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 September 30, 2014
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 S Accelerated filer £ 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: 66,399,857 shares outstanding as of October 29, 2014.


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 expected to be 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, as a result of the planned spin-off of our senior housing business on November 6, 2014 or other factors;
•
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;
•
prior to the planned spin-off of our senior housing business, our dependence on our property managers and tenants in our senior housing business; the ability of our property managers and tenants to comply with laws, rules and regulations in the operation of our properties, to maintain and improve our properties, to deliver high quality services, to attract and retain qualified personnel and to attract residents; increases in costs at our senior housing properties (including, but not limited to, the costs of labor, supplies, insurance and property taxes); and the impact of litigation or any financial, accounting, legal or regulatory issues that may affect our senior housing properties or our property managers and tenants;
•
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;
•
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)
 
September 30, 2014
 
December 31, 2013
 
(Unaudited)
 
Assets
 

 
 

Real estate securities, available-for-sale
$
310,639

 
$
984,263

Real estate related and other loans, held-for-sale, net
224,992

 
437,530

Residential mortgage loans, held-for-investment, net
—

 
255,450

Residential mortgage loans, held-for-sale, net
4,036

 
2,185

Subprime mortgage loans subject to call option
406,217

 
406,217

Investments in senior housing real estate, net of accumulated depreciation
1,582,477

 
1,362,900

Investments in other real estate, net of accumulated depreciation
245,510

 
250,208

Intangibles, net of accumulated amortization
201,909

 
196,407

Other investments
26,456

 
25,468

Cash and cash equivalents
257,584

 
73,984

Restricted cash
4,624

 
5,856

Receivables and other assets
111,996

 
139,595

Assets of discontinued operations
6,863

 
697,572

Total Assets
$
3,383,303

 
$
4,837,635

 
 
 
 
 
 
 
 
Liabilities and Equity
 

 
 

Liabilities
 

 
 

CDO bonds payable
$
230,858

 
$
544,525

Other bonds and notes payable
82,063

 
230,279

Repurchase agreements
63,804

 
556,347

Mortgage notes payable
1,148,008

 
1,076,828

Credit facilities and obligations under capital leases, golf
160,692

 
152,498

Financing of subprime mortgage loans subject to call option
406,217

 
406,217

Junior subordinated notes payable
51,233

 
51,237

Dividends payable
40,770

 
36,075

Accounts payable, accrued expenses and other liabilities
249,065

 
261,825

Liabilities of discontinued operations
412

 
295,680

Total Liabilities
$
2,433,122

 
$
3,611,511

 
 
 
 
 
 
 
 
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 September 30, 2014 and December 31, 2013
$
61,583

 
$
61,583

Common stock, $0.01 par value, 1,000,000,000 shares authorized, 66,399,857 and 58,575,583 shares issued and outstanding, at September 30, 2014 and December 31, 2013, respectively
664

 
586

Additional paid-in capital
3,171,983

 
2,973,715

Accumulated deficit
(2,350,567
)
 
(1,947,913
)
Accumulated other comprehensive income
66,342

 
76,874

Total Newcastle Stockholders' Equity
950,005

 
1,164,845

Noncontrolling interests
176

 
61,279

Total Equity
$
950,181

 
$
1,226,124

 
 
 
 
Total Liabilities and Equity
$
3,383,303

 
$
4,837,635

 
Statement continues on the next page.

1


NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
The following table presents certain assets of consolidated variable interest entities (“VIEs”), which are included in the Consolidated Balance Sheets above. The assets in the table below include those assets that can only 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.


 
September 30, 2014
 
December 31, 2013
 
(Unaudited)
 
Assets of consolidated VIEs that can only be used to settle obligations of
    consolidated VIEs
 

 
 

Real estate securities, available-for-sale
$
299,362

 
$
426,695

Real estate related and other loans, held-for-sale, net
224,992

 
437,530

Residential mortgage loans, held-for-sale, net
3,117

 
223,628

Subprime mortgage loans subject to call option
406,217

 
406,217

Other investments
20,057

 
19,308

Restricted cash
1,672

 
2,344

Receivables and other assets
2,864

 
3,680

Assets of discontinued operations
6,627

 
6,677

Total assets of consolidated VIEs that can only be used to settle obligations
    of consolidated VIEs
$
964,908

 
$
1,526,079


 
The following table presents certain liabilities of consolidated VIEs, which are included in the Consolidated Balance Sheets above. The liabilities in the table below include 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.


 
September 30, 2014
 
December 31, 2013
 
(Unaudited)
 
Liabilities of consolidated VIEs for which creditors or beneficial interest
    holders do not have recourse to the general credit of Newcastle
 

 
 

CDO bonds payable
$
230,858

 
$
544,525

Other bonds and notes payable
82,063

 
230,279

Financing of subprime mortgage loans subject to call option
406,217

 
406,217

Accounts payable, accrued expenses and other liabilities
4,844

 
20,148

Liabilities of discontinued operations
412

 
413

Total liabilities of consolidated VIEs for which creditors or beneficial
    interest holders do not have recourse to the general credit of Newcastle
$
724,394

 
$
1,201,582

 

See notes to consolidated financial statements.

2


NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(dollars in thousands, except share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Interest income
$
27,544

 
$
47,486

 
$
103,889

 
$
171,642

Interest expense
32,549

 
20,555

 
102,340

 
65,263

Net interest income (expense)
(5,005
)
 
26,931

 
1,549

 
106,379

Impairment/(Reversal)
 

 
 

 
 

 
 

Valuation allowance (reversal) on loans
(4,015
)
 
(12,998
)
 
(1,243
)
 
(11,473
)
Other-than-temporary impairment on securities
—

 
—

 
—

 
4,405

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 (loss)
—

 
—

 
—

 
44

Total impairment (reversal)
(4,015
)
 
(12,998
)
 
(1,243
)
 
(7,024
)
Net interest income (expense) after impairment/reversal
(990
)
 
39,929

 
2,792

 
113,403

Operating Revenues
 

 
 

 
 

 
 

Rental income
60,828

 
20,607

 
167,208

 
42,799

Care and ancillary income
6,428

 
3,763

 
17,555

 
8,081

Golf course operations
50,414

 
—

 
140,699

 
—

Sales of food and beverages - golf
18,871

 
—

 
52,333

 
—

Other golf revenue
12,209

 
—

 
33,832

 
—

Total operating revenues
148,750

 
24,370

 
411,627

 
50,880

Other Income
 

 
 

 
 

 
 

Gain on settlement of investments, net
7,007

 
1,388

 
49,742

 
6,451

Gain (loss) on extinguishment of debt
—

 
3,359

 
(3,410
)
 
4,565

Other income, net
7,092

 
1,963

 
25,258

 
9,554

Total other income
14,099

 
6,710

 
71,590

 
20,570

Expenses
 

 
 

 
 

 
 

Loan and security servicing expense
159

 
908

 
1,424

 
2,963

Property operating expenses
26,519

 
15,542

 
74,092

 
31,827

Operating expenses - golf
67,576

 
—

 
191,119

 
—

Cost of sales - golf
8,420

 
—

 
23,183

 
—

General and administrative expense
8,539

 
9,350

 
27,380

 
23,495

Management fee to affiliate
8,106

 
7,166

 
23,618

 
24,879

Depreciation and amortization
37,023

 
7,678

 
97,812

 
15,717

Total expenses
156,342

 
40,644

 
438,628

 
98,881

Income from continuing operations before income tax
5,517

 
30,365

 
47,381

 
85,972

Income tax expense
334

 
—

 
1,169

 
—

Income from continuing operations
5,183

 
30,365

 
46,212

 
85,972

Income (loss) from discontinued operations, net of tax
127

 
(1,121
)
 
(4,748
)
 
35,008

Net Income
5,310

 
29,244

 
41,464

 
120,980

Preferred dividends
(1,395
)
 
(1,395
)
 
(4,185
)
 
(4,185
)
Net loss attributable to noncontrolling interests
21

 
—

 
711

 
—

Income Applicable to Common Stockholders
$
3,936

 
$
27,849

 
$
37,990

 
$
116,795


Continued on next page.

3


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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Income Applicable to Common Stock, per share (1)
 

 
 

 
 
 
 
Basic
$
0.06

 
$
0.57

 
$
0.63

 
$
2.67

Diluted
$
0.06

 
$
0.56

 
$
0.62

 
$
2.60

Income from continuing operations per share of common stock,
after preferred dividends and noncontrolling interests (1)
 

 
 

 
 

 
 

Basic
$
0.06

 
$
0.59

 
$
0.71

 
$
1.87

Diluted
$
0.06

 
$
0.58

 
$
0.69

 
$
1.82

Income (loss) from discontinued operations per share of common
stock (1)
 

 
 

 
 

 
 

Basic
$
—

 
$
(0.02
)
 
$
(0.08
)
 
$
0.80

Diluted
$
—

 
$
(0.02
)
 
$
(0.08
)
 
$
0.78

Weighted Average Number of Shares of Common Stock
Outstanding (1)
 

 
 

 
 

 
 

Basic
62,329,023

 
48,895,648

 
59,848,506

 
43,798,831

Diluted
63,865,796

 
50,171,319

 
61,630,175

 
44,842,947

Dividends Declared per Share of Common Stock (1)
$
0.60

 
$
0.60

 
$
1.80

 
$
2.94

(1) All per share amounts and shares outstanding for all periods reflect the 1-for-3 reverse stock split, which was effective after the close of trading on August 18, 2014 and the 1-for-2 reverse stock split, which was effective after the close of trading on October 22, 2014.





See notes to consolidated financial statements.

4


NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(dollars in thousands, except share data)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
5,310

 
$
29,244

 
$
41,464

 
$
120,980

Other comprehensive income (loss):
 

 
 

 
 

 
 

Net unrealized gain (loss) on securities
(3,743
)
 
3,123

 
4,734

 
42,400

Reclassification of net realized gain on securities
into earnings
—

 
(1,381
)
 
(18,032
)
 
(1,549
)
Net unrecognized gain and pension prior service cost
(discontinued operations)
—

 
—

 
9

 
—

Net unrealized gain (loss) on derivatives designated as cash flow hedges
6

 
(172
)
 
(148
)
 
(128
)
Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings
1,200

 
1,279

 
3,372

 
4,846

Other comprehensive income (loss)
(2,537
)
 
2,849

 
(10,065
)
 
45,569

Total comprehensive income
$
2,773

 
$
32,093

 
$
31,399

 
$
166,549

Comprehensive income attributable to Newcastle
stockholders' equity
$
2,794

 
$
32,093

 
$
32,110

 
$
166,549

Comprehensive loss attributable to noncontrolling interests
$
(21
)
 
$
—

 
$
(711
)
 
$
—

  
See notes to consolidated financial statements.

5


NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014
(dollars in thousands, except share data)
 
Newcastle Stockholders
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Additional Paid-
 
Accumulated
 
Accumulated Other Comp.
 
Total Newcastle Stockholders'
 
Noncontrolling
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
in Capital
 
Deficit
 
Income (Loss)
 
Equity
 
Interests
 
(Deficit)
Equity - December 31, 2013
2,463,321

 
$
61,583

 
58,575,583

 
$
586

 
$
2,973,715

 
$
(1,947,913
)
 
$
76,874

 
$
1,164,845

 
$
61,279

 
$
1,226,124

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends declared
—

 
—

 
—

 
—

 
—

 
(114,340
)
 
—

 
(114,340
)
 
—

 
(114,340
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock
—

 
—

 
7,824,274

 
78

 
198,268

 
—

 
—

 
198,346

 
—

 
198,346

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Spin-off of New Media
—

 
—

 
—

 
—

 
—

 
(330,489
)
 
(467
)
 
(330,956
)
 
(60,392
)
 
(391,348
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)


 


 


 


 


 


 


 


 


 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
—

 
—

 
—

 
—

 
—

 
42,175

 
—

 
42,175

 
(711
)
 
41,464

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income
—

 
—

 
—

 
—

 


 
—

 
(10,065
)
 
(10,065
)
 
—

 
(10,065
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32,110

 
(711
)
 
31,399

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity - September 30, 2014
2,463,321

 
$
61,583

 
66,399,857

 
$
664

 
$
3,171,983

 
$
(2,350,567
)
 
$
66,342

 
$
950,005

 
$
176

 
$
950,181

 










See notes to consolidated financial statements.

6


NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands, except share data)
 
Nine Months Ended September 30,
 
2014
 
2013
Cash Flows From Operating Activities
 
 
 
Net income
$
41,464

 
$
120,980

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

 
 

Depreciation and amortization
102,585

 
15,881

Accretion of discount and other amortization
(12,393
)
 
(27,851
)
Interest income in CDOs redirected for reinvestment or CDO bond paydown
(1,747
)
 
(1,068
)
Interest income on investments accrued to principal balance
(15,960
)
 
(19,495
)
Interest expense on debt accrued to principal balance
332

 
330

Non-cash directors' compensation
275

 
275

Valuation allowance (reversal) on loans
(1,243
)
 
(11,473
)
Other-than-temporary impairment on securities
—

 
4,449

Change in fair value of investments in excess mortgage servicing rights
—

 
(3,894
)
Change in fair value of investments in equity method investees
—

 
(19,170
)
Change in fair value of contingent consideration
(1,500
)
 
—

Straight-lining of rental income
(19,035
)
 
—

Equity in earnings from equity method investments
(621
)
 
(587
)
Distributions of earnings from equity method investees
—

 
1,069

Gain on settlement of investments (net)
(49,742
)
 
(6,451
)
Unrealized gain on non-hedge derivatives and hedge ineffectiveness
(18,432
)
 
(7,302
)
Loss/(gain) on extinguishment of debt
3,410

 
(4,565
)
Change in:
 

 
 

Restricted cash
3,278

 
3,786

Receivables and other assets
6,441

 
(983
)
Accounts payable, accrued expenses and other liabilities
(11,494
)
 
8,554

Payment of deferred interest
—

 
(648
)
Deferred interest received
—

 
5,125

Net cash provided by operating activities
25,618

 
56,962

Cash Flows From Investing Activities
 

 
 

Principal repayments from repurchased CDO debt
68,265

 
80,817

Principal repayments from CDO securities
12,997

 
2,792

Principal repayments from non-Agency RMBS
252

 
25,178

Return of investments in excess mortgage servicing rights
—

 
15,803

Principal repayments from loans and non-CDO securities (excluding non-Agency RMBS)
34,310

 
186,999

Principal repayment from security accounted for as a linked transaction
116,806

 
—

Purchase of real estate securities
—

 
(1,113,528
)
Purchase of securities accounted for as linked transactions
—

 
(103,140
)
Purchase of real estate related and other loans
—

 
(207,125
)
Proceeds from sale of investments
798,122

 
43,916

Acquisition of investments in real estate
(299,244
)
 
(224,760
)
Additions to investments in real estate
(14,275
)
 
(1,899
)
Contributions to equity method investees
—

 
(442,655
)
Distributions of capital from equity method investees
—

 
12,134

Deposits paid on investments
(150
)
 
(5,248
)
Net cash provided by (used in) investing activities
717,083

 
(1,730,716
)
 
Continued on next page

7


NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands, except share data)
 
Nine Months Ended September 30,
 
2014
 
2013
Cash Flows From Financing Activities
 
 
 
Repurchases of CDO bonds payable
$
—

 
$
(31,285
)
Repayments of other bonds and notes payable
(168,111
)
 
(30,300
)
Borrowings under repurchase agreements
78,804

 
2,094,395

Borrowings under credit facilities, golf
3,000

 
—

Borrowings under repurchase agreements accounted for as linked transactions
5,283

 
59,968

Repayments of repurchase agreements
(571,347
)
 
(1,326,584
)
Repayments under repurchase agreements accounted for as linked transactions
(65,929
)
 
—

Repayments of credit facilities, media and golf
(4,482
)
 
—

Repayments of capital lease liabilities
(168
)
 
—

Margin deposits under repurchase agreements
(23,716
)
 
(176,414
)
Return of margin deposits under repurchase agreements
23,716

 
143,914

Borrowings under mortgage notes payable
80,145

 
165,696

Repayment of mortgage notes payable
(9,943
)
 
(143
)
Issuance of common stock
198,671

 
962,827

Costs related to issuance of common stock
(254
)
 
(1,699
)
New Media and New Residential spin-offs
(23,845
)
 
(181,582
)
Common stock dividends paid
(105,462
)
 
(136,640
)
Preferred stock dividends paid
(4,185
)
 
(4,185
)
Payment of financing costs
(3,002
)
 
(4,195
)
Proceeds from settlement of derivative instruments
—

 
217

Net cash provided by (used in) financing activities
(590,825
)
 
1,533,990

Net Increase in Cash and Cash Equivalents
151,876

 
(139,764
)
Cash and Cash Equivalents of Continuing Operations, Beginning of Period
73,984

 
231,518

Cash and Cash Equivalents of Discontinued Operations, Beginning of Period
31,960

 
380

Cash and Cash Equivalents, End of Period
$
257,820

 
$
92,134

 
 
 
 
Cash and Cash Equivalents of Continuing Operations, End of Period
$
257,584

 
$
91,985

Cash and Cash Equivalents of Discontinued Operations, End of Period
$
236

 
$
149

Supplemental Disclosure of Cash Flow Information
 

 
 

Cash paid during the period for income taxes
$
1,351

 
$
—

Cash paid during the period for interest expense
$
58,093

 
$
35,649

Supplemental Schedule of Non-Cash Investing and Financing Activities
 

 
 

Assumption of mortgage notes payable
$
—

 
$
41,443

Issuance of seller financing for acquisition of senior housing facilities
$
—

 
$
11,432

Costs associated with issuance of common stock
$
346

 
$
—

Fair value adjustment related to seller financing
$
—

 
$
2,000

Additions to capital lease assets and liabilities
$
5,162

 
$
—

Preferred stock dividends declared but not paid
$
930

 
$
930

Common stock dividends declared but not paid
$
39,840

 
$
29,349

Reduction of Assets and Liabilities relating to the spin-off of New Media
 

 
 

Property, plant and equipment, net
$
266,385

 
$
—

Goodwill and intangibles, net
$
271,350

 
$
—

Restricted cash
$
6,477

 
$
—

Receivables and other assets
$
101,940

 
$
—

Credit facilities, media
$
177,955

 
$
—

Accounts payable, accrued expenses and other liabilities
$
100,695

 
$
—

Reduction of Assets and Liabilities relating to the spin-off of New Residential
 
 
 
Real estate securities, available for sale
$
—

 
$
1,647,289

Residential mortgage loans, held-for-investment, net
$
—

 
$
35,865

Investments in excess mortgage servicing rights at fair value
$
—

 
$
229,936

Investments in equity method investees
$
—

 
$
392,469

Receivables and other assets
$
—

 
$
37,844

Repurchase agreements
$
—

 
$
1,320,360

Accounts payable, accrued expenses and other liabilities
$
—

 
$
642

 See notes to consolidated financial statements

8
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2014
(dollars in tables in thousands, except share data)
 



1.   GENERAL
 
Newcastle Investment Corp. (and its subsidiaries, “Newcastle”) 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".

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, 2013
and notes thereto included in Newcastle’s Annual Report on Form 10-K filed with the SEC on March 3, 2014 and on Form 8-K filed with the SEC on May 5, 2014. Capitalized terms used herein, and not otherwise defined, are defined in Newcastle’s consolidated financial statements for the year ended December 31, 2013.

Certain prior period amounts have been reclassified to conform to the current period’s presentation. All per share amounts, common shares outstanding and options for the third quarter of 2014 and all prior periods reflect Newcastle's 1-for-3 reverse stock split, which was effective August 18, 2014 and Newcastle's 1-for-2 reverse stock split, which was effective October 22, 2014.

On February 13, 2014, Newcastle completed the spin-off of New Media Investment Group Inc. ("New Media"), and established New Media as a separate, publicly traded company (NYSE:NEWM). The spin-off was effected as a taxable pro rata distribution by Newcastle of all of the outstanding shares of common stock it held of New Media to Newcastle’s common stockholders of record at the close of business on February 6, 2014. The distribution ratio was 0.0722 shares of New Media common stock for each share of Newcastle common stock.

In December 2013, Newcastle restructured an investment in mezzanine debt issued by NGP Mezzanine, LLC (“NGP”), the indirect parent of NGP Realty Sub, L.P. (“National Golf”). National Golf owns 27 golf properties across 8 states, and leases these properties to American Golf Corporation (“American Golf”), an affiliated operating company. American Golf also leases an additional 52 golf properties and manages 11 properties, all owned by third parties. As part of the transaction, Newcastle acquired the equity of NGP and American Golf’s indirect parent, AGC Mezzanine Pledge LLC (“AGC”), and therefore is consolidating these entities.

As a result, Newcastle conducts its business through the following segments: (i) investments in senior housing properties (“senior housing”), which Newcastle expects to spin off on November 6, 2014 as described in more detail below, (ii) debt investments financed with collateralized debt obligations (“CDOs”), (iii) other debt investments (“other debt”), (iv) investments in golf properties and facilities (“Golf”) and (v) corporate. With respect to the CDOs and other debt investments, subject to the passing of certain periodic coverage tests, Newcastle is generally entitled to receive the net cash flows from these structures on a periodic basis.

Newcastle is party to a management agreement (the "Management Agreement") with FIG LLC (the "Manager"), a subsidiary of Fortress Investment Group LLC (“Fortress”), under which the Manager advises Newcastle on various aspects of its business and manages its day-to-day operations, 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.


9
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2014
(dollars in tables in thousands, except share data)
 

Newcastle either leases senior housing properties under triple net leases or has its senior housing properties managed pursuant to property management agreements (the “Senior Housing Management Agreements”). Currently, the senior housing managers are affiliates or subsidiaries of either Holiday Acquisition Holdings LLC (“Holiday”), a portfolio company that is majority owned by private equity funds managed by an affiliate of Newcastle’s Manager, or FHC Property Management LLC (together with its subsidiaries, “Blue Harbor”), an affiliate of Newcastle’s Manager.

On June 16, 2014, Newcastle announced that its board of directors unanimously approved a plan to spin off its senior housing business. New Senior Investment Group Inc. (“New Senior”, NYSE: SNR), a subsidiary of Newcastle, filed a registration statement with the SEC with respect to the planned spin-off, which the SEC declared effective on October 24, 2014. New Senior will be a publicly traded REIT that primarily targets senior housing related investments.

The spin-off will be effected as a distribution of all of the outstanding shares of common stock of New Senior to the holders of Newcastle common stock. Newcastle will distribute one share of New Senior common stock for each share of Newcastle common stock held by Newcastle stockholders of record as of the record date, October 27, 2014.  The distribution is expected to occur on November 6, 2014. The distribution ratio is based on the number of Newcastle shares outstanding following the 1-for-2 reverse stock split.

In connection with the spin-off, Newcastle will contribute to New Senior all of its investments in senior housing properties, any liabilities relating to these properties and a cash and cash equivalents balance of approximately $243 million.

In August 2014, Newcastle issued 7,654,166 shares of its common stock in a public offering at a price to the underwriters of $25.92 per share for net proceeds of approximately $197.9 million (see Note 13).
Approximately 1.1 million shares of Newcastle’s common stock were held by Fortress, through its affiliates, and its principals at September 30, 2014. In addition, Fortress, through its affiliates, held options to purchase approximately 5.0 million shares of Newcastle’s common stock at September 30, 2014.

A principal of the Manager owned or leased aircraft that Newcastle chartered from a third-party aircraft operator for business purposes in the course of operations. Newcastle paid market rates for the charters. These amounts totaled $0.2 million and less than $0.1 million for the nine months ended September 30, 2014 and 2013. 
 
Significant Accounting Policies

As a result of the Golf acquisition on December 30, 2013, the following summarizes significant accounting policies related to this segment.

REVENUE RECOGNITION

Revenue from green fees, cart rentals, food and beverage sales, merchandise sales and other income (consisting primarily of range income, banquets, and club and other rental income) are 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 as revenue ratably over the appropriate period, which is generally twelve months or less. The monthly dues are generally structured to cover the club operating costs and membership services.

Private country club members generally pay an advance initiation fee upon their acceptance as a member to the country club. Initiation fees at most private clubs are deposits which are generally refundable 30 years after the date of acceptance as a member. Revenue related to membership deposits is recognized over the expected life of an active membership. For membership deposits, the difference between the amount paid by the member and the present value of the refund obligation is deferred and recognized on a straight-line basis over the expected life of an active membership.

The present value of the refund obligation is recorded as a membership deposit liability in the consolidated balance sheets and accretes over the nonrefundable term (30 years) using the effective interest method. This accretion is recorded as interest expense in the consolidated statements of income.


10
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2014
(dollars in tables in thousands, except share data)
 

EXPENSE RECOGNITION

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 minimum scheduled increases in rental payments at various times during the term of the lease. These scheduled rent increases are recognized on a straight-line basis over the term of the lease, resulting in an accrual, which is included in accounts payable, accrued expenses and other liabilities, for the amount by which the cumulative straight-line rent exceeds the contractual cash rent.

CAPITAL LEASES

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. Amortization of capital lease assets is calculated using the straight-line method over the shorter of the estimated useful lives and the initial lease terms. The cost of equipment under capital leases is included in investments in other real estate in the consolidated balance sheets. Payments under the lease are treated as reductions of the liability, with a portion being recorded as interest expense under the effective interest method.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.  ASU 2014-08 raises the threshold for disposals to qualify as discontinued operations. A discontinued operation is defined as: (1) a component of an entity or group of components that has been disposed of or classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results; or (2) an acquired business that is classified as held for sale on the acquisition date. ASU 2014-08 also requires additional disclosures regarding discontinued operations, as well as material disposals that do not meet the definition of discontinued operations. The application of this guidance is prospective from the date of adoption and applies only to disposals (or new classifications to held for sale) that have not been reported as discontinued operations in Newcastle's previously issued financial statements. This update is effective for Newcastle in the first quarter of 2015. Newcastle is currently evaluating the new guidance to determine the impact it may have to its consolidated financial statements.

In May 2014, the FASB and the International Accounting Standards Board ("IASB") issued 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. The ASU is effective for Newcastle in the first quarter of 2017. Early application is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance in the ASU. Newcastle is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.  The standard changes the accounting for repurchase-to-maturity transactions and linked repurchase financing transactions to secured borrowing accounting. The ASU also expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales that are economically similar to repurchase agreements and the types of collateral pledged in repurchase agreements and similar transactions accounted for as a secured borrowing. The ASU is effective for Newcastle in the first quarter of 2015. Early application is not permitted. Disclosures are not required for comparative periods presented before the effective date. Newcastle is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements.

In August 2014, the FASB issued ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (“CFE”). The standard allows a reporting entity that consolidates

11
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2014
(dollars in tables in thousands, except share data)
 

a CFE, to elect to measure the financial assets and the financial liabilities of that CFE using the measurement alternative. Under the measurement alternative, the reporting entity should measure both the financial assets and the financial liabilities of that CFE in its consolidated financial statements using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. This guidance is effective for Newcastle in the first quarter of 2016. An entity can elect either a retrospective or modified retrospective transition method, and early adoption is permitted as of the beginning of an annual period. Newcastle is currently evaluating the new guidance to determine the impact it may have to its consolidated financial statements.
The FASB has recently issued or discussed a number of proposed standards on such topics as consolidation, 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.
 

2.   ACQUISITIONS

Acquisitions of Senior Housing properties:

i.
Managed Properties

In the nine months ended September 30, 2014, Newcastle completed the acquisitions of nine senior housing properties in six different portfolios for an aggregate purchase price of approximately $116.2 million plus acquisition-related costs. Each of these acquisitions was accounted for as a business combination, under which all assets acquired and liabilities assumed are recognized at their acquisition-date fair value with acquisition-related costs being expensed as incurred. For two of the properties, Newcastle has retained Holiday to manage the properties. Pursuant to the property management agreements with Holiday, Newcastle pays management fees equal to either (i) 5% of the property’s effective gross income (as defined in the agreements) or (ii) 6% of the property’s effective gross income (as defined in the agreements) for the first two years and 7% thereafter. For the other seven properties acquired, Newcastle has retained Blue Harbor to manage the properties. Pursuant to the agreements with Blue Harbor, Newcastle pays management fees equal to 6% of the property’s effective gross income (as defined in the agreements) for the first two years and 7% thereafter. In addition, Newcastle will reimburse Holiday and Blue Harbor for certain expenses, primarily the compensation expense associated with the on-site employees.

ii.
Triple Net Lease Properties

On June 30, 2014, Newcastle completed the acquisition of six senior housing properties for an aggregate purchase price of approximately $183.0 million plus acquisition-related costs. The acquisition was accounted for as a business combination, under which all assets acquired and liabilities assumed are recognized at their acquisition-date fair value with acquisition-related costs being expensed as incurred.

On June 30, 2014, Newcastle also entered into a triple net lease of these properties with a third party (the “June 2014 Master Tenant”). The lease has a 15-year term with two five-year renewal options and first-year rent equal to approximately 7.6% of the purchase price with annual increases during each of the following three years of 3.75% to 2.5% thereafter. Under the lease, the June 2014 Master Tenant is responsible for (i) operating the properties and bearing the related costs, including maintenance, utilities, taxes, insurance, repairs and capital improvements, and (ii) complying with the terms of the mortgage financing documents.

As part of the June 2014 Master Tenant lease, Newcastle committed to making $6.5 million immediately available for capital improvements and other repairs to the properties under the lease agreement and also agreed to make available to the June 2014 Master Tenant an additional $9.0 million at certain intervals over the 15 year lease period to be used for further capital improvements. Upon funding the capital improvements, Newcastle will be entitled to a rent increase.


12
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2014
(dollars in tables in thousands, except share data)
 


The following table summarizes the allocation of the purchase price to the fair value of identifiable assets acquired and liabilities assumed in connection with these acquisitions, in accordance with the acquisition method of accounting:
 
Nine months ended September 30, 2014 Acquisitions
 
 
 
Managed Properties
 
Triple Net Lease Properties
 
Total
Allocation of Purchase Price
 
 
 
 
 
Investments in Real Estate
$
103,530

 
$
144,148

 
$
247,678

Resident Lease Intangibles
13,963

 
39,475

 
53,438

Other Intangibles
—

 
960

 
960

Other Liabilities, net of other Assets
(1,280
)
 
(1,552
)
 
(2,832
)
Total purchase price
$
116,213

 
$
183,031

 
$
299,244

 
 
 
 
 
 
Mortgage Notes Payable (A)
(80,145
)
 
—

 
(80,145
)
Net assets acquired
$
36,068

 
$
183,031

 
$
219,099

Total acquisition related costs (B)
$
2,149

 
$
980

 
$
3,129


(A)
See Note 10.
(B)
Acquisition-related costs are expensed as incurred and included within general and administrative expense on the consolidated statements of income.

The initial accounting for business combinations is incomplete for acquisitions that are within their respective measurement period and Newcastle continues to evaluate adjustments to the provisional amounts recognized in the financial statements, including fair values assigned to real estate property and intangible assets acquired. Therefore, the purchase price allocations are preliminary and are subject to change. Final fair value measurements may materially differ from the initial acquisition accounting.

During the three months ended September 30, 2014, measurement period adjustments were made based on the reclassification and valuation of assets acquired and liabilities assumed in the amounts of ($18.7) million, ($8.7) million, $15.3 million, ($2.2) million and $14.3 million for investments in senior housing real estate, investments in other real estate, intangibles, receivables and other assets and accounts payable, accrued expenses and other liabilities, respectively. None of the measurement period adjustments had a material impact on Newcastle's previously reported results of operations.


 

3.   DISCONTINUED OPERATIONS

On May 15, 2013, Newcastle completed the spin-off of New Residential from Newcastle.

On February 13, 2014, Newcastle completed the spin-off of New Media from Newcastle.

The following table presents the carrying value of the assets and liabilities of New Media, immediately preceding the February 13, 2014 spin-off and at December 31, 2013.

13
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2014
(dollars in tables in thousands, except share data)
 

 
February 13, 2014
 
December 31, 2013
Assets
 
 
 
Property, plant and equipment, net
$
266,385

 
$
270,188

Intangibles, net
144,664

 
145,400

Goodwill
126,686

 
126,686

Cash and cash equivalents
23,845

 
31,811

Restricted cash
6,477

 
6,477

Receivables and other assets
101,940

 
110,184

Total Assets
$
669,997

 
$
690,746

 
 
 
 
Liabilities
 
 
 
Credit facilities - media
$
177,955

 
$
182,016

Accounts payable, accrued expenses and other liabilities
100,695

 
113,251

Total Liabilities
$
278,650

 
$
295,267

 
 
 
 
Net Assets
$
391,347

 
$
395,479

As of September 30, 2014, Newcastle is working to sell its commercial real estate properties in Beavercreek, OH.
As a result of the May 15, 2013 spin-off, the February 13, 2014 spin-off, and the plan to sell the commercial real estate properties in Beavercreek, OH, for all periods presented, the assets, liabilities and results of operations of those components of Newcastle’s operations that (i) were part of the spin-off, and/or (ii) represent operations in which Newcastle has no significant continuing involvement, are presented separately in discontinued operations in Newcastle’s consolidated financial statements.

With respect to the planned sale of the commercial real estate properties in Beavercreek, Ohio, the assets of discontinued operations include $6.6 million and $6.6 million of investments in other real estate and $0.3 million and $0.2 million of cash and cash equivalents, restricted cash and receivables and other assets, as of September 30, 2014 and December 31, 2013, respectively. The liabilities of discontinued operations include $0.4 million of accounts payable, accrued liabilities and other liabilities, as of September 30, 2014 and December 31, 2013.

14
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2014
(dollars in tables in thousands, except share data)
 


Results from discontinued operations were as follows:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Interest Income
$
—

 
$
—

 
$
—

 
$
15,095

Interest Expense
—

 
—

 
2,096

 
—

Net interest income (loss)
—

 
—

 
(2,096
)
 
15,095

 
 
 
 
 
 
 
 
Media income
—

 
—

 
68,213

 
—

Rental income
527

 
542

 
1,630

 
1,545

Other income (loss)
—

 
(2,386
)
 
—

 
(2,388
)
Change in fair value of investments in excess mortgage servicing rights
—

 
—

 
—

 
3,894

Change in fair value of investments in equity method investees
—

 
—

 
—

 
885

Earnings from investments in equity method investees
—

 
1,045

 
—

 
19,331

Total media, rental and other income (loss)
527

 
(799
)
 
69,843

 
23,267

 
 
 
 
 
 
 
 
Media operating expenses
—

 
—

 
65,826

 
—

Property operating costs
327

 
262

 
838

 
761

General and administrative expenses
9

 
6

 
1,973

 
2,429

Depreciation and amortization
64

 
54

 
4,773

 
164

Income tax (benefit) expense
—

 
—

 
(915
)
 
—

Total expenses
400

 
322

 
72,495

 
3,354

 
 
 
 
 
 
 
 
Income (loss) from discontinued operations
$
127

 
$
(1,121
)
 
$
(4,748
)
 
$
35,008

 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interest
$
—

 
$
—

 
$
522

 
$
—



The May 15, 2013 spin-off resulted in a $1.2 billion reduction in the basis upon which Newcastle’s management fees are computed (and an equivalent reduction in the basis upon which the incentive compensation threshold is computed), as well as a reduction in the strike price of Newcastle’s then outstanding options.

The February 13, 2014 spin-off resulted in a $0.4 billion reduction in the basis upon which Newcastle’s management fees are computed (and an equivalent reduction in the basis upon which the incentive compensation threshold is computed), as well as a reduction in the strike price of Newcastle’s then outstanding options (see Note 13).

Upon the spin-off of New Senior expected on November 6, 2014, the assets, liabilities and results of operations of this component of Newcastle’s operations that (i) are part of the spin-off, and (ii) represent operations in which Newcastle has no significant continuing involvement, will be presented separately in discontinued operations in Newcastle’s consolidated financial statements.


 





15
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2014
(dollars in tables in thousands, except share data)
 

4.   SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES
 
Newcastle conducts its business through the following segments: (i) investments in senior housing properties (“senior housing”), (ii) debt investments financed with collateralized debt obligations (“CDOs”), (iii) other debt investments (“other debt”), (iv) investment in golf properties and facilities (“golf”) and (v) corporate. With respect to the CDOs and other debt segments, Newcastle is generally entitled to receive net cash flows from these structures on a periodic basis.

The corporate segment consists primarily of interest income on short term investments, general and administrative expenses, interest expense on the junior subordinated notes payable and management fees pursuant to the Management Agreement.
 

16
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2014
(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:
 
Senior
 
Debt Investments (A)
 
 
 
 
 
Discontinued
 
 
 
 
 
Housing (A)
 
CDOs
 
Other Debt (B)
 
Golf
 
Corporate
 
Operations
 
Eliminations
 
Total
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
—

 
$
70,635

 
$
39,102

 
$
112

 
$
41

 
$
—

 
$
(6,001
)
 
$
103,889

Interest expense
(41,429
)
 
(16,932
)
 
(32,344
)
 
(14,764
)
 
(2,872
)
 
—

 
6,001

 
(102,340
)
Inter-segment elimination
—

 
(6,001
)
 
1,748

 
4,253

 
—

 
—

 
—

 
—

Net interest income (expense)
(41,429
)
 
47,702

 
8,506

 
(10,399
)
 
(2,831
)
 
—

 
—

 
1,549

Impairment (reversal)
—

 
(2,185
)
 
942

 
—

 
—

 
—

 
—

 
(1,243
)
Operating revenues
184,763

 
—

 
—

 
226,864

 
—

 
—

 
—

 
411,627

Other income, net
1,457

 
34,717

 
32,698

 
2,718

 
—

 
—

 
—

 
71,590

Loan and security servicing expense
—

 
466

 
958

 
—

 
—

 
—

 
—

 
1,424

Property operating expenses
74,092

 
—

 
—

 
—

 
—

 
—

 
—

 
74,092

Operating expenses - golf (C)
—

 
—

 
—

 
183,925

 
—

 
—

 
—

 
183,925

Repairs and maintenance expenses - golf
—

 
—

 
—

 
7,194

 
—

 
—

 
—

 
7,194

Cost of sales - golf
—

 
—

 
—

 
23,183

 
—

 
—

 
—

 
23,183

General and administrative expense
3,116

 
—

 
2,921

 
986

 
5,963

 
—

 
—

 
12,986

Acquisition and transaction expenses (D)
12,800

 
—

 
—

 
1,530

 
64

 
—

 
—

 
14,394

Management fee to affiliate
6,766

 
—

 
—

 
—

 
16,852

 
—

 
—

 
23,618

Depreciation and amortization
74,672

 
—

 
—

 
23,053

 
87

 
—

 
—

 
97,812

Income tax expense
1,025

 
—

 
—

 
144

 
—

 
—

 
—

 
1,169

Income (loss) from continuing operations
(27,680
)
 
84,138

 
36,383

 
(20,832
)
 
(25,797
)
 
—

 
—

 
46,212

Loss from discontinued operations, net of tax
—

 
—

 
—

 
—

 
—

 
(4,748
)
 
—

 
(4,748
)
Net income (loss)
(27,680
)
 
84,138

 
36,383

 
(20,832
)
 
(25,797
)
 
(4,748
)
 
—

 
41,464

Preferred dividends
—

 
—

 
—

 
—

 
(4,185
)
 
—

 
—

 
(4,185
)
Net loss attributable to noncontrolling interests
—

 
—

 
—

 
189

 
—

 
522

 
—

 
711

Income (loss) applicable to common stockholders
$
(27,680
)
 
$
84,138

 
$
36,383

 
$
(20,643
)
 
$
(29,982
)
 
$
(4,226
)
 
$
—

 
$
37,990



17
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2014
(dollars in tables in thousands, except share data)
 

 
Senior
 
Debt Investments (A)
 
 
 
 
 
Discontinued
 
 
 
 
 
Housing (A)
 
CDOs
 
Other Debt (B)
 
Golf
 
Corporate
 
Operations
 
Eliminations
 
Total
Three Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
—

 
$
19,316

 
$
9,749

 
$
37

 
$
6

 
$
—

 
$
(1,564
)
 
$
27,544

Interest expense
(14,138
)
 
(4,823
)
 
(9,343
)
 
(4,847
)
 
(962
)
 
—

 
1,564

 
(32,549
)
Inter-segment elimination
—

 
(1,564
)
 
112

 
1,452

 
—

 
—

 
—

 
—

Net interest income (expense)
(14,138
)
 
12,929

 
518

 
(3,358
)
 
(956
)
 
—

 
—

 
(5,005
)
Impairment (reversal)
—

 
(4,143
)
 
128

 
—

 
—

 
—

 
—

 
(4,015
)
Operating revenues
67,256

 
—

 
—

 
81,494

 
—

 
—

 
—

 
148,750

Other income, net
1,481

 
1,822

 
8,067

 
2,729

 
—

 
—

 
—

 
14,099

Loan and security servicing expense
—

 
157

 
2

 
—

 
—

 
—

 
—

 
159

Property operating expenses
26,519

 
—

 
—

 
—

 
—

 
—

 
—

 
26,519

Operating expenses - golf (C)
—

 
—

 
—

 
64,984

 
—

 
—

 
—

 
64,984

Repairs and maintenance expenses - golf
—

 
—

 
—

 
2,592

 
—

 
—

 
—

 
2,592

Cost of sales - golf
—

 
—

 
—

 
8,420

 
—

 
—

 
—

 
8,420

General and administrative expense
1,415

 
—

 
1,051

 
527

 
2,238

 
—

 
—

 
5,231

Acquisition and transaction expenses (D)
3,992

 
—

 
—

 
27

 
(711
)
 
—

 
—

 
3,308

Management fee to affiliate
2,442

 
—

 
—

 
—

 
5,664

 
—

 
—

 
8,106

Depreciation and amortization
28,648

 
—

 
—

 
8,362

 
13

 
—

 
—

 
37,023

Income tax expense
334

 
—

 
—

 
—

 
—

 
—

 
—

 
334