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 June 30, 2013
 
or
 
o     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________
 
Commission File Number: 001-31458
     
Newcastle Investment Corp.
 (Exact name of registrant as specified in its charter)
     
Maryland
  
81-0559116
(State or other jurisdiction of incorporation 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: 293,326,085 shares outstanding as of August 1, 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;
 
·
our ability to take advantage of opportunities in additional asset classes or types of assets, including, without limitation, senior living facilities, at attractive risk-adjusted prices or at all;
 
·
risks related to investments in senior housing including, but not limited to, the risk that we are dependent on the performance of our operators, the risk that a downturn in the housing market or an overall economic downturn could cause our occupancy rates, revenues and results of operations to decline and the risk that increases in labor costs at our senior housing facilities may have a material adverse effect on us; 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 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
       
     
         
     
         
     
1
         
     
3
 
        
     
4
         
     
5
         
     
6
 
        
     
8
         
   
42
         
   
71
         
Controls and Procedures    
73
         
     
         
   
74
         
Risk Factors    
74
         
Unregistered Sales of Equity Securities and Use of Proceeds    
104
         
Defaults upon Senior Securities    
104
         
   
104
         
   
104
         
   
105
         
   
110
 
 
 
 
 
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
   
June 30, 2013
      December 31,  
   
(Unaudited)
    
 2012
  
Assets
            
Real estate securities, available-for-sale
   $ 777,102     $ 1,691,575  
Real estate related and other loans, held-for-sale, net
     837,427       843,132  
Residential mortgage loans, held-for-investment, net
     273,332       292,461  
Residential mortgage loans, held-for-sale, net
     2,266       2,471  
Subprime mortgage loans subject to call option
     406,217       405,814  
Investments in real estate, net of accumulated depreciation
     167,878       169,473  
Intangibles, net of accumulated amortization
     13,349       19,086  
Other investments
     24,907       24,907  
Cash and cash equivalents
     271,052       231,898  
Restricted cash
     7,173       2,064  
Derivative assets
     43,470       165  
Due from affiliates
     1,254       —  
Receivables and other assets
     19,907       17,197  
Assets of discontinued operations
     —       245,069  
Total Assets
   $ 2,845,334     $ 3,945,312  
 
                
                 
Liabilities and Stockholders’ Equity
                
Liabilities
                
CDO bonds payable
   $ 844,484     $ 1,091,354  
Other bonds and notes payable
     163,718       183,390  
Repurchase agreements
     311,276       929,435  
Mortgage notes payable
     120,525       120,525  
Financing of subprime mortgage loans subject to call option
     406,217       405,814  
Junior subordinated notes payable
     51,240       51,243  
Derivative liabilities
     20,197       31,576  
Dividends Payable
     43,951       38,884  
Due to affiliates
     3,216       3,620  
Accrued expenses and other liabilities
     16,884       15,931  
Liabilites of discontinued operations
     —       480  
Total Liabilities
   $ 1,981,708     $ 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 June 30, 2013 and December 31, 2012
   $ 61,583     $ 61,583  
Common stock, $0.01 par value, 1,000,000,000 and 500,000,000 shares authorized, 293,326,085 and 172,525,645 shares issued and outstanding, at June 30, 2013 and December 31, 2012, respectively
     2,933       1,725  
Additional paid-in capital
     2,670,444       1,710,083  
Accumulated deficit
     (1,940,305 )     (771,095 )
Accumulated other comprehensive income
     68,971       70,764  
Total Stockholders’ Equity
   $ 863,626     $ 1,073,060  
                 
Total Liabilities and Stockholders’ Equity
   $ 2,845,334     $ 3,945,312  
 
Statement continues on the next page.
 
 
1
 
 
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
The following table presents certain assets of consolidated variable interest entities (VIEs), which are included in the Consolidated Balance Sheets above. The assets in the table below include those assets that can only be used to settle obligations of consolidated VIEs, and are in excess of those obligations. Additionally, the assets in the table below exclude intercompany balances that eliminate in consolidation.
 
   
June 30, 2013
     December 31,  
   
(Unaudited)
    
2012
  
Assets of consolidated VIEs that can only be used to settle obligations of consolidated VIEs
            
Real estate securities, available-for-sale
   $ 427,818     $ 567,685  
Real estate related and other loans, held-for-sale, net
     660,065       813,301  
Residential mortgage loans, held-for-investment, net
     237,348       292,461  
Subprime mortgage loans subject to call option
     406,217       405,814  
Investments in real estate, net of accumulated depreciation
     6,686       6,672  
Other investments
     18,883       18,883  
Restricted cash
     7,173       2,064  
Receivables and other assets
     4,911       7,535  
Total assets of consolidated VIEs that can only be used to settle obligations of consolidated VIEs
   $ 1,769,101     $ 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.

   
June 30, 2013
      December 31,  
   
(Unaudited)
    
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
   $ 844,484     $ 1,091,354  
Other bonds and notes payable
     163,718       183,390  
Repurchase agreements
     —       4,244  
Financing of subprime mortgage loans subject to call option
     406,217       405,814  
Derivative liabilities
     20,197       31,576  
Accrued expenses and other liabilities
     7,093       8,365  
Total liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of Newcastle
   $ 1,441,709     $ 1,724,743  
 
See notes to consolidated financial statements
 
 
2
 
 
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(dollars in thousands, except share data) 
 
   
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2013
    
2012
    
2013
    
2012
  
                         
Interest income
   $ 62,824     $ 77,956     $ 124,156     $ 150,818  
Interest expense
     21,998       29,462       44,708       59,627  
Net interest income
     40,826       48,494       79,448       91,191  
                                 
Impairment/(Reversal)
                                
Valuation allowance (reversal) on loans
     (709 )     (3,223 )     1,525       (12,254 )
Other-than-temporary impairment on securities
     3,430       10,859       4,405       16,742  
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)
     480       863       44       (3,069 )
Total impairment
     3,201       8,499       5,974       1,419  
                                 
Net interest income after impairment/reversal
     37,625       39,995       73,474       89,772  
Other Revenues
                                
Rental income
     11,721       515       23,195       1,024  
Care and ancillary income
     2,292       —       4,318       —  
Total other revenues
     14,013       515       27,513       1,024  
Other Income (Loss)
                                
Gain (loss) on settlement of investments, net
     5,066       (1,177 )     5,063       3,646  
Gain on extinguishment of debt
     —       39       1,206       20,782  
Other income (loss), net
     3,024       (3,744 )     7,591       (774 )
Total other income (loss)
     8,090       (4,882 )     13,860       23,654  
Expenses
                                
Loan and security servicing expense
     1,021       1,104       2,055       2,202  
Property operating expenses
     8,409       231       16,772       457  
General and administrative expense
     9,938       4,841       14,151       7,003  
Management fee to affiliate
     8,148       5,631       17,713       10,607  
Depreciation and amortization
     4,070       2       8,149       4  
Total expenses
     31,586       11,809       58,840       20,273  
Income from continuing operations
     28,142       23,819       56,007       94,177  
Income (loss) from discontinued operations
     25,581       6,620       35,729       9,733  
Net Income
     53,723       30,439       91,736       103,910  
Preferred dividends
     (1,395 )     (1,395 )     (2,790 )     (2,790 )
Income Available for Common Stockholders
   $ 52,328     $ 29,044     $ 88,946     $ 101,120  
Income Per Share of Common Stock
                                
Basic
   $ 0.20     $ 0.21     $ 0.36     $ 0.84  
Diluted
   $ 0.20     $ 0.21     $ 0.35     $ 0.84  
Income from continuing operations per share of common stock, after preferred dividends
                                
Basic
   $ 0.10     $ 0.17     $ 0.22     $ 0.76  
Diluted
   $ 0.10     $ 0.17     $ 0.21     $ 0.76  
Income (loss) from discontinued operations per share of common stock
                                
Basic
   $ 0.10     $ 0.04     $ 0.14     $ 0.08  
Diluted
   $ 0.10     $ 0.04     $ 0.14     $ 0.08  
Weighted Average Number of Shares of Common Stock Outstanding
                                
Basic
     259,228,343       134,115,335       247,249,101       119,648,172  
Diluted
     265,396,219       135,172,953       252,807,613       120,421,528  
Dividends Declared per Share of Common Stock
   $ 0.17     $ 0.20     $ 0.39     $ 0.40  
 
See notes to consolidated financial statements
 
 
3
 
 
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(dollars in thousands, except share data) 
 
   
Three Months Ended
 June 30,
    
Six Months Ended
 June 30,
  
   
2013
    
2012
    
2013
    
2012
  
Net income
   $ 53,723     $ 30,439     $ 91,736     $ 103,910  
Other comprehensive income (loss):
                                
Net unrealized gain (loss) on securities
     9,823       (10,128 )     39,277       66,289  
Reclassification of net realized (gain) loss on securities into earnings
     (707 )     12,900       (168 )     8,413  
Net unrealized gain on derivatives designated as cash flow hedges
     1,771       4,058       3,612       12,232  
Reclassification of net realized (gain) loss on derivatives designated as cash flow hedges into earnings
     (1 )     5,836       (1 )     5,625  
Other comprehensive income
     10,886       12,666       42,720       92,559  
Total comprehensive income
   $ 64,609     $ 43,105     $ 134,456     $ 196,469  
 
See notes to consolidated financial statements
 
 
4
 
 
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2013
(dollars in thousands, except share data)
 
   
Preferred Stock
    
Common Stock
    
Additional Paid-in
      Accumulated    
Accum. Other Comp. Income
    Total Stock- holders’  
   
Shares
    
Amount
    
Shares
    
Amount
     Capital    
Deficit
     (Loss)    
Equity
  
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
     —       —       —       —       —       (101,476 )     —       (101,476 )
                                                                 
Issuance of common stock
     —       —       120,800,440       1,208       960,361       —       —       961,569  
                                                                 
Spin-off of New Residential
     —       —       —       —       —       (1,159,470 )     (44,513 )     (1,203,983 )
                                                                 
Net income
     —       —       —       —       —       91,736       —       91,736  
                                                                 
Other comprehensive income
     —       —       —       —       —       —       42,720       42,720  
                                                                 
Stockholders’ equity - June 30, 2013
     2,463,321     $ 61,583       293,326,085     $ 2,933     $ 2,670,444     $ (1,940,305 )   $ 68,971     $ 863,626  
 
See notes to consolidated financial statements
 
 
5
 
 
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands, except share data)
 
   
Six Months Ended June 30,
  
   
2013
    
2012
  
Cash Flows From Operating Activities
            
Net income
   $ 91,736     $ 103,910  
Adjustments to reconcile net income to net cash provided by (used in) operating activities (inclusive of amounts related to discontinued operations):
                
Depreciation and amortization
     8,149       174  
Accretion of discount and other amortization
     (22,426 )     (25,860 )
Interest income in CDOs redirected for reinvestment or CDO bond paydown
     (817 )     (2,445 )
Interest income on investments accrued to principal balance
     (12,673 )     (10,914 )
Interest expense on debt accrued to principal balance
     219       218  
Non-cash directors' compensation
     275       220  
Valuation allowance (reversal) on loans
     1,525       (12,254 )
Other-than-temporary impairment on securities
     4,449       13,673  
Change in fair value of investments in excess mortgage servicing rights
     (3,894 )     (4,739 )
Change in investments in equity method investees
     (19,170 )     —  
Distributions of earnings from equity method investees
     1,069       —  
(Gain)/loss on settlement of investments (net)
     (5,063 )     (3,646 )
Unrealized (gain)/loss on non-hedge derivatives and hedge ineffectiveness
     (5,409 )     2,476  
Gain on extinguishment of debt
     (1,206 )     (20,782 )
Change in:
                
Restricted cash
     3,036       364  
Receivables and other assets
     580       (4,371 )
Due to affiliates
     (404 )     334  
Accrued expenses and other liabilities
     771       2,977  
Payment of deferred interest
     (648 )     —  
Deferred interest received
     5,125       —  
Net cash provided by (used in) operating activities
     45,224       39,335  
Cash Flows From Investing Activities
                
Principal repayments from repurchased CDO debt
     75,903       12,567  
Principal repayments from CDO securities
     1,781       527  
Principal repayments from non-Agency RMBS
     25,178       4,173  
Return of investments in excess mortgage servicing rights
     15,803       4,820  
Principal repayments from loans and non-CDO securities (excluding non-Agency RMBS)
     146,401       38,115  
Purchase of real estate securities
     (1,034,234 )     (227,670 )
Purchase of securites accounted for as linked transactions
     (103,140 )     —  
Purchase of real estate related and other loans
     (174,234 )     —  
Proceeds from sale of investments
     37,905       —  
Acquisition of investments in excess mortgage servicing rights
     —       (190,510 )
Additions to investments in real estate
     (834 )     —  
Contributions to equity method investees
     (386,502 )     —  
Distributions of capital from equity method investees
     12,134       —  
Deposits paid on investments
     (5,520 )     (16,801 )
Net cash provided by (used in) investing activities
     (1,389,359 )     (374,779 )
 
Continued on next page
 
 
6
 
 
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands, except share data)
 
   
Six Months Ended June 30,
  
   
2013
    
2012
  
Cash Flows From Financing Activities
            
Repurchases of CDO bonds payable
     (9,722 )     (9,177 )
Repayments of other bonds and notes payable
     (20,157 )     (21,684 )
Borrowings under repurchase agreements
     2,004,020       102,194  
Borrowings under repurchase agreements accounted for as linked transactions
     59,968       —  
Repayments of repurchase agreements
     (1,301,819 )     (18,424 )
Margin deposits under repurchase agreements
     (152,725 )     (17,457 )
Return of margin deposits under repurchase agreements
     120,225       17,457  
Issuance of common stock
     962,827       268,050  
Costs related to issuance of common stock
     (1,302 )     (621 )
Contribution of cash to New Residential upon spin-off
     (181,582 )     —  
Common stock dividends paid
     (93,619 )     (36,813 )
Preferred stock dividends paid
     (2,790 )     (2,790 )
Payment of deferred financing costs
     (35 )     —  
Net cash provided by (used in) financing activities
     1,383,289       280,735  
Net Increase (Decrease) in Cash and Cash Equivalents
     39,154       (54,709 )
Cash and Cash Equivalents of Continuing Operations, Beginning of Period
     231,898       157,347  
Cash and Cash Equivalents of Discontinued Operations, Beginning of Period     —       9  
Cash and Cash Equivalents, End of Period
   $ 271,052     $ 102,647  
Supplemental Disclosure of Cash Flow Information
                
Cash paid during the period for interest expense
   $ 25,592     $ 40,390  
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
   $ 43,021     $ 29,436  
Securities purchased not yet settled
   $ —     $ 68,296  
Purchase price payable on investments in excess mortgage servicing rights
   $ —     $ 31,382  
Deposit on senior living assets due to affiliates
   $ —     $ 5,930  
Reduction of Assets and Liabilities relating to the spin-off of New Residential
                
Real estate securities, available for sale
   $ 1,647,289     $ —  
Residential mortgage loans, held-for-investment, net
   $ 35,865     $ —  
Investments in excess mortgage servicing rights at fair value
   $ 229,936     $ —  
Investments in equity method investees
   $ 392,469     $ —  
Receivables and other assets
   $ 37,844     $ —  
Repurchase agreements
   $ 1,320,360     $ —  
Accrued expenses and other liabilities
   $ 642     $ —  
 
See notes to consolidated financial statements
 
 
7
 
 
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 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 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.

On April 26, 2013, Newcastle announced that its board of directors had formally declared the distribution of shares of common stock of New Residential Investment Corp. (“New Residential,” NYSE: NRZ), a then wholly owned subsidiary of Newcastle. Following the spin-off, New Residential is an independent, publicly traded REIT primarily focused on investing in residential mortgage related assets. The spin-off transaction was effected as a taxable pro rata distribution by Newcastle of all the outstanding shares of common stock of New Residential to the stockholders of record of Newcastle at the close of business on May 6, 2013. The stockholders of Newcastle as of the record date received one share of New Residential common stock for each share of Newcastle common stock held.

In connection with the spin-off, Newcastle contributed to New Residential all of its investments in excess mortgage servicing rights (“Excess MSRs”) as of May 15, 2013, the non-Agency RMBS Newcastle had acquired since the second quarter of 2012, certain Agency ARM RMBS, the residential mortgage loans Newcastle had acquired since the beginning of 2013, its interest in a portfolio of consumer loans and a cash and cash equivalents balance of $181.6 million.

Newcastle now conducts its business through the following segments: (i) investments in senior living assets financed with non-recourse debt (“non-recourse senior living”), (ii) investments financed with non-recourse collateralized debt obligations (“non-recourse CDOs”), (iii) unlevered investments in deconsolidated Newcastle CDO debt (“unlevered CDOs”), (iv) investments financed with other non-recourse debt (“non-recourse other”), (v) investments and debt repurchases financed with recourse debt (“recourse”), (vi) other unlevered investments (“unlevered other”) and (vii) 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 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 certain 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 6.1 million shares of Newcastle’s common stock were held by Fortress, through its affiliates, and its principals at June 30, 2013. In addition, Fortress, through its affiliates, held options to purchase approximately 21.8 million shares of Newcastle’s common stock at June 30, 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.
 
 
8
 
 
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2013
(dollars in tables in thousands, except share data)
 
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 adopted this accounting standard and presents this information in Note 13 to the financial statements.
 
The FASB has recently issued or discussed a number of proposed standards on such topics as consolidation, 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.

2. SPIN-OFF OF NEW RESIDENTIAL

As previously discussed in Note 1, on May 15, 2013, Newcastle completed the spin-off of New Residential from Newcastle.

On April 1, 2013, Newcastle completed a co-investment in a portfolio of consumer loans with a UPB of approximately $4.2 billion as of December 31, 2012. The portfolio included over 400,000 personal unsecured loans and personal homeowner loans originated through subsidiaries of HSBC Finance Corporation. The investment was completed through newly formed limited liability companies (collectively, the “Consumer Loan Companies”), which acquired the portfolio from HSBC Finance Corporation and its affiliates. Newcastle invested approximately $250 million for 30% membership interests in each of the Consumer Loan Companies. Of the remaining 70% of the membership interests, Springleaf Finance Inc. (“Springleaf”), which is majority-owned by Fortress funds managed by the Manager, acquired 47%, and an affiliate of Blackstone Tactical Opportunities Advisors L.L.C., acquired 23%. Springleaf acts as the managing member of the Consumer Loan Companies. The Consumer Loan Companies financed $2.2 billion of the approximately $3.0 billion purchase price with asset-backed notes.

The investment in the portfolio of consumer loans was made in contemplation of, and was included in the May 15, 2013 spin-off. Newcastle has no continuing involvement in the consumer loans business post spin-off. Accordingly, the operating results are presented in discontinued operations.

The following table presents the carrying value of the assets and liabilities of New Residential, immediately preceding the May 15, 2013 spin-off.
 
Assets
      
Real estate securities, available-for-sale
   $ 1,647,289  
Residential mortgage loans, held-for-investment, net
     35,865  
Investments in excess mortgage servicing rights at fair value
     229,936  
Investments in equity method investees
     392,469  
Cash and cash equivalents
     181,582  
Receivables and other assets
     37,844  
Total Assets
   $ 2,524,985  
         
Liabilities
        
Repurchase agreements
   $ 1,320,360  
Accrued expenses and other liabilities
     642  
Total Liabilities
   $ 1,321,002  
         
Net Assets
   $ 1,203,983  
 
For pro-forma information relating to the May 15, 2013 spin-off, see Note 16.
 
 
9
 
 
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2013
(dollars in tables in thousands, except share data)
 
As a result of the May 15, 2013 spin-off, for all periods presented, the assets, liabilities and results of operations of those components of Newcastle’s operations that (i) were part of the spin-off, and (ii) represent operations in which Newcastle has no significant continuing involvement, are presented separately in discontinued operations in Newcastle’s consolidated financial statements. These components are primarily related to Excess MSRs and consumer loans.

Assets and liabilities of discontinued operations as of December 31, 2012 were as follows:
 
Assets
      
Investments in excess mortgage servicing rights at fair value
   $ 245,036  
Receivables and other assets
     33  
Total assets of discontinued operations
   $ 245,069  
         
Liabilities
        
Purchase price payable on investments in excess mortgage servicing rights
   $ 59  
Accrued expenses and other liabilities
     421  
Total liabilities of discontinued operations
   $ 480  
 
Results from discontinued operations were as follows:
 
   
Three Months Ended
    
Six Months Ended
  
   
June 30
    
June 30
  
   
2013
    
2012
    
2013
    
2012
  
                         
Interest Income
   $ 5,060     $ 4,482     $ 15,095     $ 6,519  
Net interest income
     5,060       4,482       15,095       6,519  
                                 
Other income (loss)
     (2 )     2       (2 )     1  
Change in fair value of investments in excess mortgage servicing rights
     2,036       3,523       3,894       4,739  
Change in fair value of investments in equity method investees
     (84 )     —       885       —  
Earnings from investments in equity method investees
     18,286       —       18,286       —  
Total other income
     20,236       3,525       23,063       4,740  
                                 
Property operating costs
     5       6       12       13  
General and administrative expenses
     (290 )     1,381       2,417       1,513  
Total expenses
     (285 )     1,387       2,429       1,526  
                                 
Income from discontinued operations
   $ 25,581     $ 6,620     $ 35,729     $ 9,733  
 
The spin-off also resulted in a $1.2 billion reduction in the basis upon which Newcastle’s management fees are computed (and an equivalent reduction in the basis upon which the incentive compensation threshold is computed), as well as a reduction in the strike price of Newcastle’s then outstanding options (see Note 10).
 
 
10
 
 
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2013
(dollars in tables in thousands, except share data)
 
3. SEGMENT REPORTING AND VARIABLE INTEREST ENTITIES

As previously stated in Note 1, Newcastle conducts its business through the following segments: (i) investments in senior living assets financed with non-recourse debt (“non-recourse senior living”), (ii) investments financed with non-recourse collateralized debt obligations (“non-recourse CDOs”), (iii) unlevered investments in deconsolidated Newcastle CDO debt (“unlevered CDOs”), (iv) investments financed with other non-recourse debt (“non-recourse other”), (v) investments and debt repurchases financed with recourse debt (“recourse”), (vi) other unlevered investments (“unlevered other”), (vii) corporate and (viii) prior to the spin-off, investments in excess mortgage servicing rights and consumer loans (“Excess MSRs and consumer loans”). 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.
 
 
11
 
 
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2013
(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:
 
   
Non-Recourse Senior
    
Non-Recourse
    
Unlevered
    
Non-Recourse
          
Unlevered
          
Excess MSRs and Consumer
   
Inter-segment
        
   
Living
    
CDOs (A)
    
CDOs (B)
    
Other (A) (C)
    
Recourse (D)
    
Other (E)
    
Corporate
    
Loans
    
Elimination (F)
    
Total
  
Six Months Ended June 30, 2013
                                                            
Interest income
   $ —     $ 68,227     $ 326     $ 32,774     $ 13,565     $ 11,093     $ 102     $ —     $ (1,931 )   $ 124,156  
Interest expense
     2,478       13,950       —       24,858       3,447       —       1,906       —       (1,931 )     44,708  
Net interest income (expense)
     (2,478 )     54,277       326       7,916       10,118       11,093       (1,804 )     —       —       79,448  
                                                                                 
Impairment (reversal)
     —       11,986       —       (573 )     3,028       (9,177 )     —       —       —       5,974  
Other revenues
     26,510       —       —       1,003       —       —       —       —       —       27,513  
Other income (loss)
     120       11,675       145       —       25       1,895       —       —       —       13,860  
Property operating expenses
     16,285       —       —       487       —       —       —       —       —       16,772  
Depreciation and amortization
     8,039       —       —       110       —       —       —       —       —       8,149  
Other operating expenses
     5,074       384       —       1,410       47       238       26,766       —       —       33,919  
Income (loss) from continuing operations
     (5,246 )     53,582       471       7,485       6,358       21,927       (28,570 )     —       —       56,007  
Income (loss) from discontinued operations
     —       —       —       —       —       (29 )     —       35,758       —       35,729  
Net income (loss)
     (5,246 )     53,582       471       7,485       6,358       21,898       (28,570 )     35,758       —       91,736  
Preferred dividends
     —       —       —       —       —       —       (2,790 )     —       —       (2,790 )
Income (loss) applicable to common stockholders
   $ (5,246 )   $ 53,582     $ 471     $ 7,485     $ 6,358     $ 21,898     $ (31,360 )   $ 35,758     $ —     $ 88,946  
                                                                                 
Three Months Ended June 30, 2013
                                                                                
Interest income
   $ —     $ 36,638     $ 87     $ 16,467     $ 6,280     $ 4,387     $ 30     $ —     $ (1,065 )   $ 62,824  
Interest expense
     1,246       6,819       —       12,475       1,569       —       954       —       (1,065 )     21,998  
Net interest income (expense)
     (1,246 )     29,819       87       3,992       4,711       4,387       (924 )     —       —       40,826  
                                                                                 
Impairment (reversal)
     —       8,803       —       (1,421 )     3,738       (7,919 )     —       —       —       3,201  
Other revenues
     13,513       —       —       500       —       —       —       —       —       14,013  
Other income (loss)
     112       7,178       71       —       25       704       —       —       —       8,090  
Property operating expenses
     8,169       —       —       240       —       —       —       —       —       8,409  
Depreciation and amortization
     4,017       —       —       53       —       —       —       —       —       4,070  
Other operating expenses
     2,686       190       —       691       5       143       15,392       —       —       19,107  
Income (loss) from continuing operations
     (2,493 )     28,004       158       4,929       993       12,867       (16,316 )     —       —       28,142  
Income (loss) from discontinued operations
     —       —       —       —       —       (13 )     —       25,594       —       25,581  
Net income (loss)
     (2,493 )     28,004       158       4,929       993       12,854       (16,316 )     25,594       —       53,723  
Preferred dividends
     —       —       —       —       —       —       (1,395 )     —       —     $ (1,395 )
Income (loss) applicable to common stockholders
   $ (2,493 )   $ 28,004     $ 158     $ 4,929     $ 993     $ 12,854     $ (17,711 )   $ 25,594     $ —     $ 52,328  
                                                                                 
June 30, 2013
                                                                                
Investments
   $ 174,541     $ 1,118,367     $ 5,440     $ 699,660     $ 335,815     $ 229,665     $ —     $ —     $ (61,010 )   $ 2,502,478  
Cash and restricted cash
     11,302       7,173       —       —       —       —       259,750       —       —       278,225  
Derivative assets
     298       —       —       —       43,172       —       —       —       —       43,470  
Other assets
     9,020       4,794       5       117       2,408       2,375       2,596       —       (154 )     21,161  
Total assets
     195,161       1,130,334       5,445       699,777       381,395       232,040       262,346       —       (61,164 )     2,845,334  
Debt
     (120,525 )     (844,484 )     —       (630,945 )     (311,276 )     —       (51,240 )     —       61,010       (1,897,460 )
Derivative liabilities
     —       (20,197 )     —       —       —       —       —       —       —       (20,197 )
Other liabilities
     (5,983 )     (5,715 )     —       (1,378 )     (34 )     (776 )