12. RECENT ACTIVITIES

On May 14, 2012, Newcastle entered into definitive agreements to co-invest in Excess MSRs related to mortgage servicing rights that Nationstar proposed to acquire from Residential Capital, LLC and related entities (“ResCap”) in an auction conducted as part of ResCap’s bankruptcy proceedings. Through September 30, 2012, Newcastle funded a deposit of $25.2 million. The auction commenced on October 23, 2012, and Nationstar did not submit the highest bid on October 24, 2012. Therefore, Newcastle will not complete this co-investment, provided that the bankruptcy court approves the highest bid at the auction. Upon the termination of the definitive agreements, Newcastle will be entitled to a refund of its deposit and its portion of the breakup fee of approximately $8.4 million.

On July 18, 2012, Newcastle completed the acquisition of eight senior housing assets from entities owned and managed by Walter C. Bowen for an aggregate purchase price of approximately $143.3 million plus related expenses. These assets comprise more than 800 beds in senior living facilities located in California, Oregon, Utah, Arizona and Idaho. Newcastle funded the purchase price with an equity investment of approximately $54.9 million and third-party financing of approximately $88.4 million. The financing is non-recourse, matures in seven years and currently has a weighted average interest rate of 3.45%. This acquisition was accounted for as a business combination, under which all assets acquired are recognized at their acquisition-date fair value with acquisition-related costs being expensed as incurred. In the nine months ended September 30, 2012, Newcastle recorded approximately $3.5 million of expenses related to the acquisition as General and Administrative expenses in the consolidated statements of income. Newcastle has retained affiliates of Fortress to manage the properties. Pursuant to a management agreement for each property, Newcastle pays management fees equal to 6% of the property’s gross income (as defined in the agreements) for the first two years and 7% thereafter. In addition, Newcastle will reimburse the manager for certain expenses, primarily the compensation expense associated with the on-site employees. In connection with the acquisition of the assets in July, 2012, Newcastle reimbursed Fortress for approximately $6.4 million (which had been recorded in Due to Affiliates as of June 30, 2012) of pre-acquisition disbursements related to the assets.

On September 12, 2012, Newcastle completed the sale of 100% of its interests in CDO X to the sole owner of the senior notes and another third party, in connection with the liquidation and termination of CDO X. Newcastle received $130 million for $89.75 million face amount of subordinated notes and all of its equity in CDO X. As a result, Newcastle recorded a gain on sale and deconsolidated CDO X. The sale and resulting deconsolidation has reduced Newcastle’s gross assets by $1.1 billion, reduced liabilities by $1.2 billion, decreased other comprehensive income by $25.5 million and resulted in a gain of $224.3 million in the quarter ended September 30, 2012. A condition to the sale of its interests was the right to purchase certain collateral held by CDO X. Newcastle purchased eight securities with a face amount of $101 million for 49.4% of par, or approximately $50 million.

In the first nine months of 2012, Newcastle repurchased $34.1 million face amount of Newcastle CDO bonds for $10.8 million. As a result, Newcastle extinguished $34.1 million of CDO debt and recorded a gain on extinguishment of debt of $23.1 million.

In the first nine months of 2012, Newcastle purchased $321.7 million principal balance of non-agency residential mortgage backed securities for approximately $201.7 million using $142.5 million of unrestricted cash and financed with approximately $59.2 million of repurchase agreements. These repurchase agreements bear interest at LIBOR plus 200 basis points, mature in October 2012, have a 65% advance rate and are subject to customary margin call provisions.

In the first nine months of 2012, Newcastle purchased $347.2 million principal balance of FNMA/FHLMC securities (primarily one-year ARMs) for approximately $367.6 million, using $19.4 million of unrestricted cash and financed with $348.2 million of repurchase agreements. These repurchase agreements bear interest at 0.42%, mature in October 2012, and are subject to customary margin call provisions.

In October 2012, Newcastle purchased $126.0 million face of FNMA/FHLMC securities for approximately $134.0 million, using $6.7 million of unrestricted cash and financed with approximately $127.3 million of repurchase agreements. These repurchase agreements bear interest at 0.43%, mature in November 2012, and are subject to customary margin call provisions.

See note 8 regarding the public offerings of Newcastle’s common stock in April 2012, May 2012 and July 2012.

These financial statements include a discussion of material events that have occurred subsequent to September 30, 2012 (referred to as “subsequent events”) through the issuance of these consolidated financial statements. Events subsequent to that date have not been considered in these financial statements.