Quarterly report pursuant to Section 13 or 15(d)

SPIN-OFF OF NEW RESIDENTIAL

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SPIN-OFF OF NEW RESIDENTIAL
 12 Months Ended
Dec. 31, 2012
Spin-Off Of New Residential  
SPIN-OFF OF NEW RESIDENTIAL
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.
 
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).