Drive Shack Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE

FAIR VALUE

6 Months Ended

Jun. 30, 2013

9.	FAIR VALUE

Fair Value Summary Table

The carrying values and fair values of Newcastle’s assets and liabilities at June 30, 2013 were as follows:

	Principal							Weighted			Weighted
	Balance or							Average			Average
	Notional		Carrying		Estimated			Yield/Funding			Maturity
	Amount		Value		Fair Value		Fair Value Method (A)	Cost			(Years)
Assets
Financial instruments:
Real estate securities, available-for-sale*	$	1,011,205	$	777,102	$	777,102	Broker quotations, counterparty quotations, pricing services, pricing models		6.22	%		3.3
Real estate related and other loans, held-for-sale, net		1,354,899		837,427		849,562	Broker quotations, counterparty quotations, pricing services, pricing models		11.25	%		1.3
Residential mortgage loans, held-for-investment, net		303,303		273,332		270,596	Pricing models		8.30	%		5.8
Residential mortgage loans, held-for-sale, net		3,345		2,266		2,266	Pricing models		18.89	%		4.6
Subprime mortgage loans subject to call option (B)		406,217		406,217			(B)		9.09	%		(B)
Restricted cash*		7,173		7,173		7,173
Cash and cash equivalents*		271,052		271,052		271,052
Non-hedge derivative assets (C)(D)*		140,206		43,470		43,470	Counterparty quotations		N/A			(C)
Other investments				24,907		13,165	Pricing models		N/A			N/A
Investments in real estate and intangibles, net				181,227
Due from affiliates				1,254
Receivables and other assets				19,907
			$	2,845,334
Liabilities
Financial instruments:
CDO bonds payable (F)	$	843,656	$	844,484	$	641,506	Pricing models		1.83	%		2.1
Other bonds and notes payable (F)		167,806		163,718		166,090	Broker quotations, pricing models		5.19	%		3.9
Repurchase agreements		311,276		311,276		311,276	Market comparables		0.39	%		0.1
Mortgage notes payable		120,525		120,525		120,525	Pricing models		3.79	%		5.3
Financing of subprime mortgage loans subject to call option (B)		406,217		406,217			(B)		9.09	%		(B)
Junior subordinated notes payable		51,004		51,240		34,267	Pricing models		7.40	%		21.8
Interest rate swaps, treated as hedges (D)(E)*		105,749		8,523		8,523	Counterparty quotations		N/A			(E)
Non-hedge derivatives (C)(D)*		186,140		11,674		11,674	Counterparty quotations		N/A			(C)
Due to affiliates				3,216
Dividends payable, accrued expenses and other liabilities				60,835
			$	1,981,708

*Measured at fair value on a recurring basis.

(A)	Methods are listed in order of priority. In the case of real estate securities and real estate related and other loans, broker quotations are obtained if available and practicable, otherwise counterparty quotations or pricing service valuations are obtained or, finally, internal pricing models are used. Internal pricing models are only used for (i) securities and loans that are not traded in an active market, and, therefore, have little or no price transparency, and for which significant unobservable inputs must be used in estimating fair value, or (ii) loans or debt obligations which are private and untraded.

(B)	These two items result from an option, not an obligation, to repurchase loans from Newcastle’s subprime mortgage loan securitizations (Note 5), are noneconomic until such option is exercised, and are equal and offsetting.

(C)	This represents one interest rate swap agreement with a total notional balance of $186.1 million, maturing in March 2015, an interest rate cap agreement with a notional balance of $23.4 million, maturing in August 2019 and linked transactions entered into in June 2013 with $116.8 face amount of underlying financed securities. Newcastle entered into the interest rate swap and cap agreement to reduce its exposure to interest rate changes on the floating rate financings of CDO VI and the senior living assets. These derivative agreements were not designated as hedges for accounting purposes as of June 30, 2013.

(D)	Newcastle’s derivatives fall into two categories. As of June 30, 2013, all derivative liabilities, which represent two interest rate swaps, were held within Newcastle’s nonrecourse structures. An aggregate notional balance of $291.9 million is only subject to the credit risks of the respective CDO structures. As they are senior to all the debt obligations of the respective CDOs and the fair value of each of the CDOs’ total investments exceeded the fair value of each of the CDOs’ derivative liabilities, no credit valuation adjustments were recorded. Derivatives with an aggregate notional balance of $140.2 million, which were assets at period end, represent an interest rate cap with a notional of $23.4 million and linked transactions with $116.8 face amount of underlying financed securities. No adjustments have been made to the fair value quotation received on the interest rate cap that relate to credit risk as a result of the counterparty’s “AA” credit rating. Newcastle’s interest rate swap and cap counterparties include Bank of America, Credit Suisse and Wells Fargo.

(E)	Represents derivative agreements:

	Weighted Average	Aggregate Notional		Weighted Average Fixed			Aggregate Fair Value
Year of Maturity	Month of Maturity	Amount		Pay Rate / Cap Rate			Asset / (Liability)

Interest rate swap agreements which receive 1-Month LIBOR:
2016	Apr	$	105,749		5.04	%	$	(8,523	)

(F)

Newcastle notes that the unrealized gain on the liabilities within CDOs and other non-recourse financing structures cannot be fully realized. 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. As a result, the fair value of Newcastle’s net investments in these nonrecourse financing structures is equal to the present value of their expected future net cash flows.

Valuation Hierarchy

The methodologies used for valuing such instruments have been categorized into three broad levels, which form a hierarchy.

Level 1 - Quoted prices in active markets for identical instruments.

Level 2 - Valuations based principally on other observable market parameters, including

Quoted prices in active markets for similar instruments,

Quoted prices in less active or inactive markets for identical or similar instruments,

Other observable inputs (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates), and

Market corroborated inputs (derived principally from or corroborated by observable market data).

Level 3 - Valuations based significantly on unobservable inputs.

Level 3A - Valuations based on third party indications (broker quotes, counterparty quotes or pricing services) which were, in turn, based significantly on unobservable inputs or were otherwise not supportable as Level 2 valuations.

Level 3B - Valuations based on internal models with significant unobservable inputs.

Newcastle follows this hierarchy for its financial instruments measured at fair value on a recurring basis. The classifications are based on the lowest level of input that is significant to the fair value measurement.

Newcastle has various processes and controls in place to ensure that fair value is reasonably estimated. With respect to the broker and pricing service quotations, to ensure these quotes represent a reasonable estimate of fair value, Newcastle’s quarterly procedures include a comparison to the outputs generated from its internal pricing models and transactions Newcastle has completed with respect to these or similar securities, as well as on its knowledge and experience of these markets. With respect to fair value estimates generated based on Newcastle’s internal pricing models, Newcastle’s management validates the inputs and outputs of the internal pricing models by comparing them to available independent third party market parameters, where available, and models for reasonableness. Newcastle believes its valuation methods and the assumptions used are appropriate and consistent with other market participants. The Board of Directors has reviewed Newcastle's process for determining the valuations of its investments raised on information provided by The Manager and has concluded such process is resonable and appropriate.

Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. For Newcastle’s investments in real estate securities, real estate related and other loans and residential mortgage loans categorized within Level 3 of the fair value hierarchy, the significant unobservable inputs include the discount rates, assumptions relating to prepayments, default rates and loss severities. Significant increases (decreases) in any of the discount rates, default rates or loss severities in isolation would result in a significantly lower (higher) fair value measurement. The impact of changes in prepayment speeds would have differing impacts on fair value, depending on the seniority of the investment. Generally, a change in the default assumption is generally accompanied by directionally similar changes in the assumptions used for the loss severity and the prepayment speed.

The following table summarizes such financial assets and liabilities measured at fair value on a recurring basis at June 30, 2013:

					Fair Value
	Principal Balance or
	Notional Amount		Carrying Value		Level 2		Level 3A		Level 3B		Total
Assets
Real estate securities, available-for-sale:
CMBS	$	352,677	$	281,468	$	—	$	255,407	$	26,061	$	281,468
REIT debt		29,200		31,059		31,059		—		—		31,059
Non-Agency RMBS		107,869		59,122		—		48,274		10,848		59,122
ABS - other real estate		8,464		199		—		—		199		199
FNMA / FHLMC		311,659		335,814		335,814		—		—		335,814
CDO		201,336		69,440		—		64,000		5,440		69,440
Real estate securities total	$	1,011,205	$	777,102	$	366,873	$	367,681	$	42,548	$	777,102
Derivative assets:
Interest rate caps, not treated as hedges		23,400		298		298		—		—		298
Linked transactions at fair value		116,806		43,172		—		43,172		—		43,172
Derivative assets total	$	140,206	$	43,470	$	298	$	43,172	$	—	$	43,470
Liabilities
Derivative Liabilities:
Interest rate swaps, treated as hedges	$	105,749	$	8,523	$	8,523	$	—	$	—	$	8,523
Interest rate swaps, not treated as hedges		186,140		11,674		11,674		—		—		11,674
Derivative liabilities total	$	291,889	$	20,197	$	20,197	$	—	$	—	$	20,197

Newcastle’s investments in instruments measured at fair value on a recurring basis using Level 3 inputs changed during the six months ended June 30, 2013 as follows:

	Level 3A
	CMBS						ABS
							Non-Agency						Equity/Other			Linked
	Conduit			Other			RMBS			Other			Securities			Transactions		Total
Balance at December 31, 2012	$	225,575		$	104,451		$	330,021		$	798		$	65,027		$	—	$	725,872
Transfers (A)
Transfers from Level 3B		—			—			11,107			—			—			—		11,107
Transfers into Level 3B		(3,291	)		(8,257	)		—			—			—			—		(11,548	)
Spin-off of New Residential		—			—			(560,783	)		—			—			—		(560,783	)
Total gains (losses) (B)
Included in net income (C)		279			(165	)		(683	)		(87	)		—			—		(656	)
Included in other comprehensive income (loss)		8,585			1,522			26,938			296			(771	)		—		36,570
Amortization included in interest income		4,091			304			9,801			—			2,337			—		16,533
Purchases, sales and repayments
Purchases		—			—			267,160			—			—			43,172		310,332
Proceeds from sales		(51,708	)		(16,902	)		(6,127	)		(934	)		—			—		(75,671	)
Proceeds from repayments		(4,326	)		(4,751	)		(29,160	)		(73	)		(2,593	)		—		(40,903	)
Balance at June 30, 2013	$	179,205		$	76,202		$	48,274		$	—		$	64,000		$	43,172	$	410,853

	Level 3B
	CMBS						ABS
							Non-Agency						Equity/Other			Linked
	Conduit			Other			RMBS			Other			Securities			Transactions		Total
Balance at December 31, 2012	$	29,194		$	17,171		$	25,954		$	677		$	5,998		$	—	$	78,994
Transfers (A)
Transfers from Level 3A		3,291			8,257			—			—			—			—		11,548
Transfers into Level 3A		—			—			(11,107	)		—			—			—		(11,107	)
Total gains (losses) (B)
Included in net income (C)		69			(159	)		3,055			5			—			—		2,970
Included in other comprehensive income (loss)		3,521			1,135			(2,198	)		(24	)		231			—		2,665
Amortization included in interest income		1,474			240			3,322			283			314			—		5,633
Purchases, sales and repayments
Purchases		—			—			—			—			—			—		—
Proceeds from sales		(21,868	)		(14,841	)		(5,054	)		(425	)		—			—		(42,188	)
Proceeds from repayments		(1,423	)		—			(3,124	)		(317	)		(1,103	)		—		(5,967	)
Balance at June 30, 2013	$	14,258		$	11,803		$	10,848		$	199		$	5,440		$	—	$	42,548

(A)	Transfers are assumed to occur at the beginning of the quarter.
(B)	None of the gains (losses) recorded in earnings during the period is attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting date.
(C)	These gains (losses) are recorded in the following line items in the consolidated statements of income:

	Six Months Ended June 30, 2013
	Level 3A			Level 3B
Gain (loss) on settlement of investments, net	$	150		$	3,586
Other income (loss), net		—			—
OTTI		(806	)		(616	)
Total	$	(656	)	$	2,970

Gain (loss) on settlement of investments, net, from investments transferred into Level 3 during the period	$	—		$	—

Securities Valuation

As of June 30, 2013, Newcastle’s securities valuation methodology and results are further detailed as follows:

					Fair Value
	Outstanding		Amortized						Internal
	Face		Cost		Multiple		Single		Pricing
Asset Type	Amount (A)		Basis (B)		Quotes (C)		Quote (D)		Models (E)		Total

CMBS	$	352,677	$	227,281	$	184,461	$	70,946	$	26,061	$	281,468
REIT debt		29,200		28,549		17,199		13,860		—		31,059
Non-Agency RMBS		107,869		42,231		34,842		13,432		10,848		59,122
ABS - other real estate		8,464		—		—		—		199		199
FNMA / FHLMC		311,659		335,164		335,814		—		—		335,814
CDO		201,336		66,493		—		64,000		5,440		69,440
Total	$	1,011,205	$	699,718	$	572,316	$	162,238	$	42,548	$	777,102

(A)	Net of incurred losses
(B)	Net of discounts (or gross of premiums) and after OTTI, including impairment taken during the period ended June 30, 2013.
(C)	Management generally obtained pricing service quotations or broker quotations from two sources, one of which was generally the seller (the party that sold us the security). Management selected one of the quotes received as being most representative of fair value and did not use an average of the quotes. Even if Newcastle receives two or more quotes on a particular security that come from non-selling brokers or pricing services, it does not use an average because management believes using an actual quote more closely represents a transactable price for the security than an average level. Furthermore, in some cases there is a wide disparity between the quotes Newcastle receives. Management believes using an average of the quotes in these cases would generally not represent the fair value of the asset. Based on Newcastle’s own fair value analysis using internal models, management selects one of the quotes which are believed to more accurately reflect fair value. Newcastle never adjusts quotes received. These quotations are generally received via email and contain disclaimers which state that they are “indicative” and not “actionable” – meaning that the party giving the quotation is not bound to actually purchase the security at the quoted price.
(D)	Management was unable to obtain quotations from more than one source on these securities. The one source was generally the seller (the party that sold us the security) or a pricing service.
(E)	Securities whose fair value was estimated based on internal pricing models are further detailed as follows:

					Impairment		Unrealized Gains		Weighted Average Significant Input
	Amortized				Recorded		(Losses) in								Cumulative
	Cost				In Current		Accumulated		Discount			Prepayment			Default			Loss
	Basis (B)		Fair Value		Period		OCI		Rate			Speed (F)			Rate			Severity
CMBS - Conduit	$	2,705	$	14,258	$	76	$	11,553		8.0	%		N/A			23.3	%		42.7	%
CMBS - Large loan / single borrower		11,489		11,803		—		314		2.2	%		N/A			50.7	%		50.7	%
Non-Agency RMBS		3,074		10,848		1		7,774		8.0	%		2.4	%		19.0	%		45.4	%
ABS - other RE		—		199		—		199		8.0	%		0.0	%		45.8	%		100.0	%
CDO		3,190		5,440		—		2,250		20.3	%		4.7	%		9.9	%		73.1	%
Total		20,458		42,548		77		22,090

	All of the assumptions listed have some degree of market observability, based on Newcastle’s knowledge of the market, relationships with market participants, and use of common market data sources. Collateral prepayment, default and loss severity projections are in the form of “curves” or “vectors” that vary for each monthly collateral cash flow projection. Methods used to develop these projections vary by asset class (e.g., CMBS projections are developed differently than home equity ABS projections) but conform to industry conventions. Newcastle uses assumptions that generate its best estimate of future cash flows of each respective security.

	The prepayment vector specifies the percentage of the collateral balance that is expected to voluntarily pay off at each point in the future. The prepayment vector is based on projections from a widely published investment bank model which considers factors such as collateral FICO score, loan-to-value ratio, debt-to-income ratio, and vintage on a loan level basis. This vector is scaled up or down to match recent collateral-specific prepayment experience, as obtained from remittance reports and market data services.

	Loss severities are based on recent collateral-specific experience with additional consideration given to collateral characteristics. Collateral age is taken into consideration because severities tend to initially increase with collateral age before eventually stabilizing. Newcastle typically uses projected severities that are higher than the historic experience for collateral that is relatively new to account for this effect. Collateral characteristics such as loan size, lien position, and location (state) also effect loss severity. Newcastle considers whether a collateral pool has experienced a significant change in its composition with respect to these factors when assigning severity projections.

	Default rates are determined from the current “pipeline” of loans that are more than 90 days delinquent, in foreclosure, or are real estate owned (REO). These significantly delinquent loans determine the first 24 months of the default vector. Beyond month 24, the default vector transitions to a steady-state value that is generally equal to or greater than that given by the widely published investment bank model.

	The discount rates Newcastle uses are derived from a range of observable pricing on securities backed by similar collateral and offered in a live market. As the markets in which Newcastle transacts have become less liquid, Newcastle has had to rely on fewer data points in this analysis.

(F)	Projected annualized average prepayment rate.

Loan Valuation

Loans which Newcastle does not have the ability or intent to hold into the foreseeable future are classified as held-for-sale. As a result, these held-for-sale loans are carried at the lower of amortized cost or fair value and are therefore recorded at fair value on a non-recurring basis. These loans were written down to fair value at the time of the impairment, based on broker quotations, pricing service quotations or internal pricing models. All the loans were within Level 3 of the fair value hierarchy. For real estate related and other loans, the most significant inputs used in the valuations are the amount and timing of expected future cash flows, market yields and the estimated collateral value of such loan investments. For residential mortgage loans, significant inputs include management’s expectations of prepayment speeds, default rates, loss severities and discount rates that market participants would use in determining the fair values of similar pools of residential mortgage loans.

The following tables summarize certain information for real estate related and other loans and residential mortgage loans held-for-sale as of June 30, 2013:

							Valuation Allowance/			Significant Input
	Outstanding						(Reversal)			Range						Weighted Average
	Face		Carrying		Fair		In Current			Discount			Loss			Discount			Loss
Loan Type	Amount		Value		Value		Year			Rate			Severity			Rate			Severity
Mezzanine	$	430,584	$	350,127	$	357,410	$	(1,112	)		5.0% - 25.0	%		0.0% - 100.0	%		9.1	%		17.5	%
Bank Loan		783,448		363,337		366,466		(3,963	)		5.8% - 27.5	%		0.0% - 100.0	%		14.0	%		47.8	%
B-Note		110,944		94,040		95,601		7,337			6.0% - 16.2	%		0.0% - 47.0	%		10.6	%		9.7	%
Whole Loan		29,923		29,923		30,085		—			4.7% - 6.9	%		0.0% - 15.0	%		4.8	%		14.6	%

Total Real Estate Related and other Loans Held-for-Sale, Net	$	1,354,899	$	837,427	$	849,562	$	2,262

							Valuation Allowance/
	Outstanding						(Reversal)			Significant Input (Weighted Average)
	Face		Carrying		Fair		In Current			Discount			Prepayment			Constant			Loss
Loan Type	Amount		Value		Value		Year			Rate			Speed			Default Rate			Severity
Non-securitized Manufactured Housing Loans Portfolio I	$	565	$	146	$	146	$	(6	)		68.5	%		5.0	%		11.6	%		70.0	%
Non-securitized Manufactured Housing Loans Portfolio II		2,780		2,120		2,120		18			15.5	%		5.0	%		3.5	%		75.0	%
Total Residential Mortgage Loans Held-for-Sale, Net	$	3,345	$	2,266	$	2,266	$	12

Loans which Newcastle has the intent and ability to hold into the foreseeable future are classified as held-for-investment. Loans held-for-investment are carried at the aggregate unpaid principal balance adjusted for any unamortized premium or discount, deferred fees or expenses, an allowance for loan losses, charge-offs and write-downs for impaired loans.

The following table summarizes certain information for residential mortgage loans held-for-investment as of June 30, 2013:

								Valuation
								Allowance/			Significant Input (Weighted Average)
	Outstanding							(Reversal)									Constant
	Face		Carrying					In Current			Discount			Prepayment			Default			Loss
Loan Type	Amount		Value		Fair Value			Year			Rate			Speed			Rate			Severity
Securitized Manufactured Housing Loans Portfolio I	$	110,589	$	94,909		$	91,676	$	(1,592	)		9.5	%		5.0	%		4.0	%		70.0	%
Securitized Manufactured Housing Loans Portfolio II		140,828		138,895			133,604		1,019			7.7	%		5.0	%		3.5	%		75.0	%

Residential Loans		51,886		39,528			45,316		(176	)		7.7	%		4.6	%		2.8	%		46.4	%
Total Residential Mortgage Loans, Held-for-Investment, Net	$	303,303	$	273,332		$	270,596	$	(749	)

Derivatives

Newcastle’s derivative instruments are comprised of interest rate caps, interest rate swaps and linked transactions. Newcastle’s interest rate caps and swaps are valued using counterparty quotations. These quotations are generally based on valuation models with model inputs that can generally be verified and which do not involve significant judgment. The significant observable inputs used in determining the fair value of Newcastle’s Level 2 interest rate cap and swap derivative contracts are contractual cash flows and market based interest rate curves. The linked transactions, which are categorized into Level 3, are evaluated on a net basis considering their underlying components, the security acquired and the related repurchase financing agreement. The securities are valued using a similar methodology to the one described in “Securities Valuation” above and this value is netted against the carrying value of the repurchase agreement (which approximates fair value as described in “Liabilities for Which Fair Value is Only Disclosed” below), adjusted for net accrued interest receivable/payable on the securities and repurchase agreement of the linked transactions (see Note 8 for a discussion of Newcastle’s outstanding linked transactions).

Newcastle’s derivatives are recorded on its balance sheet as follows:

		Fair Value
		June 30,		December 31,
	Balance sheet location	2013		2012
Derivative Assets
Linked transactions at fair value	Derivative Assets	$	43,172	$	—
Interest rate caps, not designated as hedges	Derivative Assets		298		165

		$	43,470	$	165
Derivative Liabilities
Interest rate swaps, designated as hedges	Derivative Liabilities	$	8,523	$	12,175
Interest rate swaps, not designated as hedges	Derivative Liabilities		11,674		19,401

		$	20,197	$	31,576

The following table summarizes information related to derivatives:

	June 30, 2013			December 31, 2012
Cash flow hedges
Notional amount of interest rate swap agreements	$	105,749		$	154,450
Amount of (loss) recognized in OCI on effective portion		(8,437	)		(12,050	)
Deferred hedge gain (loss) related to anticipated financings, which have subsequently occurred, net of amortization		204			237
Deferred hedge gain (loss) related to dedesignation, net of amortization		(179	)		(210	)
Expected reclassification of deferred hedges from AOCI into earnings over the next 12 months		6			4
Expected reclassification of current hedges from AOCI into earnings over the next 12 months		(4,537	)		(6,259	)

Non-hedge Derivatives
Notional amount of interest rate swap agreements		186,140			294,203
Notional amount of interest rate cap agreements		23,400			23,400
Notional amount of linked transactions (A)		116,806			—

(A) This represents the current face amount of the underlying financed securities comprising linked transactions.

The following table summarizes gains (losses) recorded in relation to derivatives:

	Income statement	Three Months Ended June 30,						Six Months Ended June 30,
	location	2013			2012			2013			2012
Cash flow hedges
Gain (loss) on the ineffective portion	Other income (loss)	$	—		$	453		$	—		$	483
Gain (loss) immediately recognized at dedesignation	Gain (loss) on sale of investments; Other income (loss)		—			(6,760	)		—			(7,036	)
Amount of gain (loss) reclassified from AOCI into income, related to effective portion	Interest expense		(1,703	)		(10,290	)		(3,568	)		(20,936	)
Deferred hedge gain reclassified from AOCI into income, related to anticipated financings	Interest expense		17			15			33			30
Deferred hedge gain (loss) reclassified from AOCI into income, related to effective portion of dedesignated hedges	Interest expense		(16	)		456			(32	)		898
Non-hedge derivatives gain (loss)
Interest rate swaps	Other income (loss)		2,282			2,021			5,408			4,077
Linked transactions	Interest expense		(8	)		—			(8	)		—

The following table presents both gross information and net information about linked transactions as of June 30, 2013:

Real estate securities-available for sale (A)	$	103,140
Repurchase agreements (B)		(59,968	)
Net assets recognized as linked transactions	$	43,172

(A)	Represents the fair value of the securities accounted for as part of linked transactions at June 30, 2013.

(B)	Represents the carrying value, which approximates fair value, of the repurchase agreements accounted for as part of linked transactions at June 30, 2013.

Liabilities for Which Fair Value is Only Disclosed

The following table summarizes the level of the fair value hierarchy, valuation techniques and inputs used for estimating each class of liabilities not measured at fair value in the statement of financial position but for which fair value is disclosed:

Type of Liabilities Not Measured At Fair Value for Which Fair Value Is Disclosed	Fair Value Hierarchy	Valuation Techniques and Significant Inputs
CDO bonds payable	Level 3	Valuation technique is based on discounted cash flow. Significant inputs include:
		•	Underlying security and loan prepayment, default and cumulative loss expectations
		•	Amount and timing of expected future cash flows
		•	Market yields and credit spreads implied by comparisons to transactions of similar tranches of CDO debt by the varying levels of subordination
Other bonds and notes payable	Level 3	Valuation technique is based on discounted cash flow. Significant inputs include:
		•	Amount and timing of expected future cash flows
		•	Interest rates
		•	Broker quotations
		•	Market yields and credit spreads implied by comparisons to transactions of similar tranches of securitized debt by the varying levels of subordination
Repurchase agreements	Level 2	Valuation technique is based on market comparables. Significant variables include:
		•	Amount and timing of expected future cash flows
		•	Interest rates
		•	Collateral funding spreads
Mortgage notes payable	Level 3	Valuation technique is based on discounted cash flows. Significant inputs include:
		•	Amount and timing of expected future cash flows
		•	Interest rates
		•	Collateral funding spreads
Junior subordinated notes payable	Level 3	Valuation technique is based on discounted cash flow. Significant inputs include:
		•	Amount and timing of expected future cash flows
		•	Interest rates
		•	Market yields and the credit spread of Newcastle

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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