NCT-2015.3.31-10Q

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, 2015



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: 66,424,508 shares outstanding as of April 27, 2015.

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, as a result of the 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;


•	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

	Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014	1

	Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2015 and 2014	2

	Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2015 and 2014	4

	Consolidated Statement of Equity (unaudited) for the three months ended March 31, 2015	5

	Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2015 and 2014	6

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	45

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	74

Item 4.	Controls and Procedures	76

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	77

Item 1A.	Risk Factors	77

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	106

Item 3.	Defaults upon Senior Securities	106

Item 4.	Mine Safety Disclosures	106

Item 5.	Other Information	106

Item 6.	Exhibits	107

SIGNATURES		109

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)



	March 31, 2015			December 31, 2014
	(Unaudited)			December 31, 2014
Assets
Real estate securities, available-for-sale	$	231,727		$	231,754
Real estate securities, pledged as collateral	409,037			407,689
Real estate related and other loans, held-for-sale, net	197,251			230,200
Residential mortgage loans, held-for-sale, net	3,735			3,854
Subprime mortgage loans subject to call option	406,217			406,217
Investments in other real estate, net of accumulated depreciation	234,049			239,283
Intangibles, net of accumulated amortization	82,000			84,686
Other investments	27,102			26,788
Cash and cash equivalents	56,002			73,727
Restricted cash	21,874			15,714
Receivables and other assets	37,448			35,191
Assets of discontinued operations	6,883			6,803
Total Assets	$	1,713,325		$	1,761,906


Liabilities and Equity
Liabilities
CDO bonds payable	$	216,464		$	227,673
Other bonds and notes payable	25,317			27,069
Repurchase agreements	421,803			441,176
Credit facilities and obligations under capital leases	162,806			161,474
Financing of subprime mortgage loans subject to call option	406,217			406,217
Junior subordinated notes payable	51,230			51,231
Dividends payable	8,901			8,901
Accounts payable, accrued expenses and other liabilities	173,489			179,390
Liabilities of discontinued operations	502			447
Total Liabilities	$	1,466,729		$	1,503,578

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, 2015 and December 31, 2014	$	61,583		$	61,583
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 66,424,508 and 66,424,508 shares issued and outstanding, at March 31, 2015 and December 31, 2014, respectively	664			664
Additional paid-in capital	3,172,060			3,172,060
Accumulated deficit	(3,051,943		)	(3,041,880		)
Accumulated other comprehensive income	64,377			65,865
Total Newcastle Stockholders' Equity	246,741			258,292
Noncontrolling interests	(145		)	36
Total Equity	$	246,596		$	258,328

Total Liabilities and Equity	$	1,713,325		$	1,761,906

See notes to consolidated financial statements.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(dollars in thousands, except share data)



	Three Months Ended March 31,
	2015			2014
Interest income	$	27,078		$	46,452
Interest expense	16,727			22,170
Net interest income	10,351			24,282
Impairment/(Reversal)
Valuation allowance (reversal) on loans	357			1,246
Other-than-temporary impairment on securities	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 (loss)	(296		)	—
Total impairment (reversal)	405			1,246
Net interest income after impairment/reversal	9,946			23,036
Operating Revenues
Golf course operations	38,954			39,772
Sales of food and beverages - golf	13,012			13,539
Other golf revenue	8,860			9,321
Total operating revenues	60,826			62,632
Other Income (Loss)
Gain on settlement of investments, net	1,015			2,334
Other income (loss), net	(514		)	13,474
Total other income	501			15,808
Expenses
Loan and security servicing expense	96			857
Operating expenses - golf	54,937			59,647
Cost of sales - golf	6,053			5,956
General and administrative expense	1,713			3,564
Management fee to affiliate	2,668			5,893
Depreciation and amortization	6,753			5,863
Total expenses	72,220			81,780
(Loss) income from continuing operations before income tax	(947		)	19,696
Income tax expense	46			140
(Loss) income from continuing operations	(993		)	19,556
Income (loss) from discontinued operations, net of tax	115			(15,299		)
Net (Loss) Income	(878		)	4,257
Preferred dividends	(1,395		)	(1,395		)
Net loss attributable to noncontrolling interests	181			661
(Loss) Income Applicable to Common Stockholders	$	(2,092	)	$	3,523

Continued on next page.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(dollars in thousands, except share data)



	Three Months Ended March 31,
	2015			2014
(Loss) Income Applicable to Common Stock, per share (1)
Basic	$	(0.03	)	$	0.06
Diluted	$	(0.03	)	$	0.06
(Loss) Income from continuing operations per share of common stock, after preferred dividends and noncontrolling interests (1)
Basic	$	(0.03	)	$	0.32
Diluted	$	(0.03	)	$	0.31
Income (Loss) from discontinued operations per share of common stock (1)
Basic	$	—		$	(0.26	)
Diluted	$	—		$	(0.26	)
Weighted Average Number of Shares of Common Stock Outstanding (1)
Basic	66,424,508			58,575,582
Diluted	66,424,508			60,511,128
Dividends Declared per Share of Common Stock (1)	$	0.12		$	0.60

(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.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(dollars in thousands, except share data)



	Three Months Ended March 31,
	2015			2014
Net (loss) income	$	(878	)	$	4,257
Other comprehensive income (loss):
Net unrealized gain on available-for-sale securities	3,694			4,588
Reclassification of net realized gain on securities into earnings	(5,838		)	(2,334		)
Net unrecognized gain and pension prior service cost (discontinued operations)	—			9
Net unrealized loss on derivatives designated as cash flow hedges	(33		)	(77		)
Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings	689			1,267
Other comprehensive (loss) income	(1,488		)	3,453
Total comprehensive (loss) income	$	(2,366	)	$	7,710
Comprehensive (loss) income attributable to Newcastle stockholders' equity	$	(2,185	)	$	8,371
Comprehensive loss attributable to noncontrolling interests	$	(181	)	$	(661	)

See notes to consolidated financial statements.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY (Unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2015

(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, 2014	2,463,321	$	61,583	66,424,508	$	664	$	3,172,060	$	(3,041,880	)	$	65,865		$	258,292		$	36		$	258,328

Dividends declared	—	—		—	—		—		(9,366		)	—			(9,366		)	—			(9,366		)

Comprehensive income (loss)

Net loss	—	—		—	—		—		(697		)	—			(697		)	(181		)	(878		)

Other comprehensive loss	—	—		—	—		—		—			(1,488		)	(1,488		)	—			(1,488		)

Total comprehensive loss															(2,185		)	(181		)	(2,366		)

Equity - March 31, 2015	2,463,321	$	61,583	66,424,508	$	664	$	3,172,060	$	(3,051,943	)	$	64,377		$	246,741		$	(145	)	$	246,596

See notes to consolidated financial statements.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(dollars in thousands, except share data)



	Three Months Ended March 31,
	2015			2014
Cash Flows From Operating Activities
Net (loss) income	$	(878	)	$	4,257
Adjustments to reconcile net income to net cash provided by operating activities (inclusive of amounts related to discontinued operations):
Depreciation and amortization	6,764			33,402
Accretion of discount and other amortization	(638		)	(7,346		)
Net interest income on investments accrued to principal balance	(4,840		)	(7,105		)
Valuation allowance on loans	357			1,246
Other-than-temporary impairment on securities	48			—
Straight-lining of rental income	—			(6,107		)
Equity in earnings from equity method investments, net of distributions	(314		)	39
Gain on settlement of investments (net)	(1,043		)	(2,332		)
Unrealized loss (gain) on non-hedge derivatives and hedge ineffectiveness	1,029			(12,748		)
Change in:
Restricted cash	(1,570		)	1,690
Receivables and other assets	(2,362		)	8,434
Accounts payable, accrued expenses and other liabilities	(7,837		)	(8,793		)
Net cash (used in) provided by operating activities	(11,284		)	4,637
Cash Flows From Investing Activities
Principal repayments from investments	37,961			57,143
Purchase of real estate securities	(407,627		)	—
Proceeds from sale of investments	398,395			532,236
Acquisition and additions of investments in real estate	(421		)	(26,378		)
Deposits paid on investments	—			(2,448		)
Net cash provided by investing activities	28,308			560,553
Cash Flows From Financing Activities
Borrowings under debt obligations	391,244			52,933
Repayments of debt obligations	(409,350		)	(538,934		)
Margin deposits under repurchase agreements and derivatives	(29,985		)	(12,277		)
Return of margin deposits under repurchase agreements and derivatives	27,650			11,867
Contribution of cash to New Media/New Residential upon spin-off	—			(23,845		)
Common stock dividends paid	(7,971		)	(35,145		)
Preferred stock dividends paid	(1,395		)	(1,395		)
Payment of deferred financing costs	—			(2,285		)
Proceeds (payments) from settlement of derivative instruments	(4,872		)	—
Net cash used in financing activities	(34,679		)	(549,081		)
Net (Decrease) Increase in Cash and Cash Equivalents	(17,655		)	16,109
Cash and Cash Equivalents of Continuing Operations, Beginning of Period	73,727			42,721
Cash and Cash Equivalents of Discontinued Operations, Beginning of Period	135			63,223
Cash and Cash Equivalents, End of Period	$	56,207		$	122,053

Cash and Cash Equivalents of Continuing Operations, End of Period	$	56,002		$	85,724
Cash and Cash Equivalents of Discontinued Operations, End of Period	$	205		$	36,329
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for income taxes	$	260		$	76
Cash paid during the period for interest expense	$	5,294		$	20,477
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	$	7,971		$	35,145
Additions to capital lease assets and liabilities	$	243		$	—
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

See notes to consolidated financial statements

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2015

(dollars in tables in thousands, except share data)

1. GENERAL

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. 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.

Approximately 1.0 million shares of Newcastle’s common stock were held by Fortress, through its affiliates, and its principals at March 31, 2015. In addition, Fortress, through its affiliates, held options to purchase approximately 4.9 million shares of Newcastle’s common stock at March 31, 2015.

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. There were no amounts incurred for the three months ended March 31, 2015 and 2014.

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, 2014 and notes thereto included in Newcastle’s Annual Report on Form 10-K filed with the SEC on March 2, 2015. Capitalized terms used herein, and not otherwise defined, are defined in Newcastle’s consolidated financial statements for the year ended December 31, 2014.

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 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.

As of March 31, 2015, 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, 2014.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2015

(dollars in tables in thousands, except share data)

REVENUE RECOGNITION

Golf Revenues - Revenue from green fees, cart rentals, food and beverage sales, merchandise sales and other income (consisting primarily of range income, banquets, instruction, 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 (currently seven years). 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 a 30-year nonrefundable term using the effective interest method. This accretion is recorded as interest expense in the consolidated statements of operations.

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 either a cash flow hedge, a fair value hedge or a hedge of a net investment in a foreign operation.

Derivative transactions are entered into by Newcastle solely for risk management purposes, except for total rate of return swaps. Such total rate of return swaps are essentially financings of certain reference assets which are treated as derivatives for accounting purposes. The decision of whether or not a given transaction/position (or portion thereof) is hedged is made on a case-by-case basis, based on the risks involved and other factors as determined by management, including restrictions imposed by the Code among others. 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. Generally, all derivatives entered into are intended to qualify as hedges under GAAP, unless specifically stated otherwise. To this end, terms of hedges are matched closely to the terms of hedged items.

Description of the risks being hedged

Interest rate risk, existing debt obligations - Newcastle has hedged (and may continue to hedge, when feasible and appropriate) the risk of interest rate fluctuations with respect to its borrowings, regardless of the form of such borrowings, which require payments based on a variable interest rate index. Newcastle generally intends to hedge only the risk related to changes in the benchmark interest rate (LIBOR or a Treasury rate). In order to reduce such risks, Newcastle may enter into swap agreements whereby Newcastle would receive floating rate payments in exchange for fixed rate payments, effectively converting the borrowing to fixed rate. Newcastle may also enter into cap agreements whereby, in exchange for a premium, Newcastle would be reimbursed for interest paid in excess of a certain cap rate.


2)	Interest rate risk, anticipated transactions - Newcastle may hedge the aggregate risk of interest rate fluctuations with respect to anticipated transactions, primarily anticipated borrowings. The primary risk involved in an anticipated borrowing is that interest rates may increase between the date the transaction becomes probable and the date of consummation.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2015

(dollars in tables in thousands, except share data)

Newcastle generally intends to hedge only the risk related to changes in the benchmark interest rate (LIBOR or a Treasury rate). This is generally accomplished through the use of interest rate swaps.

Cash Flow Hedges

To qualify for cash flow hedge accounting, interest rate swaps and caps must meet certain criteria, including (1) the items to be hedged expose Newcastle to interest rate risk, (2) the interest rate swaps or caps are highly effective in reducing Newcastle’s exposure to interest rate risk, and (3) with respect to an anticipated transaction, such transaction is probable. Correlation and effectiveness are periodically assessed based upon a comparison of the relative changes in the fair values or cash flows of the interest rate swaps and caps and the items being hedged, or using regression analysis on an ongoing basis to assess retrospective and prospective hedge effectiveness.

For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss, and net payments received or made, on the derivative instrument are reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. The premiums paid for interest rate caps, treated as cash flow hedges, are amortized into interest expense based on the estimated value of such cap for each period covered by such cap.

With respect to interest rate swaps which have been designated as hedges of anticipated financings, periodic net payments are recognized currently as adjustments to interest expense; any gain or loss from fluctuations in the fair value of the interest rate swaps is recorded as a deferred hedge gain or loss in accumulated other comprehensive income and treated as a component of the anticipated transaction. In the event the anticipated refinancing failed to occur as expected, the deferred hedge credit or charge would be recognized immediately in earnings. Newcastle’s hedges of such financings were terminated upon the consummation of such financings.

Newcastle has designated certain of its derivatives, and in some cases re-designated all or a portion thereof as hedges. As a result of these designations, in the cases where the originally hedged items were still owned by Newcastle, the unrealized gain or loss was recorded in accumulated other comprehensive income as a deferred hedge gain or loss and is being amortized over the life of the hedged item.

As of March 31, 2015, the aggregate notional amount of our interest rate swaps designated as cash flow hedges of interest rate risk totaled $57.9 million. Under these agreements, we will pay fixed monthly coupons at fixed rates of 5.04% of the notional amount to the counterparty and receive floating rate LIBOR. Our interest rate swaps designated as cash flow hedges of interest rate risk will mature on April 2016.

Non-Hedge Derivatives

With respect to interest rate swaps and caps that have not been designated as hedges, any net payments under, or fluctuations in the fair value of, such swaps and caps have been recognized currently in other income (loss). These derivatives may, to some extent, be economically effective as hedges. Under these agreements, we paid fixed monthly coupons at fixed rates of 4.85% of the notional amount to the counterparty and received floating rate LIBOR. Our interest rate swaps not designated as hedges matured in March 2015.

Newcastle has entered into certain transactions which financed the purchase of certain assets with the seller of these assets. The contemporaneous purchase of the asset and the associated financing are treated as a linked transaction and accordingly recorded on a net basis as a non-hedge derivative instrument, with changes in market value recorded on the statement of operations. In May 2014, the CDO VIII Class 1 notes were repaid in full and the repurchase agreement was terminated. Therefore, the associated linked transaction was effectively terminated and there are no linked transactions at December 31, 2014.

Newcastle also transacts in the to be announced MBS ("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

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2015

(dollars in tables in thousands, except share data)

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 instrument, with changes in market value recorded on the statement of operations. As of March 31, 2015, Newcastle held two TBA contracts with $390.0 million in short notional amount of Agency RMBS.

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 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.

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 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, 2015, Newcastle recorded $0.1 million of servicing rights amortization and no servicing rights impairment. As of March 31, 2015, Newcastle’s servicing asset had a carrying value of $1.0 million recorded in receivables and other assets.

Investments in Other Real Estate, Net - Real estate and related improvements are recorded at cost less accumulated depreciation. Costs that both materially add value and appreciably extend the useful life of an asset are capitalized. Fees and costs incurred in the successful negotiation of leases are deferred and amortized on a straight-line basis over the terms of the respective leases. With respect to golf course improvements (included in land improvements), only costs associated with original construction, significant replacements, or the addition of new trees, permanent landscaping, sand traps, fairways, tee boxes or greens are capitalized. Expenditures for repairs and 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. The results of operations for such disposal, assuming such disposal qualifies as a “component of an entity” that represents a strategic shift that had (or will have) a major effect on the operations or financial results as defined, 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. 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

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2015

(dollars in tables in thousands, except share data)

the lease 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	15-30 years
Building improvements	3-10 years
Capital leases - equipment	shorter of the lease term or estimated useful life of the asset
Furniture, fixtures and equipment	3-10 years
Leasehold improvements	shorter of the lease term or estimated useful life of the asset

Intangibles - Intangible assets 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 course. The management contract intangible represents Newcastle’s golf course management contracts for both leased and managed properties, is valued utilizing a discounted cash flow methodology under the income approach, and is amortized over the average contractual term of the agreements. The membership base intangible represents Newcastle’s relationship with its private golf club members, is valued using the multi-period excess earnings method under the income approach, and is amortized over the weighted average remaining useful life of the private memberships.

Amortization of leasehold intangible assets is included within operating expense - golf and amortization of all other intangible assets is included within depreciation and amortization on the consolidated statements of operations.

Other Investment - Newcastle owns 23% of preferred equity in a commercial real estate project which is recorded as an equity method investment. As of March 31, 2015 and December 31, 2014, the carry value of this investment was $27.1 million and $26.8 million, respectively. Newcastle evaluates its equity method 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.

Recent Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. The ASU is effective for Newcastle in the first quarter of 2016 and early adoption is permitted. Newcastle is currently evaluating the new guidance to determine the impact it may have to its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Topic 835): Simplifying the Presentation of Debt Issuance Costs. The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2015

(dollars in tables in thousands, except share data)

sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new guidance is effective in the first quarter of 2016 and early adoption is permitted. Newcastle elected to early adopt this new guidance effective for the first quarter of 2015 to simplify presentation of debt issuance costs and has applied the changes retrospectively to all periods presented. Accordingly, "Receivables and other assets" excludes deferred financing costs and "Credit facilities and obligations under capital leases" is reported net of deferred financing costs of $0.4 million as of both March 31, 2015 and December 31, 2014 in the Consolidated Balance Sheets.

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

On February 13, 2014, Newcastle completed the spin-off of New Media Investment Group Inc. ("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.



	February 13, 2014
Assets
Property, plant and equipment, net	$	266,385
Intangibles, net	144,664
Goodwill	126,686
Cash and cash equivalents	23,845
Restricted cash	6,477
Receivables and other assets	101,940
Total Assets	$	669,997

Liabilities
Credit facilities - media	$	177,955
Accounts payable, accrued expenses and other liabilities	100,695
Total Liabilities	$	278,650

Net Assets	$	391,347

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2015

(dollars in tables in thousands, except share data)

On November 6, 2014, Newcastle completed the spin-off of New Senior Investment Group Inc. ("New Senior") from Newcastle. The following table presents the carrying value of the assets and liabilities of New Senior, immediately preceding the November 6, 2014 spin-off.



	November 6, 2014
Assets
Investment in senior housing real estate, net	$	1,574,048
Intangibles, net	107,658
Cash and cash equivalents	245,246
Receivables and other assets	95,942
Total Assets	$	2,022,894

Liabilities
Mortgage notes payable	$	1,260,633
Accounts payable, accrued expenses and other liabilities	89,245
Total Liabilities	$	1,349,878

Net Assets	$	673,016

Newcastle initially reported its commercial real estate properties in Beavercreek, OH as held-for-sale as of September 30, 2014 and the properties continue to be reported as held-for-sale as of March 31, 2015. As a result of the spin-offs and the plan to sell the commercial real estate properties in Beavercreek, OH, the assets, liabilities and results of operations of those components of Newcastle’s operations that (i) were part of the spin-offs, 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 for all periods presented.

In April 2015, Newcastle closed on the sale of these properties (see Note 20).

With respect to the planned sale of the commercial real estate properties in Beavercreek, Ohio, the assets of discontinued operations include investments in other real estate in the amount of $6.6 million as of both March 31, 2015 and December 31, 2014 and cash and cash equivalents, restricted cash and receivables and other assets in the total amount of $0.3 million and $0.2 million as of March 31, 2015 and December 31, 2014, respectively. The liabilities of discontinued operations include $0.5 million of accounts payable, accrued liabilities and other liabilities, as of both March 31, 2015 and December 31, 2014.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2015

(dollars in tables in thousands, except share data)

Results from discontinued operations were as follows:



	Three Months Ended March 31,
	2015		2014
Interest income	$	—	$	—
Interest expense	—		15,797
Net interest income (loss)	—		(15,797		)

Media income	—		68,213
Rental income	499		52,890
Care and ancillary income	—		5,461
Total media, rental and other income	499		126,564

Media operating expenses	—		65,826
Property operating expenses	344		25,960
General and administrative expenses	29		7,552
Depreciation and amortization	11		27,488
Income tax (benefit) expense	—		(760		)
Total expenses	384		126,066

Income (loss) from discontinued operations	$	115	$	(15,299	)

Net income attributable to noncontrolling interests	$	—	$	522

The February 13, 2014 spin-off of New Media 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.

The November 6, 2014 spin-off of New Senior resulted in a $0.7 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.

4. SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES

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. 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.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2015

(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)												Discontinued
	CDOs			Other Debt (B)			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
Impairment (reversal)	337			68			—			—			—		—			405
Operating revenues	—			—			60,826			—			—		—			60,826
Other income, net	530			(37		)	8			—			—		—			501
Loan and security servicing expense	96			—			—			—			—		—			96
Operating expenses - golf (C)	—			—			52,971			—			—		—			52,971
Repairs and maintenance expenses - golf	—			—			1,966			—			—		—			1,966
Cost of sales - golf	—			—			6,053			—			—		—			6,053
General and administrative expense	—			—			249			1,428			—		—			1,677
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, net of tax	—			—			—			—			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 noncontrolling interests	—			—			181			—			—		—			181
Income (loss) applicable to common stockholders	$	11,958		$	2,911		$	(10,643	)	$	(6,433	)	$	115	$	—		$	(2,092	)

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2015

(dollars in tables in thousands, except share data)



	Debt Investments (A)										Discontinued
	CDOs		Other Debt (B)		Golf			Corporate			Operations		Total
March 31, 2015
Investments, net (E)	$	440,436	$	834,633	$	316,049		$	—		$	—	$	1,591,118
Cash and restricted cash	14,149		3,778		11,933			48,016			—		77,876
Other assets	1,575		2,100		33,637			136			—		37,448
Assets of discontinued operations	—		—		—			—			6,883		6,883
Total assets	456,160		840,511		361,619			48,152			6,883		1,713,325
Debt, net (E)	277,464		792,337		162,806			51,230			—		1,283,837
Other liabilities	1,386		6,352		158,406			16,246			—		182,390
Liabilities of discontinued operations	—		—		—			—			502		502
Total liabilities	278,850		798,689		321,212			67,476			502		1,466,729
Preferred stock	—		—		—			61,583			—		61,583
Noncontrolling interests	—		—		(145		)	—			—		(145		)
Equity attributable to common stockholders	$	177,310	$	41,822	$	40,552		$	(80,907	)	$	6,381	$	185,158

Additions to investments in real estate excluding intangibles and other liabilities, net of other assets acquired	$	—	$	—	$	385		$	—		$	—	$	385

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2015

(dollars in tables in thousands, except share data)



	Debt Investments (A)												Discontinued
	CDOs			Other Debt (B)			Golf			Corporate			Operations			Eliminations			Total
Three Months Ended March 31, 2014
Interest income	$	30,722		$	16,952		$	41		$	11		$	—		$	(1,274	)	$	46,452
Interest expense	(6,128		)	(12,663		)	(3,698		)	(955		)	—			1,274			(22,170		)
Inter-segment elimination	(1,274		)	1,274			—			—			—			—			—
Net interest income (expense)	23,320			5,563			(3,657		)	(944		)	—			—			24,282
Impairment (reversal)	432			814			—			—			—			—			1,246
Operating revenues	—			—			62,632			—			—			—			62,632
Other income, net	13,610			2,198			—			—			—			—			15,808
Loan and security servicing expense	156			701			—			—			—			—			857
Operating expenses - golf (C)	—			—			57,129			—			—			—			57,129
Repairs and maintenance expenses - golf	—			—			2,518			—			—			—			2,518
Cost of sales - golf	—			—			5,956			—			—			—			5,956
General and administrative expense	—			—			307			2,095			—			—			2,402
Acquisition and transaction expenses (D)	—			—			775			387			—			—			1,162
Management fee to affiliate	—			—			—			5,893			—			—			5,893
Depreciation and amortization	—			—			5,826			37			—			—			5,863
Income tax expense	—			—			140			—			—			—			140
Income (loss) from continuing operations	36,342			6,246			(13,676		)	(9,356		)	—			—			19,556
Income from discontinued operations	—			—			—			—			(15,299		)	—			(15,299		)
Net income (loss)	36,342			6,246			(13,676		)	(9,356		)	(15,299		)	—			4,257
Preferred dividends	—			—			—			(1,395		)	—			—			(1,395		)
Net loss attributable to non-controlling interests	—			—			139			$	—		522			—			661
Income (loss) applicable to common stockholders	$	36,342		$	6,246		$	(13,537	)	$	(10,751	)	$	(14,777	)	$	—		$	3,523

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2015

(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, 2015
	Investments				Debt
Non-Recourse	Outstanding Face Amount		Carrying Value		Outstanding Face Amount		Carrying Value
Subprime mortgage loans subject to call options	$	406,217	$	406,217	$	406,217	$	406,217
Other
Unlevered real estate securities (F)	52,327		12,252		—		—
Levered real estate securities	389,056		409,037		386,120		386,120
Other investments	N/A		6,555		—		—
Residential mortgage loans	931		572		—		—
	$	848,531	$	834,633	$	792,337	$	792,337


(C)	Operating expenses-golf includes rental expenses recorded under operating leases for carts and equipment in the amount of $1.1 million and $1.4 million for the three months ended March 31, 2015 and 2014, respectively.


(D)	Includes all transaction related and spin-off related expenses.


(E)	Net of $36.6 million of inter-segment eliminations.


(F)	Excludes eight securities with a zero value, which had an aggregate face amount of $113.8 million.

Variable Interest Entities (“VIEs”)

The consolidated variable interest entities ("VIEs") in which Newcastle has a significant interest include Newcastle’s CDOs, in which Newcastle has been determined to be the primary beneficiary and therefore consolidates them (with the exception of CDO V), since it has the power to direct the activities that most significantly impact the CDOs’ economic performance and would absorb a significant portion of their expected losses and receive a significant portion of their expected residual returns. Newcastle’s CDOs are held in special purpose entities whose debt is treated as non-recourse secured borrowings of Newcastle.

The following table presents certain assets of VIEs, which are included in the Consolidated Balance Sheets. 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.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2015

(dollars in tables in thousands, except share data)



	March 31, 2015
	(Unaudited)		December 31, 2014
Assets of consolidated VIEs that can only be used to settle obligations of consolidated VIEs
Real estate securities, available-for-sale	$	219,475	$	219,490
Real estate related and other loans, held-for-sale, net	197,251		230,200
Residential mortgage loans, held-for-sale, net	3,164		3,211
Subprime mortgage loans subject to call option	406,217		406,217
Other investments	20,546		20,308
Restricted cash	14,149		11,790
Receivables and other assets	1,575		1,927
Assets of discontinued operations	6,883		6,803
Total assets of consolidated VIEs that can only be used to settle obligations of consolidated VIEs	$	869,260	$	899,946

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.



	March 31, 2015
	(Unaudited)		December 31, 2014
Liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of Newcastle
CDO bonds payable	$	216,464	$	227,673
Other bonds and notes payable	25,317		27,069
Financing of subprime mortgage loans subject to call option	406,217		406,217
Accounts payable, accrued expenses and other liabilities	1,386		2,391
Liabilities of discontinued operations	502		447
Total liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of Newcastle	$	649,886	$	663,797

Newcastle’s subprime securitizations and CDO V are also 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, and therefore does not consolidate them.

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 since they 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 deconsolidation of an entity that otherwise would have been consolidated.

As of March 31, 2015, 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, such as if Newcastle owned 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.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2015

(dollars in tables in thousands, except share data)

Newcastle had variable interests in the following unconsolidated VIEs at March 31, 2015, in addition to the subprime securitizations which are described in Note 6:



Entity	Gross Assets (A)		Debt (A) (B)		Carrying Value of Newcastle's Investment (C)
Newcastle CDO V	$	115,835	$	143,480	$	8,538


(A)	Face amount.


(B)	Newcastle CDO V includes $42.4 million face amount of debt owned by Newcastle with a carrying value of $8.5 million at March 31, 2015.


(C)	This amount represents Newcastle’s maximum exposure to loss from this entity.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2015

(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, 2015, all of which are classified as available-for-sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income, except for securities that are other-than-temporarily impaired.



			Amortized Cost Basis							Gross Unrealized								Weighted Average
Asset Type	Outstanding Face Amount		Before Impairment		Other-Than- Temporary Impairment			After Impairment		Gains		Losses			Carrying Value (A)		Number of Securities	Rating (B)	Coupon		Yield		Life (Years) (C)	Principal Subordination (D)
CMBS	$	209,371	$	207,761	$	(65,861	)	$	141,900	$	37,122	$	(293	)	$	178,729	30	B	5.88	%	11.01	%	2.4	11.9	%
Non-Agency RMBS	64,720		80,421		(54,589		)	25,832		18,628		—			44,460		28	CCC	1.24	%	10.08	%	7.7	22.4	%
ABS-Franchise	8,464		7,647		(7,647		)	—		—		—			—		1	C	6.69	%	0.00	%	—	0.0	%
CDO (E)	14,466		—		—			—		8,538		—			8,538		2	CCC-	1.47	%	0.00	%	11.1	15.1	%
Debt Security Total / Average (F)	$	297,021	$	295,829	$	(128,097	)	$	167,732	$	64,288	$	(293	)	$	231,727	61	B-	4.68	%	10.87	%	3.9
Equity Securities			—		—			—		—		—			—		1
Total Securities, Available-for-Sale			$	295,829	$	(128,097	)	$	167,732	$	64,288	$	(293	)	$	231,727	62

FNMA/FHLMC	389,056		407,494		—			407,494		1,543		—			409,037		4	AAA	3.50	%	2.72	%	7.1	N/A
Total Securities, Pledged as Collateral (F)	$	389,056	$	407,494	$	—		$	407,494	$	1,543	$	—		$	409,037	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 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 eight securities with a zero value, which had an aggregate face amount of $113.8 million.


(F)	The total outstanding face amount was $0.6 billion for fixed rate securities and $0.1 billion for floating rate securities.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2015

(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, 2015, Newcastle recorded other-than-temporary impairment charges (“OTTI”) of $0.3 million with respect to real estate securities (gross of $0.2 million of other-than-temporary impairment recognized in other comprehensive income). Based on management’s analysis of the securities, the performance of the underlying loans and changes in market factors, Newcastle noted adverse changes in the expected cash flows on certain of these securities and concluded that they were other-than-temporarily impaired. Any remaining unrealized losses on Newcastle’s securities were primarily the result of changes in market factors, rather than issue-specific credit impairment. Newcastle performed analyses in relation to such securities, using management’s best estimate of their cash flows, which support that the carrying values of such securities were fully recoverable over their expected holding period. The following table summarizes Newcastle’s securities in an unrealized loss position as of March 31, 2015.

Amortized Cost Basis

Securities in

Outstanding

Other-than-

Number

Weighted Average

an Unrealized

Face

Before

Temporary

After

Gross Unrealized

Carrying

Life

Loss Position

Amount

Impairment

Gains

Losses

Value

Securities

Rating

Coupon

Yield

(Years)

Less Than Twelve
Months

3,823

3,818

(48

)

3,770

—

(293

)

3,477