
181,825

 
$


(A)
Face amount.
(B)
Newcastle CDO V includes $44.6 million face amount of debt owned by Newcastle with a carrying value of $9.8 million at March 31, 2016. Newcastle CDO VI includes $75.5 million face amount of debt owned by Newcastle with zero carrying value at March 31, 2016.
(C)
Represents Newcastle’s maximum exposure to loss from this entity.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date by one year. The standard will be effective for annual and interim periods beginning after December 15, 2017; however, all entities are allowed to adopt the standard as early as the original effective date (annual periods beginning after December 15, 2016). Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. In March 2016, the FASB issued ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations which clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how to apply the control principle to certain types of arrangements. In April 2016, the FASB issued ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing which clarifies when a promised good

11

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2016
(dollars in tables in thousands, except share data)
 

or service is separately identifiable. Newcastle is currently reviewing the guidance to determine its impact on the Consolidated Financial Statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The standard amends the consolidation considerations when evaluating certain limited partnerships, variable interest entities and investment funds. Newcastle adopted this guidance in the first quarter of 2016.

In January 2016, the FASB issued ASU 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The standard addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Newcastle is currently evaluating the new guidance to determine the impact it may have on its Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842). The standard requires lessees to recognize most leases on the balance sheet and addresses certain aspects of lessor accounting. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and early adoption is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with an option to use certain relief. Newcastle is currently evaluating the new guidance to determine the impact it may have on its Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-04 Liabilities - Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Store-Valued Products. The standard requires entities that sell prepaid stored-value products redeemable for goods, services or cash at third-party merchants to recognize breakage consistent with how it will be recognized under the new revenue recognition standard. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and early adoption is permitted. Entities can apply the guidance using either a modified retrospective approach with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption or use a full retrospective approach. Newcastle is currently evaluating the new guidance to determine the impact it may have on its Consolidated Financial Statements.

The FASB has recently issued or discussed a number of proposed standards on such topics as financial statement presentation, leases, financial instruments and hedging. Some of the proposed changes are significant and could have a material impact on Newcastle’s reporting. Newcastle has not yet fully evaluated the potential impact of these proposals, but will make such an evaluation as the standards are finalized. 

3.   DISCONTINUED OPERATIONS

In April 2015, Newcastle closed the sale of its commercial real estate properties in Beavercreek, OH for $7.0 million, net of closing costs, and recognized a net gain on the sale of these assets of approximately $0.3 million. In addition, Newcastle repaid the related debt on this property of $6.0 million held within CDO IX, which was eliminated in consolidation.

As a result of the sale of the commercial real estate properties in Beavercreek, OH (which was initially reported as held-for-sale as of September 30, 2014), the assets, liabilities and results of operations of those components of Newcastle’s operations that represent operations in which Newcastle has no significant continuing involvement, are presented separately in discontinued operations in Newcastle’s Consolidated Financial Statements for all periods presented.

12

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2016
(dollars in tables in thousands, except share data)
 

Results from discontinued operations were as follows:
 
Three Months Ended 
 March 31,
 
2016
 
2015
Rental income

 
499

 
 
 
 
Property operating expenses

 
344

General and administrative expenses

 
29

Depreciation and amortization

 
11

Total expenses

 
384

 
 
 
 
Income from discontinued operations
$

 
$
115



4.   SEGMENT REPORTING
 
Newcastle conducts its business through the following segments: (i) debt investments financed with collateralized debt obligations (“CDOs”), (ii) other debt investments (“Other Debt”), (iii) investment in golf properties and facilities (“Golf”) and (iv) corporate, which 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.
 

13

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2016
(dollars in tables in thousands, except share data)
 

Summary financial data on Newcastle’s segments is given below, together with reconciliation to the same data for Newcastle as a whole:
 
Debt Investments (A)
 
 
 
 
 
 
 
CDOs
 
Other Debt (B)
 
Golf
 
Corporate
 
Total
Three Months Ended March 31, 2016
 
 
 
 
 
 
 
 
 
Interest income
$
1,097

 
$
19,894

 
$
42

 
$
6

 
$
21,039

Interest expense
(491
)
 
(9,433
)
 
(2,665
)
 
(945
)
 
(13,534
)
Net interest income (expense)
606

 
10,461

 
(2,623
)
 
(939
)
 
7,505

Total impairment
110

 
2,198

 

 

 
2,308

Total operating revenues

 

 
62,158

 

 
62,158

Total other income (loss)
82,130

 
(1,403
)
 
(284
)
 

 
80,443

Loan and security servicing expense
30

 
7

 

 

 
37

Operating expenses - golf (C)

 

 
54,713

 

 
54,713

Operating expenses - golf, repairs and maintenance expenses

 

 
1,892

 

 
1,892

Cost of sales - golf

 

 
6,211

 

 
6,211

General and administrative expense

 

 
841

 
1,883

 
2,724

General and administrative expense - acquisition and transaction expenses (D)

 

 
138

 
38

 
176

Management fee to affiliate

 

 

 
2,675

 
2,675

Depreciation and amortization

 

 
6,031

 

 
6,031

Income tax expense

 

 
44

 

 
44

Income (loss) from continuing operations
82,596

 
6,853

 
(10,619
)
 
(5,535
)
 
73,295

Net income (loss)
82,596

 
6,853

 
(10,619
)
 
(5,535
)
 
73,295

Preferred dividends

 

 

 
(1,395
)
 
(1,395
)
Net loss attributable to noncontrolling interests

 

 
124

 

 
124

Income (loss) applicable to common stockholders
$
82,596

 
$
6,853

 
$
(10,495
)
 
$
(6,930
)
 
$
72,024

 
 
 
 
 
 
 
 
 
 
 
 
 
 









14

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2016
(dollars in tables in thousands, except share data)
 

Summary segment financial data (continued).
 
Debt Investments (A)
 
 
 
 
 
 
 
CDOs
 
Other Debt (B)
 
Golf
 
Corporate
 
Total
March 31, 2016
 
 
 
 
 
 
 
 
 
Investments
$

 
$
943,204

 
$
297,454

 
$

 
$
1,240,658

Cash and restricted cash

 
660

 
7,634

 
27,730

 
36,024

Other assets

 
367,888

 
35,377

 
153

 
403,418

Total assets

 
1,311,752

 
340,465

 
27,883

 
1,680,100

Debt, net

 
736,498

 
79,649

 
51,223

 
867,370

Other liabilities

 
382,407

 
163,292

 
14,272

 
559,971

Total liabilities

 
1,118,905

 
242,941

 
65,495

 
1,427,341

Preferred stock

 

 

 
61,583

 
61,583

Noncontrolling interests

 

 
(381
)
 

 
(381
)
Equity (deficit) attributable to common stockholders
$

 
$
192,847

 
$
97,905

 
$
(99,195
)
 
$
191,557

 
 
 
 
 
 
 
 
 
 
Additions to investments in real estate
$

 
$

 
$
2,262

 
$

 
$
2,262



15

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2016
(dollars in tables in thousands, except share data)
 

Summary segment financial data (continued).

 
Debt Investments (A)
 
 
 
 
 
Discontinued
 
 
 
 
 
CDOs
 
Other Debt
 
Golf
 
Corporate
 
Operations
 
Eliminations
 
Total
Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
15,922

 
$
12,595

 
$
35

 
$
4

 
$

 
$
(1,478
)
 
$
27,078

Interest expense
(2,583
)
 
(9,579
)
 
(5,097
)
 
(946
)
 

 
1,478

 
(16,727
)
Inter-segment elimination
(1,478
)
 

 
1,478

 

 

 

 

Net interest income (expense)
11,861

 
3,016

 
(3,584
)
 
(942
)
 

 

 
10,351

Total impairment
337

 
68

 

 

 

 

 
405

Total operating revenues

 

 
60,826

 

 

 

 
60,826

Total other income (loss)
530

 
(37
)
 
8

 

 

 

 
501

Loan and security servicing expense
96

 

 

 

 

 

 
96

Operating expenses - golf (C)

 

 
52,971

 

 

 

 
52,971

Operating expenses - golf, repairs and maintenance expenses

 

 
1,966

 

 

 

 
1,966

Cost of sales - golf

 

 
6,053

 

 

 

 
6,053

General and administrative expense

 

 
249

 
1,428

 

 

 
1,677

General and administrative expense - acquisition and transaction expenses (D)

 

 
36

 

 

 

 
36

Management fee to affiliate

 

 

 
2,668

 

 

 
2,668

Depreciation and amortization

 

 
6,753

 

 

 

 
6,753

Income tax expense

 

 
46

 

 

 

 
46

Income (loss) from continuing operations
11,958

 
2,911

 
(10,824
)
 
(5,038
)
 

 

 
(993
)
Income from discontinued operations

 

 

 

 
115

 

 
115

Net income (loss)
11,958

 
2,911

 
(10,824
)
 
(5,038
)
 
115

 

 
(878
)
Preferred dividends

 

 

 
(1,395
)
 

 

 
(1,395
)
Net loss attributable to non-controlling interests

 

 
181

 

 

 

 
181

Income (loss) applicable to common stockholders
$
11,958

 
$
2,911

 
$
(10,643
)
 
$
(6,433
)
 
$
115

 
$

 
$
(2,092
)

 
 
 
 
 
 
 
 
 
 
 
 
 
 


16

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2016
(dollars in tables in thousands, except share data)
 

(A)
Assets held within non-recourse structures, including all of the assets in the CDO segment, are not available to satisfy obligations outside of such financings, except to the extent net cash flow distributions are received from such structures. Furthermore, creditors or beneficial interest holders of these structures generally have no recourse to the general credit of Newcastle. Therefore, the exposure to the economic losses from such structures generally is limited to 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)
The following table summarizes the investments and debt in the Other Debt segment:
 
March 31, 2016
 
Investments
 
Debt
Non-Recourse
Outstanding
Face Amount
 
Carrying
Value
 
Outstanding
Face Amount
 
Carrying
Value
Subprime mortgage loans subject to call options
$
372,874

 
$
372,874

 
$
372,874

 
$
372,874

Other
 
 
 
 
 
 
 
Unlevered real estate securities (E)
37,471

 
12,638

 

 

Levered real estate securities (F)
363,080

 
381,206

 
352,049

 
352,049

Real estate related and other loans
246,517

 
155,075

 
11,660

 
11,575

Other investments
N/A

 
20,965

 

 

Residential mortgage loans
780

 
446

 

 

 
$
1,020,722

 
$
943,204

 
$
736,583

 
$
736,498


(C)
Operating expenses - golf includes rental expenses recorded under operating leases for carts and equipment in the amount of $1.0 million and $1.1 million for the three months ended March 31, 2016 and 2015, respectively.
(D)
Includes all transaction related expenses.
(E)
Excludes 13 securities with zero value, which had an aggregate face amount of $192.0 million.
(F)
These investments represent purchases that were traded on March 31, 2016 but settled on April 13, 2016. The debt represents repurchase agreements collateralized by sold investments that were traded on March 31, 2016 and settled on April 13, 2016.



17

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2016
(dollars in tables in thousands, except share data)
 


5. REAL ESTATE SECURITIES
 
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.



18

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2016
(dollars in tables in thousands, except share data)
 


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.


19

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2016
(dollars in tables in thousands, except share data)
 

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.  

6. REAL ESTATE RELATED AND OTHER LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS

Loans are accounted for based on management’s strategy for the loan, and on whether the loan was credit-impaired at the date of acquisition. Purchased loans that Newcastle has the intent and ability to hold for the foreseeable future or until maturity or payoff are classified as held-for-investment. Alternatively, loans acquired with the intent to sell are classified as held-for-sale.

The following is a summary of real estate related and other loans, residential mortgage loans and subprime mortgage loans at March 31, 2016. The loans contain various terms, including fixed and floating rates, self-amortizing and interest only. They are generally subject to prepayment.
Loan Type
Outstanding
Face Amount
 
Carrying
Value (A)
 
Valuation Allowance (Reversal)
 
Loan
Count
 
Weighted
 Average
 Yield
 
Weighted Average Coupon
 
Weighted Average Life
(Years) (B)
 
Floating Rate Loans as % of Face Amount
 
Delinquent Face Amount (C)
Mezzanine Loans
$
37,200

 
$
19,433

 
$

 
3

 
8.00
%
 
8.27
%
 
0.1
 
100.0
%
 
$
17,767

Corporate Bank Loans
209,317

 
135,642

 
2,192

 
4

 
22.47
%
 
18.30
%
 
0.8
 
%
 
45,687

Total Real Estate Related and other Loans Held-for-Sale, Net
$
246,517

 
$
155,075

 
$
2,192