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, 2013

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 or organization)		(I.R.S. Employer Identification No.)

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 x No o

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).

x Yes No o

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 x Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

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: 253,025,645 shares outstanding as of May 2, 2013.

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:

●

reductions in cash flows received from our investments;

●

our ability to deploy capital accretively;

●

the risks that default and recovery rates on our real estate securities and loan portfolios deteriorate compared to our underwriting estimates;

●

changes in prepayment rates on the loans underlying certain of our assets;

●

the relationship between yields on assets which are paid off and yields on assets in which such monies can be reinvested;

●

the relative spreads between the yield on the assets we invest in and the cost of financing;

●

changes in economic conditions generally and the real estate and debt securities markets specifically;

●

adverse changes in the financing markets we access affecting our ability to finance our investments, or in a manner that maintains our historic net spreads;

●

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 quality and size of the investment pipeline and the rate at which we can invest our cash at attractive risk-adjusted returns, including cash inside our collateralized debt obligations (“CDOs”);

●

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;

●

legislative/regulatory changes, including but not limited to, any modification of the terms of loans;

●

the availability and cost of capital for future investments;

●

competition within the finance and real estate industries; 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 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 provide 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, 2013 (unaudited) and December 31, 2012	1

	Consolidated Statements of Income (unaudited) for the three months ended March 31, 2013 and 2012	3

	Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2013 and 2012	4

	Consolidated Statement of Stockholders’ Equity (unaudited) for the three months ended March 31, 2013	5

	Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2013 and 2012	7

	Notes to Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	77

Item 4.	Controls and Procedures	79


PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	80

Item 1A.	Risk Factors	80

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	111

Item 3.	Defaults upon Senior Securities	111

Item 4.	Mine Safety Disclosures	111

Item 5.	Other Information	111

Item 6.	Exhibits	112


SIGNATURES		117

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)


	March 31, 2013
	(Unaudited)			December 31, 2012
Assets
Real estate securities, available-for-sale	$	2,495,473		$	1,691,575
Real estate related loans, held-for-sale, net		851,525			843,132
Residential mortgage loans, held-for-investment, net		317,708			292,461
Residential mortgage loans, held-for-sale, net		2,380			2,471
Investments in excess mortgage servicing rights at fair value		236,555			245,036
Investments in equity method investees at fair value		102,588			—
Subprime mortgage loans subject to call option		406,115			405,814
Investments in real estate, net of accumulated depreciation		168,515			169,473
Intangibles, net of accumulated amortization		16,218			19,086
Other investments		24,907			24,907
Cash and cash equivalents		534,772			231,898
Restricted cash		11,494			2,064
Derivative assets		176			165
Receivables and other assets		27,577			17,230
Total Assets	$	5,196,003		$	3,945,312


Liabilities and Stockholders’ Equity
Liabilities
CDO bonds payable	$	1,015,560		$	1,091,354
Other bonds and notes payable		173,723			183,390
Repurchase agreements		1,473,586			929,435
Mortgage notes payable		120,525			120,525
Financing of subprime mortgage loans subject to call option		406,115			405,814
Junior subordinated notes payable		51,242			51,243
Derivative liabilities		26,612			31,576
Dividends Payable		56,596			38,884
Due to affiliates		4,611			3,620
Purchase price payable on investments in excess mortgage servicing rights		59			59
Accrued expenses and other liabilities		17,875			16,352
Total Liabilities	$	3,346,504		$	2,872,252

Commitments and contingencies

Stockholders’ 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, 2013 and December 31, 2012	$	61,583		$	61,583
Common stock, $0.01 par value, 500,000,000 shares authorized, 253,025,645 and 172,525,645 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively		2,530			1,725
Additional paid-in capital		2,472,931			1,710,083
Accumulated deficit		(790,143	)		(771,095	)
Accumulated other comprehensive income (loss)		102,598			70,764
Total Equity	$	1,849,499		$	1,073,060

Total Liabilities and Stockholders’ Equity	$	5,196,003		$	3,945,312

Statement continues on the next page.

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.

	March 31, 2013
	(Unaudited)		December 31, 2012
Assets of consolidated VIEs that can only be used to settle obligations of consolidated VIEs
Real estate securities, available-for-sale	$	563,639	$	567,685
Real estate related loans, held-for-sale, net		754,913		813,301
Residential mortgage loans, held-for-investment, net		244,552		292,461
Subprime mortgage loans subject to call option		406,115		405,814
Investments in real estate, net of accumulated depreciation		6,740		6,672
Other investments		18,883		18,883
Restricted cash		11,494		2,064
Receivables and other assets		7,647		7,535
Total assets of consolidated VIEs that can only be used to settle obligations of consolidated VIEs	$	2,013,983	$	2,114,415

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, 2013
	(Unaudited)			December 31, 2012

Liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of Newcastle
CDO bonds payable	$	1,015,560	$	1,091,354
Other bonds and notes payable		173,723		183,390
Repurchase agreements		-		4,244
Financing of subprime mortgage loans subject to call option		406,115		405,814
Derivative liabilities		26,612		31,576
Accrued expenses and other liabilities		6,954		8,365
Total liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of Newcastle	$	1,628,964	$	1,724,743

See notes to consolidated financial statements

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(dollars in thousands, except share data)

	Three Months Ended March 31,
	2013			2012

Interest income	$	71,367		$	74,899
Interest expense		22,710			30,165
Net interest income		48,657			44,734

Impairment/(Reversal)
Valuation allowance (reversal) on loans		2,234			(9,031	)
Other-than-temporary impairment on securities		422			5,883

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)		117			(3,932	)
		2,773			(7,080	)

Net interest income after impairment/reversal		45,884			51,814

Other Revenues
Rental income		12,887			509
Care and ancillary income		613			—
Total other revenues		13,500			509

Other Income (Loss)
Gain (loss) on settlement of investments, net		(3	)		4,823
Gain on extinguishment of debt		1,206			20,743
Change in fair value of investments in excess mortgage servicing rights		1,858			1,216
Change in fair value of investments in equity method investees		969			—
Other income (loss), net		4,567			2,970
		8,597			29,752
Expenses
Loan and security servicing expense		1,034			1,098
Property operating expenses		8,363			225
General and administrative expense		6,911			2,286
Management fee to affiliate		9,565			4,976
Depreciation and amortization		4,079			2
		29,952			8,587
Income from continuing operations		38,029			73,488
Income (loss) from discontinued operations		(16	)		(17	)
Net Income		38,013			73,471
Preferred dividends		(1,395	)		(1,395	)
Income Available for Common Stockholders	$	36,618		$	72,076

Income Per Share of Common Stock
Basic	$	0.16		$	0.68
Diluted	$	0.15		$	0.68

Income from continuing operations per share of common stock, after preferred dividends
Basic	$	0.16		$	0.68
Diluted	$	0.15		$	0.68

Income (loss) from discontinued operations per share of common stock
Basic	$	—		$	—
Diluted	$	—		$	—

Weighted Average Number of Shares of Common Stock Outstanding
Basic		235,136,756			105,181,009
Diluted		240,079,144			105,670,102

Dividends Declared per Share of Common Stock	$	0.22		$	0.20

See notes to consolidated financial statements

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(dollars in thousands)

	Three Months Ended March 31,
	2013		2012
Net income	$	38,013	$	73,471
Other comprehensive income (loss):
Net unrealized gain (loss) on securities		29,454		76,417
Reclassification of net realized (gain) loss on securities into earnings		539		(4,487	)
Net unrealized gain (loss) on derivatives designated as cash flow hedges		1,841		8,174
Reclassification of net realized (gain) loss on derivatives designated as cash flow hedges into earnings		—		(211	)
Other comprehensive income (loss)		31,834		79,893
Total comprehensive income	$	69,847	$	153,364

See notes to consolidated financial statements

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2013

(dollars in thousands)

	Preferred Stock				Common Stock				Additional Paid-in Capital		Accumulated Deficit			Accum. Other Comp. Income (Loss)		Total Stock-holders’ Equity
	Shares		Amount		Shares		Amount
Stockholders’ equity - December 31, 2012		2,463,321	$	61,583		172,525,645	$	1,725	$	1,710,083	$	(771,095	)	$	70,764	$	1,073,060

Dividends declared		—		—		—		—		—		(57,061	)		—		(57,061	)

Issuance of common stock		—		—		80,500,000		805		762,848		—			—		763,653

Net income		—		—		—		—		—		38,013			—		38,013

Other comprehensive income (loss)		—		—		—		—		—		—			31,834		31,834

Stockholders’ equity - March 31, 2013		2,463,321	$	61,583		253,025,645	$	2,530	$	2,472,931	$	(790,143	)	$	102,598	$	1,849,499

See notes to consolidated financial statements

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(dollars in thousands)

	Three Months Ended March 31,
	2013			2012
Cash Flows From Operating Activities
Net income	$	38,013		$	73,471
Adjustments to reconcile net income to net cash provided by (used in) operating activities (inclusive of amounts related to discontinued operations):
Depreciation and amortization		4,079			87
Accretion of discount and other amortization		(8,539	)		(12,213	)
Interest income in CDOs redirected for reinvestment or CDO bond paydown		(536	)		(1,230	)
Interest income on investments accrued to principal balance		(6,181	)		(5,293	)
Interest expense on debt accrued to principal balance		109			109
Valuation allowance (reversal) on loans		2,234			(9,031	)
Other-than-temporary impairment on securities		539			1,951
Change in fair value of investments in excess mortgage servicing rights		(1,858	)		(1,216	)
Change in fair value of investments in equity method investees		(969	)		—
Distributions of earnings from equity method investees		1,344			—
(Gain)/Loss on settlement of investments (net)		3			(4,823	)
Unrealized gain on non-hedge derivatives and hedge ineffectiveness		(3,126	)		(2,086	)
Gain on extinguishment of debt		(1,206	)		(20,743	)
Change in:
Restricted cash		995			286
Receivables and other assets		(2,277	)		554
Due to affiliates		991			—
Accrued expenses and other liabilities		1,004			(559	)
Net cash provided by (used in) operating activities		24,619			19,264
Cash Flows From Investing Activities
Principal repayments from repurchased CDO debt		8,656			4,497
Principal repayments from CDO securities		1,290			198
Principal repayments from non-Agency RMBS		17,472			—
Return of investments in excess mortgage servicing rights		10,272			2,425
Principal repayments from loans and non-CDO securities (excluding non-Agency RMBS)		74,944			22,894
Purchase of real estate securities		(871,127	)		(4,340	)
Purchase of real estate loans		(101,313	)		—
Acquisition of investments in excess mortgage servicing rights		—			(3,072	)
Additions to investments in real estate		(259	)		—
Contributions to equity method investees		(109,588	)		—
Distributions of capital from equity method investees		6,625			—
Deposit paid on investments		(2,700	)		—
Net cash provided by (used in) investing activities		(965,728	)		22,602

Continued on next page

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(dollars in thousands)

	Three Months Ended March 31,
	2013			2012
Cash Flows From Financing Activities
Repurchases of CDO bonds payable		(9,722	)		(9,159	)
Repayments of other bonds and notes payable		(9,922	)		(10,450	)
Borrowings under repurchase agreements		1,379,928			4,117
Repayments of repurchase agreements		(835,777	)		(10,133	)
Margin deposits under repurchase agreements		(62,100	)		(9,634	)
Return of margin deposits under repurchase agreements		56,788			9,634
Issuance of common stock		764,759			—
Costs related to issuance of common stock		(592	)		—
Common stock dividends paid		(37,954	)		(15,777	)
Preferred stock dividends paid		(1,395	)		(1,395	)
Payment of deferred financing costs		(30	)		—
Net cash provided by (used in) financing activities		1,243,983			(42,797	)

Net Increase (Decrease) in Cash and Cash Equivalents		302,874			(931	)
Cash and Cash Equivalents, Beginning of Period		231,898			157,356
Cash and Cash Equivalents, End of Period	$	534,772		$	156,425
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest expense	$	12,953		$	20,726
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	$	55,666		$	21,036

See notes to consolidated financial statements

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2013

(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 conducts its business through the following segments: (i) investments financed with non-recourse collateralized debt obligations (“non-recourse CDOs”), (ii) unlevered investments in deconsolidated Newcastle CDO debt (“unlevered CDOs”), (iii) unlevered investments in excess mortgage servicing rights (“unlevered Excess MSRs”), (iv) investments in senior living assets financed with non-recourse debt (“non-recourse senior living”), (v) investments financed with other non-recourse debt (“non-recourse other”), (vi) investments and debt repurchases financed with recourse debt (“recourse”), (vii) other unlevered investments (“unlevered other”) and (viii) corporate. With respect to the non-recourse CDOs and non-recourse other segments, 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 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.

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.

Newcastle is party to management agreements (the “Senior Living Management Agreements”) with subsidiaries (the “Senior Living Managers”) of Fortress, under which the Senior Living Managers manage the day-to-day operations of the senior living assets, subject to the supervision of Newcastle’s officers and board of directors. For their services, the Senior Living Managers are entitled to an annual management fee as defined in, and in accordance with the terms of, the Senior Living Management Agreements.

Approximately 5.3 million shares of Newcastle’s common stock were held by Fortress, through its affiliates, and its principals at March 31, 2013. In addition, Fortress, through its affiliates, held options to purchase approximately 17.7 million shares of Newcastle’s common stock at March 31, 2013.

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 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, 2012 and notes thereto included in Newcastle’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. Capitalized terms used herein, and not otherwise defined, are defined in Newcastle’s consolidated financial statements for the year ended December 31, 2012.

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

Recent Accounting Pronouncements

In February 2013, the FASB issued new guidance regarding the reporting of reclassifications out of accumulated other comprehensive income. The new guidance does not change current requirements for reporting net income or other comprehensive income in financial statements. However, it requires companies to present the effects on the line items of net income of significant amounts reclassified out of accumulated OCI if the item reclassified is required to be reclassified to net income in its entirety during the same reporting period. Presentation should occur either on the face of the income statement where net income is presented, or in the notes to the financial statements. Newcastle has early adopted this accounting standard and opted to present this information in a note to the financial statements.

The FASB has recently issued or discussed a number of proposed standards on such topics as consolidation, the definition of an investment company, financial statement presentation, revenue recognition, leases, financial instruments, hedging and contingencies. 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.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2013

(dollars in tables in thousands, except share data)

2. SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES

Newcastle conducts its business through the following segments: (i) investments financed with non-recourse collateralized debt obligations (“non-recourse CDOs”), (ii) unlevered investments in deconsolidated Newcastle CDO debt (“unlevered CDOs”), (iii) unlevered investments in excess mortgage servicing rights (“unlevered Excess MSRs”), (iv) investments in senior living assets financed with non-recourse debt (“non-recourse senior living”), (v) investments financed with other non-recourse debt (“non-recourse other”), (vi) investments and debt repurchases financed with recourse debt (“recourse”), (vii) other unlevered investments (“unlevered other”) and (viii) corporate. With respect to the non-recourse CDOs and non-recourse other segments, 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.

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, 2013

(dollars in tables in thousands, except share data)

Summary financial data on Newcastle’s segments is given below, together with a reconciliation to the same data for Newcastle as a whole:

	Non-Recourse CDOs (A)			Unlevered CDOs (B)		Unlevered Excess MSRs			Non-Recourse Senior Living			Non-Recourse Other (A) (C)			Recourse (D)			Unlevered Other (E)			Corporate			Inter-segment Elimination (F)			Total
Three Months Ended March 31, 2013
Interest income	$	31,589		$	239	$	10,035		$	—		$	16,307		$	7,285		$	6,706		$	72		$	(866	)	$	71,367
Interest expense		7,131			—		—			1,232			12,383			1,878			—			952			(866	)		22,710
Net interest income (expense)		24,458			239		10,035			(1,232	)		3,924			5,407			6,706			(880	)		—			48,657
Impairment (reversal)		3,183			—		—			—			848			—			(1,258	)		—			—			2,773
Other revenues		—			—		—			12,997			503			—			—			—			—			13,500
Other income (loss)		4,497			74		2,827			8			—			—			1,191			—			—			8,597
Property operating expenses		—			—		—			8,116			247			—			—			—			—			8,363
Depreciation and amortization		—			—		—			4,022			57			—			—			—			—			4,079
Other operating expenses		194			—		221			2,388			719			42			95			13,851			—			17,510
Income (loss) from continuing operations		25,578			313		12,641			(2,753	)		2,556			5,365			9,060			(14,731	)		—			38,029
Income (loss) from discontinued operations		—			—		—			—			—			—			(16	)		—			—			(16	)
Net income (loss)		25,578			313		12,641			(2,753	)		2,556			5,365			9,044			(14,731	)		—			38,013
Preferred dividends		—			—		—			—			—			—			—			(1,395	)		—			(1,395	)
Income (loss) applicable to common stockholders	$	25,578		$	313	$	12,641		$	(2,753	)	$	2,556		$	5,365		$	9,044		$	(16,126	)	$	—		$	36,618

March 31, 2013

Investments	$	1,347,691		$	5,254	$	339,143		$	177,993		$	708,998		$	1,634,243		$	470,509		$	—		$	(61,847	)	$	4,621,984
Cash and restricted cash		11,494			—		—			10,207			—			—			—			524,565			—			546,266
Derivative assets		—			—		—			176			—			—			—			—			—			176
Other assets		7,556			6		—			7,537			91			9,893			2,350			299			(155	)		27,577
Total assets		1,366,741			5,260		339,143			195,913			709,089			1,644,136			472,859			524,864			(62,002	)		5,196,003
Debt		(1,015,560	)		—		—			(120,525	)		(641,685	)		(1,473,586	)		—			(51,242	)		61,847			(3,240,751	)
Derivative liabilities		(26,612	)		—		—			—			—			—			—			—			—			(26,612	)
Other liabilities		(5,510	)		—		(280	)		(4,935	)		(1,444	)		(142	)		(854	)		(66,131	)		155			(79,141	)
Total liabilities		(1,047,682	)		—		(280	)		(125,460	)		(643,129	)		(1,473,728	)		(854	)		(117,373	)		62,002			(3,346,504	)
Preferred stock		—			—		—			—			—			—			—			(61,583	)		—			(61,583	)
GAAP book value	$	319,059		$	5,260	$	338,863		$	70,453		$	65,960		$	170,408		$	472,005		$	345,908		$	—		$	1,787,916

Investments in equity method investees at fair value	$	—		$	—	$	102,588		$	—		$	—		$	—		$	—		$	—		$	—		$	102,588
Additions to investments in real estate		—			—		—			130			129			—			—			—			—			259

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2013

(dollars in tables in thousands, except share data)

	Non-Recourse CDOs (A)			Unlevered CDOs (B)		Unlevered Excess MSRs		Non-Recourse Senior Living		Non-Recourse Other (A)		Recourse		Unlevered Other			Corporate			Inter-segment Elimination (F)			Total

Three Months Ended March 31, 2012
Interest income	$	54,402		$	115	$	2,037	$	—	$	18,426	$	814	$	523		$	51		$	(1,469	)	$	74,899
Interest expense		17,636			—		—		—		12,663		268		—			954			(1,356	)		30,165
Net interest income (expense)		36,766			115		2,037		—		5,763		546		523			(903	)		(113	)		44,734
Impairment (reversal)		(8,531	)		—		—		—		1,648		—		(197	)		—			—			(7,080	)
Other revenues		—			—		—		—		509		—		—			—			—			509
Other income (loss)		29,913			92		1,216		—		—		—		(1,469	)		—			—			29,752
Property operating expenses		—			—		—		—		338		—		—			—			(113	)		225
Depreciation and amortization		—			—		—		—		2		—		—			—			—			2
Other operating expenses		241			1		123		—		844		—		13			7,138			—			8,360
Income (loss) from continuing operations		74,969			206		3,130		—		3,440		546		(762	)		(8,041	)		—			73,488
Income (loss) from discontinued operations		—			—		—		—		—		—		(17	)		—			—			(17	)
Net income (loss)		74,969			206		3,130		—		3,440		546		(779	)		(8,041	)		—			73,471
Preferred dividends		—			—		—		—		—		—		—			(1,395	)		—			(1,395	)
Income (loss) applicable to common stockholders	$	74,969		$	206	$	3,130	$	—	$	3,440	$	546	$	(779	)	$	(9,436	)		—		$	72,076

(A)

Assets held within CDOs and other non-recourse structures are not available to satisfy obligations outside of such financings, except to the extent Newcastle receives net cash flow distributions from such structures. Furthermore, creditors or beneficial interest holders of these structures have no recourse to the general credit of Newcastle. Therefore, Newcastle’s exposure to the economic losses from such structures is limited to its 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)	Represents unlevered investments in CDO securities issued by Newcastle. These CDOs have been deconsolidated as Newcastle does not have the power to direct the relevant activities of the CDOs.

(C)	The following table summarizes the investments and debt in the other non-recourse segment:

	March 31, 2013
	Investments				Debt
	Outstanding		Carrying		Outstanding		Carrying
	Face Amount		Value		Face Amount*		Value*
Manufactured housing loan portfolio I	$	114,355	$	96,752	$	86,490	$	78,102
Manufactured housing loan portfolio II		146,865		144,274		112,046		111,447
Subprime mortgage loans subject to call options		406,217		406,115		406,217		406,115
Real estate securities		62,633		55,117		43,989		40,021
Other commercial real estate		N/A		6,740		6,000		6,000
	$	730,070	$	708,998	$	654,742	$	641,685

*	An aggregate face amount of $70.5 million (carrying value of $61.8 million) of debt represents financing provided by the CDO segment (and included as investments in the CDO segment), which is eliminated upon consolidation.

(D)

The $1.5 billion of recourse debt is comprised of (i) a $1.3 billion repurchase agreement secured by $1.4 billion carrying value of FNMA/FHLMC securities and (ii) a $158.0 million repurchase agreement secured by $233.8 million carrying value of non-agency residential mortgage backed securities (“RMBS”).

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2013

(dollars in tables in thousands, except share data)

(E)	The following table summarizes the investments in the unlevered other segment:

	March 31, 2013
	Outstanding Face Amount		Carrying Value		Number of Investments
Real estate securities	$	592,450	$	292,337		63
Real estate related loans		265,209		96,612		2
Residential mortgage loans		112,716		75,536		646
Other investments		N/A		6,024		1
	$	970,375	$	470,509		712

(F)	Represents the elimination of investments and financings and their related income and expenses between the CDO segment and other non-recourse segment as the corresponding inter-segment investments and financings are presented on a gross basis within each of these segments.

Variable Interest Entities (“VIEs”)

The VIEs in which Newcastle has a significant interest include (i) 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, and (ii) the manufactured housing loan financing structures, which are similar to the CDOs in analysis. Newcastle’s CDOs and manufactured housing loan financings are held in special purpose entities whose debt is treated as non-recourse secured borrowings of Newcastle.

Newcastle’s subprime securitizations are also considered VIEs, but Newcastle does not control their activities and no longer receives a significant portion of their returns, and therefore does not consolidate them.

In addition, Newcastle’s investments in RMBS, CMBS, CDO securities and 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 de-consolidation of an entity that otherwise would have been consolidated.

As of March 31, 2013, 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 has not consolidated the entities in which Newcastle holds a 50% interest that made an investment in Excess MSRs. Newcastle has determined that the decisions that most significantly impact the economic performance of these entities will be made collectively by Newcastle and the other investor in the entities. In addition, these entities have sufficient equity to permit the entities to finance their activities without additional subordinated financial support. Based on Newcastle’s analysis, these entities do not meet any of the VIE criteria.

Newcastle had variable interests in the following unconsolidated VIE at March 31, 2013, in addition to the subprime securitizations which are described in Note 4:

Entity		Gross Assets (A)				Debt (A) (B)				Carrying Value of Newcastle’s Investment (C)
Newcastle CDO V		$	225,628			$	241,263			$	5,254

(A)	Face amount.

(B)	Includes $42.2 million face amount of debt owned by Newcastle with a carrying value of $5.3 million at March 31, 2013.

(C)	This amount represents Newcastle’s maximum exposure to loss from this entity, which was the fair value at March 31, 2013, related to $17.8 million face amount of CDO V Class I, III, and IV-FL notes.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2013

(dollars in tables in thousands, except share data)

3. REAL ESTATE SECURITIES

The following is a summary of Newcastle’s real estate securities at March 31, 2013, 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
					Other-Than-												Number									Maturity		Principal
Asset Type	Outstanding Face Amount		Before Impairment		Temporary Impairment			After Impairment		Gains		Losses			Carrying Value (A)		of Securities		Rating (B)	Coupon			Yield			(Years) (C)		Subordination (D)
CMBS-Conduit	$	338,056	$	314,424	$	(99,020	)	$	215,404	$	54,263	$	(6,752	)	$	262,915		52	B+		5.54	%		10.33	%		3.2		9.5	%
CMBS- Single Borrower		124,709		123,409		(12,364	)		111,045		5,818		(1,609	)		115,254		22	BB		4.89	%		5.93	%		2.5		9.5	%
CMBS-Large Loan		5,819		5,643		—			5,643		205		—			5,848		1	BBB-		6.08	%		12.16	%		0.7		2.0	%
REIT Debt		50,700		50,055		—			50,055		4,064		—			54,119		8	BBB-		5.75	%		6.10	%		1.8		N/A
Non-Agency RMBS (E)		904,784		604,616		(68,708	)		535,908		49,218		(1,226	)		583,900		93	CC		0.75	%		6.55	%		7.3		10.0	%
ABS-Franchise		10,036		9,329		(7,839	)		1,490		219		(325	)		1,384		3	CCC-		5.95	%		3.47	%		4.7		2.7	%
FNMA/FHLMC		1,309,855		1,396,400		—			1,396,400		6,130		(2,102	)		1,400,428		83	AAA		3.23	%		1.42	%		4.1		N/A
CDO (F)		202,232		81,608		(14,861	)		66,747		4,878		—			71,625		13	CCC+		2.86	%		8.12	%		1.4		21.4	%
Total / Average (G)	$	2,946,191	$	2,585,484	$	(202,792	)	$	2,382,692	$	124,795	$	(12,014	)	$	2,495,473		275	BBB-		2.84	%		3.92	%		4.7

(A)	See Note 9 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 used an implied AAA rating for the FNMA/FHLMC securities. Ratings provided were determined by third party rating agencies as of a particular date, may not be current and are subject to change at any time.

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

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

(E)

Includes (i) the retained bond with a face amount of $4.0 million and a carrying value of $1.4 million from Securitization Trust 2006 (Note 4) and (ii) 53 non-agency RMBS purchased since April 2012 with an aggregate face amount of $784.3 million and a carrying value of $518.6 million as of March 31, 2013, of which an aggregate face amount of $644.7 million and a carrying value of $440.1 million is serviced by Nationstar. The total UPB of the loans underlying these Nationstar serviced non-Agency RMBS was approximately $8.3 billion as of March 31, 2013.

(F)

Includes two CDO bonds issued by a third party with a carrying value of $62.5 million, four CDO bonds issued by CDO V (which has been deconsolidated) and held as investments by Newcastle with a carrying value of $5.3 million and seven CDO bonds issued by C-BASS with a carrying value of $3.9 million.

(G)	The total outstanding face amount of fixed rate securities was $0.5 billion, and of floating rate securities was $2.4 billion.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2013

(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, 2013, Newcastle recorded other-than-temporary impairment charges (“OTTI”) of $0.4 million (net of a $0.1 million reversal of other-than-temporary impairment recognized in other comprehensive income) with respect to real estate securities. Based on management’s analysis of these 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 its belief 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, 2013.

			Amortized Cost Basis							Gross Unrealized									Weighted Average
Securities in	Outstanding				Other-than-												Number
an Unrealized	Face		Before		Temporary			After							Carrying		of									Maturity
Loss Position	Amount		Impairment		Impairment			Impairment		Gains		Losses			Value		Securities		Rating	Coupon			Yield			(Years)
Less Than Twelve Months	$	562,897	$	509,420	$	(5,236	)	$	504,184	$	—	$	(3,230	)	$	500,954		34	BBB		2.44	%		2.15	%		5.9
Twelve or More Months		119,054		118,953		(236	)		118,717		—		(8,784	)		109,933		24	BB-		4.44	%		4.63	%		1.5
Total	$	681,951	$	628,373	$	(5,472	)	$	622,901	$	—	$	(12,014	)	$	610,887		58	BBB		2.79	%		2.62	%		5.1

Newcastle performed an assessment of all of its debt securities that are in an unrealized loss position (unrealized loss position exists when a security’s amortized cost basis, excluding the effect of OTTI, exceeds its fair value) and determined the following:

March 31, 2013

Amortized

Cost Basis

Unrealized Losses

Fair Value

After Impairment

Credit (B)

Non-Credit (C)

Securities Newcastle intends to sell

—