As filed with the Securities and Exchange Commission on April 29, 2013

File No. 001-35777

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 6

to

FORM 10

 

 

GENERAL FORM FOR REGISTRATION OF SECURITIES

PURSUANT TO SECTION 12(b) OR 12(g) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

 

New Residential Investment Corp.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   45-3449660

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1345 Avenue of the Americas,

New York, New York

  10105
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:

212-479-3150

Securities to be registered pursuant to Section 12(b) of the Act:

 

Title of each class to

be so registered

 

Name of each exchange on which

each class is to be registered

Common Stock, par value $0.01 per share   New York Stock Exchange

Securities to be registered pursuant to Section 12(g) of the Act:

None

 

 

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

 

 

 


NEW RESIDENTIAL INVESTMENT CORP.

INFORMATION REQUIRED IN REGISTRATION STATEMENT

CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10

Certain information required to be included in this Form 10 is incorporated by reference to specifically-identified portions of the body of the information statement filed herewith as Exhibit 99.1. None of the information contained in the information statement shall be incorporated by reference herein or deemed to be a part hereof unless such information is specifically incorporated by reference.

 

Item 1. Business.

The information required by this item is contained under the sections of the information statement entitled “Summary,” “Risk Factors,” “Cautionary Statement Regarding Forward-Looking Statements,” “Our Separation From Newcastle,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Certain Relationships and Transactions with Related Persons, Affiliates and Affiliated Entities” and “Where You Can Find More Information.” Those sections are incorporated herein by reference.

 

Item 1A.     Risk Factors.

The information required by this item is contained under the sections of the information statement entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.” Those section are incorporated herein by reference.

 

Item 2. Financial Information.

The information required by this item is contained under the sections of the information statement entitled “Summary—Summary Historical and Pro Forma Consolidated Financial Information,” “Selected Historical Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Those sections are incorporated herein by reference.

 

Item 3. Properties.

Not applicable.

 

Item 4. Security Ownership of Certain Beneficial Owners and Management.

The information required by this item is contained under the section of the information statement entitled “Principal Stockholders.” That section is incorporated herein by reference.

 

Item 5. Directors and Executive Officers.

The information required by this item is contained under the sections of the information statement entitled “Management” and “Our Manager and Management Agreement.” Those sections are incorporated herein by reference.

 

Item 6. Executive Compensation.

The information required by this item is contained under the sections of the information statement entitled “Management—Executive Officer Compensation,” “Management—Nonqualified Stock Option and Incentive Award Plan” and “Our Manager and Management Agreement.” Those sections are incorporated herein by reference.

 

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Item 7. Certain Relationships and Related Transactions.

The information required by this item is contained under the sections of the information statement entitled “Management,” “Our Manager and Management Agreement” and “Certain Relationships and Transactions with Related Persons, Affiliates and Affiliated Entities.” Those sections are incorporated herein by reference.

 

Item 8. Legal Proceedings.

The information required by this item is contained under the section of the information statement entitled “Business—Legal Proceedings.” That section is incorporated herein by reference.

 

Item 9. Market Price of, and Dividends on, the Registrant’s Common Equity and Related Stockholder Matters.

The information required by this item is contained under the section of the information statement entitled “Summary,” “Our Separation From Newcastle,” “Distribution Policy” and “Description of Our Capital Stock.” Those sections are incorporated herein by reference.

 

Item 10. Recent Sales of Unregistered Securities.

Not applicable.

 

Item 11. Description of Registrant’s Securities to be Registered.

The information required by this item is contained under the section of the information statement entitled “Our Separation From Newcastle” and “Description of Our Capital Stock.” Those sections are incorporated herein by reference.

 

Item 12. Indemnification of Directors and Officers.

The information required by this item is contained under the section of the information statement entitled “Description of Our Capital Stock—Limitations on Liability and Indemnification of Directors and Officers.” That section is incorporated herein by reference.

 

Item 13. Financial Statements and Supplementary Data.

The information required by this item is contained under the section of the information statement entitled “Index to Financial Statements of New Residential Investment Corp. and Subsidiaries” (and the financial statements and related notes referenced therein). That section is incorporated herein by reference.

 

Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

 

Item 15. Financial Statements and Exhibits.

(a) Financial Statements

The information required by this item is contained under the section of the information statement entitled “Index to Financial Statements of New Residential Investment Corp. and Subsidiaries” (and the financial statements referenced therein). That section is incorporated herein by reference.

 

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(b) Exhibits

See below.

The following documents are filed as exhibits hereto:

 

Exhibit
Number

 

Exhibit Description

2.1*   Separation and Distribution Agreement dated April 26, 2013, between New Residential Investment Corp. and Newcastle Investment Corp.
2.2   Purchase Agreement, among the Sellers listed therein, HSBC Finance Corporation and SpringCastle Acquisition LLC, dated March 5, 2013 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed March 11, 2013)
3.1**   Form of Amended and Restated Certificate of Incorporation of New Residential Investment Corp.
3.2**   Form of Amended and Restated Bylaws of New Residential Investment Corp.
10.1**   Form of Management Agreement between New Residential Investment Corp. and FIG LLC
10.2**   Form of Indemnification Agreement by and between New Residential Investment Corp. and its directors and officers
10.3**   Form of New Residential Investment Corp. Nonqualified Stock Option and Incentive Award Plan
10.4**   Investment Guidelines
10.5   Excess Servicing Spread Sale and Assignment Agreement, by and between Nationstar Mortgage LLC and NIC MSR I LLC, dated December 8, 2011 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed March 15, 2012)
10.6   Excess Spread Refinanced Loan Replacement Agreement, by and between Nationstar Mortgage LLC and NIC MSR I LLC, dated December 8, 2011 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed March 15, 2012)
10.7  

Future Spread Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR IV LLC, dated May 13, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed May 15, 2012)

10.8  

Future Spread Agreement for FNMA Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR V LLC, dated May 13, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed May 15, 2012)

10.9   Future Spread Agreement for Non-Agency Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR VI LLC, dated May 13, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed May 15, 2012)
10.10   Future Spread Agreement for GNMA Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR VII, LLC, dated May 13, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed May 15, 2012)
10.11   Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR III LLC, dated May 31, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed June 6, 2012)
10.12   Future Spread Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR III LLC, dated May 31, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed June 6, 2012)
10.13   Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed June 7, 2012)

 

4


Exhibit
Number

  

Exhibit Description

10.14    Amended and Restated Future Spread Agreement for FNMA Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed June 7, 2012)
10.15    Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed June 7, 2012)
10.16    Amended and Restated Future Spread Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed June 7, 2012)
10.17    Amended and Restated Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed June 7, 2012)
10.18    Amended and Restated Future Spread Agreement for Non-Agency Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed June 7, 2012)
10.19    Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR V LLC, dated June 28, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed July 5, 2012)
10.20    Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR IV LLC, dated June 28, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed July 5, 2012)
10.21    Amended and Restated Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR VI LLC, dated June 28, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed July 5, 2012)
10.22    Amended and Restated Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR VII LLC, dated June 28, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed July 5, 2012)
10.23    Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, between Nationstar Mortgage LLC and MSR VIII LLC, dated December 31, 2012 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed February 28, 2013)
10.24    Future Spread Agreement for GNMA Mortgage Loans, between Nationstar Mortgage LLC and MSR VIII LLC, dated December 31, 2012 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed February 28, 2013)
10.25    Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage LLC and MSR IX LLC, dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed February 28, 2013)
10.26    Future Spread Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage LLC and MSR IX LLC, dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed February 28, 2013)

 

5


Exhibit
Number

 

Exhibit Description

10.27   Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, between Nationstar Mortgage LLC and MSR X LLC, dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed February 28, 2013)
10.28   Future Spread Agreement for FNMA Mortgage Loans, between Nationstar Mortgage LLC and MSR X LLC, dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed February 28, 2013)
10.29   Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, between Nationstar Mortgage LLC and MSR XI LLC, dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed February 28, 2013)
10.30   Future Spread Agreement for GNMA Mortgage Loans, between Nationstar Mortgage LLC and MSR XI LLC, dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed February 28, 2013)
10.31   Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, between Nationstar Mortgage LLC and MSR XII LLC, dated January 6, 2013, (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed February 28, 2013)
10.32   Future Spread Agreement for Non-Agency Mortgage Loans, between Nationstar Mortgage LLC and MSR XII LLC, dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed February 28, 2013)
10.33   Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, between Nationstar Mortgage LLC and MSR XIII LLC, dated January 6, 2013, (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed February 28, 2013)
10.34   Future Spread Agreement for Non-Agency Mortgage Loans, between Nationstar Mortgage LLC and MSR XIII LLC, dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed February 28, 2013)
10.35**   Interim Servicing Agreement, among the Interim Servicers listed therein, HSBC Finance Corporation, as Interim Servicer Representative, HSBC Bank USA, National Association, SpringCastle America, LLC, SpringCastle Credit, LLC, SpringCastle Finance, LLC, Wilmington Trust, National Association, as Loan Trustee, and SpringCastle Finance LLC, as Owner Representative
21.1**   List of Subsidiaries of New Residential Investment Corp.
99.1*   Preliminary Information Statement of New Residential Investment Corp., subject to completion, dated April 29, 2013

 

* Filed herewith.
** Previously filed.

 

6


SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

 

NEW RESIDENTIAL INVESTMENT CORP.

 

By:  

/s/    Kenneth M. Riis

Name:   Kenneth M. Riis
Title:   Chief Executive Officer and President

Date: April 29, 2013

 

7

EXHIBIT 2.1

SEPARATION AND DISTRIBUTION AGREEMENT

by and between

NEWCASTLE INVESTMENT CORP.

and

NEW RESIDENTIAL INVESTMENT CORP.

dated as of

April 26, 2013


TABLE OF CONTENTS

ARTICLE I

DEFINITIONS

 

Section 1.1

  Definitions      1   

Section 1.2

  Interpretation      10   
ARTICLE II   
THE SEPARATION   

Section 2.1

  Transfers of Assets and Assumptions of Liabilities      11   

Section 2.2

  Termination of Intercompany Agreements      13   

Section 2.3

  Settlement of Intercompany Account      14   
ARTICLE III   
CERTAIN ACTIONS PRIOR TO THE DISTRIBUTION   

Section 3.1

  SEC and Other Securities Filings      14   

Section 3.2

  NYSE Listing Application      15   

Section 3.3

  Distribution Agent Agreement      15   

Section 3.4

  Management Agreements      15   

Section 3.5

  Governmental Approvals and Consents      15   

Section 3.6

  Ancillary Agreements      15   

Section 3.7

  Governance Matters      15   

Section 3.8

  Repurchase Agreements      16   

Section 3.9

  Vendor Services Agreements      16   
ARTICLE IV   
THE DISTRIBUTION   

Section 4.1

  Dividend to Newcastle      16   

Section 4.2

  Delivery to Distribution Agent      16   

Section 4.3

  Mechanics of the Distribution      16   

Section 4.4

  Stock Options      17   
ARTICLE V   
CONDITIONS   

Section 5.1

  Conditions Precedent to Consummation of the Distribution      18   

Section 5.2

  Right Not to Close      20   

 

i


ARTICLE VI   
NO REPRESENTATIONS OR WARRANTIES   

Section 6.1

  Disclaimer of Representations and Warranties      20   

Section 6.2

  As Is, Where Is      20   
ARTICLE VII   
CERTAIN COVENANTS AND ADDITIONAL AGREEMENTS   

Section 7.1

  Insurance Matters      21   

Section 7.2

  Tax Matters      21   

Section 7.3

  No Restrictions on Post-Closing Competitive Activities; Corporate Opportunities      21   
ARTICLE VIII   
ACCESS TO INFORMATION; CONFIDENTIALITY; PRIVILEGE   

Section 8.1

  Agreement for Exchange of Information      23   

Section 8.2

  Ownership of Information      24   

Section 8.3

  Compensation for Providing Information      24   

Section 8.4

  Retention of Records      25   

Section 8.5

  Limitation of Liability      25   

Section 8.6

  Production of Witnesses      25   

Section 8.7

  Confidentiality      25   

Section 8.8

  Privileged Matters      26   

Section 8.9

  Financial Information Certifications      28   
ARTICLE IX   
MUTUAL RELEASES; INDEMNIFICATION   

Section 9.1

  Release of Pre-Distribution Claims      28   

Section 9.2

  Indemnification by New Residential      30   

Section 9.3

  Indemnification by Newcastle      31   

Section 9.4

  Procedures for Indemnification      31   

Section 9.5

  Indemnification Obligations Net of Insurance Proceeds      34   

Section 9.6

  Indemnification Obligations Net of Taxes      35   

Section 9.7

  Contribution      35   

Section 9.8

  Remedies Cumulative      35   

Section 9.9

  Survival of Indemnities      36   

Section 9.10

  Limitation of Liability      36   

 

ii


ARTICLE X   
DISPUTE RESOLUTION   

Section 10.1

  Appointed Representative      36   

Section 10.2

  Negotiation and Dispute Resolution      36   

Section 10.3

  Arbitration      36   
ARTICLE XI   
TERMINATION   

Section 11.1

  Termination      37   

Section 11.2

  Effect of Termination      37   
ARTICLE XII   
MISCELLANEOUS   

Section 12.1

  Further Assurances      38   

Section 12.2

  Payment of Expenses      38   

Section 12.3

  Amendments and Waivers      38   

Section 12.4

  Entire Agreement      38   

Section 12.5

  Survival of Agreements      39   

Section 12.6

  Third Party Beneficiaries      39   

Section 12.7

  Notices      39   

Section 12.8

  Counterparts; Electronic Delivery      39   

Section 12.9

  Severability      39   

Section 12.10

  Assignability; Binding Effect      40   

Section 12.11

  Governing Law      40   

Section 12.12

  Construction      40   

Section 12.13

  Performance      40   

Section 12.14

  Title and Headings      41   

Section 12.15

  Exhibits and Schedules      41   

Exhibit A – New Residential Subsidiaries

  

 

iii


SEPARATION AND DISTRIBUTION AGREEMENT

This SEPARATION AND DISTRIBUTION AGREEMENT (this “ Agreement ”) is entered into as of April 26, 2013, by and between Newcastle Investment Corp., a Maryland corporation (“ Newcastle ”), and New Residential Investment Corp., a Delaware corporation and a direct, wholly owned subsidiary of Newcastle (“ New Residential ”). Newcastle and New Residential are sometimes referred to herein individually as a “ Party ,” and collectively as the “ Parties .” Capitalized terms used but not otherwise defined herein shall have the respective meanings set forth in Section 1.1.

RECITALS

WHEREAS, Newcastle, through New Residential, has invested in certain residential mortgage related investments and other investments, such as excess mortgage servicing rights, residential mortgage backed securities, residential mortgage loans and consumer loans;

WHEREAS, the board of directors of Newcastle has determined that it is advisable and in the best interests of Newcastle to establish New Residential as an independent publicly traded company; and

WHEREAS, pursuant to the terms of this Agreement, the Parties intend to effect the separation of Newcastle and New Residential by distributing to the holders of Newcastle’s outstanding shares of common stock, par value $0.01 per share (“ Newcastle Common Stock ”), on a pro rata basis, all of the outstanding shares of common stock, par value $0.01 per share, of New Residential (“ New Residential Common Stock ”), owned by Newcastle as of the Distribution Date (which shall represent 100% of the issued and outstanding shares of New Residential Common Stock).

NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth below and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the Parties hereby agree as follows:

ARTICLE I

DEFINITIONS

Section 1.1 Definitions . As used in this Agreement, the following terms shall have the meanings set forth in this Section 1.1:

Action ” means any demand, claim, action, suit, countersuit, arbitration, litigation, inquiry, proceeding or investigation by or before any Governmental Authority or any arbitration or mediation tribunal or authority.

Adjusted Newcastle Stock Options ” has the meaning set forth in Section 4.4(a).


Affiliate ” means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the specified Person. For this purpose “control” of a Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through ownership of voting securities, by contract or otherwise.

Agreement ” has the meaning set forth in the preamble to this Agreement and includes all Exhibits and Schedules attached hereto or delivered pursuant hereto.

Agreement Dispute ” has the meaning set forth in Section 10.2(a).

Ancillary Agreements ” has the meaning set forth in Section 3.6.

Appointed Representative ” has the meaning set forth in Section 10.1.

Appropriate Member of the Newcastle Group ” has the meaning set forth in Section 9.3.

Appropriate Member of the New Residential Group ” has the meaning set forth in Section 9.2.

Asset ” means all rights, properties or other assets, whether real, personal or mixed, tangible or intangible, of any kind, nature and description, whether accrued, contingent or otherwise, and wheresoever situated and whether or not carried or reflected, or required to be carried or reflected, on the books of any Person.

Business Day ” means a day other than a Saturday, a Sunday or a day on which banking institutions located in the State of New York are authorized or obligated by applicable Law or executive order to close.

Code ” means the Internal Revenue Code of 1986, as amended.

Confidential Information ” means any and all information:

(a) that is required to be maintained in confidence by any Law or under any Contract;

(b) concerning market studies, business plans, computer hardware, computer software (including all versions, source and object codes and all related files and data), software and database technologies, systems, structures and architectures, and other similar technical or business information;

(c) concerning any business and its affairs, which includes earnings reports and forecasts, macro-economic reports and forecasts, business and strategic plans, general market evaluations and surveys, litigation presentations and risk assessments, financing and credit-related information, financial projections, tax returns and accountants’ materials, historical, business plans, strategic plans, Contracts, however documented, and other similar financial or business information;

 

2


(d) constituting communications by or to attorneys (including attorney-client privileged communications), memos and other materials prepared by attorneys or under their direction (including attorney work product), communications and materials otherwise related to or made or prepared in connection with or in preparation for any legal proceeding; or

(e) constituting notes, analyses, compilations, studies, summaries and other material that contain or are based, in whole or in part, upon any information included in the foregoing clauses (a) through (d).

Consent ” means any consent, waiver or approval from, or notification requirement to, any Person other than a member of either Group.

Contract ” means any written, oral, implied or other contract, agreement, covenant, lease, license, guaranty, indemnity, representation, warranty, assignment, sales order, purchase order, power of attorney, instrument or other commitment, assurance, undertaking or arrangement that is binding on any Person or entity or any part of its property under applicable Law.

CPR ” means The International Institute for Conflict Prevention & Resolution.

CPR Rules ” has the meaning set forth in Section 10.3(a).

Distribution ” means the transactions contemplated by Section 4.3.

Distribution Agent ” means American Stock Transfer & Trust Company, LLC.

Distribution Date ” means the date on which the Distribution occurs, such date to be determined by, or under the authority of, the board of directors of Newcastle, in its sole and absolute discretion.

Distribution Ratio ” has the meaning set forth in Section 4.3(a).

Effective Time ” means the time at which the Distribution is effective on the Distribution Date.

Escrow Account ” has the meaning set forth in Section 9.4(h).

Exchange Act ” means the Securities Exchange Act of 1934, as amended.

Expense Amount ” has the meaning set forth in Section 9.4(h).

Expense Amount Accountant’s Letter ” has the meaning set forth in Section 9.4(h).

Expense Amount Tax Opinion ” has the meaning set forth in Section 9.4(h).

 

3


Governmental Approval ” means any notice, report or other filing to be given to or made with, or any release, consent, substitution, approval, amendment, registration, permit or authorization from, any Governmental Authority.

Governmental Authority ” means any U.S. federal, state, local or non-U.S. court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority.

Group ” means either the Newcastle Group or the New Residential Group, as the context requires.

Guarantee ” means any guarantee (including guarantees of performance or payment under Contracts, commitments, Liabilities and permits), letter of credit or other credit or credit support arrangement or similar assurance, including surety bonds, bid bonds, advance payment bonds, performance bonds, payment bonds, retention and/or warranty bonds or other bonds or similar instruments.

Indebtedness ” of any specified Person means (a) all obligations of such specified Person for borrowed money or arising out of any extension of credit to or for the account of such specified Person (including reimbursement or payment obligations with respect to surety bonds, letters of credit, bankers’ acceptances and similar instruments), (b) all obligations of such specified Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such specified Person upon which interest charges are customarily paid, (d) all obligations of such specified Person under conditional sale or other title retention agreements relating to Assets purchased by such specified Person, (e) all obligations of such specified Person issued or assumed as the deferred purchase price of property or services, (f) all Liabilities secured by (or for which any Person to which any such Liability is owed has an existing right, contingent or otherwise, to be secured by) any mortgage, lien, pledge or other encumbrance on property owned or acquired by such specified Person (or upon any revenues, income or profits of such specified Person therefrom), whether or not the obligations secured thereby have been assumed by the specified Person or otherwise become Liabilities of the specified Person, (g) all capital lease obligations of such specified Person, (h) all securities or other similar instruments convertible or exchangeable into any of the foregoing, and (i) any Liability of others of a type described in any of the preceding clauses (a) through (h) in respect of which the specified Person has incurred, assumed or acquired a Liability by means of a Guarantee.

Indemnifiable Loss ” has the meaning set forth in Section 9.5.

Indemnifying Party ” has the meaning set forth in Section 9.4(a).

Indemnitee ” means any Newcastle Indemnitee or any New Residential Indemnitee.

Indemnity Loan ” has the meaning set forth in Section 9.4(h).

Indemnity Loan Agreement ” has the meaning set forth in Section 9.4(h).

Indemnity Payment ” has the meaning set forth in Section 9.5.

 

4


Information Statement ” means the information statement, attached as an exhibit to the Registration Statement, and any related documentation to be provided to holders of Newcastle Common Stock in connection with the Distribution, including any amendments or supplements thereto.

Insurance Policy ” means any insurance policies and insurance Contracts, including, without limitation, general liability, property and casualty, workers’ compensation, automobile, directors & officers liability, errors and omissions, employee dishonesty and fiduciary liability policies, whether, in each case, in the nature of primary, excess, umbrella or self-insurance overage, together with all rights, benefits and privileges thereunder.

Insurance Proceeds ” means those monies (in each case, net of any out-of-pocket costs or expenses incurred in the collection thereof):

(a) received by an insured Person from any insurer, insurance underwriter, mutual protection and indemnity club or other risk collective, excluding any proceeds received directly or indirectly (such as through reinsurance arrangements) from any captive insurance Subsidiary of the insured Person; or

(b) paid on behalf of an insured Person by any insurer, insurance underwriter, mutual protection and indemnity club or other risk collective, excluding any such payment made directly or indirectly (such as through reinsurance arrangements) from any captive insurance Subsidiary of the insured Person, on behalf of the insured.

Intercompany Account ” means any receivable, payable or loan between any member of the Newcastle Group, on the one hand, and any member of the New Residential Group, on the other hand, that exists prior to the Effective Time and is reflected in the records of the relevant members of the Newcastle Group and the New Residential Group, except for any such receivable, payable or loan that arises pursuant to this Agreement or any Ancillary Agreement.

Intercompany Agreement ” means any Contract, whether or not in writing, between or among any member of the Newcastle Group, on the one hand, and any member of the New Residential Group, on the other hand, entered into prior to the Distribution Date, but excluding any Contract to which a Person other than any member of the Newcastle Group or the New Residential Group is also a party.

IRS ” means the United States Internal Revenue Service.

Investment Advisors Act ” means the Investment Advisors Act of 1940.

Investment Company Act ” means the Investment Company Act of 1940.

Junior Subordinated Notes ” means Newcastle’s junior subordinated notes due 2035, issued pursuant to the Junior Subordinated Indenture, dated April 30, 2009, between Newcastle and The Bank of New York Mellon Trust Company, National Association.

 

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Law ” means any law, statute, ordinance, code, rule, regulation, order, writ, proclamation, judgment, injunction or decree of any Governmental Authority.

Liabilities ” means any and all Indebtedness, liabilities and obligations, whether accrued, fixed or contingent, mature or inchoate, known or unknown, reflected on a balance sheet or otherwise, including those arising under any Law, Action or any judgment of any Governmental Authority or any award of any arbitrator of any kind, and those arising under any Contract.

Losses ” means any and all damages, losses, deficiencies, Liabilities, obligations, penalties, judgments, settlements, claims, payments, interest costs, Taxes, fines and expenses (including the costs and expenses of any and all Actions and demands, assessments, judgments, settlements and compromises relating thereto and attorneys’, accountants’, consultants’ and other professionals’ fees and expenses incurred in the investigation or defense thereof or the enforcement of rights hereunder).

Manager ” means FIG LLC, a Delaware limited liability company.

Newcastle ” has the meaning set forth in the preamble to this Agreement.

Newcastle Assets ” means all Assets owned, directly or indirectly, by Newcastle, other than any New Residential Assets.

Newcastle Common Stock ” has the meaning set forth in the recitals to this Agreement.

Newcastle D&O Policy ” has the meaning set forth in Section 7.1.

Newcastle Group ” means Newcastle and the Subsidiaries of Newcastle other than New Residential and the New Residential Subsidiaries.

Newcastle Indemnitees ” means each member of the Newcastle Group and its Affiliates (other than New Residential and the New Residential Subsidiaries) and each of their respective current or former stockholders, directors, officers, agents and employees (in each case, in such Person’s respective capacity as such) and their respective heirs, executors, administrators, successors and assigns.

Newcastle Liabilities ” means the Junior Subordinated Notes and any other Liabilities of Newcastle or any of its Subsidiaries, other than any New Residential Liabilities.

Newcastle Management Agreement ” means the Amended and Restated Management and Advisory Agreement, dated as of April 25, 2013, by and between Newcastle and FIG LLC.

Newcastle Option Plan ” has the meaning set forth in Section 4.4(a).

Newcastle Stock Options ” has the meaning set forth in Section 4.4(a).

 

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New Residential ” has the meaning set forth in the preamble to this Agreement.

New Residential Assets ” means all of the equity of the New Residential Subsidiaries and all of the other assets held by New Residential set forth on Section 1.1 of the Disclosure Schedule. For the avoidance of doubt, the New Residential Assets shall include, but not be limited to, all Assets recorded on the consolidated balance sheet of New Residential as of the date of this Agreement.

New Residential Common Stock ” has the meaning set forth in the recitals to this Agreement.

New Residential Group ” means New Residential and the New Residential Subsidiaries.

New Residential Indemnitees ” means each member of the New Residential Group and their Affiliates and each of their respective current or former stockholders, directors, officers, agents and employees (in each case, in such Person’s respective capacity as such) and their respective heirs, executors, administrators, successors and assigns.

New Residential Liabilities ” means, except as otherwise expressly provided in this Agreement or one or more Ancillary Agreements, if any:

(a) all Liabilities relating to or arising out of the New Residential Assets whether arising prior to, at the time of, or after the Effective Time;

(b) all Liabilities arising out of claims made by New Residential’s directors, officers and Affiliates after the Effective Time against Newcastle or New Residential, to the extent relating to the New Residential Assets; and

(c) any potential liabilities with respect to matters identified on, and subject to the limitations set forth on, Section 1.2 of the Disclosure Schedule.

New Residential Management Agreement ” has the meaning set forth in Section 3.4(a).

New Residential Ratio ” means the amount determined by dividing (x) the number one (1) by (y) the Distribution Ratio.

New Residential Stock Options ” has the meaning set forth in Section 4.4(a).

New Residential Subsidiaries ” means the Subsidiaries of New Residential as of the date of this Agreement, including, but not limited to, the Subsidiaries of New Residential listed on Exhibit A hereto, and any Subsidiary of New Residential formed after the date of this Agreement and prior to the Distribution Date.

Nonqualifying Income ” means any amount that is treated as gross income for purposes of Section 856 of the Code and which is not Qualifying Income.

 

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NYSE ” means the New York Stock Exchange, Inc.

NYSE Listing Application ” has the meaning set forth in Section 3.2(a).

Party ” or “ Parties ” has the meaning set forth in the preamble to this Agreement.

Person ” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, a union, an unincorporated organization or a governmental entity or any department, agency or political subdivision thereof.

Post-Distribution Newcastle Common Stock Price ” means the five (5) day average closing price for Newcastle Common Stock subsequent to the Distribution Date.

Post-Distribution New Residential Common Stock Price ” means the five (5) day average closing price for New Residential Common Stock subsequent to the Distribution Date.

Post-Distribution Stock Options ” has the meaning set forth in Section 4.4(a).

Pre-Distribution Option Price ” has the meaning set forth in Section 4.4(a).

Protected REIT ” means any entity that (i) has elected to be taxed as a REIT, and (ii) either (A) is an Indemnitee or (B) owns a direct or indirect equity interest in any Indemnitee and is treated for purposes of Section 856 of the Code as owning all or a portion of the assets of such Indemnitee or as receiving all or a portion of the Indemnitee’s income.

Qualifying Income ” means gross income that is described in Section 856(c)(3) of the Code.

Record Date ” means the close of business on the date, to be determined by the board of directors of Newcastle, as the record date for determining holders of Newcastle Common Stock entitled to receive shares of New Residential Common Stock in the Distribution.

Record Holders ” has the meaning set forth in Section 4.2.

Registration Statement ” means the registration statement on Form 10 of New Residential with respect to the registration under the Exchange Act of the New Residential Common Stock to be distributed in the Distribution, including any amendments or supplements thereto.

REIT ” means a real estate investment trust, as defined under the Code.

REIT Qualification Ruling ” has the meaning set forth in Section 9.4(h).

REIT Requirements ” means the requirements imposed on REITs pursuant to Sections 856 through and including 860 of the Code.

Release Document ” has the meaning set forth in Section 9.4(h).

 

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Repurchase Agreements ” means the agreements listed on Section 3.8 of the Disclosure Schedule.

SEC ” means the United States Securities and Exchange Commission.

Security Interests ” means any mortgage, security interest, pledge, lien, charge, claim, option, indenture, right to acquire, right of first refusal, deed of trust, licenses to third parties, leases to third parties, security agreements, voting or other restriction, covenant, condition, restriction, encroachment, restriction on transfer, restrictions or limitations on use of real or personal property or any other encumbrance of any nature whatsoever, imperfections in or failure of title or defect of title.

Separation ” means the transactions contemplated by Article II.

Subsidiary ” means, with respect to any specified Person, any corporation, partnership, limited liability company, joint venture or other organization, whether incorporated or unincorporated, of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such specified Person or by any one or more of its subsidiaries, or by such specified Person and one or more of its subsidiaries.

Taxes ” means all taxes, charges, fees, duties, levies, imposts or other assessments imposed by any federal, state, local or foreign Taxing Authority, including, but not limited to, income, gross receipts, excise, property, sales, use, license, capital stock, transfer, franchise, payroll, withholding, social security, value added and other taxes, and any interest, penalties or additions attributable thereto.

Taxing Authority ” means any Governmental Authority or any subdivision, agency, commission or authority thereof or any quasi-governmental or private body having jurisdiction over the assessment, determination, collection or imposition of any Tax (including the IRS).

Third-Party Claim ” has the meaning set forth in Section 9.4(b).

Transactions ” means the Separation, the Distribution and any other transactions contemplated by this Agreement or any Ancillary Agreement.

Vendor Services Agreements ” means the agreements listed on Section 3.9 of the Disclosure Schedule.

 

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Section 1.2 Interpretation . In this Agreement and the Ancillary Agreements, if any, unless the context clearly indicates otherwise:

(a) words used in the singular include the plural and words used in the plural include the singular;

(b) the words “include,” “includes” and “including” shall be deemed to be followed by the words “without limitation”;

(c) the word “or” shall have the inclusive meaning represented by the phrase “and/or”;

(d) relative to the determination of any period of time, “from” means “from and including,” “to” means “to but excluding” and “through” means “through and including”;

(e) accounting terms used herein shall have the meanings historically ascribed to them by Newcastle and its Subsidiaries in its and their internal accounting and financial policies and procedures in effect immediately prior to the date of this Agreement;

(f) reference to any agreement, instrument or other document means such agreement, instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof and by this Agreement;

(g) reference to any Law means such Law (including any and all rules and regulations promulgated thereunder) as amended, modified, codified or reenacted, in whole or in part, and in effect at the time of determining compliance or applicability;

(h) references to any Person include such Person’s successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement; a reference to such Person’s “Affiliates” shall be deemed to mean such Person’s Affiliates following the Distribution and any reference to a third party shall be deemed to mean a Person who is not a Party or an Affiliate of a Party;

(i) if there is any conflict between the provisions of the main body of this Agreement or an Ancillary Agreement and the Exhibits and Schedules hereto or thereto, the provisions of the main body of this Agreement or the Ancillary Agreement, as applicable, shall control unless explicitly stated otherwise in such Schedule;

(j) if there is any conflict between the provisions of this Agreement and any Ancillary Agreement, the provisions of such Ancillary Agreement shall control (but only with respect to the subject matter thereof) unless explicitly stated otherwise therein; and

(k) any portion of this Agreement or any Ancillary Agreement obligating a Party to take any action or refrain from taking any action, as the case may be, shall mean that such Party shall also be obligated to cause its relevant Subsidiaries to take such action or refrain from taking such action, as the case may be.

 

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ARTICLE II

THE SEPARATION

Section 2.1 Transfers of Assets and Assumptions of Liabilities.

(a) Transfer of Assets and Assumption of Liabilities Prior to Effective Time . Subject to Section 2.1(b), Newcastle and New Residential agree to take all actions necessary so that, immediately prior to the Effective Time, (i) the New Residential Group will own, to the extent it does not already own, all of the New Residential Assets and none of the Newcastle Assets, and (ii) the New Residential Group will assume, to the extent it is not already liable for, all New Residential Liabilities.

(b) Deferred Transfers and Assumptions .

(i) Nothing in this Agreement or in any Ancillary Agreement will be deemed to require the transfer of any Assets or the assumption of any Liabilities that by their terms or by operation of Law cannot be transferred or assumed.

(ii) To the extent that any transfer of Assets or assumption of Liabilities contemplated by this Agreement or any Ancillary Agreement is not consummated prior to the Effective Time as a result of an absence or non-satisfaction of any required Consent, Governmental Approval and/or other condition (such Assets or Liabilities, a “ Deferred Asset ” or a “ Deferred Liability ,” as applicable, and, collectively, a “ Deferred Asset or Liability ”), the Parties will use commercially reasonable efforts to effect such transfers or assumptions as promptly following the Effective Time as practicable. If and when the Consents, Governmental Approvals and/or other conditions, the absence or non-satisfaction of which gave rise to the Deferred Asset or Deferred Liability, are obtained or satisfied, the transfer or assumption of the Deferred Asset or Deferred Liability will be effected in accordance with and subject to the terms of this Agreement or the applicable Ancillary Agreement, if any.

(iii) From and after the Effective Time until such time as the Deferred Asset or Deferred Liability is transferred or assumed, as applicable, (A) the Party retaining such Deferred Asset will thereafter hold such Deferred Asset for the use and benefit of the Party entitled thereto (at the expense of the Party entitled thereto) and (B) the Party intended to assume such Deferred Liability will pay or reimburse the Party retaining such Deferred Liability for all amounts paid or incurred in connection with the retention of such Deferred Liability; it being agreed that the Party retaining such Deferred Asset or Deferred Liability will not be obligated, in connection with the foregoing clause (A) and clause (B), to expend any money unless the necessary funds are advanced or agreed in writing to be reimbursed by the Party entitled to such Deferred Asset or intended to assume such Deferred Liability. The Party retaining the Deferred Asset or Deferred Liability will use its commercially reasonable efforts to notify

 

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the Party entitled to or intended to assume such Deferred Asset or Deferred Liability of the need for such expenditure. In addition, the Party retaining such Deferred Asset or Deferred Liability will, insofar as reasonably practicable and to the extent permitted by applicable Law, (A) treat such Deferred Asset or Deferred Liability in the ordinary course of business consistent with past practice, (B) promptly take such other actions as may be requested by the Party entitled to such Deferred Asset or by the Party intended to assume such Deferred Liability in order to place such Party in the same position as if the Deferred Asset or Deferred Liability had been transferred or assumed, as applicable, as contemplated hereby, and so that all the benefits and burdens relating to such Deferred Asset or Deferred Liability, including possession, use, risk of loss, potential for gain, and control over such Deferred Asset or Deferred Liability, are to inure from and after the Effective Time to such Party entitled to such Deferred Asset or intended to assume such Deferred Liability and (C) hold itself out to third parties as agent or nominee on behalf of the Party entitled to such Deferred Asset or intended to assume such Deferred Liability.

(iv) In furtherance of the foregoing, the Parties agree that, as of the Effective Time, each Party will be deemed to have acquired beneficial ownership of all of the Assets, together with all rights and privileges incident thereto, and will be deemed to have assumed all of the Liabilities, and all duties, obligations and responsibilities incident thereto, that such Party is entitled to acquire or intended to assume pursuant to the terms of this Agreement or the applicable Ancillary Agreement, if any.

(v) The Parties agree to treat, for all tax purposes, any Asset or Liability that is not transferred or assumed prior to the Effective Time and which is subject to the provisions of this Section 2.1(b), as (A) owned by the Party to which such Asset was intended to be transferred or by the Party which was intended to assume such Liability, as the case may be, from and after the Effective Time, (B) having not been owned by the Party retaining such Asset or Liability, as the case may be, at any time from and after the Effective Time, and (C) having been held by the Party retaining such Asset or Liability, as the case may be, only as agent or nominee on behalf of the other Party from and after the Effective Time until the date such Asset or Liability, as the case may be, is transferred to or assumed by such other Party. The Parties will not take any position inconsistent with the foregoing unless otherwise required by applicable Law (in which case, the Parties will provide indemnification for any Taxes attributable to the Asset or Liability during the period beginning on the Distribution Date and ending on the date of the actual transfer).

(c) Misallocated Assets and Liabilities .

(i) In the event that, at any time from and after the Effective Time, either Party discovers that it or another member of its Group is the owner of, receives or otherwise comes to possess or benefit from any Asset (including the receipt of payments made pursuant to Contracts and proceeds from

 

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accounts receivable with respect to such Asset) that should have been allocated to a member of the other Group pursuant to this Agreement or any Ancillary Agreement (except in the case of any deliberate acquisition of Assets from a member of the other Group for value subsequent to the Effective Time), such Party shall promptly transfer, or cause to be transferred, such Asset to such member of the other Group, and such member of the other Group shall accept such Asset for no further consideration other than that set forth in this Agreement and such Ancillary Agreement. Prior to any such transfer, such Asset shall be held in accordance with Section 2.1(b).

(ii) In the event that, at any time from and after the Effective Time, either Party discovers that it or another member of its Group is liable for any Liability that should have been allocated to a member of the other Group pursuant to this Agreement or any Ancillary Agreement (except in the case of any deliberate assumption of Liabilities from a member of the other Group for value subsequent to the Effective Time), such Party shall promptly transfer, or cause to be transferred, such Liability to such member of the other Group and such member of the other Group shall assume such Liability for no further consideration than that set forth in this Agreement and such Ancillary Agreement. Prior to any such assumption, such Liabilities shall be held in accordance with Section 2.1(b) .

(d) Instruments of Transfer and Assumption . The Parties agree that (i) transfers of Assets that may be required by this Agreement or any Ancillary Agreement shall be effected by delivery by the transferor to the transferee of (A) with respect to those Assets that constitute stock or other equity interests, certificates endorsed in blank or evidenced or accompanied by stock powers or other instruments of transfer endorsed in blank, against receipt and (B) with respect to all other Assets, such good and sufficient instruments of contribution, conveyance, assignment and transfer, in form and substance reasonably satisfactory to the Parties, as shall be necessary, in each case, to vest in the designated transferee all of the title and ownership interest of the transferor in and to any such Asset, and (ii) the assumptions of Liabilities required by this Agreement or any Ancillary Agreement shall be effected by delivery by the transferee to the transferor of such good and sufficient instruments of assumption, in form and substance reasonably satisfactory to the Parties, as shall be necessary, in each case, for the assumption by the transferee of such Liabilities.

Section 2.2 Termination of Intercompany Agreements .

(a) Except as set forth in Section 2.2(b), Newcastle, on behalf of itself and each of the other members of the Newcastle Group, and New Residential, on behalf of itself and each of the other members of the New Residential Group, hereby terminate, effective as of the Effective Time, any and all Intercompany Agreements. No such terminated Intercompany Agreement will be of any further force or effect from and after the Effective Time and all Parties shall be released from all Liabilities thereunder other than the Liability to settle any Intercompany Accounts as provided in Section 2.3. Each Party shall take, or cause to be taken, any and all actions as may be reasonably necessary to effect the foregoing.

 

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(b) The provisions of Section 2.2(a) shall not apply to any of the following agreements (which agreements shall continue to be outstanding after the Distribution Date and thereafter shall be deemed to be, for each relevant Party (or the member of such Party’s Group), an obligation to a third party and shall no longer be an Intercompany Agreement):

(i) this Agreement and the Ancillary Agreements (and each other agreement or instrument expressly contemplated by this Agreement or any Ancillary Agreement), if any;

(ii) any confidentiality or non-disclosure agreements among any members of either Group or employees of the Manager; and

(iii) any agreement listed or described on Section 2.2(b) of the Disclosure Schedule, if any.

Section 2.3 Settlement of Intercompany Account . Each Intercompany Account outstanding immediately prior to the Distribution Date (other than those set forth on Section 2.3 of the Disclosure Schedule, if any), will be satisfied and/or settled in full in cash or otherwise cancelled and terminated or extinguished by the relevant members of the Newcastle Group and the New Residential Group prior to the Effective Time, in each case, in the manner agreed to by the Parties. Each Intercompany Account outstanding immediately prior to the Distribution Date set forth on Section 2.3 of the Disclosure Schedule shall continue to be outstanding after the Distribution Date (unless previously satisfied in accordance with its terms) and thereafter shall be deemed to be, for each Party (or the relevant member of such Party’s Group), an obligation to a third party and shall no longer be an Intercompany Account.

ARTICLE III

CERTAIN ACTIONS PRIOR TO THE DISTRIBUTION

Section 3.1 SEC and Other Securities Filings .

(a) Prior to the date of this Agreement, the Parties caused the Registration Statement to be prepared and filed with the SEC.

(b) The Parties shall use their respective commercially reasonable efforts to cause the Registration Statement to become effective as soon as reasonably practicable following the date of this Agreement.

(c) As soon as practicable after the Registration Statement becomes effective, Newcastle shall cause the Information Statement to be mailed to the Record Holders.

(d) The Parties shall cooperate in preparing, filing with the SEC and causing to become effective any other registration statements or amendments or supplements thereto that are necessary or appropriate in order to effect the Transactions, or to reflect the establishment of, or amendments to, any employee benefit plans contemplated hereby.

 

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(e) The Parties shall take all such action as may be necessary or appropriate under state and foreign securities or “blue sky” Laws in connection with the Transactions.

Section 3.2 NYSE Listing Application .

(a) Prior to the date of this Agreement, the Parties caused an application for the listing on the NYSE of New Residential Common Stock to be issued to the Record Holders in the Distribution (the “ NYSE Listing Application ”) to be prepared and filed.

(b) The Parties shall use commercially reasonable efforts to have the NYSE Listing Application approved, subject to official notice of issuance, as soon as reasonably practicable following the date of this Agreement.

(c) Newcastle shall give the NYSE notice of the Record Date in compliance with Rule 10b-17 under the Exchange Act.

Section 3.3 Distribution Agent Agreement . On or prior to the date of this Agreement, Newcastle shall, if requested by the Distribution Agent, enter into a distribution agent agreement with the Distribution Agent.

Section 3.4 Management Agreements .

(a) New Residential Management Agreement . On or prior to the Distribution Date, New Residential shall enter into a management and advisory agreement with the Manager (the “ New Residential Management Agreement ”) substantially in the form filed by New Residential with the SEC as an exhibit to the Registration Statement.

(b) Adjustment to Newcastle Management Fee . The Parties acknowledge and agree that immediately following the Distribution, the amount of Newcastle’s “Gross Equity” as defined in Section 8(a) of the Newcastle Management Agreement shall be reduced by an amount equal to New Residential’s initial “Gross Equity” as defined in Section 8(a) of the New Residential Management Agreement.

Section 3.5 Governmental Approvals and Consents . To the extent that any of the Transactions require any Governmental Approval or Consent which has not been obtained prior to the date of this Agreement, the Parties will use commercially reasonable efforts to obtain, or cause to be obtained, such Governmental Approval or Consent prior to the Effective Time.

Section 3.6 Ancillary Agreements . Prior to the Effective Time, each Party shall execute and deliver, and shall cause each applicable member of its Group to execute and deliver, as applicable, such other written agreements, documents or instruments (collectively, the “ Ancillary Agreements ”) as the Parties may agree are reasonably necessary or desirable and which specifically state that they are Ancillary Agreements within the meaning of this Agreement.

Section 3.7 Governance Matters .

(a) Articles of Incorporation and Bylaws . On or prior to the Distribution Date, the Parties shall take all necessary actions to adopt each of the amended and restated articles of incorporation and the amended and restated bylaws of New Residential, each substantially in the forms filed by New Residential with the SEC as exhibits to the Registration Statement.

 

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(b) Officers and Directors . On or prior to the Distribution Date, the Parties shall take all necessary action so that, as of the Distribution Date, the officers and directors of New Residential will be as set forth in the Information Statement.

Section 3.8 Repurchase Agreements . Prior to the Effective Time, Newcastle shall use commercially reasonable efforts to amend, or to assign to New Residential, or shall terminate, the outstanding Repurchase Agreements listed on Section 3.8 of the Disclosure Schedule.

Section 3.9 Vendor Services Agreements . Prior to the Effective Time, Newcastle shall terminate the Vendor Services Agreements listed on Section 3.9 of the Disclosure Schedule, and Newcastle and New Residential shall use commercially reasonable efforts to cause replacement agreements with substantially similar terms as the Vendor Services Agreements to be entered into by each respective Party, at the cost and expense of such Party. Such replacement agreements may also be entered into by the Manager on behalf of each of Newcastle and/or New Residential, in which case Newcastle and/or New Residential, as applicable, shall reimburse the Manager for the cost and expenses of entering into such agreements on such terms as each party may agree with the Manager.

ARTICLE IV

THE DISTRIBUTION

Section 4.1 Dividend to Newcastle . Prior to the Distribution Date, New Residential shall issue to Newcastle as a stock dividend such number of shares of New Residential Common Stock (or Newcastle and New Residential shall take or cause to be taken such other appropriate actions to ensure that Newcastle has the requisite number of shares of New Residential Common Stock) as may be required to effect the Distribution.

Section 4.2 Delivery to Distribution Agent . Subject to Section 5.1, on or prior to the Distribution Date, Newcastle will authorize the Distribution Agent, for the benefit of holders of record of Newcastle Common Stock at the close of business on the Record Date (the “ Record Holders ”), to effect the book-entry transfer of all outstanding shares of New Residential Common Stock and will instruct the Distribution Agent to effect the Distribution at the Effective Time in the manner set forth in Section 4.3.

Section 4.3 Mechanics of the Distribution .

(a) On the Distribution Date, Newcastle will direct the Distribution Agent to distribute, effective as of the Effective Time, to each Record Holder, one share of New Residential Common Stock for each share of Newcastle Common Stock held by such Record Holder on the Record Date (the “ Distribution Ratio ”). All such shares of New Residential Common Stock to be so distributed shall be distributed as uncertificated shares registered in book-entry form through the direct registration system. No certificates therefor shall be distributed. Following the Distribution, Newcastle shall cause the Distribution Agent to deliver

 

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an account statement to each holder of New Residential Common Stock reflecting such holder’s ownership thereof. All of the shares of New Residential Common Stock distributed in the Distribution will be validly issued, fully paid and non-assessable.

(b) Notwithstanding any other provision of this Agreement, Newcastle, the Distribution Agent, or any Person that is a withholding agent under applicable Law shall be entitled to deduct and withhold from any consideration distributable or payable hereunder the amounts required to be deducted and withheld under the Code, or any provision of any U.S. federal, state, local or foreign Tax Law. Any amounts so withheld shall be paid over to the appropriate Taxing Authority in the manner prescribed by Law. To the extent that amounts are so deducted and withheld, such deducted and withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Persons in respect of which such deduction and withholding was made.

Section 4.4 Stock Options .

(a) Subsequent to the effectiveness of the Registration Statement, but prior to the consummation of the Distribution, and subject to the consummation of the Distribution, each option to purchase Newcastle Common Stock (“ Newcastle Stock Options ”) granted and outstanding under the Newcastle Investment Corp. Nonqualified Stock Option and Incentive Award Plan and the 2012 Newcastle Investment Corp. Nonqualified Stock Option and Incentive Award Plan (collectively, the “ Newcastle Option Plan ”) shall remain granted and outstanding and shall not, and Newcastle shall cause (to the maximum extent permitted under the Newcastle Option Plan) the Newcastle Stock Options not to, terminate, accelerate or otherwise vest as a result of the Distribution.

(b) Subsequent to the effectiveness of the Registration Statement, but prior to the consummation of the Distribution, and subject to the consummation of the Distribution, each holder of Newcastle Stock Options immediately prior to the Distribution will be entitled to the following, determined in a manner in accordance with, and subject to, the Newcastle Option Plan, any award agreement pursuant to which the Newcastle Stock Option was awarded, and, to the extent applicable, FASB ASC Topic 718, Compensation—Stock Compensation, and Section 409A of the Code:

(i) an option to acquire a number of shares of New Residential Common Stock (the “ New Residential Stock Options ”) equal to the product of (1) the Distribution Ratio multiplied by (2) the number of shares of Newcastle Common Stock subject to the Newcastle Stock Option held by such holder immediately prior to the Distribution, rounded down to the nearest whole share, with an exercise price equal to the product of (1) the per share exercise price of the Newcastle Stock Option immediately prior to the Distribution Date (the “ Pre-Distribution Option Price ”) multiplied by (2) a fraction, the numerator of which shall be the Post-Distribution New Residential Common Stock Price and the denominator of which shall be the sum of (x) the Post-Distribution Newcastle Common Stock Price and (y) the quotient determined by dividing the Post-Distribution New Residential Common Stock Price by the New Residential Ratio, rounded up to the nearest cent and

 

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(ii) the adjustment of the exercise price of such holder’s Newcastle Stock Option, to be equal to the product of (1) the Pre-Distribution Option Price multiplied by (2) a fraction, the numerator of which shall be the Post-Distribution Newcastle Common Stock Price and the denominator of which shall be the sum of (x) the Post-Distribution Newcastle Common Stock Price and (y) the quotient determined by dividing the Post-Distribution New Residential Common Stock Price by the New Residential Ratio, rounded up to the nearest cent (the “ Adjusted Newcastle Stock Options ”) (the New Residential Stock Options and the Adjusted Newcastle Stock Options, together, the “ Post-Distribution Stock Options ”).

The terms and conditions applicable to the New Residential Stock Options shall be substantially similar to the terms and conditions otherwise applicable to the corresponding Newcastle Stock Options.

(c) The option exercise price of the New Residential Stock Options and the Adjusted Newcastle Stock Options shall be set in compliance with Treasury Regulation Section 1.409A-1(b)(5)(v)(D), regardless whether applicable, to maintain the intrinsic value of the Newcastle Stock Options as of the Distribution Date, and to maintain the ratio of exercise price to fair market value of the Newcastle Stock Options and the Post-Distribution Stock Options.

(d) Each of Newcastle and New Residential intends that, subsequent to the Distribution, New Residential shall establish, or shall cause to be established, one or more equity incentive or similar plans that will allow or provide for the issuance of restricted stock, new options (or other equity-based awards) to acquire New Residential Common Stock, or other equity awards on such terms, and subject to such conditions (including, without limitation, as to eligibility, vesting and performance criteria), as New Residential may decide in its sole discretion.

ARTICLE V

CONDITIONS

Section 5.1 Conditions Precedent to Consummation of the Distribution . The Distribution shall not be effected unless and until the following conditions have been satisfied or waived by Newcastle, in its sole and absolute discretion, at or before the Effective Time:

(a) the board of directors of Newcastle shall have declared the Distribution, which declaration may be made or withheld at its sole and absolute discretion;

(b) the Registration Statement shall have been declared effective by the SEC, with no stop order in effect with respect thereto, and no proceedings for such purpose shall be pending before, or threatened by, the SEC;

(c) Newcastle shall have mailed the Information Statement (and such other information concerning New Residential, the Distribution and such other matters as the Parties shall determine and as may otherwise be required by Law) to the Record Holders;

 

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(d) all other actions and filings necessary or appropriate under applicable federal or state securities Laws and state blue sky Laws in connection with the Transactions shall have been taken;

(e) Newcastle shall have obtained an opinion from Skadden, Arps, Slate, Meagher & Flom LLP, in form and substance reasonably satisfactory to Newcastle, to the effect that, commencing with Newcastle’s initial taxable year that ended on December 31, 2002, Newcastle has been organized in conformity with the requirements for qualification as a REIT under the Code, and its actual method of operation through the date of this letter has enabled, and its proposed method of operation will enable, it to meet the requirements for qualification and taxation as a REIT;

(f) New Residential shall have obtained an opinion from Skadden, Arps, Slate, Meagher & Flom LLP, in form and substance reasonably satisfactory to New Residential, to the effect that, commencing with New Residential’s initial taxable year ending on December 31, 2013, New Residential has been organized in conformity with the requirements for qualification as a REIT under the Code, and its proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT;

(g) Newcastle shall not be required to register as an investment company under the Investment Company Act;

(h) New Residential shall not be required to register as an investment company under the Investment Company Act;

(i) the NYSE shall have approved the NYSE Listing Application, subject to official notice of issuance;

(j) New Residential and the Manager shall have executed and delivered the New Residential Management Agreement and the Manager shall be registered under the Investment Advisors Act;

(k) the Ancillary Agreements, if any, shall have been executed and delivered by each of the parties thereto and no party to any of the Ancillary Agreements will be in material breach of any such agreement;

(l) any material Governmental Approvals and Consents necessary to consummate the Transactions or any portion thereof shall have been obtained and be in full force and effect;

(m) no preliminary or permanent injunction or other order, decree, or ruling issued by a Governmental Authority, and no statute (as interpreted through orders or rules of any Governmental Authority duly authorized to effectuate the statute), rule, regulation or executive order promulgated or enacted by any Governmental Authority shall be in effect preventing the consummation of, or materially limiting the benefits of, the Transactions; and

(n) no other event or development shall have occurred or failed to occur that, in the judgment of the board of directors of Newcastle, in its sole discretion, prevents the consummation of the Transactions or any portion thereof or makes the consummation of the Transactions inadvisable.

 

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Section 5.2 Right Not to Close . Each of the conditions set forth in Section 5.1 is for the benefit of Newcastle, and the board of directors of Newcastle may, in its sole and absolute discretion, determine whether to waive any condition, in whole or in part. Any determination made by the board of directors of Newcastle concerning the satisfaction or waiver of any or all of the conditions in Section 5.1 will be conclusive and binding on the Parties. The satisfaction of the conditions set forth in Section 5.1 will not create any obligation on the part of Newcastle to any other Person to effect any of the Transactions or in any way limit Newcastle’s right to terminate this Agreement and the Ancillary Agreements as set forth in Section 11.1 or alter the consequences of any termination from those specified in Section 11.2.

ARTICLE VI

NO REPRESENTATIONS OR WARRANTIES

Section 6.1 Disclaimer of Representations and Warranties . EACH PARTY (ON BEHALF OF ITSELF AND EACH OTHER MEMBER OF ITS GROUP) UNDERSTANDS AND AGREES THAT, EXCEPT AS EXPRESSLY SET FORTH HEREIN, IN ANY ANCILLARY AGREEMENT OR IN ANY OTHER AGREEMENT OR DOCUMENT CONTEMPLATED BY THIS AGREEMENT OR ANY ANCILLARY AGREEMENT, NO PARTY IS REPRESENTING OR WARRANTING IN ANY WAY AS TO (A) THE ASSETS, BUSINESSES OR LIABILITIES CONTRIBUTED, TRANSFERRED, DISTRIBUTED OR ASSUMED AS CONTEMPLATED HEREBY OR THEREBY, (B) ANY CONSENTS OR GOVERNMENTAL APPROVALS REQUIRED IN CONNECTION HEREWITH OR THEREWITH, (C) THE VALUE OR FREEDOM FROM ANY SECURITY INTERESTS OF, OR ANY OTHER MATTER CONCERNING, ANY ASSETS OF ANY PARTY, (D) THE ABSENCE OF ANY DEFENSES OR RIGHT OF SETOFF OR FREEDOM FROM COUNTERCLAIM WITH RESPECT TO ANY ACTION OR OTHER ASSET, INCLUDING ACCOUNTS RECEIVABLE, OF ANY PARTY, OR (E) THE LEGAL SUFFICIENCY OF ANY CONTRIBUTION, DISTRIBUTION, ASSIGNMENT, DOCUMENT, CERTIFICATE OR INSTRUMENT DELIVERED HEREUNDER OR THEREUNDER TO CONVEY TITLE TO ANY ASSET UPON THE EXECUTION, DELIVERY AND FILING HEREOF OR THEREOF.

Section 6.2 As Is, Where Is . EACH PARTY (ON BEHALF OF ITSELF AND EACH OTHER MEMBER OF ITS GROUP) UNDERSTANDS AND AGREES THAT ALL ASSETS TRANSFERRED PURSUANT TO THIS AGREEMENT OR ANY ANCILLARY AGREEMENT ARE BEING TRANSFERRED “AS IS, WHERE IS.”

 

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ARTICLE VII

CERTAIN COVENANTS AND ADDITIONAL AGREEMENTS

Section 7.1 Insurance Matters . Following the Distribution Date, Newcastle shall maintain its currently existing Insurance Policies related to director and officer liability (the “ Newcastle D&O Policies ”). Prior to the Distribution Date, Newcastle and New Residential shall use commercially reasonable efforts to obtain separate Insurance Policies for New Residential on substantially similar terms as the Newcastle D&O Policies (it being understood that New Residential shall be responsible for all premiums, costs and fees associated with any new insurance policies placed for the benefit of New Residential pursuant to this Section 7.1, which, for the avoidance of doubt, shall exclude any premiums, costs and fees associated with any run-off Insurance Policy obtained by Newcastle in connection with the Separation).

Section 7.2 Tax Matters .

(a) Taxability of Distribution . The Parties acknowledge that the Distribution is a taxable distribution under Section 301 of the Code, and the Parties shall not take any position on any U.S. federal, state, local or foreign Tax return that is inconsistent with such treatment.

(b) Newcastle and New Residential REIT Status .

(i) Newcastle has no knowledge of any fact or circumstance that would cause New Residential to fail to qualify as a REIT, including a failure to qualify as a REIT due to Newcastle’s failure to maintain REIT status.

(ii) Subject to Section 7.2(b)(iii), Newcastle shall use its commercially reasonable efforts to cooperate with New Residential as necessary to enable New Residential to qualify for taxation as a REIT and receive customary legal opinions concerning New Residential’s qualification and taxation as a REIT, including by providing information and representations to New Residential and its tax counsel with respect to the composition of Newcastle’s income and Assets, the composition of the holders of stock of Newcastle and Newcastle’s organization, operation, and qualification as a REIT.

(iii) Newcastle shall use reasonable best efforts to maintain its REIT status for each of its taxable years ending on or before December 31, 2014, unless Newcastle obtains an opinion from a nationally recognized tax counsel or a private letter ruling from the IRS, on which New Residential can rely, substantially to the effect that Newcastle’s failure to maintain its REIT status will not prevent New Residential from making a valid REIT election for any taxable year, or otherwise cause New Residential to fail to qualify for taxation as a REIT for any taxable year, pursuant to Section 856(g)(3) of the Code.

(iv) New Residential shall use its reasonable best efforts to qualify for taxation as a REIT for its taxable year ending December 31, 2013.

Section 7.3 No Restrictions on Post-Closing Competitive Activities; Corporate Opportunities .

(a) Each of the Parties agrees that this Agreement shall not include any non-competition or other similar restrictive arrangements with respect to the range of business activities that may be conducted, or investments that may be made, by the Groups. Accordingly, each of the Parties acknowledges and agrees that nothing set forth in this Agreement shall be construed to create any explicit or implied restriction or other limitation on the ability of any Group to engage in any business or other activity that overlaps or competes with the business of

 

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the other Group, including investing in residential mortgage related securities. Except as expressly provided herein, or in the Ancillary Agreements, if any, each Group shall have the right to, and shall have no duty to abstain from exercising such right to, (i) engage or invest, directly or indirectly, in the same, similar or related business activities or lines of business as the other Group, (ii) make investments in the same or similar types of investments as the other Group, (iii) do business with any client, customer, vendor or lessor of any of the other Group or (iv) employ or otherwise engage any officer, director or employee of the other Group. Neither Party or Group, nor any officer or director thereof, shall be liable to the other Party or Group or its stockholders for breach of any fiduciary duty by reason of any such activities of such Party or Group or of any such Person’s participation therein.

(b) Except as Newcastle and each other member of the Newcastle Group, on the one hand, and New Residential and each other member of the New Residential Group, on the other hand, may otherwise agree in writing, the Parties hereby acknowledge and agree that if any Person that is a member of a Group, including any officer or director thereof, acquires knowledge of a potential transaction or matter that may be a corporate opportunity for either or both Groups, neither the other Group nor its stockholder shall have an interest in, or expectation that, such corporate opportunity be offered to it or that it be offered an opportunity to participate therein, and any such interest, expectation, offer or opportunity to participate, and any other interest or expectation otherwise due to such Group with respect to such corporate opportunity, is hereby renounced by such Group on its behalf and on behalf of its stockholders. Accordingly, subject to Section 7.3(c) below, (i) neither Group nor any officer or director thereof will be under any obligation to present, communicate or offer any such corporate opportunity to the other Group and (ii) each Group has the right to hold any such corporate opportunity for their own account, or to direct, recommend, sell, assign or otherwise transfer such corporate opportunity to any Person or Persons other than the other Group, and, to the fullest extent permitted by Law, neither Group nor the officers or directors thereof shall have or be under any fiduciary duty, duty of loyalty or duty to act in good faith or in the best interests of the other Group and its stockholders and shall not be liable to the other Group and its stockholders for any breach or alleged breach thereof or for any derivation of personal economic gain by reason of the fact that such Group or any of its officers or directors pursues or acquires the corporate opportunity for itself, or directs, recommends, sells, assigns or otherwise transfers the corporate opportunity to another Person, or such Group and its officers or directors does not present, offer or communicate information regarding the corporate opportunity to the other Group.

(c) Except as Newcastle and each other member of the Newcastle Group, on the one hand, and New Residential and each other member of the New Residential Group, on the other hand, may otherwise agree in writing, the Parties hereby acknowledge and agree that in the event that a director or officer of either Group who is also a director or officer of the other Group acquires knowledge of a potential transaction or matter that may be a corporate opportunity or is offered a corporate opportunity, if (i) such Person acts in good faith and (ii) such knowledge of such potential transaction or matter was not obtained solely in connection with, or such corporate opportunity was not offered to such Person solely in, such Person’s capacity as director or officer of either Group, then (A) such director or officer, to the fullest extent permitted by Law, (1) shall be deemed to have fully satisfied and fulfilled such Person’s fiduciary duty to each Group and their stockholders with respect to such corporate

 

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opportunity, (2) shall not have or be under any fiduciary duty to either Group or their stockholders and shall not be liable to either Group or their stockholders for any breach or alleged breach thereof by reason of the fact that the other Group pursues or acquires the corporate opportunity for itself, or directs, recommends, sells, assigns or otherwise transfers the corporate opportunity to another Person, or either Group or such director or officer does not present, offer or communicate information regarding the corporate opportunity to the other Group, (3) shall be deemed to have acted in good faith and in a manner such Person reasonably believes to be in, and not opposed to, the best interests of each Group and its stockholders and (4) shall not have any duty of loyalty to the other Group and its stockholders or any duty not to derive any personal benefit therefrom and shall not be liable to the other Group or its stockholders for any breach or alleged breach thereof and (B) such potential transaction or matter that may be a corporate opportunity, or the corporate opportunity, shall belong to the applicable Group (and not to the other Group).

(d) Except as provided in the Newcastle Management Agreement or the New Residential Management Agreement, if the Manager acquires knowledge of a potential transaction or matter that may be a corporate opportunity for either or both Groups, neither the Manager, nor any agent or advisor thereof, shall have any duty to communicate or present such corporate opportunity to either Group and shall not be liable to either Group or to their stockholders for breach of any fiduciary duty by reason of the fact that the Manager pursues or acquires the corporate opportunity for itself, or directs, recommends, sells, assigns or otherwise transfers the corporate opportunity to either Group or another Person, or does not present such corporate opportunity to either Group.

(e) For the purposes of this Section 7.3, “corporate opportunities” of a Group shall include business opportunities that such Group are financially able to undertake, that are, by their nature, in a line of business of such Group, are of practical advantage to it and are ones in which any member of the Group has an interest or a reasonable expectancy, and in which, by embracing the opportunities, the self-interest of a Person or any of its officers or directors will be brought into conflict with that of such Group.

ARTICLE VIII

ACCESS TO INFORMATION; CONFIDENTIALITY; PRIVILEGE

Section 8.1 Agreement for Exchange of Information .

(a) Subject to Section 8.1(b), for a period of three (3) years (the “ Period ”) following the Distribution Date, as soon as reasonably practicable after written request: (i) Newcastle shall afford to any member of the New Residential Group and their authorized accountants, counsel and other designated representatives reasonable access during normal business hours to, or, at the New Residential Group’s expense, provide copies of, all books, records, Contracts, instruments, data, documents and other information in the possession or under the control of any member of the Newcastle Group immediately following the Distribution Date that relates to any member of the New Residential Group or the New Residential Assets and (ii) New Residential shall afford to any member of the Newcastle Group and their authorized accountants, counsel and other designated representatives reasonable access during normal

 

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business hours to, or, at the Newcastle Group’s expense, provide copies of, all books, records, Contracts, instruments, data, documents and other information in the possession or under the control of any member of the New Residential Group immediately following the Distribution Date that relates to any member of the Newcastle Group or the Newcastle Assets; provided , however , that in the event that New Residential or Newcastle, as applicable, determine that any such provision of or access to any information in response to a request under this Section 8.1(a) would be commercially detrimental in any material respect, violate any Law or agreement or waive any attorney-client privilege, the work product doctrine or other applicable privilege, the Parties shall take all reasonable measures to permit compliance with such request in a manner that avoids any such harm or consequence; provided , further , that to the extent specific information—or knowledge-sharing provisions are contained in any of the Ancillary Agreements, such other provisions (and not this Section 8.1(a)) shall govern; provided , further , that the Period shall be extended with respect to requests related to any third party litigation or other dispute filed prior to the end of such period until such litigation or dispute is finally resolved.

(b) A request for information under Section 8.1(a) may be made: (i) to comply with reporting, disclosure, filing or other requirements imposed on the requesting party (including under applicable securities laws) by a Governmental Authority having jurisdiction over such requesting party, (ii) for use in any other judicial, regulatory, administrative or other proceeding or in order to satisfy audit, accounting, claims defense, regulatory filings, litigation or other similar requirements (other than in connection with any action, suit or proceeding in which any member of a Group is adverse to any member of the other Group), (iii) for use in compensation, benefit or welfare plan administration or other bona fide business purposes, or (iv) to comply with any obligations under this Agreement or any Ancillary Agreement.

(c) Without limiting the generality of Section 8.1(a), until the end of the first full fiscal year following the Distribution Date (and for a reasonable period of time thereafter as required for any party to prepare consolidated financial statements or complete a financial statement audit for the fiscal year during which the Distribution Date occurs), New Residential shall use its commercially reasonable efforts to cooperate with any requests from any member of the Newcastle Group pursuant to Section 8.1(a) and Newcastle shall use its commercially reasonable efforts to cooperate with any requests from any member of the New Residential Group pursuant to Section 8.1(a), in each case to enable the requesting Party to meet its timetable for dissemination of its earnings releases and financial statements and to enable such requesting party’s auditors to timely complete their audit of the annual financial statements and review of the quarterly financial statements.

Section 8.2 Ownership of Information . Any information owned by any Person that is provided pursuant to Section 8.1(a) shall be deemed to remain the property of the providing Person. Unless specifically set forth herein, nothing contained in this Agreement shall be construed to grant or confer rights of license or otherwise to the requesting Person with respect to any such information.

Section 8.3 Compensation for Providing Information . A Person requesting information pursuant to Section 8.1(a) agrees to reimburse the providing Person for the reasonable expenses, if any, of gathering and copying such information, to the extent that such expenses are incurred for the benefit of the requesting Person.

 

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Section 8.4 Retention of Records . To facilitate the exchange of information pursuant to this Article VIII after the Distribution Date, for a period of three (3) years following the Distribution Date, except as otherwise required or agreed in writing, the Parties agree to use commercially reasonable efforts to retain, or cause to be retained, all information in their, or any member of their Group’s, respective possession or control on the Distribution Date in accordance with the policies and procedures of Newcastle as in effect on the Distribution Date.

Section 8.5 Limitation of Liability . No Person required to provide information under this Article VIII shall have any Liability (a) if any historical information provided pursuant to this Article VIII is found to be inaccurate, in the absence of gross negligence or willful misconduct by such Person, or (b) if any information is lost or destroyed despite using commercially reasonable efforts to comply with the provisions of Section 8.4.

Section 8.6 Production of Witnesses . At all times from and after the Distribution Date, upon reasonable request:

(a) New Residential shall use commercially reasonable efforts to make available, or cause to be made available, to any member of the Newcastle Group, the directors, officers, employees and agents of any member of the New Residential Group as witnesses to the extent that the same may reasonably be required by the requesting party (giving consideration to business demands of such directors, officers, employees and agents) in connection with any legal, administrative or other proceeding in which the requesting party may from time to time be involved, except in the case of any action, suit or proceeding in which any member of the New Residential Group is adverse to any member of the Newcastle Group; and

(b) Newcastle shall use commercially reasonable efforts to make available, or cause to be made available, to any member of the New Residential Group, the directors, officers, employees and agents of any member of the Newcastle Group as witnesses to the extent that the same may reasonably be required by the requesting party (giving consideration to business demands of such directors, officers, employees and agents) in connection with any legal, administrative or other proceeding in which the requesting party may from time to time be involved, except in the case of any action, suit or proceeding in which any member of the Newcastle Group is adverse to any member of the New Residential Group.

Section 8.7 Confidentiality .

(a) New Residential (on behalf of itself and each other member of its Group) and Newcastle (on behalf of itself and each other member of its Group) shall hold, and shall cause each of their respective Affiliates to hold, and each of the foregoing shall cause their respective directors, officers, employees, agents, consultants and advisors to hold, in strict confidence, and not to disclose or release or use, for any purpose other than as expressly permitted pursuant to this Agreement or the Ancillary Agreements, if any, any and all Confidential Information concerning any member of the other Group without the prior written consent of such member of the other Group; provided , that each Party and the members of its Group may disclose, or may permit disclosure of, such Confidential Information (i) to other members of their Group and their respective auditors, attorneys, financial advisors, bankers and other appropriate consultants and advisors (including the Manager) who have a need to know

 

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such information for purposes of performing services for a member of such Group and who are informed of their obligation to hold such information confidential to the same extent as is applicable to the Parties and in respect of whose failure to comply with such obligations, such Party will be responsible, (ii) if it or any of its Affiliates are required or compelled to disclose any such Confidential Information by judicial or administrative process or by other requirements of Law or stock exchange rule, or (iii) as necessary in order to permit such Party to prepare and disclose its financial statements, or other disclosures required by Law or such applicable stock exchange. Notwithstanding the foregoing, in the event that any demand or request for disclosure of Confidential Information is made pursuant to the foregoing clause (ii) above, the Party requested to disclose Confidential Information concerning a member of the other Group, shall promptly notify such member of the other Group of the existence of such request or demand and, to the extent commercially practicable, shall provide such member of the other Group thirty (30) days (or such lesser period as is commercially practicable) to seek an appropriate protective order or other remedy, which the Parties will cooperate in obtaining. In the event that such appropriate protective order or other remedy is not obtained, the Party that is required to disclose Confidential Information about a member of the Group shall furnish, or cause to be furnished, only that portion of the Confidential Information that is legally required to be disclosed and shall use commercially reasonable efforts to ensure that confidential treatment is accorded such information.

(b) Notwithstanding anything to the contrary set forth herein, the Parties shall be deemed to have satisfied their obligations hereunder with respect to Confidential Information of any member of the other Group if they exercise the same degree of care (but no less than a reasonable degree of care) as they exercise to preserve confidentiality for their own similar Confidential Information.

(c) Upon the written request of a Party or a member of its Group, the other Party shall take, and shall cause the applicable members of its Group to take, reasonable steps to promptly (i) deliver to the requesting Person all original copies of Confidential Information (whether written or electronic) concerning the requesting Person or any member of its Group that is in the possession of the other Party or any member of its Group and (ii) if specifically requested by the requesting Person, destroy any copies of such Confidential Information (including any extracts therefrom), unless such delivery or destruction would violate any Law; provided , that the other Party shall not be obligated to destroy Confidential Information that is required by or relates to the business of the other Party or any member of its Group. Upon the written request of the requesting Person, the other Party shall, or shall cause another member of its Group to cause, its duly authorized officers to certify in writing to the requesting party that the requirements of the preceding sentence have been satisfied in full.

Section 8.8 Privileged Matters .

(a) Pre-Distribution Services . The Parties recognize that legal and other professional services that have been and will be provided prior to the Effective Time have been and will be rendered for the collective benefit of the Parties and their Affiliates, and that each of the Parties should be deemed to be the client with respect to such pre-Distribution services for the purposes of asserting all privileges that may be asserted under applicable Law.

 

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(b) Post-Distribution Services . The Parties recognize that legal and other professional services will be provided following the Effective Time that will be rendered solely for the benefit of New Residential and its Affiliates or Newcastle and its Affiliates, as the case may be. With respect to such post-Distribution services, the Parties agree as follows:

(i) Newcastle shall be entitled, in perpetuity, to control the assertion or waiver of all privileges in connection with privileged information that relates solely to the Newcastle Assets, whether or not the privileged information is in the possession of or under the control of Newcastle or New Residential. Newcastle shall also be entitled, in perpetuity, to control the assertion or waiver of all privileges in connection with privileged information that relates solely to the subject matter of any claims constituting Newcastle Liabilities, now pending or which may be asserted in the future, in any lawsuits or other proceedings initiated by or against any member of the Newcastle Group, whether or not the privileged information is in the possession of or under the control of Newcastle or New Residential; and

(ii) New Residential shall be entitled, in perpetuity, to control the assertion or waiver of all privileges in connection with privileged information that relates solely to the New Residential Assets, whether or not the privileged information is in the possession of or under the control of Newcastle or New Residential. New Residential shall also be entitled, in perpetuity, to control the assertion or waiver of all privileges in connection with privileged information that relates solely to the subject matter of any claims constituting New Residential Liabilities, now pending or which may be asserted in the future, in any lawsuits or other proceedings initiated by or against any member of the New Residential Group, whether or not the privileged information is in the possession of or under the control of Newcastle or New Residential.

(c) The Parties agree that they shall have a shared privilege, with equal right to assert or waive, subject to the restrictions in this Section 8.8, with respect to all privileges not allocated pursuant to the terms of Section 8.8(b). New Residential may not waive, and shall cause each other member of the New Residential Group not to waive, any privilege that could be asserted by a member of the Newcastle Group under any applicable Law, and in which a member of the Newcastle Group has a shared privilege, without the consent of Newcastle, which consent shall not be unreasonably withheld, conditioned or delayed or as provided in Section 8.8(d) or Section 8.8(e) below. Newcastle may not waive, and shall cause each other member of the Newcastle Group not to waive, any privilege that could be asserted by a member of the New Residential Group under any applicable Law, and in which a member of the New Residential Group has a shared privilege, without the consent of New Residential, which consent shall not be unreasonably withheld, conditioned or delayed or as provided in Section 8.8(d) or Section 8.8(e) below.

(d) In the event of any litigation or dispute between or among New Residential and Newcastle, or any members of their respective Groups, the Parties may waive a privilege in which a member of the other Group has a shared privilege, without obtaining the consent from any other party; provided , that such waiver of a shared privilege shall be effective only as to the use of information with respect to the litigation or dispute between the relevant Parties and/or the applicable members of their respective Groups, and shall not operate as a waiver of the shared privilege with respect to third parties.

 

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(e) If a dispute arises between or among New Residential and Newcastle, or any members of their respective Groups, regarding whether a privilege should be waived to protect or advance the interest of a party, each Party agrees that it shall negotiate in good faith, shall endeavor to minimize any prejudice to the rights of such party and shall not unreasonably withhold consent to any request for waiver by such party. Each Party agrees that it will not withhold consent to waiver for any purpose except to protect its own legitimate interests or the legitimate interests of any other member of its Group.

(f) Upon receipt by either Party, or by any member of its Group, of any subpoena, discovery or other request which requires the production or disclosure of information which such Party knows is subject to a shared privilege or as to which a member of the other Group has the sole right hereunder to assert or waive a privilege, or if either Party obtains knowledge that any of its or any other member of its Group’s current or former directors, officers, agents or employees have received any subpoena, discovery or other requests which requires the production or disclosure of such privileged information, such Party shall promptly notify the other Party of the existence of the request and shall provide the other Party a reasonable opportunity to review the information and to assert any rights it or they may have under this Section 8.8 or otherwise to prevent the production or disclosure of such privileged information.

(g) The access to information being granted pursuant to Section 8.1, the agreement to provide witnesses and individuals pursuant to Section 8.6 hereof, and the transfer of privileged information between and among the Parties and the members of their respective Groups pursuant to this Agreement shall not be deemed a waiver of any privilege that has been or may be asserted under this Agreement, any of the Ancillary Agreements or otherwise.

Section 8.9 Financial Information Certifications . The Parties agree to cooperate with each other in such manner as is necessary to enable the principal executive officer or officers, principal financial officer or officers and controller or controllers of each of the Parties to make the certifications required of them under Sections 302, 404 and 906 of the Sarbanes-Oxley Act of 2002.

ARTICLE IX

MUTUAL RELEASES; INDEMNIFICATION

Section 9.1 Release of Pre-Distribution Claims .

(a) Except as provided in Section 9.1(d), effective as of the Effective Time, New Residential does hereby, for itself and each other member of the New Residential Group, release and forever discharge each Newcastle Indemnitee, from any and all Liabilities whatsoever to any member of the New Residential Group, whether at law or in equity (including any right of contribution), whether arising under any Contract, by operation of Law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed at or before the Effective Time, including in connection with the Transactions.

 

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(b) Except as provided in Section 9.1(d), effective as of the Effective Time, Newcastle does hereby, for itself and each other member of the Newcastle Group, release and forever discharge each New Residential Indemnitee from any and all Liabilities whatsoever to any member of the Newcastle Group, whether at law or in equity (including any right of contribution), whether arising under any Contract, by operation of Law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed at or before the Effective Time, including in connection with the Transactions.

(c) The Parties expressly understand and acknowledge that it is possible that unknown losses or claims exist or might come to exist or that present losses may have been underestimated in amount, severity, or both. Accordingly, the Parties are deemed expressly to understand provisions and principles of law such as Section 1542 of the Civil Code of the State of California (as well as any and all provisions, rights and benefits conferred by any law of any state or territory of the United States, or principle of common law, which is similar or comparable to Section 1542), which Section provides: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR. The Parties are hereby deemed to agree that the provisions of Section 1542 and all similar federal or state laws, rights, rules, or legal principles of California or any other jurisdiction that may be applicable herein, are hereby knowingly and voluntarily waived and relinquished with respect to the releases in Section 9.1(a) and Section 9.1(b).

(d) Nothing contained in Section 9.1(a) or Section 9.1(b) shall impair any right of any Person to enforce this Agreement, any Ancillary Agreement or any agreements, arrangements, commitments or understandings that are specified in, or contemplated to continue pursuant to, this Agreement or any Ancillary Agreement. Without limiting the foregoing, nothing contained in Section 9.1(a) or Section 9.1(b) shall release any Person from:

(i) any Liability, contingent or otherwise, assumed by, or allocated to, such Person in accordance with this Agreement or any Ancillary Agreement;

(ii) any Liability that such Person may have with respect to indemnification or contribution pursuant to this Agreement or any Ancillary Agreement for claims brought by third Persons, which Liability shall be governed by the provisions of this Article IX and, if applicable, the appropriate provisions of the Ancillary Agreements, if any;

(iii) any unpaid accounts payable or receivable arising from or relating to the sale, provision, or receipt of goods, payment for goods,

 

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property or services purchased, obtained or used in the ordinary course of business by any member of the Newcastle Group from any member of the New Residential Group, or by any member of the New Residential Group from any member of the Newcastle Group from and after the Effective Time; or

(iv) any Liability the release of which would result in the release of any Person other than an Indemnitee; provided , that the Parties agree not to bring suit, or permit any other member of their respective Group to bring suit, against any Indemnitee with respect to such Liability.

(e) New Residential shall not make, and shall not permit any other member of the New Residential Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or indemnification, against any Newcastle Indemnitee with respect to any Liabilities released pursuant to Section 9.1(a). Newcastle shall not make, and shall not permit any member of the Newcastle Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against any New Residential Indemnitee with respect to any Liabilities released pursuant to Section 9.1(b).

Section 9.2 Indemnification by New Residential . Except as provided in Section 9.4 and Section 9.5, New Residential shall, and, in the case of Section 9.2(a) or Section 9.2(b), shall in addition cause each Appropriate Member of the New Residential Group to, indemnify, defend and hold harmless, the Newcastle Indemnitees from and against any and all Losses of the Newcastle Indemnitees relating to, arising out of or resulting from any of the following (without duplication):

(a) any New Residential Liability, including the failure of any member of the New Residential Group or any other Person to pay, perform or otherwise promptly discharge any New Residential Liabilities in accordance with their respective terms, whether prior to, at or after the Effective Time;

(b) any breach by any member of the New Residential Group of any provision of this Agreement or of any of the Ancillary Agreements, subject to any limitations of liability provisions and other provisions applicable to any such breach set forth therein; and

(c) any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in the Registration Statement or the Information Statement other than information that relates solely to the Newcastle Assets;

in each case, regardless of when or where the loss, claim, accident, occurrence, event or happening giving rise to the Loss took place, or whether any such loss, claim, accident, occurrence, event or happening is known or unknown, or reported or unreported and regardless of whether such loss, claim, accident, occurrence, event or happening giving rise to the Loss existed prior to, on or after the Distribution Date or relates to, arises out of or results from actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to, on

 

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or after the Distribution Date. As used in this Section 9.2, “ Appropriate Member of the New Residential Group ” means the member or members of the New Residential Group, if any, whose acts, conduct or omissions or failures to act caused, gave rise to or resulted in the Loss from and against which indemnity is provided.

Section 9.3 Indemnification by Newcastle . Except as provided in Section 9.4 and Section 9.5, Newcastle shall, and, in the case of Section 9.3(a) or Section 9.3(b), shall in addition cause each Appropriate Member of the Newcastle Group to, indemnify, defend and hold harmless the New Residential Indemnitees from and against any and all Losses of the New Residential Indemnitees relating to, arising out of or resulting from any of the following (without duplication):

(a) any Newcastle Liability, including the failure of any member of the Newcastle Group or any other Person to pay, perform or otherwise promptly discharge any Newcastle Liabilities in accordance with their respective terms, whether prior to, at or after the Effective Time;

(b) any breach by any member of the Newcastle Group of any provision of this Agreement or of any of the Ancillary Agreements, subject to any limitations of liability provisions and other provisions applicable to any such breach set forth therein; and

(c) any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, solely with respect to information contained in the Registration Statement or the Information Statement that relates solely to the Newcastle Assets;

in each case, regardless of when or where the loss, claim, accident, occurrence, event or happening giving rise to the Loss took place, or whether any such loss, claim, accident, occurrence, event or happening is known or unknown, or reported or unreported and regardless of whether such loss, claim, accident, occurrence, event or happening giving rise to the Loss existed prior to, on or after the Distribution Date or relates to, arises out of or results from actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to, on or after the Distribution Date. As used in this Section 9.3, “ Appropriate Member of the Newcastle Group ” means the member or members of the Newcastle Group, if any, whose acts, conduct or omissions or failures to act caused, gave rise to or resulted in the Loss from and against which indemnity is provided.

Section 9.4 Procedures for Indemnification .

(a) An Indemnitee shall give notice of any matter that such Indemnitee has determined has given or would reasonably be expected to give rise to a right of indemnification under this Agreement or any Ancillary Agreement (other than a Third-Party Claim which shall be governed by Section 9.4(b)) to any Party that is or may be required pursuant to this Agreement or any Ancillary Agreement to make such indemnification (the “ Indemnifying Party ”) promptly (and in any event within fifteen (15) days) after making such a determination. Such notice shall state the amount of the Loss claimed, if known, and method of computation thereof, and containing a reference to the provisions of this Agreement or the

 

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applicable Ancillary Agreement in respect of which such right of indemnification is claimed by such Indemnitee; provided , however , that the failure to provide such notice shall not release the Indemnifying Party from any of its obligations except and solely to the extent the Indemnifying Party shall have been materially prejudiced as a result of such failure.

(b) If a claim or demand is made against an Indemnitee by any Person who is not a Party to this Agreement or an Affiliate of a Party (a “ Third-Party Claim ”) as to which such Indemnitee is or reasonably expects to be entitled to indemnification pursuant to this Agreement, such Indemnitee shall notify the Indemnifying Party in writing, and in reasonable detail, of the Third-Party Claim promptly (and in any event within thirty (30) days) after receipt by such Indemnitee of written notice of the Third-Party Claim; provided , however , that the failure to provide notice of any such Third-Party Claim pursuant to this sentence shall not release the Indemnifying Party from any of its obligations except and solely to the extent the Indemnifying Party shall have been materially prejudiced as a result of such failure (except that the Indemnifying Party or Parties shall not be liable for any expenses incurred by the Indemnitee in defending such Third-Party Claim during the period in which the Indemnitee failed to give such notice). Thereafter, the Indemnitee shall deliver to the Indemnifying Party, promptly (and in any event within ten (10) days) after the Indemnitee’s receipt thereof, copies of all notices and documents (including court papers) received by the Indemnitee relating to the Third-Party Claim.

(c) An Indemnifying Party shall be entitled (but shall not be required) to assume, control the defense of, and settle any Third-Party Claim, at such Indemnifying Party’s own cost and expense and by such Indemnifying Party’s own counsel, which counsel must be reasonably acceptable to the Indemnitee, if it gives written notice of its intention to do so (including a statement that the Indemnitee is entitled to indemnification under this Article IX) to the applicable Indemnitees within thirty (30) days of the receipt of notice from such Indemnitees of the Third-Party Claim (failure of the Indemnifying Party to respond within such thirty (30) day period shall be deemed to be an election by the Indemnifying Party not to assume the defense for such Third-Party Claim). After a notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third-Party Claim, such Indemnitee shall have the right to employ separate counsel and to participate in (but not control) the defense, compromise or settlement thereof, at its own expense and, in any event, shall reasonably cooperate with the Indemnifying Party in such defense and make available to the Indemnifying Party all witnesses and information in such Indemnitee’s possession or under such Indemnitee’s control relating thereto as are reasonably required by the Indemnifying Party; provided , however , that such access shall not require the Indemnitee to disclose any information the disclosure of which would, in the good faith judgment of the Indemnitee, result in the loss of any existing privilege with respect to such information or violate any applicable Law.

(d) Notwithstanding anything to the contrary in this Section 9.4, in the event that (i) an Indemnifying Party elects not to assume the defense of a Third-Party Claim, (ii) there exists a conflict of interest or potential conflict of interest between the Indemnifying Party and the Indemnitee, (iii) any Third-Party Claim seeks an order, injunction or other equitable relief or relief for other than money damages against the Indemnitee, (iv) the Indemnitee’s exposure to Liability in connection with such Third-Party Claim is reasonably expected to exceed the Indemnifying Party’s exposure in respect of such Third-Party Claim taking into account the indemnification obligations hereunder, or (v) the Person making such Third-Party

 

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Claim is a Governmental Authority with regulatory authority over the Indemnitee or any of its material Assets, such Indemnitee shall be entitled to control the defense of such Third-Party Claim, at the Indemnifying Party’s expense, with counsel of such Indemnitee’s choosing (such counsel to be reasonably acceptable to the Indemnifying Party). If the Indemnitee is conducting the defense against any such Third-Party Claim, the Indemnifying Party shall reasonably cooperate with the Indemnitee in such defense and make available to the Indemnitee all witnesses and information in such Indemnifying Party’s possession or under such Indemnifying Party’s control relating thereto as are reasonably required by the Indemnitee; provided , however , that such access shall not require the Indemnifying Party to disclose any information the disclosure of which would, in the good faith judgment of the Indemnifying Party, result in the loss of any existing privilege with respect to such information or violate any applicable Law.

(e) Unless the Indemnifying Party has failed to assume the defense of the Third-Party Claim in accordance with the terms of this Agreement, no Indemnitee may settle or compromise any Third-Party Claim without the consent of the Indemnifying Party (not to be unreasonably withheld, conditioned or delayed). If an Indemnifying Party has failed to assume the defense of the Third-Party Claim, it shall not be a defense to any obligation to pay any amount in respect of such Third-Party Claim that the Indemnifying Party was not consulted in the defense thereof, that such Indemnifying Party’s views or opinions as to the conduct of such defense were not accepted or adopted, that such Indemnifying Party does not approve of the quality or manner of the defense thereof or that such Third-Party Claim was incurred by reason of a settlement rather than by a judgment or other determination of liability.

(f) In the case of a Third-Party Claim, no Indemnifying Party shall consent to entry of any judgment or enter into any settlement of the Third-Party Claim without the consent (not to be unreasonably withheld, conditioned or delayed) of the Indemnitee if the effect thereof is to permit any injunction, declaratory judgment, other order or other non-monetary relief to be entered, directly or indirectly, against any Indemnitee, does not release the Indemnitee from all liabilities and obligations with respect to such Third-Party Claim or includes an admission of guilt or liability on behalf of the Indemnitee.

(g) Absent fraud or intentional misconduct by an Indemnifying Party, the indemnification provisions of this Article IX shall be the sole and exclusive remedy of an Indemnitee for any monetary or compensatory damages or Losses resulting from any breach of this Agreement or any Ancillary Agreement, and each Indemnitee expressly waives and relinquishes any and all rights, claims or remedies such Person may have with respect to the foregoing other than under this Article IX against any Indemnifying Party.

(h) Notwithstanding anything to the contrary in this Agreement, in the event that counsel or independent accountants for a Protected REIT determine that there exists a material risk that any indemnification payments due under this Agreement would be treated as Nonqualifying Income upon the payment of such amounts to the relevant Indemnitee, the amount paid to the Indemnitee pursuant to this Agreement in any tax year shall not exceed the maximum amount that can be paid to the Indemnitee in such year without causing the Protected REIT to fail to meet the REIT Requirements for any tax year, determined as if the payment of such amount were Nonqualifying Income as determined by such counsel or independent accountants to the Protected REIT. If the amount payable for any tax year under the preceding sentence is

 

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less than the amount which the relevant Indemnifying Party would otherwise be obligated to pay to the relevant Indemnitee pursuant to this Agreement (the “ Expense Amount ”), then: (1) the Indemnifying Party shall place the Expense Amount into an escrow account (the “ Escrow Account ”) using an escrow agent and agreement reasonably acceptable to the Indemnitee and shall not release any portion thereof to the Indemnitee, and the Indemnitee shall not be entitled to any such amount, unless and until the Indemnitee delivers to the Indemnifying Party, at the sole option of the relevant Protected REIT, (i) an opinion (an “ Expense Amount Tax Opinion ”) of the Protected REIT’s tax counsel to the effect that such amount, if and to the extent paid, would not constitute Nonqualifying Income, (ii) a letter (an “ Expense Amount Accountant’s Letter ”) from the Protected REIT’s independent accountants indicating the maximum amount that can be paid at that time to the Indemnitee without causing the Protected REIT to fail to meet the REIT Requirements for any relevant taxable year, or (iii) a private letter ruling issued by the IRS to the Protected REIT indicating that the receipt of any Expense Amount hereunder will not cause the Protected REIT to fail to satisfy the REIT Requirements (a “ REIT Qualification Ruling ” and, collectively with an Expense Amount Tax Opinion and an Expense Amount Accountant’s Letter, a “ Release Document ”); and (2) pending the delivery of a Release Document by the Indemnitee to the Indemnifying Party, the Indemnitee shall have the right, but not the obligation, to borrow the Expense Amount from the Escrow Account pursuant to a loan agreement (an “ Indemnity Loan Agreement ”) reasonably acceptable to the Indemnitee that (i) requires the Indemnifying Party to lend the Indemnitee immediately available cash proceeds in an amount equal to the Expense Amount (an “ Indemnity Loan ”), and (ii) provides for (A) a commercially reasonable interest rate and commercially reasonable covenants, taking into account the credit standing and profile of the Indemnitee or any guarantor of the Indemnitee, including the Protected REIT, at the time of such loan, and (B) a 15 year maturity with no periodic amortization.

Section 9.5 Indemnification Obligations Net of Insurance Proceeds . The Parties intend that any Loss subject to indemnification or reimbursement pursuant to this Article IX (an “ Indemnifiable Loss ”) will be net of Insurance Proceeds that actually reduce the amount of the Loss. Accordingly, the amount which an Indemnifying Party is required to pay to any Indemnitee will be reduced by any Insurance Proceeds actually recovered by or on behalf of the Indemnitee in reduction of the related Loss. If an Indemnitee receives a payment (an “ Indemnity Payment ”) required by this Agreement from an Indemnifying Party in respect of any Loss and subsequently receives Insurance Proceeds, the Indemnitee will pay to the Indemnifying Party an amount equal to the excess of the Indemnity Payments received over the amount of the Indemnity Payments that would have been due if the Insurance Proceeds recovery had been received, realized or recovered before the Indemnity Payments were made. The Indemnitee shall use and cause its Affiliates to use commercially reasonable efforts to recover any Insurance Proceeds to which the Indemnitee is entitled with respect to any Indemnifiable Loss. The existence of a claim by an Indemnitee for insurance or against a third party in respect of any Indemnifiable Loss shall not, however, delay any payment pursuant to the indemnification provisions contained in this Article IX and otherwise determined to be due and owing by an Indemnifying Party; rather, the Indemnifying Party shall make payment in full of such amount so determined to be due and owing by it against a concurrent written assignment by the Indemnitee to the Indemnifying Party of the portion of the claim of the Indemnitee for such insurance or against such third party equal to the amount of such payment. The Indemnitee shall use and cause its Affiliates to use commercially reasonable efforts to assist the Indemnifying Party in recovering or to recover on behalf of the Indemnifying Party, any Insurance Proceeds to which

 

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the Indemnifying Party is entitled with respect to any Indemnifiable Loss as a result of such assignment. The Indemnitee shall make available to the Indemnifying Party and its counsel all employees, books and records, communications, documents, items or matters within its knowledge, possession or control that are necessary, appropriate or reasonably deemed relevant by the Indemnifying Party with respect to the recovery of such Insurance Proceeds; provided , however , that nothing in this sentence shall be deemed to require a Party to make available books and records, communications, documents or items which (i) in such Party’s good faith judgment could result in a waiver of any privilege even if the Parties cooperated to protect such privilege as contemplated by this Agreement or (ii) such Party is not permitted to make available because of any Law or any confidentiality obligation to a third party, in which case such Party shall use commercially reasonable efforts to seek a waiver of or other relief from such confidentiality restriction. Unless the Indemnifying Party has made payment in full of any Indemnifiable Loss, such Indemnifying Party shall use and cause its Affiliates to use commercially reasonable efforts to recover any Insurance Proceeds to which it or such Affiliate is entitled with respect to any Indemnifiable Loss.

Section 9.6 Indemnification Obligations Net of Taxes . The Parties intend that any Indemnifiable Loss will be net of Taxes. Accordingly, the amount which an Indemnifying Party is required to pay to an Indemnitee will be adjusted to reflect any tax benefit to the Indemnitee from the underlying Loss and to reflect any Taxes imposed upon the Indemnitee as a result of the receipt of such payment. Such an adjustment will first be made at the time that the Indemnity Payment is made and will further be made, as appropriate, to take into account any change in the liability of the Indemnitee for Taxes that occurs in connection with the final resolution of an audit by a Taxing Authority. For purposes of this Section 9.6, the value of any tax benefit to the Indemnitee from the underlying Loss shall be an amount equal to the product of (a) the amount of any present or future deduction allowed or allowable to the Indemnitee by the Code, or other applicable Law, as a result of such Loss and (b) the highest statutory rate applicable under Section 11 of the Code, or other applicable Law. To the extent permitted by Law, the Parties will treat any Indemnity Payment paid pursuant to this Agreement as a capital contribution made by Newcastle to New Residential or as a distribution made by New Residential to Newcastle, as the case may be, on the date of this Agreement.

Section 9.7 Contribution . If the indemnification provided for in this Article IX is unavailable to an Indemnitee in respect of any Indemnifiable Loss, then the Indemnifying Party, in lieu of indemnifying such Indemnitee, shall contribute to the Losses paid or payable by such Indemnitee as a result of such Indemnifiable Loss in such proportion as is appropriate to reflect the relative fault of New Residential and each other member of the New Residential Group, on the one hand, and Newcastle and each other member of the Newcastle Group, on the other hand, in connection with the circumstances which resulted in such Indemnifiable Loss.

Section 9.8 Remedies Cumulative . The remedies provided in this Article IX shall be cumulative and, subject to the provisions of Article X, shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party.

 

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Section 9.9 Survival of Indemnities . The rights and obligations of each of the Parties and their respective Indemnitees under this Article IX shall survive the Distribution Date indefinitely, unless a specific survival or other applicable period is expressly set forth herein, and shall survive the sale or other transfer by any Party or any of its Subsidiaries of any Assets or businesses or the assignment by it of any Liabilities.

Section 9.10 Limitation of Liability . EXCEPT TO THE EXTENT SPECIFICALLY PROVIDED IN ANY ANCILLARY AGREEMENT, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY EXEMPLARY, PUNITIVE, SPECIAL, INDIRECT, CONSEQUENTIAL, REMOTE OR SPECULATIVE DAMAGES (INCLUDING IN RESPECT OF LOST PROFITS OR REVENUES), HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF ANY PROVISION OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

ARTICLE X

DISPUTE RESOLUTION

Section 10.1 Appointed Representative . Each Party shall appoint a representative who shall be responsible for administering the dispute resolution provisions in Section 10.2 (each, an “ Appointed Representative ”). Each Appointed Representative shall have the authority to resolve any Agreement Disputes on behalf of the Party appointing such representative.

Section 10.2 Negotiation and Dispute Resolution .

(a) Except as otherwise provided in this Agreement or in any Ancillary Agreement, in the event of a controversy, dispute or claim arising out of, in connection with, or in relation to the interpretation, performance, nonperformance, validity, termination or breach of this Agreement or any Ancillary Agreement or otherwise arising out of, or in any way related to this Agreement or any Ancillary Agreement or any of the transactions contemplated hereby or thereby (each, an “ Agreement Dispute ”), the Appointed Representatives shall negotiate in good faith for thirty (30) days to settle any such Agreement Dispute.

(b) Nothing said or disclosed, nor any document produced, in the course of any negotiations, conferences and discussions in connection with efforts to settle an Agreement Dispute that is not otherwise independently discoverable shall be offered or received as evidence or used for impeachment or for any other purpose, but shall be considered as to have been disclosed for settlement purposes.

(c) If a satisfactory resolution of any Agreement Dispute is not achieved by the Appointed Representatives within thirty (30) days, each Party will be entitled to refer the dispute to arbitration in accordance with Section 10.3.

Section 10.3 Arbitration .

(a) If a satisfactory resolution of any Agreement Dispute is not achieved by the Appointed Representatives within thirty (30) days, such Agreement Dispute shall be resolved, at the request of either Party, by arbitration administered by the CPR under its

 

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Arbitration Rules (the “ CPR Rules ”), conducted in New York, New York. There shall be three arbitrators. Each Party shall appoint one arbitrator. The two Party-appointed arbitrators shall agree on a third arbitrator who will chair the arbitral tribunal. Any arbitrator not appointed within a reasonable time shall be appointed in accordance with the CPR Rules. Any controversy concerning whether an Agreement Dispute is an arbitrable Agreement Dispute, whether arbitration has been waived, whether an assignee of this Agreement is bound to arbitrate, or as to the interpretation or enforceability of this Section 10.3 will be determined by the arbitrators. In resolving any Agreement Dispute, the Parties intend that the arbitrators apply the substantive laws of the State of New York, without regard to any choice of law principles thereof that would mandate the application of the laws of another jurisdiction. The Parties intend that the provisions to arbitrate set forth herein be valid, enforceable and irrevocable, and any award rendered by the arbitrators shall be final and binding on the Parties. The Parties agree to comply with any award made in any such arbitration proceedings and agree to enforcement of or entry of judgment upon such award, in any court of competent jurisdiction, including any New York State or federal court. The arbitrators shall be entitled, if appropriate, to award monetary damages and other remedies, subject to the provisions of Section 9.10. The Parties will use commercially reasonable efforts to encourage the arbitrators to resolve any arbitration related to any Agreement Dispute as promptly as practicable. Except as required by applicable Law, including disclosure or reporting requirements, the arbitrators and the Parties shall maintain the confidentiality of all information, records, reports, or other documents obtained in the course of the arbitration, and of all awards, orders, or other arbitral decisions rendered by the arbitrators.

(b) The arbitrators may consolidate arbitration under this Agreement with any arbitration arising under or relating to any of the Ancillary Agreements if the subjects of the Agreement Disputes thereunder arise out of or relate essentially to the same set of facts or transactions. Such consolidated arbitration will be determined by the arbitrators appointed for the arbitration proceeding that was commenced first in time.

(c) Unless otherwise agreed in writing, the Parties will continue to provide service and honor all other commitments under this Agreement and each Ancillary Agreement during the course of dispute resolution pursuant to the provisions of this Article X with respect to all matters not subject to such dispute resolution.

ARTICLE XI

TERMINATION

Section 11.1 Termination . Upon written notice, this Agreement and each of the Ancillary Agreements, if any, may be terminated at any time prior to the Effective Time by and in the sole discretion of Newcastle without the approval of any other Party.

Section 11.2 Effect of Termination . In the event of termination pursuant to Section 11.1, neither Party shall have any Liability of any kind to the other Party.

 

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ARTICLE XII

MISCELLANEOUS

Section 12.1 Further Assurances . Subject to the limitations or other provisions of this Agreement, (a) each Party shall, and shall cause the other members of its Group to, use commercially reasonable efforts (subject to, and in accordance with applicable Law) to take promptly, or cause to be taken promptly, all actions, and to do promptly, or cause to be done promptly, and to assist and cooperate with the other Party in doing, all things reasonably necessary, proper or advisable to consummate and make effective the Transactions and to carry out the intent and purposes of this Agreement, including using commercially reasonable efforts to obtain satisfaction of the conditions precedent in Article V within its reasonable control and to perform all covenants and agreements herein applicable to such Party or any member of its Group and (b) neither Party will, nor will either Party allow any other member of its Group to, without the prior written consent of the other Party, take any action which would reasonably be expected to prevent or materially impede, interfere with or delay any of the Transactions. Without limiting the generality of the foregoing, where the cooperation of third parties, such as insurers or trustees, would be necessary in order for a Party to completely fulfill its obligations under this Agreement, such Party shall use commercially reasonable efforts to cause such third parties to provide such cooperation.

Section 12.2 Payment of Expenses . All costs and expenses incurred and directly related to the Transactions shall: (i) to the extent incurred and payable on or prior to the Distribution Date, be paid by Newcastle; and (ii) to the extent arising and payable following the Distribution Date, be paid by the Party incurring such cost or expense.

Section 12.3 Amendments and Waivers .

(a) Subject to Section 11.1, this Agreement may not be amended except by an agreement in writing signed by both Parties.

(b) Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the Party entitled to the benefit thereof and any such waiver shall be validly and sufficiently given for the purposes of this Agreement if it is in writing signed by an authorized representative of such Party. No delay or failure in exercising any right, power or remedy hereunder shall affect or operate as a waiver thereof; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power or remedy preclude any further exercise thereof or of any other right, power or remedy. The rights and remedies hereunder are cumulative and not exclusive of any rights or remedies that either Party would otherwise have.

Section 12.4 Entire Agreement . This Agreement, the Ancillary Agreements, if any, and the Exhibits and Schedules referenced herein and therein and attached hereto or thereto, constitute the entire agreement and understanding between the Parties with respect to the subject matter hereof and supersede all prior negotiations, agreements, commitments, writings, courses of dealing and understandings with respect to the subject matter hereof.

 

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Section 12.5 Survival of Agreements . Except as otherwise expressly contemplated by this Agreement, all covenants and agreements of the Parties contained in this Agreement shall survive the Effective Time and remain in full force and effect in accordance with their applicable terms.

Section 12.6 Third Party Beneficiaries . Except (a) as provided in Article IX relating to Indemnitees and for the release of any Person provided under Section 9.1, (b) as provided in Section 7.1 relating to insured persons and (c) as provided in Section 8.1(a), this Agreement is solely for the benefit of the Parties and should not be deemed to confer upon third parties any remedy, claim, liability, reimbursement, cause of action or other right in excess of those existing without reference to this Agreement.

Section 12.7 Notices . All notices, requests, permissions, waivers and other communications hereunder shall be in writing and shall be deemed to have been duly given (a) five (5) Business Days following sending by registered or certified mail, postage prepaid, (b) when sent, if sent by facsimile, (c) when delivered, if delivered personally to the intended recipient, and (d) one (1) Business Day following sending by overnight delivery via a national courier service and, in each case, addressed to a Party at the following address for such Party:

 

  (a) If to Newcastle:

Newcastle Investment Corp.

c/o Fortress Investment Group

1345 Avenue of the Americas

New York, New York 10105

Attention: Randal A. Nardone, Secretary

Fax: (212) 798-6120

 

  (b) If to New Residential:

New Residential Investment Corp.

c/o FIG LLC

1345 Avenue of the Americas

New York, New York 10105

Attention: Cameron MacDougall, Secretary

Fax: (212) 798-6075

Section 12.8 Counterparts; Electronic Delivery . This Agreement may be executed in multiple counterparts, each of which when executed shall be deemed to be an original, but all of which together shall constitute one and the same agreement. Execution and delivery of this Agreement or any other documents pursuant to this Agreement by facsimile or other electronic means shall be deemed to be, and shall have the same legal effect as, execution by an original signature and delivery in person.

Section 12.9 Severability . If any term or other provision of this Agreement or the Exhibits and Schedules attached hereto or thereto is determined by a nonappealable decision by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this

 

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Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the Transactions is not affected in any manner materially adverse to either Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the court, administrative agency or arbitrator shall interpret this Agreement so as to affect the original intent of the Parties as closely as possible in an acceptable manner to the end that the Transactions are fulfilled to the fullest extent possible. If any sentence in this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only as broad as is enforceable.

Section 12.10 Assignability; Binding Effect . This Agreement shall be binding upon and inure to the benefit of the Parties and their successors and permitted assigns; provided , however , that the rights and obligations of each Party under this Agreement shall not be assignable, in whole or in part, directly or indirectly, whether by operation of law or otherwise, by such Party without the prior written consent of the other Party (such consent not to be unreasonably withheld, conditioned or delayed) and any attempt to assign any rights or obligations under this Agreement without such consent shall be null and void. Notwithstanding the foregoing, either Party may assign its rights and obligations under this Agreement to any of their respective Affiliates provided that no such assignment shall release such assigning Party from any liability or obligation under this Agreement.

Section 12.11 Governing Law . This Agreement shall be governed by, and construed and enforced in accordance with, the substantive laws of the State of New York, without regard to any conflicts of law provisions thereof that would result in the application of the laws of any other jurisdiction.

Section 12.12 Construction . This Agreement shall be construed as if jointly drafted by the Parties and no rule of construction or strict interpretation shall be applied against either Party. The Parties represent that this Agreement is entered into with full consideration of any and all rights which the Parties may have. The Parties have relied upon their own knowledge and judgment. The Parties have had access to independent legal advice, have conducted such investigations they thought appropriate, and have consulted with such other independent advisors as they deemed appropriate regarding this Agreement and their rights and asserted rights in connection therewith. The Parties are not relying upon any representations or statements made by the other Party, or such other Party’s employees, agents, representatives or attorneys, regarding this Agreement, except to the extent such representations are expressly set forth or incorporated in this Agreement. The Parties are not relying upon a legal duty, if one exists, on the part of the other Party (or such other Party’s employees, agents, representatives or attorneys) to disclose any information in connection with the execution of this Agreement or their preparation, it being expressly understood that neither Party shall ever assert any failure to disclose information on the part of the other Party as a ground for challenging this Agreement.

Section 12.13 Performance . Each Party shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary or Affiliate of such Party.

 

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Section 12.14 Title and Headings . Titles and headings to Sections and Articles are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement.

Section 12.15 Exhibits and Schedules . The Exhibits and Schedules attached hereto are incorporated herein by reference and shall be construed with and as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein.

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their respective officers as of the date first set forth above.

 

NEWCASTLE INVESTMENT CORP.
By:   /s/ Brian Sigman
  Name: Brian Sigman
  Title:   Chief Financial Officer

 

NEW RESIDENTIAL INVESTMENT CORP.
By:   /s/ Cameron MacDougall
  Name: Cameron MacDougall
  Title:   Secretary

[Signature P age to S eparation and D istribution A greement]


Exhibit A

New Residential Subsidiaries

 

Subsidiary

  

State/Country of Incorporation/Formation

1. NIC MSR I LLC

   Delaware

2. NIC MSR II LLC

   Delaware

3. NIC MSR III LLC

   Delaware

4. NIC RMBS LLC

   Delaware

5. NIC MSR IV LLC

   Delaware

6. NIC MSR V LLC

   Delaware

7. NIC MSR VI LLC

   Delaware

8. NIC MSR VII LLC

   Delaware

9. RC FH LLC

   Delaware

10. RC FN LLC

   Delaware

11. RC PLS LLC

   Delaware

12. RC GN LLC

   Delaware

13. NIC MSR VIII LLC

   Delaware

14. NIC MSR IX FH LLC

   Delaware

15. NIC MSR X FN LLC

   Delaware

16. NIC MSR XI GN LLC

   Delaware

17. NIC MSR XII PLS LLC

   Delaware

18. NIC VIII Parent LLC

   Delaware

19. NIC IX Parent LLC

   Delaware

20. NIC X Parent LLC

   Delaware

21. NIC XI Parent LLC

   Delaware

22. NIC XII Parent LLC

   Delaware

23. MSR VIII Holdings LLC

   Delaware

24. MSR IX Holdings LLC

   Delaware

25. MSR X Holdings LLC

   Delaware

26. MSR XI Holdings LLC

   Delaware

27. MSR XII Holdings LLC

   Delaware

28. MSR VIII LLC

   Delaware

29. MSR IX LLC

   Delaware

30. MSR X LLC

   Delaware

31. MSR XI LLC

   Delaware

32. MSR XII LLC

   Delaware

33. MSR Admin Parent LLC

   Delaware

34. MSR Admin LLC

   Delaware

35. NIC MSR XIII PLS 2 LLC

   Delaware

36. MSR XIII Parent LLC

   Delaware

37. MSR XIII Holdings LLC

   Delaware

38. MSR XIII LLC

   Delaware

39. MSR IX Trust

   Delaware

40. MSR X Trust

   Delaware

41. NIC MSR XIV TBW FH LLC

   Delaware

42. MSR XIV Parent LLC

   Delaware

43. MSR XIV Holdings LLC

   Delaware

44. MSR XIV LLC

   Delaware

45. NIC Reverse Loan LLC

   Delaware

46. Reverse TRS LLC

   Delaware

47. NRZ Consumer LLC

   Delaware

48. NRZ SC America LLC

   Delaware

49. NRZ SC Credit Limited

   Delaware

50. NRZ SC Finance I LLC

   Delaware

51. NRZ SC Finance II LLC

   Delaware

52. NRZ SC Finance III LLC

   Delaware

53. NRZ SC Finance IV LLC

   Delaware

54. NRZ SC Finance V LLC

   Delaware

55. NRZ SC Credit Limited

   Delaware


Schedules :

 

Section 1.1

   Assets of New Residential other than Equity of Subsidiaries

Section 1.2

   Potential Liabilities

Section 2.2(b)

   Intercompany Agreements

Section 2.3

   Intercompany Accounts

Section 3.8

   Repurchase Agreements

Section 3.9

   Vendor Services Agreements
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Exhibit 99.1

 

LOGO

                    , 2013

Dear Newcastle Investment Corp. Stockholder:

We are pleased to inform you that on April 25, 2013, the board of directors of Newcastle Investment Corp. (“Newcastle”) declared the distribution of all the shares of common stock of New Residential Investment Corp. (“New Residential”), a wholly-owned subsidiary of Newcastle, to Newcastle stockholders. New Residential holds or will hold prior to the distribution, directly or indirectly, certain of Newcastle’s residential mortgage related investments and other investments such as excess mortgage servicing rights, Agency and non-Agency residential mortgage backed securities, residential mortgage loans and consumer loans.

Upon the distribution, Newcastle stockholders will own 100% of the common stock of New Residential. Newcastle’s board of directors has determined upon careful review and consideration in accordance with the applicable standard review under Maryland law that creating New Residential is in the best interests of Newcastle.

The distribution of New Residential common stock will occur on May 15, 2013 by way of a taxable pro rata special dividend to Newcastle stockholders of record on the record date of the distribution. Each Newcastle stockholder will be entitled to receive one share of New Residential common stock for each share of Newcastle common stock held by such stockholder at the close of business on May 6, 2013, the record date of the distribution. The New Residential common stock will be issued in book-entry form only, which means that no physical stock certificates will be issued.

Stockholder approval of the distribution is not required, and you are not required to take any action to receive your New Residential common stock.

Following the distribution, you will own shares in both Newcastle and New Residential. The number of Newcastle shares you own will not change as a result of this distribution. Newcastle’s common stock will continue to trade on The New York Stock Exchange under the symbol “NCT.” New Residential has been approved to list its common stock on The New York Stock Exchange under the symbol “NRZ.”

The information statement, which is being mailed to all holders of Newcastle common stock on the record date for the distribution, describes the distribution in detail and contains important information about New Residential, its business, financial condition and operations. We urge you to read the information statement carefully.

We want to thank you for your continued support of Newcastle and we look forward to your future support of New Residential.

Sincerely,

 

LOGO

Kenneth M. Riis

Chief Executive Officer


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LOGO

                    , 2013

Dear Future New Residential Investment Corp. Stockholder:

It is our pleasure to welcome you as a stockholder of our company, New Residential Investment Corp. (“New Residential”). Following the separation of our company from Newcastle Investment Corp., we will be a newly listed public real estate investment trust primarily focused on investing in residential mortgage related assets. We will be externally managed by an affiliate of Fortress Investment Group (“Fortress”). Our goal is to drive strong risk-adjusted returns primarily through investments in residential mortgage related assets, such as excess mortgage servicing rights and Agency and non-Agency residential mortgage backed securities. We will generally target assets that either generate significant current cash flows or that have the potential for meaningful capital appreciation, or both. We will aim to generate attractive returns for our stockholders without excessive use of financial leverage. We also intend to capitalize on our manager’s relationship with Nationstar Mortgage LLC, which is majority-owned by Fortress funds managed by our manager, to source opportunities to acquire Excess MSRs.

We were formed as NIC MSR LLC, a Delaware limited liability company and wholly owned subsidiary of Newcastle Investment Corp., in September 2011. We converted to a Delaware corporation and changed our name to New Residential Investment Corp. in December 2012.

New Residential has been approved to list its common stock on The New York Stock Exchange under the symbol “NRZ.”

We invite you to learn more about New Residential by reviewing the enclosed information statement. We urge you to read the information statement carefully. We look forward to our future and to your support as a holder of New Residential common stock.

Sincerely,

 

LOGO

Kenneth M. Riis

Chief Executive Officer and President


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Information contained herein is subject to completion or amendment. A registration statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended

 

Preliminary and Subject to Completion, dated April 29, 2013

INFORMATION STATEMENT

New Residential Investment Corp.

Common Stock

(Par Value, $0.01 Per Share)

 

 

This information statement is being furnished in connection with the distribution by Newcastle Investment Corp. (“Newcastle”) to its stockholders of the outstanding shares of common stock of New Residential Investment Corp. (“New Residential”), a wholly-owned subsidiary of Newcastle. New Residential holds or will hold, directly or indirectly, certain of Newcastle’s residential mortgage related investments and other investments such as excess mortgage servicing rights, Agency and non-Agency residential mortgage backed securities, residential mortgage loans and consumer loans. To implement the distribution, Newcastle will distribute the shares of New Residential common stock on a pro rata basis.

For every share of common stock of Newcastle held of record by you as of the close of business on May 6, 2013, the record date for the distribution, you will receive one share of New Residential common stock. As discussed under “Our Separation from Newcastle—Market for Common Stock—Trading Between the Record Date and Distribution Date,” if you sell your shares of common stock of Newcastle in the “regular-way” market after the record date and before the separation, you also will be selling your right to receive shares of our common stock in connection with the separation. We expect the shares of New Residential common stock to be distributed by Newcastle to you on May 15, 2013. We refer to the date of the distribution of New Residential common stock as the “distribution date.”

No vote of Newcastle’s stockholders is required in connection with this distribution. Therefore, you are not being asked for a proxy, and you are requested not to send us a proxy, in connection with the separation. You do not need to pay any consideration, exchange or surrender your existing shares of common stock of Newcastle or take any other action to receive your shares of New Residential common stock.

There is no current trading market for New Residential common stock, although we expect that a limited market, commonly known as a “when-issued” trading market, will develop on or shortly before the record date for the distribution, and we expect “regular-way” trading of New Residential common stock to begin on the first trading day following the completion of the separation. New Residential has been approved to list its common stock on The New York Stock Exchange (“NYSE”) under the symbol “NRZ.”

New Residential intends to elect and qualify to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes commencing with our initial taxable year ending December 31, 2013. To assist it in qualifying as a REIT, among other purposes, stockholders will generally be restricted from owning more than 9.8% by value or number, whichever is more restrictive, of its outstanding shares of common stock, or 9.8% by value or number, whichever is more restrictive, of its outstanding shares of capital stock. In addition, New Residential’s certificate of incorporation contains various other restrictions on the ownership and transfer of its common stock. See “Description of Our Capital Stock—Restrictions on Ownership and Transfer of Our Capital Stock.”

New Residential is an emerging growth company as defined in the Jumpstart Our Business Startups Act.

In reviewing this information statement, you should carefully consider the matters described under the caption “ Risk Factors ” beginning on page 29.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

This information statement was first mailed to Newcastle stockholders on or about                , 2013.

 

 

The date of this information statement is                , 2013.


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TABLE OF CONTENTS

 

       Page  

Summary

     1   

Risk Factors

     29   

Cautionary Statement Regarding Forward-Looking Statements

     64   

Our Separation From Newcastle

     66   

Distribution Policy

     76   

Selected Historical Consolidated Financial Information

     77   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     78   

Business

     103   

Our Manager and Management Agreement

     125   

Management

     131   

Principal Stockholders

     139   

Certain Relationships and Transactions with Related Persons, Affiliates and Affiliated Entities

     140   

Description of Our Capital Stock

     147   

Federal Income Tax Considerations

     153   

Where You Can Find More Information

     178   

Index to Financial Statements of New Residential Investment Corp. and Subsidiaries (formerly known as NIC MSR LLC)

     F-1   

Industry Data

Unless otherwise indicated, information contained in this information statement concerning the mortgage and mortgage servicing industry, including our general expectations and market position and market opportunity, is based on information from various sources (including government and industry publications, surveys, analyses, valuations and forecasts and our internal research), assumptions that we have made (which we believe are reasonable based on those data from such sources and other similar sources) and our knowledge of the markets. The projections, assumptions and estimates of our future performance and the future performance of the mortgage and mortgage servicing industry are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described under “Risk Factors” and elsewhere in this information statement. These and other factors could cause results to differ materially from those expressed in the estimates included in this information statement.

Presentation of Information

Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement including the consolidated financial statements of New Residential, assumes the completion of all the transactions referred to in this information statement in connection with the separation and distribution. Unless the context otherwise requires, any references in this information statement to “we,” “our,” “us” and the “Company” refer to New Residential Investment Corp. and its consolidated subsidiaries as in effect upon the completion of the distribution. References in this information statement to “Newcastle” generally refer to Newcastle Investment Corp. and its consolidated subsidiaries, including us, unless the context requires otherwise. All figures included in this information statement are as of December 31, 2012, unless stated otherwise.


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SUMMARY

This summary highlights selected information from this information statement relating to our Company, our separation from Newcastle and the distribution of our common stock by Newcastle to its stockholders. For a more complete understanding of our business and the separation and distribution, you should carefully read the entire information statement.

Our Company

New Residential will be a newly listed public REIT primarily focused on investing in residential mortgage related assets. We will be externally managed by an affiliate of Fortress Investment Group (“Fortress”). Our goal is to drive strong risk-adjusted returns primarily through investments in residential real estate related investments including, but not limited to, excess mortgage servicing rights (“Excess MSRs”), Agency and non-Agency residential mortgage backed securities (“RMBS”) and residential mortgage loans. New Residential’s investment guidelines will be purposefully broad to enable us to make investments in a wide array of assets, including mortgage servicing advances and non-real estate related assets such as consumer loans. We will generally target assets that generate significant current cash flows and/or have the potential for meaningful capital appreciation. We will aim to generate attractive returns for our stockholders without excessive use of financial leverage.

Our initial holdings will include all of Newcastle’s co-investments in Excess MSRs, a portion of its Agency RMBS, all of the non-Agency RMBS it has acquired (other than through securitization vehicles) since the beginning of 2012, all mortgage loans acquired since the beginning of 2013 and all consumer loans it has acquired. Our initial holdings may also include other investments in residential mortgage related, or other, assets that Newcastle could make and contribute to us prior to the distribution. A majority of our assets will consist of qualifying real estate assets for purposes of Section 3(c)(5)(C) of the Investment Company Act of 1940 (the “1940 Act”), including investments in Agency RMBS. After the distribution, our asset allocation and target assets may change over time, depending on our Manager’s (as defined below) investment decisions in light of prevailing market conditions. The assets in our initial portfolio are described in more detail below under “Initial Portfolio.”

Our Manager

We will be managed by FIG LLC (our “Manager”), an affiliate of Fortress. We will draw upon the long-standing expertise and resources of Fortress, a global investment management firm with $53.4 billion of alternative and traditional assets under management as of December 31, 2012.

We also intend to capitalize on our Manager’s relationship with Nationstar Mortgage LLC (“Nationstar”), which is majority-owned by Fortress funds managed by our Manager, to source opportunities to acquire Excess MSRs. Nationstar (NYSE: NSM) is the largest non-bank servicer of residential loans, according to Inside Mortgage Finance, and it was ranked among the highest quality servicers by Fannie Mae in August 2012. We have developed an innovative strategy for co-investing in Excess MSRs with Nationstar, as described under “Market Opportunity and Target Assets—Excess Mortgage Servicing Rights (Excess MSRs).”

Pursuant to the terms of a Management Agreement, our Manager will provide a management team and other professionals who will be responsible for implementing our business strategy and performing certain services for us, subject to oversight by our board of directors. Our Manager’s duties will include: (1) performing all of our day-to-day functions, (2) determining investment criteria in conjunction with, and subject to the supervision of, our board of directors, (3) sourcing, analyzing and executing on investments and sales, (4) performing investment and liability management duties, including financing and hedging, and (5) performing financial and accounting management. For its services, our Manager will be entitled to an annual management fee and incentive compensation, as described below under “Management Agreement.”

 

 

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Our Manager also manages our predecessor, Newcastle, a publicly traded REIT that pursues a broad range of real estate related investments. Our management team will not be required to exclusively dedicate their services to us and will provide services for other entities affiliated with our Manager, including, but not limited to, Newcastle.

Reasons for the Separation

Newcastle’s board of directors periodically reviews strategic alternatives. The board determined upon careful review and consideration in accordance with the applicable standard of review under Maryland law that the separation of New Residential is in the best interests of the Company. The board’s determination was based on a number of factors, including those set forth below.

 

   

Creation of two focused companies . After the separation, New Residential will focus primarily on investments in residential real estate assets, and Newcastle will focus primarily on investments in commercial real estate related assets. We believe investors may find it more appealing to be able to invest in two distinct businesses. Each business will have the opportunity to cultivate a distinct identity, which we expect will facilitate investor understanding by reducing the complexity associated with a company that has diverse business objectives.

 

   

Potential for a higher aggregate market value for stockholders . The separation will enable potential investors and the financial community to evaluate the performance of each company separately, which may result in a higher aggregate market value than the value of the combined company.

 

   

Tailored capital structure and financing options . Each company will have the flexibility to create a capital structure tailored to its needs, and each may be able to attain more favorable financing terms separately. In addition, tailored capital structures will facilitate each company’s ability to pursue acquisitions, possibly using common stock as currency, and other strategic alliances.

The anticipated benefits of the separation are based on a number of assumptions, and there can be no assurance that such benefits will materialize to the extent anticipated or at all. In the event that the separation does not result in such benefits, the costs associated with the transaction, including an expected increase in management compensation and general and administrative expenses, could have a negative effect on our financial condition and ability to make distributions to our stockholders. For more information about the risks associated with the separation, see “Risk Factors.”

Market Opportunity and Target Assets

We believe that unfolding developments in the U.S. residential housing market are generating significant investment opportunities. The U.S. residential market is vast: the value of the housing market totaled $18 trillion as of December 31, 2012, including approximately $10 trillion of outstanding mortgages, according to Inside Mortgage Finance. In the aftermath of the U.S. financial crisis, the residential mortgage industry is undergoing major structural changes that are transforming the way mortgages are originated, owned and serviced. We believe these changes are creating a compelling set of investment opportunities.

We also believe that New Residential is one of only a select number of market participants that have the combination of capital, industry expertise and key business relationships we think are necessary to take advantage of this opportunity. We intend to focus on the investment opportunities described below, as well as other opportunities that may arise as the residential mortgage market evolves. A majority of our assets will consist of qualifying real estate assets for purposes of Section 3(c)(5)(C) of the 1940 Act, including investments in Agency RMBS.

For more information about the mortgage industry, see “Business—Mortgage Industry” included elsewhere in this information statement.

 

 

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Excess Mortgage Servicing Rights (Excess MSRs)

In our view, the mortgage servicing sector presents a number of compelling investment opportunities. A mortgage servicing right (“MSR”) provides a mortgage servicer with the right to service a pool of mortgages in exchange for a portion of the interest payments made on the underlying mortgages. This amount typically ranges from 25 to 50 basis points (“bps”) times the unpaid principal balance (“UPB”) of the mortgages. Approximately 83% of MSRs are currently owned by banks. We expect this number to decline as banks face pressure to reduce their MSR exposure as a result of heightened capital reserve requirements under Basel III, regulatory scrutiny and a more challenging servicing environment.

As banks sell MSRs, there is an opportunity for entities such as New Residential to participate through co-investment in the corresponding Excess MSRs. An MSR is made up of two components: a basic fee and an Excess MSR. The basic fee is the amount of compensation for the performance of servicing duties, and the Excess MSR is the amount that exceeds the basic fee. For example, if an MSR is 30 bps and the basic fee is 5 bps, then the Excess MSR is 25 bps. As the owner of an Excess MSR, we are not required to assume any servicing duties, advance obligations or liabilities associated with the portfolios underlying our investment.

There are a number of reasons why we believe Excess MSRs are a compelling investment opportunity:

 

   

Supply-Demand Imbalance . Since 2010, banks have sold or committed to sell MSRs totaling more than $1 trillion of the approximately $10 trillion mortgage market. As a result of the legal and other pressures facing bank servicers, we believe the volume of MSR sales is likely to be substantial for some period of time. We estimate that MSRs on approximately $300 billion of mortgages are currently for sale, requiring a capital investment of approximately $2 billion based on current pricing dynamics, and approximately $2 trillion of MSRs could be sold over the next several years. In addition, we estimate that Excess MSRs on $25 - 50 billion UPB could be sold in the form of “flow arrangements,” whereby loan originators agree to sell Excess MSRs on a recurring basis (often monthly or quarterly) on newly originated or delinquent loans. We expect that non-bank servicers such as Nationstar—which pursues a “capital light” investment model—will need companies to invest in the Excess MSR portion of these investments.

 

   

Attractive Pricing . MSRs are currently being sold at a material discount to historical pricing levels. We estimate that prices in many cases are down nearly 50% or more from their peak. At current prices, we believe investments in Excess MSRs can generate attractive returns without leverage.

 

   

Significant Barrier to Entry . Non-servicers cannot own the basic fee component of an MSR directly and would therefore need to co-invest with a servicer in order to invest in an Excess MSR. The number of strong, scalable non-bank servicers is limited. Moreover, in the case of Excess MSRs on Agency pools, the servicer must be Agency-approved. As a result, non-servicers seeking to invest in Excess MSRs generally face a significant barrier to entering the market, particularly if they do not have a relationship with a quality servicer. We believe New Residential’s track record of investing in Excess MSRs and its established relationship with Nationstar give us a competitive advantage over other investors.

As a wholly owned subsidiary of Newcastle, New Residential pioneered investments in Excess MSRs. We believe it remains the most active REIT in the sector. For details about New Residential’s investments in Excess MSRs, see “Initial Portfolio—Excess MSRs” below.

Residential Mortgage Backed Securities (RMBS)

RMBS are securities created through the securitization of a pool of residential mortgage loans. Currently, approximately $6 trillion of the $10 trillion of residential mortgages outstanding has been securitized, according to Inside Mortgage Finance as of June 2012. Of the securitized mortgages, approximately $5 trillion are Agency

 

 

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RMBS, which are RMBS issued or guaranteed by a U.S. Government agency, such as the Government National Mortgage Association (“Ginnie Mae”), or by a government-sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”). The balance has been securitized by either public or private trusts (“private label securitizations”), and these securities are referred to as non-Agency RMBS. For more information about the securitization market, see “Business—Mortgage Industry—Overview” included elsewhere in this information statement.

We invest in Agency RMBS, which we believe complement our Excess MSR and non-Agency RMBS investments. Agency RMBS offer more stable cash flows and historically have been subject to lower credit risk and greater price stability than the other types of residential mortgage investments we intend to target. For details about New Residential’s investments in Agency RMBS, see “Business—Market Opportunity and Target Assets—RMBS—Agency RMBS” included elsewhere in this information statement.

Since the onset of the financial crisis in 2007, there has been significant volatility in the prices for non-Agency RMBS. This has resulted from a widespread contraction in capital available for this asset class, deteriorating housing fundamentals, and an increase in forced selling by institutional investors (often in response to rating agency downgrades). While the prices of these assets have started to recover from their lows, we believe a meaningful gap still exists between current prices and the recovery value of many non-Agency RMBS. Accordingly, we believe there are opportunities to acquire non-Agency RMBS at attractive risk-adjusted yields, with the potential for meaningful upside if the U.S. economy and housing market continue to strengthen. We believe the value of existing non-Agency RMBS may also rise if the number of buyers returns to pre-2007 levels. Furthermore, we believe that in many non-Agency RMBS vehicles there is a meaningful discrepancy between the value of the non-Agency RMBS and the value of the underlying collateral. We intend to pursue opportunities to structure transactions that would enable us to realize this difference. For details about New Residential’s investments in non-Agency RMBS, see “Initial Portfolio—Non-Agency RMBS” below.

Residential Mortgage Loans

We believe there may be attractive opportunities to invest in portfolios of non-performing and other residential mortgage loans. In these investments, we would expect to acquire the loans at a deep discount to their face amount, and we (either independently or with a servicing co-investor) would seek to resolve the loans at a substantially higher valuation. We would seek to improve performance by transferring the servicing to Nationstar or another reputable servicer, which we believe could increase unlevered yields. In addition, we may seek to employ leverage to increase returns, either through traditional financing lines or securitization options.

While a number of portfolios of non-performing residential loans have been sold since the financial crisis, we believe the volume of such sales may increase for a number of reasons. For example, with improved balance sheets, many large banks have more financial flexibility to recognize losses on non-performing assets. The U.S. Department of Housing and Urban Development, or HUD, which acquires the non-performing loans from Ginnie Mae securitizations, has been increasing the number of portfolio sales. In addition, we believe that residential loan servicers—which have traditionally resorted to loan foreclosure procedures and subsequent property sales to maximize recoveries on non-performing loans—may increase sales of defaulted loans. To the extent any of these dynamics results in a meaningful volume of non-performing loan sales, we believe they may represent attractive investment opportunities for New Residential.

 

 

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Residential Mortgage Servicing Advances

We believe there may be attractive opportunities to invest in servicing advances. Servicing advances are reimbursable cash payments made by a loan servicer to the owner of a loan when the borrower fails to make required payments. Servicing advances typically fall into one of three categories:

 

   

Principal and Interest Advances : Cash payments made by the servicer to the owner of the mortgage loan to cover scheduled payments of principal and interest on a mortgage loan that have not been paid on a timely basis by the borrower.

 

   

Escrow Advances (Taxes and Insurance Advances) : Cash payments made by the servicer to third parties on behalf of the borrower for real estate taxes and insurance premiums on the property that have not been paid on a timely basis by the borrower.

 

   

Foreclosure Advances : Cash payments made by the servicer to third parties for the costs and expenses incurred in connection with the foreclosure, preservation and sale of the mortgaged property, including attorneys’ and other professional fees.

Servicing advances are usually reimbursed from amounts received with respect to the related mortgage loan, including payments from the borrower or amounts received from the liquidation of the property securing the loan, which is referred to as “loan level recovery.”

Servicing advances are structured to provide liquidity to mortgage loan securitization trusts. Servicers customarily have the right to cease making servicing advances on a loan if they determine that advances cannot be repaid from the proceeds of the loan or related property.

Servicing advances are typically financed through securitizations or loans structured by third parties such as investment banks. When servicing advances are financed through securitizations, recovery of advances are senior in the payment “waterfall.” In addition, in the event that the loan level recovery is not sufficient to reimburse the servicer in full for servicing advances, most pooling and servicing agreements provide that the servicer is entitled to be reimbursed from collections received with respect to other loans in the same securitized mortgage pool, which is referred to as “pool level recovery.”

We believe there is an evolving market in the financing of servicing advances that could present us with a significant investment opportunity. We intend to make investments in servicing advances by providing financing to servicers through senior, mezzanine or equity positions. The status of investments in servicing advances for purposes of the REIT requirements is uncertain, and therefore our ability to make these kinds of investments may be limited.

Other Investments

We may pursue other types of investments as the market evolves, such as our recent investment in consumer loans. See “—Initial Portfolio—Other Investments.” Our Manager will make decisions about our investments in accordance with broad investment guidelines adopted by our board of directors. Accordingly, we may change our target asset classes, and we may opportunistically acquire a variety of assets that may be different from, and may be riskier than, our initial portfolio or target assets. For more information about our investment guidelines, see “Business—Investment Guidelines” included elsewhere in this information statement.

 

 

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Our Strengths

Focused Strategy

New Residential will pursue an investment strategy focused primarily on attractive opportunities across the residential spectrum. With an $18 trillion residential housing market undergoing major structural change, we believe a dedicated strategy presents investors with an opportunity to participate in that restructuring.

Experienced Management Team

Our Manager is an affiliate of Fortress, a leading alternative asset manager with $53.4 billion of assets under management as of December 31, 2012. Residential and other real estate related assets, including those in our initial portfolio, have been a significant component of the investment strategies of both Fortress and Newcastle. Through our Manager, we have access to Fortress’s extensive and long-standing relationships with major issuers of real estate related securities and the broker-dealers that trade these securities, as well as their banking relationships in the mortgage servicing industry. We believe these relationships, together with Fortress’s infrastructure, will provide us access to an ongoing pipeline of attractive investment opportunities, many of which may not be available to our competitors. We also believe that the breadth of Fortress’s experience will enable New Residential to react nimbly to the changing residential landscape in order to execute on emerging investment opportunities. For instance, in 2012, we obtained a private letter ruling from the Internal Revenue Service that permits us to treat Excess MSRs as qualifying assets that generate qualifying income for purposes of the REIT asset and income tests, which gave us an early advantage for investing in Excess MSRs.

Existing Portfolio of Residential Mortgage Related Assets

Our initial holdings will include all of Newcastle’s co-investments in Excess MSRs, a portion of its Agency RMBS, all of the non-Agency RMBS it has acquired (other than through securitization vehicles) since the beginning of 2012, all mortgage loans acquired since the beginning of 2013 and all consumer loans it has acquired. We target returns on invested equity that average in the mid-teens. We believe these returns are attainable given the performance of our existing investments to date and based on market dynamics that we believe will foster significant opportunities to invest in additional residential real estate assets at similar returns. For example, our underwriting assumptions projected a weighted average internal rate of return (“IRR”) of 18% for the Excess MSRs we owned as of December 31, 2012, and this portfolio has performed better than our underwriting assumptions. We believe that various market dynamics, including the current low-interest rate environment, a supply-demand imbalance for investments in Excess MSRs, and barriers to entry with respect to this asset class, support our target returns. However, the returns of individual assets, as well as different asset classes, will vary, and there can be no assurance that any of our assets, or our portfolio as a whole, will generate target returns. In addition, our ability to achieve target returns on our Agency and non-Agency RMBS, and potentially other assets, depends in part on the use of leverage and our ability to quickly deploy the proceeds of any financing at attractive returns. There can be no assurance that we will be able to secure financing on favorable terms, or at all. In addition, there can be no assurance that we will be able to source, or quickly complete, attractive investments for which the proceeds of any such financing could be used.

Relationship with Nationstar

We intend to capitalize on our Manager’s relationship with Nationstar, which is majority-owned by Fortress funds managed by our Manager, to source opportunities to acquire Excess MSRs. Nationstar (NYSE: NSM) is the largest non-bank servicer of residential loans, according to Inside Mortgage Finance, and it was ranked among the highest quality servicers by Fannie Mae in August 2012. We have developed an innovative strategy for co-investing in Excess MSRs with Nationstar. Given that non-servicers cannot own the basic fee component of an MSR directly, this strategy creates the opportunity for us to co-invest in Excess MSRs and affords

 

 

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Nationstar the opportunity to invest in MSRs on a “capital light” basis. To date, we have completed several co-investments with Nationstar, as described under “Initial Portfolio—Excess MSRs” below. In addition, we have capitalized on Nationstar’s origination capabilities by entering into a “recapture agreement” in each of our Excess MSR investments to date. Under the recapture agreements, we are generally entitled to a pro rata interest in the Excess MSRs on any initial or subsequent refinancing by Nationstar of a loan in the original portfolio. In other words, we are generally entitled to a pro rata interest in the Excess MSRs on both (i) a loan resulting from a refinancing by Nationstar of a loan in the original portfolio, and (ii) a loan resulting from a refinancing by Nationstar of a previously recaptured loan. We believe this arrangement mitigates our exposure to the prepayment risk associated with Excess MSRs. Furthermore, all of the Non-Agency RMBS included in our initial portfolio is serviced by Nationstar.

Tax Efficient REIT Status

We will elect to be treated as, and expect to operate in conformity with the requirements for qualification and taxation as, a REIT. REIT status will provide us with certain tax advantages compared to some of our competitors. Those advantages include an ability to reduce our corporate-level income taxes by making dividend distributions to our stockholders, and an ability to pass our capital gains through to our stockholders in the form of capital gains dividends. We believe our REIT status provides us with a significant advantage as compared to other companies or industry participants who do not have a similar tax efficient structure.

Initial Portfolio

Our initial holdings will include all of Newcastle’s co-investments in Excess MSRs, a portion of its Agency RMBS, all of the non-Agency RMBS it has acquired (other than through securitization vehicles) since the beginning of 2012, all mortgage loans acquired since the beginning of 2013 and all consumer loans it has acquired. Our initial holdings may also include other investments in residential mortgage related assets that Newcastle could make and contribute to us prior to the distribution. A majority of our assets will consist of qualifying real estate assets for purposes of Section 3(c)(5)(C) of the 1940 Act, including investments in Agency RMBS. After the distribution, our asset allocation and target assets may change over time, depending on our Manager’s investment decisions in light of prevailing market conditions. The assets in our initial portfolio are described in more detail below.

Excess MSRs

As of December 31, 2012, we had approximately $245 million estimated carrying value of Excess MSRs. In addition, since December 31, 2012, we have agreed to invest in Excess MSRs in two additional transactions, as described below.

On January 6, 2013, we agreed to co-invest in Excess MSRs on a portfolio of residential mortgage loans with a UPB of approximately $215 billion as of November 30, 2012. Approximately 53% of the loans in this portfolio are in private label securitizations, and the remainder are owned, insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Nationstar has agreed to acquire the related servicing rights from Bank of America. We committed to invest approximately $340 million (based on the November 30, 2012 UPB) to acquire an approximately one-third interest in the Excess MSRs on this portfolio. The remaining interests in the Excess MSRs will be owned by a Fortress-managed fund and Nationstar on a pari passu basis. As the servicer, Nationstar will perform all servicing and advancing functions, and it will retain the ancillary income, servicing obligations and liabilities associated with this portfolio. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs will be shared pro rata among the Fortress-managed fund, Nationstar and us, subject to certain limitations.

On January 31, 2013, we completed the first closing of this co-investment. The first closing relates to Excess MSRs on loans with an aggregate UPB of approximately $58 billion as of December 31, 2012, that are owned, insured or

 

 

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guaranteed by Fannie Mae or Freddie Mac. Our purchase price for this portion of the investment was approximately $108 million. We are entitled to one-third of the Excess MSRs. Nationstar also closed on servicing rights to Ginnie Mae loans with a UPB of approximately $39 billion as of December 31, 2012. The closing of the remainder of the co-investment, which corresponds to loans in private label securitizations and the Ginnie Mae loans, is expected to occur in the second quarter of 2013, subject to the receipt of regulatory and third-party approvals, including Ginnie Mae approval and certain rating agency approvals. There can be no assurance that we will complete this investment as anticipated or at all. However, we believe that it is probable that we will be able to obtain pending approvals and subsequently complete this investment.

In addition, on January 4, 2013, we completed a co-investment in Excess MSRs on a portfolio of Ginnie Mae residential mortgage loans with a UPB of approximately $13 billion as of November 30, 2012. Nationstar acquired the related servicing rights from Bank of America in November 2012. We invested approximately $27 million to acquire a 33% interest in the Excess MSRs on this portfolio. The remaining interests in the Excess MSRs will be owned by a Fortress-managed fund and Nationstar on a pari passu basis.

As of December 31, 2012, our completed investments represent a 65% interest in the Excess MSRs on five pools of mortgage loans with an aggregate UPB of approximately $77 billion. Nationstar is the servicer of the loans underlying all of our investments in Excess MSRs to date, and it earns a basic fee in exchange for providing all servicing functions. In addition, Nationstar retains a 33-35% interest in the Excess MSRs and all ancillary income associated with the portfolios. We do not have any servicing duties, liabilities or obligations associated with the servicing of the portfolios underlying any of our investments. Each of our investments to date is subject to a recapture agreement with Nationstar. Under the recapture agreements, we are generally entitled to a pro rata interest in the Excess MSRs on any initial or subsequent refinancing by Nationstar of a loan in the original portfolio. In other words, we are generally entitled to a pro rata interest in the Excess MSRs on both (i) a loan resulting from a refinancing by Nationstar of a loan in the original portfolio, and (ii) a loan resulting from a refinancing by Nationstar of a previously recaptured loan. The table below summarizes the terms of our completed investments in Excess MSRs as of December 31, 2012.

 

Summary of Excess MSR Investments as of December 31, 2012

 
     Investment
Date
     Initial
UPB
(bn)
     Current 1
UPB
(bn)
     Loan
Type 2
     MSR Component     Interest
in Excess
MSR
(%)
    Excess MSR  
                 MSR
(bps)
    Excess
MSR
(bps)
      Purchase
Price
(mm)
     Carrying
Value
(mm)
 

Pool 1

     12/2011       $ 9.9       $ 8.4         GSE         35  bps      29  bps      65   $ 43.6       $ 40.9   

Pool 2

     06/2012         10.4         9.4         GSE         31        23        65     42.3         39.3   

Pool 3

     06/2012         9.8         9.1         GSE         32        23        65     36.2         35.5   

Pool 4

     06/2012         6.3         5.8         GSE         26        17        65     15.4         15.0   

Pool 5

     06/2012         47.6         43.9         PLS         32        13        65     124.8         114.3   
     

 

 

    

 

 

       

 

 

   

 

 

     

 

 

    

 

 

 

Total/Weighted Avg.

      $ 84.0       $ 76.6            32 bps        17 bps        $ 262.3       $ 245.0   
     

 

 

    

 

 

       

 

 

   

 

 

     

 

 

    

 

 

 

 

(1) As of December 31, 2012.
(2) “GSE” refers to loans in Fannie Mae or Freddie Mac securitizations. “PLS” refers to loans in private label securitizations.

 

 

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Summary of Excess MSR Investments Through Equity Method Investees Subsequent to December 31, 2012

 
                          MSR Component     Interest
Investee
(%)
    Investee
Interest
in Excess
MSR (%)
    Excess  MSR
Initial
Investment
(mm)
 
     Investment
Date
     UPB  (bn) 2      Loan
type 3
     MSR
(bps)
    Excess
MSR (bps)
       

Pool 6

     01/2013       $ 13         GM         40  bps      10  bps      50     67   $ 27   

Pool 7

     01/2013         40         GSE         27        5        50     67     70   

Pool 8

     01/2013         18         GSE         28        10        50     67     37   

Pool 9 1

     01/2013         39         GM         40        22        50     67     85 4  

Pool 10 1

     01/2013         107         PLS         34        10        50     67     141 4  
     

 

 

       

 

 

   

 

 

       

 

 

 

Total/Weighted Avg.

  

   $ 216            34 bps        11 bps          $ 360   
     

 

 

       

 

 

   

 

 

       

 

 

 

 

(1) This investment has been committed to but has not yet closed. This investment is subject to certain closing requirements and regulatory approvals.
(2) As of December 31, 2012.
(3) “GSE” refers to loans in Fannie Mae or Freddie Mac securitizations. “PLS” refers to loans in private label securitizations. “GM” refers to loans in Ginnie Mae securitizations.
(4) The actual amount invested will be based on the UPB at the time of close.

We currently expect to continue to make co-investments with Nationstar, and we may also acquire Excess MSRs from other servicers. Nationstar does not, however, have any obligation to offer us any future co-investment opportunity. In the event that we cannot co-invest in Excess MSRs with Nationstar, we may not be able to find other suitable counterparties from which to acquire Excess MSRs, which could have a material adverse effect on our business. At the same time, our co-investments with Nationstar expose us to counterparty concentration risk, which could increase if we do not or cannot acquire Excess MSRs from other counterparties. Nationstar publicly discloses its financial statements and other material information in filings with the SEC, which may be obtained at the SEC’s website, www.sec.gov. The contents of Nationstar’s public disclosure are not incorporated by reference herein, do not form part of this information statement and have not been verified by us. For more details about our initial portfolio of Excess MSRs, see “Business—Initial Portfolio—Excess MSRs.”

Agency RMBS

Subsequent to December 31, 2012, Newcastle contributed to us approximately $1.0 billion face amount of Agency RMBS with a fair value of approximately $1.1 billion. We financed these Agency RMBS with approximately $1.0 billion of repurchase agreements. The counterparties of these repurchase agreements are Goldman Sachs & Co., Barclays Capital Inc., Citigroup Global Markets Inc., Nomura Securities International, Inc. and Morgan Stanley & Co. LLC. These repurchase agreements have a 95% advance rate and contain customary margin call provisions. The initial term of these repurchase agreements is 30 days.

 

Summary of Agency RMBS Contributed by Newcastle(1)

 

Asset type

   Outstanding
Face Amount
     Amortized
Cost Basis
     Carrying
Value(2)
     Outstanding
Repurchase
Agreements
 

Agency RMBS

   $ 1,020,073       $ 1,079,029       $ 1,079,029       $ 1,024,055   

 

(1) All amounts are as of the contribution date.
(2) Fair value, which is equal to carrying value for all securities.

 

 

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Non-Agency RMBS

As of December 31, 2012, we had approximately $434 million face amount of non-Agency RMBS. The table below summarizes our investments in non-Agency RMBS.

 

Summary of non-Agency RMBS as of December 31, 2012

 
                   Gross Unrealized               

Asset Type

   Outstanding
Face Amount
     Amortized
Cost Basis
     Gains      Losses     Carrying
Value (1)
     Outstanding
Repurchase
Amounts
 

Non-Agency RMBS

   $ 433,510       $ 274,230       $ 15,856       $ (330   $ 289,756       $ 150,922   

 

(1) Fair value, which is equal to carrying value for all securities.

Subsequent to December 31, 2012, we acquired an additional approximately $392 million face amount of non-Agency RMBS for approximately $243 million. For more details about our initial portfolio of non-Agency RMBS, see “Business—Initial Portfolio—Non-Agency RMBS.”

In July 2012, we financed two of the securities with approximately $59.2 million of repurchase agreements guaranteed by Newcastle, at a cost of one-month LIBOR plus 200 bps and a 65% advance rate. These repurchase agreements, which contain customary margin call provisions, had an initial 90-day term, which was extended on October 11, 2012 to January 26, 2013.

In December 2012, we financed previously acquired non-Agency RMBS with approximately $90.2 million of repurchase agreements guaranteed by Newcastle, at a cost of one-month LIBOR plus 200 bps. The weighted average advance rate for these repurchase agreements is approximately 65%. These repurchase agreements, which contain customary margin call provisions, have an initial term ending on January 28, 2013.

In January 2013, we extended these repurchase agreements to April 29, 2013. On April 22, 2013, these repurchase agreements had an outstanding principal balance of approximately $158.0 million. Prior to the separation, we intend to amend these agreements to replace the guaranty by Newcastle with a guaranty by New Residential.

In April 2013, we financed additional non-Agency RMBS with approximately $144 million of repurchase agreements guaranteed by Newcastle, at a cost of one-month LIBOR plus 200 bps. The weighted average advance rate for these repurchase agreements is approximately 70%. These repurchase agreements, which contain customary margin call provisions, have an initial term ending on July 9, 2013. Prior to the separation, we intend to amend these agreements to replace the guaranty by Newcastle with a guaranty by New Residential.

Residential Mortgage Loans

On February 27, 2013, we entered into an agreement to co-invest in residential mortgage loans with a UPB of approximately $83 million as of December 31, 2012. We invested approximately $35 million to acquire a 70% interest in the mortgage loans. Nationstar has co-invested pari passu with us in 30% of the mortgage loans and will be the servicer of the loans performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities as the servicer.

Other Investments

On March 5, 2013, we agreed to co-invest in a portfolio of consumer loans with a UPB of approximately $4.2 billion as of December 31, 2012. The portfolio includes over 400,000 personal unsecured loans and personal homeowner loans originated through subsidiaries of HSBC Finance Corporation. On April 1, 2013, we completed this co-investment through newly formed limited liability companies (collectively, “the consumer loan companies”). The consumer loan companies acquired the portfolio from HSBC Finance Corporation and its affiliates. We 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 our Manager, acquired 47%, and an affiliate of Blackstone

 

 

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Tactical Opportunities Advisors L.L.C. acquired 23%. Springleaf will act 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 consumer loan companies were formed on March 19, 2013, for the purpose of making this investment and commenced operations upon the completion of the investment. After a servicing transition period, Springleaf will be the servicer of the loans and will provide all servicing and advancing functions for the portfolio. Springleaf is a leading provider of consumer credit based in Evansville, Indiana that makes secured and unsecured personal loans through its more than 800 branches located across the United States.

Prior to the separation, Newcastle will also contribute to us approximately $260 million of cash. Over time, we expect to opportunistically adjust our portfolio composition in response to market conditions. Our Manager will make decisions about our investments in accordance with broad investment guidelines adopted by our board of directors. Accordingly, we may acquire a variety of assets that may be different from, and may be riskier than, the assets that comprise our initial portfolio. For more information about our investment guidelines, see “Business—Investment Guidelines” included elsewhere in this information statement.

Financing Strategy

Our objective is to generate attractive risk-adjusted returns for our stockholders without excessive use of leverage. We do not have a predetermined target leverage level. The amount of leverage we deploy for a particular investment will depend upon an assessment of a variety of factors, which may include the anticipated liquidity and price volatility of our assets; the gap between the duration of assets and liabilities, including hedges; the availability and cost of financing the assets; our opinion of the creditworthiness of financing counterparties; the health of the U.S. economy and the residential mortgage and housing markets; our outlook for the level, slope and volatility of interest rates; the credit quality of the loans underlying our RMBS; and our outlook for asset spreads relative to financing costs.

We have funded the acquisition of Excess MSRs on an unlevered basis, but we may invest in Excess MSRs on a levered basis in the future. We currently expect that our primary sources of financing will include bank credit facilities, repurchase agreements, securitizations and other secured and unsecured forms of borrowing.

As of April 22, 2013, we had outstanding repurchase agreements with an aggregate face amount of approximately $302.0 million to finance non-Agency RMBS and approximately $1.0 billion to finance Agency RMBS. Under these agreements, we sold a security to a counterparty and concurrently agreed to repurchase the same security at a later date for a higher specified price. The sale price represents financing proceeds, and the difference between the sale and repurchase prices represents interest on the financing. The price at which the security is sold generally represents the market value of the security less a discount or “haircut,” which can range broadly, for example from 5% for Agency RMBS to between 20% and 40% for non-Agency RMBS. During the term of the repurchase agreement, which can be as short as 30 days, the counterparty holds the security as collateral. The counterparty monitors and calculates what it estimates to be the value of the collateral during the term of the agreement. If this value declines by more than a de minimis threshold, the counterparty could require us to post additional collateral (or “margin”) in order to maintain the initial haircut on the collateral. This margin is typically required to be posted in the form of cash and cash equivalents.

These repurchase agreements have terms that generally conform to the terms of the standard master repurchase agreement published by the Securities Industry and Financial Markets Association (“SIFMA”) as to repayment, margin requirements and segregation of all securities sold under any repurchase transactions. In addition, each counterparty typically requires that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions include changes to the margin maintenance requirements, required haircuts, purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction and cross default provisions. These provisions may differ for each of our counterparties and are not determined until we engage in a specific repurchase transaction.

 

 

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Management Agreement

Prior to the completion of the distribution, we will enter into a Management Agreement with our Manager. Our Management Agreement will require our Manager to manage our business affairs in conformity with the broad investment guidelines adopted and monitored by our board of directors. For more information about our investment guidelines, see “Business—Investment Guidelines” included elsewhere in this information statement.

Our Management Agreement has an initial one-year term and will be automatically renewed for one-year terms thereafter unless terminated either by us or our Manager. Our Manager is entitled to receive from us a management fee and incentive compensation that is based on our performance. In addition, we are obligated to reimburse certain expenses incurred by our Manager. Our Manager is also entitled to receive a termination fee from us under certain circumstances. The terms of our Management Agreement are summarized below and described in more detail under “Our Manager and Management Agreement” elsewhere in this information statement.

 

Type

  

Description

Management Fee

   1.5% per annum of our gross equity calculated and payable monthly in arrears in cash. Gross equity is generally the equity transferred by Newcastle on the distribution date, plus total net proceeds from stock offerings, plus certain capital contributions to subsidiaries, less capital distributions and repurchases of common stock. For illustrative purposes only, the amount of the management fee payable to the manager in the first fiscal year following the completion of the separation would be approximately $5.7 million if our average annual gross equity during such period were equal to the amount of total Newcastle’s Equity shown on our consolidated balance sheet as of December 31, 2012, which was $378 million, and no equity offerings, capital distributions or repurchases occurred during such period.

Incentive Compensation

   Our Manager will be entitled to receive annual incentive compensation in an amount equal to the product of (A) 25% of the dollar amount by which (1)(a) the funds from operations before the incentive compensation per share of common stock, plus (b) gains (or losses) from debt restructuring and gains (or losses) from sales of property and other assets per share of common stock, exceed (2) an amount equal to (a) the weighted average of the book value per share of the equity transferred by Newcastle on the distribution date and the prices per share of our common stock in any offerings by us (adjusted for prior capital dividends or capital distributions) multiplied by (b) a simple interest rate of 10% per annum, multiplied by (B) the weighted average number of shares of common stock outstanding. “Funds from operations” means net income (computed in accordance with GAAP), excluding gains (losses) from debt restructuring and gains (or losses) from sales of property, plus depreciation on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations will be computed on an unconsolidated basis. The computation of funds from operations may be adjusted at the direction of our independent directors based on changes in, or
   certain applications of, GAAP. Funds from operations will be determined from the date of the spin-off and without regard to Newcastle’s prior performance. Funds from operations does not represent cash generated from operating activities in accordance

 

 

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Type

  

Description

   with GAAP and should not be considered as an alternative to net income as an indication of our performance or to cash flows as a measure of liquidity or ability to make distributions.
Reimbursement of Expenses   

We will pay, or reimburse our Manager’s employees for performing certain legal, accounting, due diligence tasks and other services that outside professionals or outside consultants otherwise would perform, provided that such costs and reimbursements are no greater than those which would be paid to outside professionals or consultants on an arm’s-length basis and shall not be reimbursed in excess of $500,000 per annum. We also pay all operating expenses, except those specifically required to be borne by our Manager under our Management Agreement.

  

Our Manager is responsible for all costs incident to the performance of its duties under the Management Agreement, including compensation of our Manager’s employees, rent for facilities and other “overhead” expenses. The expenses required to be paid by us include, but are not limited to, issuance and transaction costs incident to the acquisition, disposition and financing of our investments, legal and auditing fees and expenses, the compensation and expenses of our independent directors, the costs associated with the establishment and maintenance of any credit facilities and other indebtedness of ours (including commitment fees, legal fees, closing costs, etc.), expenses associated with other securities offerings of ours, the costs of printing and mailing proxies and reports to our stockholders, costs incurred by employees of our manager for travel on our behalf, costs associated with any computer software or hardware that is used solely for us, costs to obtain liability insurance to indemnify our directors and officers and the compensation and expenses of our transfer agent.

 

We will not reimburse our Manager for the salaries of our officers, rent attributable to the space occupied by our Manager, and all other “overhead” expenses of our Manager.

Termination Fee    The termination fee is a fee equal to the sum of (1) the amount of the management fee during the 12 months immediately preceding the date of termination, and (2) the “Incentive Compensation Fair Value Amount.” The Incentive Compensation Fair Value Amount is an amount equal to the Incentive Compensation that would be paid to the Manager if our assets were sold for cash at their then current fair market value (as determined by an appraisal, taking into account, among other things, the expected future value of the underlying investments).

 

 

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Summary Risk Factors

You should carefully read and consider the risk factors set forth under “Risk Factors,” as well as all other information contained in this information statement. If any of the following risks occur, our business, financial condition, liquidity and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline.

 

   

We have no operating history as an independent company and may not be able to successfully operate our business strategy or generate sufficient revenue to make or sustain distributions to our stockholders. The financial information included in this information statement may not be indicative of the results we would have achieved as a separate stand-alone company and may not be a reliable indicator of our future performance or results.

 

   

The value of our Excess MSRs is based on various assumptions that could prove to be incorrect and could have a negative impact on our financial results.

 

   

We will rely heavily on mortgage servicers to achieve our investment objective and have no direct ability to influence their performance.

 

   

We have significant counterparty concentration risk in Nationstar and Springleaf and are subject to other counterparty concentration and default risks.

 

   

GSE initiatives and other actions may adversely affect returns from investments in Excess MSRs.

 

   

Many of our investments may be illiquid, and this lack of liquidity could significantly impede our ability to vary our portfolio in response to changes in economic and other conditions or to realize the value at which such investments are carried if we are required to dispose of them.

 

   

We may invest in RMBS collateralized by subprime mortgage loans, which are subject to increased risks.

 

   

The value of our RMBS may be adversely affected by deficiencies in servicing and foreclosure practices, as well as related delays in the foreclosure process.

 

   

The lenders under our repurchase agreements may elect not to extend financing to us, which could quickly and seriously impair our liquidity.

 

   

Our investments in RMBS may be subject to significant impairment charges, which would adversely affect our results of operations.

 

   

We may not be able to finance our investments on attractive terms or at all, and financing for Excess MSRs may be particularly difficult or impossible to obtain.

 

   

The consumer loans underlying our investments are subject to delinquency and loss, which could have a negative impact on our financial results.

 

   

Interest rate fluctuations and shifts in the yield curve may cause losses.

 

   

Maintenance of our 1940 Act exemption imposes limits on our operations.

 

   

We are dependent on our Manager and may not find a suitable replacement if our Manager terminates the Management Agreement.

 

   

There are conflicts of interest in our relationship with our Manager.

 

   

Our directors have approved broad investment guidelines for our Manager and do not approve each investment decision made by our Manager. In addition, we may change our investment strategy without stockholder consent, which may result in our making investments that are different, riskier or less profitable than our current investments.

 

   

We may be unable to achieve some or all of the benefits that we expect to achieve from our separation from Newcastle.

 

 

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We may compete with affiliates of our Manager, including Newcastle, which could adversely affect our and their results of operations.

 

   

We do not know what impact the Dodd-Frank Act will have on our business.

 

   

Our failure to qualify as a REIT would result in higher taxes and reduced cash available for distribution to our stockholders.

 

   

The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT.

 

   

The failure of our Excess MSRs to qualify as real estate assets or the income from our Excess MSRs to qualify as mortgage interest could adversely affect our ability to qualify as a REIT.

 

   

REIT distribution requirements could adversely affect our liquidity and our ability to execute our business plan.

 

   

There is no existing market for our common stock and a trading market that will provide you with adequate liquidity may not develop for our common stock. In addition, once our common stock begins trading, the market price of our shares may fluctuate widely.

 

   

Your percentage ownership in New Residential may be diluted in the future.

Conflicts of Interest

Although we have established certain policies and procedures designed to mitigate conflicts of interest, there can be no assurance that these policies and procedures will be effective in doing so. It is possible that actual, potential or perceived conflicts of interest could give rise to investor dissatisfaction, litigation or regulatory enforcement actions.

One or more of our officers and directors have responsibilities and commitments to entities other than us, including, but not limited to, Newcastle. For example, after the distribution, we will have some of the same directors and officers. In addition, we do not have a policy that expressly prohibits our directors, officers, securityholders or affiliates from engaging for their own account in business activities of the types conducted by us. However, our code of business conduct and ethics will prohibit the directors, officers and employees of our Manager from engaging in any transaction that involves an actual conflict of interest with us. See “Risk Factors—Risks Relating to Our Manager—There are conflicts of interest in our relationship with our Manager.”

Our key agreements, including our Management Agreement, have been negotiated among related parties, and their respective terms, including fees and other amounts payable, may not be as favorable to us as terms negotiated on an arm’s-length basis with unaffiliated parties. Our independent directors may not vigorously enforce the provisions of our Management Agreement against our Manager. For example, our independent directors may refrain from terminating our Manager because doing so could result in the loss of key personnel.

The structure of the Manager’s compensation arrangement may have unintended consequences for us. We have agreed to pay our Manager a management fee that is not tied to our performance and incentive compensation that is based entirely on our performance. The management fee may not sufficiently incentivize our Manager to generate attractive risk-adjusted returns for us, while the performance-based incentive compensation component may cause our Manager to place undue emphasis on the maximization of earnings, including through the use of leverage, at the expense of other objectives, such as preservation of capital, to achieve higher incentive distributions. Investments with higher yield potential are generally riskier or more speculative than investments with lower yield potential. This could result in increased risk to the value of our portfolio of assets and your investment in us.

We may compete with entities affiliated with our Manager or Fortress, including Newcastle, for certain target assets. From time to time, affiliates of Fortress may seek to acquire the same or similar types of assets that we may seek to acquire. These affiliates currently have meaningful purchasing capacity, which may change over time depending upon a variety of factors, including, but not limited to, available equity capital and debt

 

 

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financing, market conditions and cash on hand. For example, Fortress has a fund primarily focused on investments in Excess MSRs with approximately $600 million in capital commitments. Fortress funds generally have a fee structure similar to ours, but the fees actually paid will vary depending on the size, terms and performance of each fund.

Our Manager may determine, in its discretion, to make a particular investment through an investment vehicle other than us. Investment allocation decisions will reflect a variety of factors, such as a particular vehicle’s availability of capital (including financing), investment objectives and concentration limits, legal, regulatory, tax and other similar considerations, the source of the investment opportunity and other factors that the Manager, in its discretion, deems appropriate. Our Manager will not have an obligation to offer us the opportunity to participate in any particular investment, even if it meets our investment objectives.

Operational and Regulatory Structure

REIT Qualification

We will elect to be taxed and intend to qualify as a REIT for U.S. federal income tax purposes commencing with our initial taxable year ending December 31, 2013. Our qualification as a REIT will depend upon our ability to meet, on a continuing basis, various complex requirements under the Internal Revenue Code of 1986, as amended (the “Code”), relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels to our stockholders and the concentration of ownership of our capital stock. We believe that, commencing with our initial taxable year ending December 31, 2013, we will be organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our intended manner of operation will enable us to meet the requirements for qualification and taxation as a REIT. In connection with the distribution of our common stock, we will receive an opinion of Skadden, Arps, Slate, Meagher & Flom LLP to the effect that we have been organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT.

1940 Act Exemption

We intend to conduct our operations in reliance on an exemption from registration as an investment company under the 1940 Act pursuant to Section 3(c)(5)(C) of the 1940 Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exemption generally requires that at least 55% of our assets must be comprised of qualifying real estate assets and at least 80% of each of our assets must be comprised of qualifying real estate assets and real estate related assets under the 1940 Act. We will monitor our holdings to ensure continuing and ongoing compliance with this test. See “Business—Operational and Regulatory Structure—1940 Act Exemption” for a further discussion of the exemption from registration under the 1940 Act that we expect to rely on and the treatment of certain of our target asset classes for purposes of such exemption.

We expect to rely on guidance published by the SEC or its staff or on our analyses of such guidance to determine which assets qualify for the exemption.

In August 2011, the SEC issued a concept release pursuant to which they solicited public comments on a wide range of issues relating to companies engaged in the business of acquiring mortgages and mortgage-related instruments and that rely on Section 3(c)(5)(C) of the 1940 Act. The concept release and the public comments thereto have not yet resulted in SEC rulemaking or interpretative guidance and we cannot predict what form any such rulemaking or interpretive guidance may take. There can be no assurance, however, that the laws and regulations governing the 1940 Act status of REITs, or guidance from the SEC or its staff regarding the exemption from registration as an investment company on which we rely, will not change in a manner that adversely affects our operations.

 

 

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Changes to such laws and regulations or new or different guidance from the SEC or its staff regarding the exemption from registration on which we rely, including with respect to which assets qualify for such exemption, could require us, among other things, either to (a) change the manner in which we conduct our operations in order to maintain our exemption from registration as an investment company, (b) limit our ability to make certain investments and/or effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or (c) register as an investment company, any of which could have a material adverse effect on us and the market price of our securities. If we were required to register as an investment company under the 1940 Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the 1940 Act), portfolio composition, including restrictions with respect to diversification and industry concentration, our ability to make distributions and other matters.

Maintenance of our exemption under the 1940 Act generally limits the amount of our investments in non-real estate related assets to no more than 20% of our total assets. See “Risk Factors—Risks Related to Our Business—Maintenance of our 1940 Act exemption imposes limits on our operations.”

Emerging Growth Company Status

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We have not made a decision whether to take advantage of any or all of these exemptions. If we do take advantage of any of these exemptions, we do not know if some investors will find our common stock less attractive as a result. The result may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected not to take advantage of the benefits of this extended transition period and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. This election is irrevocable.

We could remain an “emerging growth company” until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (b) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), (c) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (d) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

Our Corporate Information

We are a wholly owned subsidiary of Newcastle. We were formed as NIC MSR LLC, a Delaware limited liability company, in September 2011. We converted to a Delaware corporation and changed our name to New Residential Investment Corp. in December 2012. Our principal executive offices are located at 1345 Avenue of the Americas, New York, New York 10105, c/o New Residential Investment Corp. Our telephone number is 212-479-3150.

 

 

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Questions and Answers about New Residential and the Separation

 

Why is the separation of New Residential structured as a distribution?    Newcastle believes that a distribution of our shares is an efficient way to separate our assets and that the separation will create benefits and value for us and Newcastle.
How will the separation of New Residential work?    New Residential currently owns, directly and through subsidiaries, a portfolio of assets that includes Excess MSRs, Agency and non-Agency RMBS, residential mortgage loans and consumer loans. Newcastle will distribute the common stock of New Residential to the holders of Newcastle common stock on a pro rata basis.
When will the distribution occur?    We expect that Newcastle will distribute the shares of New Residential common stock on May 15, 2013 to holders of record of Newcastle common stock on May 6, 2013, subject to certain conditions described under “—The Separation and Distribution—Conditions to the distribution.”
What do stockholders need to do to participate in the distribution?    Nothing, but we urge you to read this entire document carefully. Stockholders who hold Newcastle common stock as of the record date will not be required to take any action to receive New Residential common stock in the distribution. No stockholder approval of the distribution is required or sought. We are not asking you for a proxy, and you are requested not to send us a proxy. You will not be required to make any payment, surrender or exchange your shares of Newcastle common stock or take any other action to receive your shares of our common stock. If you own Newcastle common stock as of the close of business on the record date, Newcastle, with the assistance of American Stock Transfer & Trust Company, LLC, the distribution agent, will electronically issue shares of our common stock to you or to your brokerage firm on your behalf by way of direct registration in book-entry form. The distribution agent will mail you a book-entry account statement that reflects your shares of New Residential common stock, or your bank or brokerage firm will credit your account for the shares. If you sell shares of Newcastle common stock in the “regular-way” market through the distribution date, you will be selling your right to receive shares of New Residential common stock in the distribution. Following the distribution, stockholders whose shares are held in book-entry form may request that their shares of New Residential common stock held in book-entry form be transferred to a brokerage or other account at any time, without charge.
  
Will I be taxed on the shares of New Residential common stock that I receive in the distribution?    Yes. The distribution will be in the form of a taxable special dividend to Newcastle stockholders. An amount equal to the fair market value of our common stock received by you will be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of Newcastle, with the excess treated as a non-taxable return of capital to the extent of your tax basis in Newcastle common stock and any remaining excess treated as capital gain. If this special dividend is distributed in the structure and timeframe currently anticipated, the special dividend is

 

 

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   expected to satisfy a portion of Newcastle’s 2013 REIT taxable income distribution requirements. For a more detailed discussion, see “Federal Income Tax Considerations.”
Can Newcastle decide to cancel the distribution of the common stock even if all the conditions have been met?    Yes. The distribution is subject to the satisfaction or waiver of certain conditions. See “—The Separation and Distribution—Conditions to the distribution” included elsewhere in this information statement. Newcastle has the right to terminate the distribution, even if all of the conditions are satisfied, if at any time the board of directors of Newcastle determines that the distribution is not in the best interests of Newcastle or that market conditions are such that it is not advisable to separate New Residential from Newcastle.
Does New Residential plan to pay dividends?   

We intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to holders of our common stock out of assets legally available for this purpose. Distributions will be authorized by our board of directors and declared by us based on a number of factors including actual results of operations, liquidity and financial condition restrictions under

Delaware law, our financial condition, our taxable income, the annual distribution requirements under the REIT provisions of the Code, our operating expenses and other factors our directors deem relevant. For more information, see “Distribution Policy” included elsewhere in this information statement.

  
Will New Residential have any debt?    Yes. Certain of our non-Agency RMBS and our Agency RMBS are financed with short-term repurchase agreements. New Residential may also seek other forms of financing, as described under “Business—Financing Strategy.”
   For additional information relating to our planned financing arrangements, see “Business—Financing Strategy” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included elsewhere in this information statement.
What will the separation cost?    Newcastle intends to incur pre-tax separation costs of approximately $4.5 million to $6.5 million. Over the 12 months following our separation, the portion of these pre-tax costs expected to be recorded in our financial statements is up to approximately $0.5 million.
How will the separation affect my tax basis and holding period in Newcastle common stock?    Your tax basis in shares of Newcastle held at the time of the distribution will be reduced (but not below zero) to the extent the fair market value of our shares distributed by Newcastle in the distribution exceeds Newcastle’s current and accumulated earnings and profits. Your holding period for such Newcastle shares will not be affected by the distribution. See “Our Separation from Newcastle—Certain U.S. Federal Income Tax Consequences of the Separation,” included elsewhere in this information statement. You should consult your own tax advisor as to the particular tax consequences of the distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

 

 

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What will my tax basis and holding period be for shares of New Residential that I receive in the distribution?    Your tax basis in shares of our common stock received will equal the fair market value of such shares on the distribution date. Your holding period for such shares will begin the day after the distribution date. See “Our Separation from Newcastle—Certain U.S. Federal Income Tax Consequences of the Separation,” included elsewhere in this information statement.
   You should consult your own tax advisor as to the particular tax consequences of the distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.
What will be the relationships between Newcastle and New Residential following the separation?    We have entered into a Separation and Distribution Agreement to effect the separation and provide a framework for our relationships with Newcastle after the separation. This agreement will govern the relationships between us and Newcastle subsequent to the completion of the separation plan and provide for the allocation between us and Newcastle of Newcastle’s assets, liabilities and obligations (including tax-related assets and liabilities) attributable to periods prior to our separation from Newcastle. We cannot assure you that this agreement is on terms as favorable to us as agreements with independent third parties. See “Certain Relationships and Transactions with Related Persons, Affiliates and Affiliated Entities” included elsewhere in this information statement.
  
Will I receive physical certificates representing shares of New Residential’s common stock following the separation?    No. Following the separation, neither Newcastle nor New Residential will be issuing physical certificates representing shares of New Residential common stock. Instead, Newcastle, with the assistance of American Stock Transfer & Trust Company, LLC, the distribution agent, will electronically issue shares of our common stock to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. The distribution agent will mail you a book-entry account statement that reflects your shares of New Residential common stock, or your bank or brokerage firm will credit your account for the shares. A benefit of issuing stock electronically in book-entry form is that there will be none of the physical handling and safekeeping responsibilities that are inherent in owning physical stock certificates.
What if I want to sell my Newcastle common stock or my New Residential common stock?    You should consult with your financial advisors, such as your stockbroker, bank or tax advisor. Neither Newcastle nor New Residential makes any recommendations on the purchase, retention or sale of shares of Newcastle common stock or the New Residential common stock to be distributed.
   If you decide to sell any shares before the distribution, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your Newcastle common stock or the New Residential common stock you will receive in the distribution or both.

 

 

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Where will I be able to trade shares of New Residential common stock?    There is not currently a public market for New Residential’s common stock. New Residential has been approved to list its common stock on the NYSE under the symbol “NRZ.” We anticipate that trading in shares of our common stock will begin on a “when-issued” basis on or shortly before the record date and will continue through the distribution date and that “regular-way” trading in shares of our common stock will begin on the first trading day following the distribution date. If trading begins on a “when-issued” basis, you may purchase or sell our common stock up to and including through the distribution date, but your transaction will not settle until after the distribution date. We cannot predict the trading prices for our common stock before, on or after the distribution date.
Will the number of Newcastle shares I own change as a result of the distribution?    No. The number of shares of Newcastle common stock you own will not change as a result of the distribution.
What will happen to the listing of Newcastle common stock?    Nothing. It is expected that after the distribution of New Residential common stock, Newcastle common stock will continue to be traded on the NYSE under the symbol “NCT.”
Will the distribution affect the market price of my Newcastle shares?    Yes. As a result of the distribution, we expect the trading price of shares of Newcastle common stock immediately following the distribution to be lower than immediately prior to the distribution because the trading price will no longer reflect the value of New Residential’s assets. Furthermore, until the market has fully analyzed the value of Newcastle without New Residential’s assets, the price of Newcastle shares may fluctuate significantly. In addition, although Newcastle believes that over time following the separation, the common stock of the separated companies should have a higher aggregate market value, on a fully distributed basis and assuming the same market conditions, than if Newcastle were to remain under its current configuration, there can be no assurance, and thus the combined trading prices of Newcastle common stock and New Residential common stock after the distribution may be equal to or less than the trading price of shares of Newcastle common stock before the distribution.
Are there risks to owning New Residential common stock?    Yes. Our business is subject to both general and specific risks relating to our business, our leverage, our relationship with Newcastle and our being a separate publicly traded company. Our business is also subject to risks relating to the separation. These risks are described in the “Risk Factors” section of this information statement beginning on page 29. We encourage you to read that section carefully.

 

 

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Where can Newcastle stockholders get more information?    Before the separation, if you have any questions relating to the separation, you should contact:
   Newcastle Investment Corp.
Investor Relations
1345 Avenue of the Americas
New York, NY 10105
Tel: 212-479-3195
www.newcastleinv.com
   After the separation, if you have any questions relating to our common stock, you should contact:
   New Residential Investment Corp.
1345 Avenue of the Americas
New York, NY 10105
Tel: 212-479-3150
www.newresi.com

 

 

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The Separation and Distribution

The following is a summary of the material terms of the separation and distribution and other related transactions.

 

Distributing company

Newcastle Investment Corp.

 

  After the distribution, Newcastle will not own any shares of our common stock.

 

Distributed company

New Residential Investment Corp.

 

  We are a Delaware corporation and a wholly owned subsidiary of Newcastle. After the distribution, we will be an independent publicly traded company and will conduct our business as a REIT for U.S. federal income tax purposes.

 

Distribution ratio

Each holder of Newcastle common stock will receive one share of our common stock for each share of Newcastle common stock held on May 6, 2013.

 

Distributed securities

All of New Residential’s shares of common stock owned by Newcastle, which will be 100% of New Residential’s common stock outstanding immediately prior to the distribution.

 

  Based on the 253,025,645 shares of Newcastle common stock outstanding on April 23, 2013, and the distribution ratio of one share of New Residential common stock for every share of Newcastle common stock, 253,025,645 shares of our common stock will be distributed to Newcastle stockholders.

 

Record date

The record date for the distribution is the close of business on May 6, 2013.

 

Distribution date

The distribution date is May 15, 2013.

 

Distribution

On the distribution date, Newcastle, with the assistance of American Stock Transfer & Trust Company, LLC, the distribution agent, will electronically issue shares of our common stock to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. You will not be required to make any payment, surrender or exchange your shares of Newcastle common stock or take any other action to receive your shares of our common stock. If you sell shares of Newcastle common stock in the “regular-way” market through the distribution date, you will be selling your right to receive shares of New Residential common stock in the distribution. Registered stockholders will receive additional information from the distribution agent shortly after the distribution date. Following the distribution, stockholders whose shares are held in book-entry form may request that their shares of New Residential common stock be transferred to a brokerage or other account at any time, without charge. Beneficial stockholders that hold shares through brokerage firms will receive additional information from their brokerage firms shortly after the distribution date.

 

 

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Conditions to the distribution

The distribution of our common stock is subject to the satisfaction of the following conditions:

 

   

the SEC shall have declared effective our registration statement on Form 10, of which this information statement is a part, under the Exchange Act, and no stop order relating to the registration statement is in effect;

 

   

the listing of our common stock on the NYSE shall have been approved, subject to official notice of issuance; and

 

   

no order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing consummation of the distribution or any of the transactions related thereto, including the transfers of assets and liabilities contemplated by the Separation and Distribution Agreement, shall be in effect.

 

  Newcastle has the right not to complete the distribution if, at any time, its board of directors determines, in its sole discretion, that the distribution is not in the best interests of Newcastle or that market conditions are such that it is not advisable to separate New Residential from Newcastle.

 

Stock exchange listing

We have been approved to list our shares of common stock on the NYSE under the ticker symbol “NRZ.” We anticipate that on or prior to the record date for the distribution, trading of shares of our common stock will begin on a “when-issued” basis and will continue up to and including the distribution date. See “Our Separation from Newcastle—Market for Common Stock—Trading Between the Record Date and Distribution Date,” included elsewhere in this information statement.

 

  It is expected that after the distribution of New Residential common stock, Newcastle common stock will continue to be traded on the NYSE under the symbol “NCT.”

 

Distribution agent

American Stock Transfer & Trust Company, LLC

 

Tax considerations

The distribution of our common stock will not qualify for tax-free treatment, and an amount equal to the fair market value of the shares received by you on the distribution date will be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of Newcastle. The excess will be treated as a non-taxable return of capital to the extent of your tax basis in Newcastle common stock and any remaining excess will be treated as capital gain. Your tax basis in shares of Newcastle held at the time of the distribution will be reduced (but not below zero) to the extent the fair market value of our shares distributed by Newcastle in the distribution exceeds Newcastle’s current and accumulated earnings and profits. Your holding period for such Newcastle shares

 

 

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will not be affected by the distribution. Newcastle will not be able to advise stockholders of the amount of earnings and profits of Newcastle until after the end of the 2013 calendar year.

 

Separation and Distribution Agreement

We have entered into a Separation and Distribution Agreement to effect the separation and distribution and provide a framework for our relationships with Newcastle after the separation. This agreement will govern the relationship between us and Newcastle subsequent to the completion of the separation plan and provide for the allocation between us and Newcastle of Newcastle’s assets, liabilities and obligations (including tax-related assets and liabilities) attributable to periods prior to our separation from Newcastle. For a discussion of these arrangements, see “Certain Relationships and Transactions with Related Persons, Affiliates and Affiliated Entities” included elsewhere in this information statement.

 

 

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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

We were formed in September 2011 as NIC MSR LLC, a Delaware limited liability company and wholly owned subsidiary of Newcastle. We converted to a Delaware corporation and changed our name to New Residential Corp. in December 2012. Since the commencement of our operations on December 8, 2011, we have acquired investments in Excess MSRs on five pools of mortgage loans and non-Agency RMBS through December 31, 2012.

The following table presents our summary historical and pro forma financial information for the period from the commencement of our operations on December 8, 2011 through December 31, 2011 and for the year ended December 31, 2012.

The summary historical consolidated statements of income for the year ended December 31, 2012 and the period from December 8, 2011 (commencement of operations) to December 31, 2011 and the summary historical consolidated balance sheets as of December 31, 2012 and 2011 have been derived from our audited financial statements included elsewhere in this information statement. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 or for any future period.

The unaudited pro forma condensed consolidated balance sheet and statement of operations reflect the historical information of New Residential with certain adjustments. The unaudited pro forma condensed consolidated balance sheet has been adjusted to give effect to all of the transactions described below as if each had occurred on December 31, 2012. The unaudited pro forma condensed consolidated statement of operations only includes adjustments to reflect: (i) interest income from the contributed Agency RMBS; (ii) interest expense from the financing of Agency RMBS; and (iii) interest expense from the financing, subsequent to December 31, 2012, of certain non-Agency RMBS, in each case as if the transactions giving rise to (i), (ii) and (iii) had occurred on January 1, 2012. Accordingly, the unaudited pro forma condensed consolidated statement of operations excludes adjustments for (i) earnings from investments in equity method investees, (ii) interest income from investments in non-Agency RMBS and (iii) interest income from investments in residential mortgage loans.

Our decision to include or exclude an adjustment in the unaudited pro forma condensed consolidated statement of operations was based on whether such adjustment would be factually supportable and historically based, as set forth in more detail below.

With respect to Agency RMBS, Newcastle held substantial investments in Agency RMBS during the entire period covered by the pro forma statement of operations. Although Newcastle did not own the exact securities contributed to us for the entire period presented, management considers Agency RMBS to be fungible because, among other factors, they are guaranteed by the U.S. government and thus have consistent credit characteristics. As a result, we determined that adjustments related to these securities are factually supportable.

In contrast to Agency RMBS, the yields of non-Agency RMBS and residential mortgage loans can have significant variances as a result of differences in the collateral and credit characteristics of each asset. Newcastle did not hold the specific non-Agency RMBS or residential mortgage loans contributed to us during the entire period presented, and Newcastle does not have records relating to the performance of these assets prior to their acquisition. As a result, management believes that adjustments for the interest income from the non-Agency RMBS and residential mortgage loans would not be factually supportable.

The investments in equity method investees were made in newly formed entities with no historical operations. Neither we nor Newcastle owned any of the underlying excluded investments prior to their acquisition by the

 

 

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investee entities. Furthermore, the underlying loans were not serviced by an affiliate of our manager prior to their acquisition. As a result, Newcastle does not have records relating to the performance of these loans prior to the acquisition of the related investments. In addition, the composition of the loan pools and the loans underlying the Excess MSRs and consumer loan investee necessarily differ from the composition of the respective pools during the period covered by the pro forma statement of operations due to prepayment and default activity prior to acquisition. As a result, an adjustment related to these investees was not considered factually supportable. The following transactions are reflected in the pro forma financial information:

 

   

The agreement to invest approximately $340 million (based on the November 30, 2012 UPB) for a 50% interest in an equity method investee, subsequent to December 31, 2012, that is expected to acquire a 67% interest in Excess MSRs on a portfolio of residential mortgage loans with a UPB of approximately $215 billion as of November 30, 2012. The completion of this transaction is subject to regulatory and third party approvals. However, we believe that it is probable that we will be able to obtain pending approvals and subsequently complete this investment. Based on the UPB at December 31, 2012, the initial investment would be approximately $333 million.

 

   

The investment of approximately $27 million for a 50% interest in an equity method investee, subsequent to December 31, 2012, that acquired a 67% interest in Excess MSRs on a portfolio of residential mortgage loans with a UPB of approximately $13 billion as of November 30, 2012.

 

   

The investment of approximately $250 million for a 30% interest in an equity method investee, subsequent to December 31, 2012, that acquired a portfolio of consumer loans with a UPB of approximately $4.2 billion as of December 31, 2012.

 

   

The contributions of Agency RMBS by Newcastle to us subsequent to December 31, 2012. Newcastle contributed Agency RMBS with a face amount of approximately $1.0 billion and a carrying amount of approximately $1.1 billion as of the dates of the contributions.

 

   

The financing of the Agency RMBS acquired subsequent to December 31, 2012. We financed these Agency RMBS with approximately $1.0 billion of repurchase agreements.

 

   

The purchase of non-Agency RMBS, subsequent to December 31, 2012. The non-Agency RMBS had a face amount of approximately $392 million and an aggregate purchase price of approximately $243 million.

 

   

The financing of non-Agency RMBS with approximately $144 million of repurchase agreements subsequent to December 31, 2012.

 

   

The investment of approximately $35 million to acquire a 70% interest in mortgage loans with a UPB of approximately $83 million as of December 31, 2012.

 

   

The contribution of approximately $260 million of cash from Newcastle to us subsequent to December 31, 2012.

 

   

The distribution of shares of our common stock by Newcastle to its shareholders and the elimination of the historical parent company investment.

The unaudited pro forma information below is based upon available information and assumptions that we believe are reasonable. The unaudited pro forma financial information is presented for illustrative and informational purposes only and is not intended to represent or be indicative of what our financial condition or results of operations would have been had the transactions described above occurred on the dates indicated. The unaudited pro forma information also should not be considered representative of our future financial condition or results of operations.

 

 

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In addition to the pro forma adjustments to our historical combined financial statements, various other factors will have an effect on our financial condition and results of operations, including those discussed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     December 8,
2011 through

December 31,
2011
     Year Ended
December 31, 2012
 
    

Historical

     Pro Forma      Historical  
                 (unaudited)         
     (dollars in thousands, except per share data)  

Statement of income data:

           

Interest income

      $ 1,260       $ 49,351       $ 33,759   

Interest expense

        0         8,377         704   

Change in fair value of investments in excess mortgage servicing rights

        367        
9,023
  
     9,023   

Other income (loss)

        0         8,400         8,400   

Expenses

        913         10,056         9,231   
     

 

 

    

 

 

    

 

 

 

Net income

      $ 714       $ 48,341       $ 41,247   
     

 

 

    

 

 

    

 

 

 

Net income per share:

           

Basic

        N/A       $ 0.34         N/A   

Diluted

        N/A       $ 0.33         N/A   

Number of shares outstanding:

           

Basic

        N/A         144,146,370         N/A   

Diluted

        N/A         145,766,413         N/A   
     December 31,
2011
     December 31, 2012  
     Historical      Pro Forma      Historical  
                 (unaudited)         
     (in thousands)  

Balance sheet data:

           

Total assets

      $ 43,971       $ 2,760,417       $ 534,876   

Total liabilities

        4,163         1,550,575         156,520   

Total equity

        39,808         1,209,842         378,356   

 

 

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RISK FACTORS

You should carefully consider the following risks and other information in this information statement in evaluating us and our common stock. Any of the following risks, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition. The risk factors generally have been separated into the following groups: risks related to our business, risks related to our Manager, risks related to the separation, risks related to the financial markets, risks related to our taxation as a REIT and risks related to our common stock.

RISKS RELATED TO OUR BUSINESS

We have no operating history as an independent company and may not be able to successfully operate our business strategy or generate sufficient revenue to make or sustain distributions to our stockholders. The financial information included in this information statement may not be indicative of the results we would have achieved as a separate stand-alone company and may not be a reliable indicator of our future performance or results.

We have no experience operating as an independent company and cannot assure you that we will be able to successfully operate our business or implement our operating policies and strategies as described in this information statement. Furthermore, we were formed in September 2011 and have a limited operating history. We completed our first investment in Excess MSRs in December 2011, and our Manager has extremely limited experience with transactions involving GSEs. The timing, terms, price and form of consideration that we and servicers pay in future transactions may vary meaningfully from prior transactions.

Once we commence operations as an independent company, there can be no assurance that we will be able to generate sufficient returns to pay our operating expenses and make satisfactory distributions to our stockholders, or any distributions at all. Our results of operations and our ability to make or sustain distributions to our stockholders depend on several factors, including the availability of opportunities to acquire attractive assets, the level and volatility of interest rates, the availability of adequate short- and long-term financing, conditions in the real estate market, the financial markets and economic conditions.

We did not operate as a separate, stand-alone company for any of the historical periods presented in the financial information included in this information statement, which has been derived from Newcastle’s historical financial statements. Therefore, the financial information in this information statement does not necessarily reflect what our financial condition, results of operations or cash flows would have been had we been a separate, stand-alone public company prior to the completion of the separation or what our results will be in the future. This is primarily a result of the following factors:

 

   

The financial results in this information statement do not reflect all of the expenses we will incur as a public company;

 

   

The working capital requirements and capital for general corporate purposes for our assets historically have been satisfied as part of corporate-wide cash management policies of Newcastle. After the distribution, Newcastle will not be required, and does not intend, to provide us with funds to finance our working capital or other cash requirements, so we will in the future need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements; and

 

   

Our cost structure, management, financing and business operations will be significantly different as a result of operating as an independent public company. These changes will result in increased costs, including, but not limited to, fees paid to our Manager, legal, accounting, compliance and other costs associated with being a public company with equity securities traded on the NYSE.

 

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The value of our Excess MSRs is based on various assumptions that could prove to be incorrect and could have a negative impact on our financial results.

When we invest in Excess MSRs, we base the price we pay and the rate of amortization of those assets on, among other things, our projection of the cash flows from the related pool of mortgage loans. We record Excess MSRs on our balance sheet at fair value, and we measure their fair value on a recurring basis. Our projections of the cash flow from Excess MSRs, and the determination of the fair value of Excess MSRs, are based on assumptions about various factors, including, but not limited to:

 

   

rates of prepayment and repayment of the underlying mortgage loans;

 

   

interest rates;

 

   

rates of delinquencies and defaults; and

 

   

recapture rates.

Our assumptions could differ materially from actual results. The use of different estimates or assumptions in connection with the valuation of these assets could produce materially different fair values for such assets, which could have a material adverse effect on our consolidated financial position, results of operations and cash flows. The ultimate realization of the value of Excess MSRs may be materially different than the fair values of such Excess MSRs as reflected in our consolidated statement of financial position as of any particular date.

Our expectation of prepayment speeds is a significant assumption underlying our cash flow projections. Prepayment speed is the measurement of how quickly borrowers pay down the UPB of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. If prepayment speeds are significantly greater than expected, the carrying value of our Excess MSRs could exceed their estimated fair value. If the fair value of our Excess MSRs decreases, we would be required to record a non-cash charge, which would have a negative impact on our financial results. Furthermore, a significant increase in prepayment speeds could materially reduce the ultimate cash flows we receive from Excess MSRs, and we could ultimately receive substantially less than what we paid for such assets. Consequently, the price we pay to acquire Excess MSRs may prove to be too high.

The values of Excess MSRs are highly sensitive to changes in interest rates. Historically, the value of Excess MSRs has increased when interest rates rise and decreased when interest rates decline due to the effect of changes in interest rates on prepayment speeds. However, prepayment speeds could increase in spite of the current interest rate environment, as a result of a general economic recovery or other factors, which would reduce the value of our Excess MSRs.

Moreover, delinquency rates have a significant impact on the value of Excess MSRs. When delinquent loans are resolved through foreclosure, the UPB of such loans cease to be a part of the aggregate UPB of the serviced loan pool when the related properties are foreclosed on and liquidated. An increase in delinquencies will generally result in lower revenue because typically we will only collect on our Excess MSRs from GSEs or mortgage owners for performing loans. If delinquencies are significantly greater than expected, the estimated fair value of the Excess MSRs could be diminished. As a result, we could suffer a loss, which would have a negative impact on our financial results.

We will seek to enter into “recapture agreements” whereby we will receive a new Excess MSR with respect to a loan that was originated by the servicer and used to repay a loan underlying an Excess MSR that we previously acquired from that same servicer, or recapture. In lieu of receiving an Excess MSR with respect to the loan used to repay a prior loan, the servicer may supply a similar Excess MSR. We believe that such recapture arrangements will protect our returns in the event of a rise in voluntary prepayment rates. There are no assurances, however, that servicers will enter into such arrangements with us. If the servicer does not meet anticipated recapture targets, the servicing cash flow on a given pool could be significantly lower than projected,

 

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which could have a material adverse effect on the value of our Excess MSRs and consequently on our business, financial condition, results of operations and cash flows. Our recapture target for each of our current recapture agreements is 20-35%, as stated in the table in Note 7 to our consolidated financial statements included herein.

We will rely heavily on mortgage servicers to achieve our investment objective and have no direct ability to influence their performance.

The value of our investments in Excess MSRs is dependent on the satisfactory performance of servicing obligations by the mortgage servicer. As a result, we could be materially and adversely affected if the servicer is unable to adequately service the underlying mortgage loans due to:

 

   

its failure to comply with applicable laws and regulation;

 

   

a downgrade in its servicer rating;

 

   

its failure to maintain sufficient liquidity or access to sources of liquidity;

 

   

its failure to perform its loss mitigation obligations;

 

   

its failure to perform adequately in its external audits;

 

   

a failure in or poor performance of its operational systems or infrastructure;

 

   

regulatory scrutiny regarding foreclosure processes lengthening foreclosure timelines;

 

   

a GSE’s or a whole-loan owner’s transfer of servicing to another party; or

 

   

any other reason.

MSRs are subject to numerous federal, state and local laws and regulations and may be subject to various judicial and administrative decisions. If the servicer, actually or allegedly failed to comply with applicable laws, rules or regulations, it could be terminated as the servicer, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Favorable ratings from third-party rating agencies such as Standard & Poor’s, Moody’s and Fitch are important to the conduct of a mortgage servicer’s loan servicing business, and a downgrade in a mortgage servicer’s ratings could have an adverse effect on us and the value of our Excess MSRs. Downgrades in a mortgage servicer’s servicer ratings could adversely affect their ability to finance servicing advances and maintain their status as an approved servicer by Fannie Mae and Freddie Mac. Downgrades in servicer ratings could also lead to the early termination of existing advance facilities and affect the terms and availability of match funded advance facilities that a mortgage servicer may seek in the future. A mortgage servicer’s failure to maintain favorable or specified ratings may cause their termination as a servicer and may impair their ability to consummate future servicing transactions, which could have an adverse effect on our operations since we will rely heavily on mortgage servicers to achieve our investment objective and have no direct ability to influence their performance.

In addition, a bankruptcy by any mortgage servicer that services the mortgage loans underlying any Excess MSRs that we have acquired or may acquire in the future could result in:

 

   

the validity and priority of our ownership in the Excess MSRs being challenged in a bankruptcy proceeding;

 

   

payments made by such servicer to us, or obligations incurred by it, being avoided by a court under federal or state preference laws or federal or state fraudulent conveyance laws;

 

   

a re-characterization of any sale of Excess MSRs or other assets to us as a pledge of such assets in a bankruptcy proceeding; or

 

   

any agreement pursuant to which we acquired the Excess MSRs being rejected in a bankruptcy proceeding.

 

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The duties and obligations of mortgage servicers are defined through contractual agreements, generally referred to as Servicing Guides in the case of GSEs, or Pooling and Servicing Agreements in the case of private-label securities (collectively, the “Servicing Guidelines”). Such Servicing Guidelines generally provide for the possibility for termination of the contractual rights of the servicer in the absolute discretion of the owner of the mortgages being serviced. In the event of such termination by a mortgage owner with respect to a particular servicer, the related Excess MSRs would under most circumstances lose all value on a going forward basis. It is expected that any termination by a mortgage owner of a servicer would take effect across all mortgages of such mortgage owner and would not be limited to a particular vintage or other subset of mortgages. Therefore, to the extent we make multiple investments relating to mortgages owned by the same owner and serviced by the same servicer, it is expected that all such investments would lose all their value in the event of the termination of the servicer by the mortgage owner. Any of the foregoing events might have a material and adverse effect on us.

We have significant counterparty concentration risk in Nationstar and Springleaf and are subject to other counterparty concentration and default risks.

We are not restricted from dealing with any particular counterparty or from concentrating any or all of our transactions with a few counterparties. Any loss suffered by us as a result of a counterparty defaulting, refusing to conduct business with us or imposing more onerous terms on us would also negatively affect our business, results of operations and financial condition.

To date, all of our co-investments in Excess MSRs relate to loans serviced by Nationstar. If Nationstar is terminated as the servicer of some or all of these portfolios, or in the event that it files for bankruptcy, our expected returns on these investments would be severely impacted. In addition, all of the Non-Agency RMBS included in our initial portfolio is serviced by Nationstar. Furthermore, Nationstar has no obligation to offer us any future co-investment opportunity on the same terms as prior transactions, or at all, and we may not be able to find suitable counterparties other than Nationstar, from which to acquire Excess MSRs, which could impact our business strategy.

In addition, all our investments in consumer loans relate to loans which will be serviced by Springleaf. If Springleaf is terminated as the servicer of some or all of these portfolios, or in the event that it files for bankruptcy, our expected returns on these investments could be severely impacted.

Moreover, we will enter into repurchase agreements with a very limited number of counterparties, and possibly a single counterparty. If any of our counterparties elected not to roll our repurchase agreements, we may not be able to find a replacement counterparty, which would have a material adverse effect on our financial condition.

Our risk-management processes may not accurately anticipate the impact of market stress or counterparty financial condition, and as a result, we may not take sufficient action to reduce our risks effectively. Although we will monitor our credit exposures, default risk may arise from events or circumstances that are difficult to detect, foresee or evaluate. In addition, concerns about, or a default by, one large participant could lead to significant liquidity problems for other participants, which may in turn expose us to significant losses.

In the event of a counterparty default, particularly a default by a major investment bank, we could incur material losses rapidly, and the resulting market impact of a major counterparty default could seriously harm our business, results of operations and financial condition. In the event that one of our counterparties becomes insolvent or files for bankruptcy, our ability to eventually recover any losses suffered as a result of that counterparty’s default may be limited by the liquidity of the counterparty or the applicable legal regime governing the bankruptcy proceeding.

Counterparty risks increased in complexity and magnitude as a result of the insolvency of a number of major financial institutions (such as Lehman Brothers). For example, the consolidation and elimination of counterparties has increased our concentration of counterparty risk and decreased the universe of potential counterparties. In addition, counterparties have generally tightened their underwriting standards and increased their margin requirements for financing, which could negatively impacted us in several ways, including, decreasing the number of counterparties willing to provide financing to us, decreasing the overall amount of leverage available to us, and increasing the costs of borrowing.

 

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GSE initiatives and other actions may adversely affect returns from investments in Excess MSRs.

On January 17, 2011, the Federal Housing Finance Agency (“FHFA”) announced that it has instructed Fannie Mae and Freddie Mac to study possible alternatives to the current residential mortgage servicing and compensation system used for single-family mortgage loans. It is too early to determine what the GSEs, including Fannie Mae or Freddie Mac, may propose as alternatives to current servicing compensation practices, or when any such alternatives would become effective. Although we do not expect MSRs that have already been created to be subject to any changes implemented by Fannie Mae or Freddie Mac, it is possible that, because of the significant role of Fannie Mae or Freddie Mac in the secondary mortgage market, any changes they implement could become prevalent in the mortgage servicing industry generally. Other industry stakeholders or regulators may also implement or require changes in response to the perception that the current mortgage servicing practices and compensation do not appropriately serve broader housing policy objectives. These proposals are still evolving. To the extent the GSEs implement reforms that materially affect the market for conforming loans, there may be secondary effects on the subprime and Alt-A markets. These reforms may have a material adverse effect on the economics or performance of any Excess MSRs that we may acquire in the future.

Changes to the minimum servicing amount for GSE loans could occur at any time and could impact us in significantly negative ways that we are unable to predict or protect against.

Currently, when a loan is sold into the secondary market for Fannie Mae or Freddie Mac loans, the servicer is generally required to retain a minimum servicing amount (“MSA”) of 25 bps of the UPB for fixed rate mortgages. As has been widely publicized, in September 2011, the FHFA announced that a Joint Initiative on Mortgage Servicing Compensation was seeking public comment on two alternative mortgage servicing compensation structures detailed in a discussion paper. Changes to the MSA structure could significantly impact our business in negative ways that we cannot predict or protect against. For example, the elimination of a MSA could radically change the mortgage servicing industry and could severely limit the supply of Excess MSRs available for sale. In addition, a removal of, or reduction in, the MSA could significantly reduce the recapture rate on the affected loan portfolio, which would negatively affect the investment return on our Excess MSRs. We cannot predict whether any changes to current MSA rules will occur or what impact any changes will have on our business, results of operations, liquidity or financial condition.

Our ability to acquire and dispose of Excess MSRs may be subject to the receipt of third-party consents.

GSEs may require that we submit to costly or burdensome conditions as a prerequisite to their consent to an investment in Excess MSRs. GSE conditions may diminish or eliminate the investment potential of certain Excess MSRs by making such investments too expensive for us or by severely limiting the potential returns available from Excess MSRs. Moreover, we have not received and do not expect to receive any assurances from any GSEs that their conditions for the sale by us of any Excess MSRs will not change. Therefore, the potential costs, issues or restrictions associated with receiving such GSEs’ consent for any such dispositions by us cannot be determined with any certainty.

Our investments in Excess MSRs may involve complex or novel structures.

Our investments in Excess MSRs may involve complex or novel structures. It is possible that a GSE’s views on whether any such acquisition structure is appropriate or acceptable may not be known to us when we make an investment and may change from time to time for any reason or for no reason, even with respect to a completed investment. A GSE’s evolving posture toward an acquisition or disposition structure through which we invest in or dispose of Excess MSRs may cause such GSE to impose new conditions on our existing investments in Excess MSRs, including the owner’s ability to hold such Excess MSRs directly or indirectly through a grantor trust or other means. Such new conditions may be costly or burdensome and may diminish or eliminate the investment potential of the Excess MSRs that are already owned by us. Moreover, obtaining such consent may require us or our co-investment counterparties to agree to material structural or economic changes, as well as agree to

 

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indemnification or other terms that expose us to risks to which we have not previously been exposed and that could negatively affect our returns from our investments.

Many of our investments may be illiquid, and this lack of liquidity could significantly impede our ability to vary our portfolio in response to changes in economic and other conditions or to realize the value at which such investments are carried if we are required to dispose of them.

The investments that we intend to make are generally illiquid. Illiquidity may result from the absence of an established market for the investments, as well as legal or contractual restrictions on their resale, refinancing or other disposition. Dispositions of investments may be subject to contractual and other limitations on transfer or other restrictions that would interfere with subsequent sales of such investments or adversely affect the terms that could be obtained upon any disposition thereof.

Excess MSRs are highly illiquid and subject to numerous restrictions on transfers. For example, the Servicing Guidelines of a mortgage owner generally require that holders of Excess MSRs obtain the mortgage owner’s prior approval of any change of direct ownership of such Excess MSRs. Such approval may be withheld for any reason or no reason in the discretion of the mortgage owner. Additionally, investments in Excess MSRs are a new type of transaction such that, prior to the date of this information statement, there have been extremely few investment products that pursue a similar investment strategy, and the risks associated with the transaction and structure are not fully known to buyers or sellers. As a result of the foregoing, there is some risk that we will be unable to locate a buyer at the time we wish to sell an Excess MSR. Additionally, there is some risk that we will be required to dispose of Excess MSRs either through an in-kind distribution or other liquidation vehicle, which will, in either case, provide little or no economic benefit to us, or a sale to a co-investor in the Excess MSR, which may be an affiliate. Accordingly, we cannot provide any assurance that we will obtain any return or any benefit of any kind from any disposition of Excess MSRs. We may not benefit from the full term of the assets and for the aforementioned reasons may not receive any benefits from the disposition, if any, of such assets.

In addition, the real estate related securities that we may purchase in connection with privately negotiated transactions may not be registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration requirements of, or is otherwise in accordance with, those laws. There are also no established trading markets for a majority of our intended investments. Moreover, certain of our investments, including our investments in consumer loans and certain investments in Excess MSRs, are made indirectly through a vehicle that owns the underlying assets. Our ability to sell our interest may be contractually limited or prohibited. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be limited.

The real estate related securities we will hold upon completion of the separation and those we intend to invest in have historically been valued based primarily on third party quotations, which are subject to significant variability based on the liquidity and price transparency created by market trading activity. The ongoing dislocation in the trading markets has continued to reduce the trading for many real estate related securities, resulting in less transparent prices for those securities. Consequently, we expect it will be more difficult for us to sell many of our real estate related securities than it has been historically because, if we were to sell such assets, we would likely not have access to readily ascertainable market prices when establishing valuations of them. Moreover, currently there is a relatively low market demand for the vast majority of the types of assets that we hold, or will hold in the future, which may make it extremely difficult to sell our assets. If we are required to liquidate all or a portion of our illiquid investments quickly, we may realize significantly less than the amount at which we have previously valued these investments.

Market conditions could negatively impact our business, results of operations and financial condition.

The market in which we operate is affected by a number of factors that are largely beyond our control but can nonetheless have a potentially significant, negative impact on us. These factors include, among other things:

 

   

Interest rates and credit spreads;

 

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The availability of credit, including the price, terms and conditions under which it can be obtained;

 

   

The quality, pricing and availability of suitable investments and credit losses with respect to our investments;

 

   

The ability to obtain accurate market-based valuations;

 

   

Loan values relative to the value of the underlying real estate assets;

 

   

Default rates on the loans underlying our investments and the amount of the related losses;

 

   

Prepayment speeds, delinquency rates and legislative/regulatory changes with respect to our investments in amongst other things Excess MSRs and consumer loans;

 

   

The actual and perceived state of the real estate markets, market for dividend-paying stocks and public capital markets generally;

 

   

Unemployment rates; and

 

   

The attractiveness of other types of investments relative to investments in real estate or REITs generally.

Changes in these factors are difficult to predict, and a change in one factor can affect other factors. For example, during 2007, increased default rates in the subprime mortgage market played a role in causing credit spreads to widen, reducing availability of credit on favorable terms, reducing liquidity and price transparency of real estate related assets, resulting in difficulty in obtaining accurate mark-to-market valuations, and causing a negative perception of the state of the real estate markets and of REITs generally. These conditions worsened during 2008, and intensified meaningfully during the fourth quarter of 2008 as a result of the global credit and liquidity crisis, resulting in extraordinarily challenging market conditions. Since then, market conditions have generally improved, but they could deteriorate in the future, including as a result of the pending mandatory reductions in federal spending during 2013.

The geographic distribution of the loans underlying, and collateral securing, certain of our investments subjects us to geographic real estate market risks, which could adversely affect the performance of our investments, our results of operations and financial condition.

The geographic distribution of the loans underlying, and collateral securing, our investments, including our Excess MSRs, Non-Agency RMBS and consumer loans, exposes us to risks associated with the real estate and commercial lending industry in general within the states and regions in which we hold significant investments. These risks include, without limitation: possible declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds; overbuilding; extended vacancies of properties; increases in competition, property taxes and operating expenses; changes in zoning laws; increased energy costs; unemployment; costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems; casualty or condemnation losses; uninsured damages from floods, earthquakes or other natural disasters; and changes in interest rates. As of December 31, 2012, 32.0% of the total unpaid principal amount of the residential mortgage loans underlying our Excess MSRs was secured by properties located in California and 10.1% was secured by properties located in Florida. As of December 31, 2012, 34.9% of the collateral securing our real estate securities was located in the Western U.S., 23.2% was located in the Southeastern U.S., 22.0% was located in the Northeastern U.S., 10.0% was located in the Midwestern U.S. and 9.9% was located in the Southwestern U.S. To the extent any of the foregoing risks arise in states and regions where we hold significant investments, the performance of our investments, our results of operations and our financial condition could suffer a material adverse effect.

We may invest in RMBS collateralized by subprime mortgage loans, which are subject to increased risks.

We may invest in RMBS backed by collateral pools of subprime residential mortgage loans. “Subprime” mortgage loans refer to mortgage loans that have been originated using underwriting standards that are less

 

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restrictive than the underwriting requirements used as standards for other first and junior lien mortgage loan purchase programs, such as the programs of Fannie Mae and Freddie Mac. These lower standards include mortgage loans made to borrowers having imperfect or impaired credit histories (including outstanding judgments or prior bankruptcies), mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgage property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents a large portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified. Due to economic conditions, including increased interest rates and lower home prices, as well as aggressive lending practices, subprime mortgage loans have in recent periods experienced increased rates of delinquency, foreclosure, bankruptcy and loss, and they are likely to continue to experience delinquency, foreclosure, bankruptcy and loss rates that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more traditional manner. Thus, because of the higher delinquency rates and losses associated with subprime mortgage loans, the performance of RMBS backed by subprime mortgage loans in which we may invest could be correspondingly adversely affected, which could adversely impact our results of operations, financial condition and business.

The value of our RMBS may be adversely affected by deficiencies in servicing and foreclosure practices, as well as related delays in the foreclosure process.

Allegations of deficiencies in servicing and foreclosure practices among several large sellers and servicers of residential mortgage loans that surfaced in 2010 raised various concerns relating to such practices, including the improper execution of the documents used in foreclosure proceedings (so-called “robo signing”), inadequate documentation of transfers and registrations of mortgages and assignments of loans, improper modifications of loans, violations of representations and warranties at the date of securitization and failure to enforce put-backs.

As a result of alleged deficiencies in foreclosure practices, a number of servicers temporarily suspended foreclosure proceedings beginning in the second half of 2010 while they evaluated their foreclosure practices. In late 2010, a group of state attorneys general and state bank and mortgage regulators representing nearly all 50 states and the District of Columbia, along with the U.S. Justice Department and the Department of Housing and Urban Development, began an investigation into foreclosure practices of banks and servicers. The investigations and lawsuits by several state attorneys general lead to a proposed settlement agreement in early February 2012 with five of the nation’s largest banks, pursuant to which the banks agreed to pay more than $25 billion to settle claims relating to improper foreclosure practices. The proposed settlement does not prohibit the states, the federal government, individuals or investors in RMBS from pursuing additional actions against the banks and servicers in the future.

The integrity of the servicing and foreclosure processes are critical to the value of the mortgage loan portfolios underlying our RMBS, and our financial results could be adversely affected by deficiencies in the conduct of those processes. For example, delays in the foreclosure process that have resulted from investigations into improper servicing practices may adversely affect the values of, and our losses on, our non-Agency RMBS. Foreclosure delays may also increase the administrative expenses of the securitization trusts for the non-Agency RMBS, thereby reducing the amount of funds available for distribution to investors. In addition, the subordinate classes of securities issued by the securitization trusts may continue to receive interest payments while the defaulted loans remain in the trusts, rather than absorbing the default losses. This may reduce the amount of credit support available for the senior classes we own, thus possibly adversely affecting these securities. Additionally, a substantial portion of the proposed $25 billion settlement is intended to be a “credit” to the banks and servicers for principal write-downs or reductions they may make to certain mortgages underlying RMBS. There remains considerable uncertainty as to how these principal reductions will work and what effect they will have on the value of related RMBS. As a result, there can be no assurance that any such principal reductions will not adversely affect the value of certain of our RMBS.

While we believe that the sellers and servicers would be in violation of their servicing contracts to the extent that they have improperly serviced mortgage loans or improperly executed documents in foreclosure or bankruptcy proceedings, or do not comply with the terms of servicing contracts when deciding whether to apply principal

 

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reductions, it may be difficult, expensive and time consuming for us to enforce our contractual rights. We continue to monitor and review the issues raised by the alleged improper foreclosure practices. While we cannot predict exactly how the servicing and foreclosure matters or the resulting litigation or settlement agreements will affect our business, there can be no assurance that these matters will not have an adverse impact on our results of operations and financial condition.

The loans underlying the securities we invest in are subject to delinquency, foreclosure and loss, which could result in losses to us.

Mortgage backed securities are bonds or notes backed by loans. The ability of borrowers to repay these loans is dependent upon the income or assets of these borrowers. If a borrower has insufficient income or assets to repay these loans, it will default on its loan. Our investments in RMBS will be adversely affected by defaults under the loans underlying such securities. To the extent losses are realized on the loans underlying the securities in which we invest, we may not recover the amount invested in, or, in extreme cases, any of our investment in such securities.

Our investments in real estate related securities are subject to changes in credit spreads, which could adversely affect our ability to realize gains on the sale of such investments.

Real estate related securities are subject to changes in credit spreads. Credit spreads measure the yield demanded on securities by the market based on their credit relative to a specific benchmark.

Fixed rate securities are valued based on a market credit spread over the rate payable on fixed rate U.S. Treasuries of like maturity. Floating rate securities are valued based on a market credit spread over LIBOR and are affected similarly by changes in LIBOR spreads. Excessive supply of these securities combined with reduced demand will generally cause the market to require a higher yield on these securities, resulting in the use of a higher, or “wider,” spread over the benchmark rate to value such securities. Under such conditions, the value of our real estate related securities portfolios would tend to decline. Conversely, if the spread used to value such securities were to decrease, or “tighten,” the value of our real estate related securities portfolio would tend to increase. Such changes in the market value of our real estate securities portfolios may affect our net equity, net income or cash flow directly through their impact on unrealized gains or losses on available-for-sale securities, and therefore our ability to realize gains on such securities, or indirectly through their impact on our ability to borrow and access capital. During 2008 through the first quarter of 2009, credit spreads widened substantially. Widening credit spreads could cause the net unrealized gains on our securities and derivatives, recorded in accumulated other comprehensive income or retained earnings, and therefore our book value per share, to decrease and result in net losses.

Prepayment rates on the mortgage loans underlying our real estate related securities may adversely affect our profitability.

In general, the mortgages collateralizing our real estate related securities may be prepaid at any time without penalty. Prepayments on our real estate related securities result when homeowners/mortgagees satisfy (i.e., pay off) the mortgage upon selling or refinancing their mortgaged property. When we acquire a particular security, we anticipate that the underlying mortgage loans will prepay at a projected rate which, together with expected coupon income, provides us with an expected yield on such securities. If we purchase assets at a premium to par value, and borrowers prepay their mortgage loans faster than expected, the corresponding prepayments on the real estate related security may reduce the expected yield on such securities because we will have to amortize the related premium on an accelerated basis. Conversely, if we purchase assets at a discount to par value, when borrowers prepay their mortgage loans slower than expected, the decrease in corresponding prepayments on the real estate related security may reduce the expected yield on such securities because we will not be able to accrete the related discount as quickly as originally anticipated. Prepayment rates on loans are influenced by changes in mortgage and market interest rates and a variety of economic, geographic and other factors, all of

 

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which are beyond our control. Consequently, such prepayment rates cannot be predicted with certainty and no strategy can completely insulate us from prepayment or other such risks. In periods of declining interest rates, prepayment rates on mortgage loans generally increase. If general interest rates decline at the same time, the proceeds of such prepayments received during such periods are likely to be reinvested by us in assets yielding less than the yields on the assets that were prepaid. In addition, the market value of our real estate related securities may, because of the risk of prepayment, benefit less than other fixed-income securities from declining interest rates.

With respect to Agency RMBS, we intend to purchase securities that have a higher coupon rate than the prevailing market interest rates. In exchange for a higher coupon rate, we would then pay a premium over par value to acquire these securities. In accordance with GAAP, we will amortize the premiums on our Agency RMBS over the life of the related securities. If the mortgage loans securing these securities prepay at a more rapid rate than anticipated, we will have to amortize our premiums on an accelerated basis which may adversely affect our profitability. Defaults on Agency RMBS typically have the same effect as prepayments because of the underlying Agency guarantee.

Prepayments, which are the primary feature of mortgage backed securities that distinguish them from other types of bonds, are difficult to predict and can vary significantly over time. As the holder of the security, on a monthly basis, we receive a payment equal to a portion of our investment principal in a particular security as the underlying mortgages are prepaid. In general, on the date each month that principal prepayments are announced (i.e., factor day), the value of our real estate related security pledged as collateral under our repurchase agreements is reduced by the amount of the prepaid principal and, as a result, our lenders will typically initiate a margin call requiring the pledge of additional collateral or cash, in an amount equal to such prepaid principal, in order to re-establish the required ratio of borrowing to collateral value under such repurchase agreements. Accordingly, with respect to our Agency RMBS, the announcement on factor day of principal prepayments is in advance of our receipt of the related scheduled payment, thereby creating a short-term receivable for us in the amount of any such principal prepayments; however, under our repurchase agreements, we may receive a margin call relating to the related reduction in value of our Agency RMBS and, prior to receipt of this short-term receivable, be required to post additional collateral or cash in the amount of the principal prepayment on or about factor day, which would reduce our liquidity during the period in which the short-term receivable is outstanding. As a result, in order to meet any such margin calls, we could be forced to sell assets in order to maintain liquidity. Forced sales under adverse market conditions may result in lower sales prices than ordinary market sales made in the normal course of business. If our real estate related securities were liquidated at prices below our amortized cost (i.e., the cost basis) of such assets, we would incur losses, which could adversely affect our earnings. In addition, in order to continue to earn a return on this prepaid principal, we must reinvest it in additional real estate related securities or other assets; however, if interest rates decline, we may earn a lower return on our new investments as compared to the real estate related securities that prepay.

Prepayments may have a negative impact on our financial results, the effects of which depend on, among other things, the timing and amount of the prepayment delay on our Agency RMBS, the amount of unamortized premium on our real estate related securities, the rate at which prepayments are made on our non-Agency RMBS, the reinvestment lag and the availability of suitable reinvestment opportunities.

Our investments in RMBS may be subject to significant impairment charges, which would adversely affect our results of operations.

We will be required to periodically evaluate our investments for impairment indicators. The value of an investment is impaired when our analysis indicates that, with respect to a security, it is probable that the value of the security is other than temporarily impaired. The judgment regarding the existence of impairment indicators is based on a variety of factors depending upon the nature of the investment and the manner in which the income related to such investment was calculated for purposes of our financial statements. If we determine that an

 

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impairment has occurred, we are required to make an adjustment to the net carrying value of the investment, which would adversely affect our results of operations in the applicable period and thereby adversely affect our ability to pay dividends to our stockholders.

The lenders under our repurchase agreements may elect not to extend financing to us, which could quickly and seriously impair our liquidity.

We intend to finance a meaningful portion of our investments in RMBS with repurchase agreements, which are short-term financing arrangements. Under the terms of these agreements, we will sell a security to a counterparty for a specified price and concurrently agree to repurchase the same security from our counterparty at a later date for a higher specified price. During the term of the repurchase agreement—which can be as short as 30 days—the counterparty will make funds available to us and hold the security as collateral. Our counterparties can also require us to post additional margin as collateral at any time during the term of the agreement. When the term of a repurchase agreement ends, we will be required to repurchase the security for the specified repurchase price, with the difference between the sale and repurchase prices serving as the equivalent of paying interest to the counterparty in return for extending financing to us. If we want to continue to finance the security with a repurchase agreement, we ask the counterparty to extend—or “roll”—the repurchase agreement for another term.

Our counterparties will not be required to roll our repurchase agreements upon the expiration of their stated terms, which subjects us to a number of risks. Counterparties electing to roll our repurchase agreements, which Newcastle has experienced recently and we may experience in the future, may charge higher spread and impose more onerous terms upon us, including the requirement that we post additional margin as collateral. More significantly, if a repurchase agreement counterparty elects not to extend our financing, we would be required to pay the counterparty the full repurchase price on the maturity date and find an alternate source of financing. Alternate sources of financing may be more expensive, contain more onerous terms or simply may not be available. If we were unable to pay the repurchase price for any security financed with a repurchase agreement, the counterparty has the right to sell the underlying security being held as collateral and require us to compensate for any shortfall between the value of our obligation to the counterparty and the amount for which the collateral was sold (which may be a significantly discounted price). As of April 22, 2013, we had outstanding repurchase agreements with an aggregate face amount of approximately $302.0 million to finance non-Agency RMBS and approximately $1.0 billion to finance Agency RMBS. Moreover, all of our repurchase agreement obligations will be with a very limited number of counterparties, and possibly a single counterparty. If any of our counterparties elected not to roll our repurchase agreements, we may not be able to find a replacement counterparty in a timely manner.

We may not be able to finance our investments on attractive terms or at all, and financing for Excess MSRs may be particularly difficult or impossible to obtain.

The ability to finance investments with securitizations or other long-term non-recourse financing not subject to margin requirements has been impaired since 2007 as a result of market conditions. In addition, it may be particularly challenging to securitize our investments in consumer loans, given that consumer loans are generally riskier than mortgage financing. These conditions make it highly likely that we will have to use less efficient forms of financing for any new investments, which will likely require a larger portion of our cash flows to be put toward making the initial investment and thereby reduce the amount of cash available for distribution to our stockholders and funds available for operations and investments, and which will also likely require us to assume higher levels of risk when financing our investments. In addition, there is no established market for financing of investments in Excess MSRs, and it is possible that one will not develop for a variety of reasons, such as the challenges with perfecting security interests in the underlying collateral.

As non-recourse long-term financing structures become available to us and are utilized, such structures expose us to risks which could result in losses to us.

We may use securitization and other non-recourse long-term financing for our investments to the extent available. In such structures, our lenders typically would have only a claim against the assets included in the

 

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securitizations rather than a general claim against us as an entity. Prior to any such financing, we would seek to finance our investments with relatively short-term facilities until a sufficient portfolio is accumulated. As a result, we would be subject to the risk that we would not be able to acquire, during the period that any short-term facilities are available, sufficient eligible assets or securities to maximize the efficiency of a securitization. We also bear the risk that we would not be able to obtain new short-term facilities or would not be able to renew any short-term facilities after they expire should we need more time to seek and acquire sufficient eligible assets or securities for a securitization. In addition, conditions in the capital markets may make the issuance of any such securitization less attractive to us even when we do have sufficient eligible assets or securities. While we would intend to retain the unrated equity component of securitizations and, therefore, still have exposure to any investments included in such securitizations, our inability to enter into such securitizations may increase our overall exposure to risks associated with direct ownership of such investments, including the risk of default. Our inability to refinance any short-term facilities would also increase our risk because borrowings thereunder would likely be recourse to us as an entity. If we are unable to obtain and renew short-term facilities or to consummate securitizations to finance our investments on a long-term basis, we may be required to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price.

Investing in the consumer loan sector represents a new category of investment for us and Newcastle, and a failure to successfully manage the risks associated with this new category of investment could have a material adverse effect on our business and financial results.

We recently completed an investment in the consumer loan sector, which represents a new category of investment for us and Newcastle. Although many of the risks applicable to consumer loans are also applicable to residential real estate loans, and thus the type of risks that we have experience managing, there are nevertheless substantial risks and uncertainties associated with engaging in a new category of investment. There may be factors that affect the consumer loan investment sector with which we are not as familiar compared to our existing categories of investment. Moreover, our underwriting assumptions for these investments may prove to be materially incorrect. It is also possible that the addition of consumer loans to our investment portfolio could divert our Manager’s time away from our other investments. Furthermore, external factors, such as compliance with regulations, may also impact our ability to succeed in the consumer loan investment sector. Failure to successfully manage these risks could have a material adverse effect on our business and financial results.

The consumer loans underlying our investments are subject to delinquency and loss, which could have a negative impact on our financial results.

The ability of borrowers to repay the consumer loans underlying our investments may be adversely affected by numerous personal factors, including unemployment, divorce, major medical expenses or personal bankruptcy. General factors, including an economic downturn, high energy costs or acts of God or terrorism, may also impact upon the financial stability of borrowers and impair their ability or willingness to repay the consumer loans in our investment portfolio. In the event of any default under a loan in the consumer loan portfolios in which we invest, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral securing the loan, if any, and the principal and accrued interest of the loan. In addition, our investments in consumer loans may entail greater risk than our investments in residential real estate loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. There can be no guarantee that we will not suffer unexpected losses on our investments as a result of the factors set out above, which could have a negative impact on our financial results.

 

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The servicer of the loans underlying our consumer loan portfolio may not be able to accurately track the default status of senior lien loans in instances where our consumer loan investments are secured by second or third liens on real estate.

A portion of our investments in consumer loans are secured by second and third liens on real estate. When we hold the second or third lien another creditor or creditors, as applicable, holds the first and/or second, as applicable, lien on the real estate that is the subject of the security. In these situations our second or third lien is subordinate in right of payment to the first and/or second, as applicable, holder’s right to receive payment. Moreover, as the servicer of the loans underlying our consumer loan portfolio is not able to track the default status of a senior lien loan in instances where we do not hold the related first mortgage, the value of the second or third lien loans in our portfolio may be lower than our records indicate.

The consumer loan investment sector is subject to various initiatives on the part of advocacy groups and extensive regulation and supervision under federal, state and local laws, ordinances and regulations, which could interfere with the focus of our investments and have a negative impact on our financial results.

In recent years consumer advocacy groups and some media reports have advocated governmental action to prohibit or place severe restrictions on the types of short-term consumer loans that underlie our investments. Such consumer advocacy groups and media reports generally focus on the Annual Percentage Rate to a consumer for this type of loan, which is compared unfavorably to the interest typically charged by banks to consumers with top-tier credit histories. The fees charged on the consumer loans in the portfolio in which we have invested may be perceived as controversial by those who do not focus on the credit risk and high transaction costs typically associated with this type of investment. If the negative characterization of these types of loans becomes increasingly accepted by consumers, demand for the consumer loan products in which we have invested could significantly decrease. Additionally, if the negative characterization of these types of loans is accepted by legislators and regulators, we could become subject to more restrictive laws and regulations in the area.

In addition, we are, or may become, subject to federal, state and local laws, regulations, or regulatory policies and practices, including the Dodd-Frank Act (which, among other things, established the Consumer Finance Protection Bureau with broad authority to regulate and examine financial institutions), which may, amongst other things, limit the amount of interest or fees allowed to be charged on the consumer loans underlying our investments, or the number of consumer loans that customers may receive or have outstanding. The operation of existing or future laws, ordinances and regulations could interfere with the focus of our investments which could have a negative impact on our financial results.

Our determination of how much leverage to apply to our investments may adversely affect our return on our investments and may reduce cash available for distribution.

We may leverage our assets through a variety of borrowings. Our investment guidelines do not limit the amount of leverage we may incur with respect to any specific asset or pool of assets. The return we are able to earn on our investments and cash available for distribution to our stockholders may be significantly reduced due to changes in market conditions, which may cause the cost of our financing to increase relative to the income that can be derived from our assets.

We may not match fund certain of our investments, which may increase the risks associated with these investments.

When available, a match funding strategy mitigates the risk of not being able to refinance an investment on favorable terms or at all. However, our Manager may elect for us to bear a level of refinancing risk on a short-term or longer-term basis, as in the case of investments financed with repurchase agreements, when, based on its analysis, our Manager determines that bearing such risk is advisable or unavoidable (which we expect to be the case generally with respect to the Agency RMBS in which we invest). In addition, we may be unable, as a result

 

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of conditions in the credit markets, to match fund our investments. For example, non-recourse term financing not subject to margin requirements was generally not available or economical for the past three years and is currently still difficult to obtain, which impairs our ability to match fund our investments. Moreover, we may not be able to enter into interest rate swaps. A decision not to, or the inability to, match fund certain investments exposes us to additional risks.

Furthermore, we anticipate that, in most cases, for any period during which our floating rate assets are not match funded with respect to maturity, the income from such assets may respond more slowly to interest rate fluctuations than the cost of our borrowings. Because of this dynamic, interest income from such investments may rise more slowly than the related interest expense, with a consequent decrease in our net income. Interest rate fluctuations resulting in our interest expense exceeding interest income would result in operating losses for us from these investments.

Accordingly, if we do not or are unable to match fund our investments with respect to maturities and interest rates, we will be exposed to the risk that we may not be able to finance or refinance our investments on economically favorable terms or may have to liquidate assets at a loss.

Interest rate fluctuations and shifts in the yield curve may cause losses.

Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Our primary interest rate exposures relate to our investments in Excess MSRs, RMBS, consumer loans and any floating rate debt obligations that we may incur. Changes in interest rates, including changes in expected interest rates or “yield curves,” affect our business in a number of ways. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on our interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities and hedges. Changes in the level of interest rates also can affect, among other things, our ability to acquire real estate related securities at attractive prices, the value of our real estate related securities and derivatives and our ability to realize gains from the sale of such assets. We expect to utilize hedging transactions to protect our positions from interest rate fluctuations, but as a result of current market conditions we face significant obstacles to entering into new hedging transactions. As a result, we may not be able to protect new investments from interest rate fluctuations, which could adversely affect our financial condition and results of operations.

In the event of a significant rising interest rate environment and/or economic downturn, loan and collateral defaults may increase and result in credit losses that would adversely affect our liquidity and operating results. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control.

Our ability to execute our business strategy, particularly the growth of our investment portfolio, depends to a significant degree on our ability to obtain additional capital. Our financing strategy for our real estate related securities is dependent on our ability to place the match funded debt we use to finance our investments at rates that provide a positive net spread. If spreads for such liabilities widen or if demand for such liabilities ceases to exist, then our ability to execute future financings will be severely restricted.

Interest rate changes may also impact our net book value as our real estate related securities and hedge derivatives are marked to market each quarter. Debt obligations are not marked to market. Generally, as interest rates increase, the value of our fixed rate securities decreases, which will decrease the book value of our equity.

Furthermore, shifts in the U.S. Treasury yield curve reflecting an increase in interest rates would also affect the yield required on our real estate related securities and therefore their value. For example, increasing interest rates would reduce the value of the fixed rate assets we hold at the time because the higher yields required by increased interest rates result in lower market prices on existing fixed rate assets in order to adjust the yield

 

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upward to meet the market, and vice versa. This would have similar effects on our real estate related securities portfolio and our financial position and operations to a change in interest rates generally.

Any hedging transactions that we enter into may limit our gains or result in losses.

We may use, when feasible and appropriate, derivatives to hedge a portion of our interest rate exposure, and this approach has certain risks, including the risk that losses on a hedge position will reduce the cash available for distribution to stockholders and that such losses may exceed the amount invested in such instruments. We have adopted a general policy with respect to the use of derivatives, which generally allows us to use derivatives where appropriate, but does not set forth specific policies and procedures or require that we hedge any specific amount of risk. From time to time, we may use derivative instruments, including forwards, futures, swaps and options, in our risk management strategy to limit the effects of changes in interest rates on our operations. A hedge may not be effective in eliminating all of the risks inherent in any particular position. Our profitability may be adversely affected during any period as a result of the use of derivatives.

There are limits to the ability of any hedging strategy to protect us completely against interest rate risks. When rates change, we expect the gain or loss on derivatives to be offset by a related but inverse change in the value of any items that we hedge. We cannot assure you, however, that our use of derivatives will offset the risks related to changes in interest rates. We cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses. In addition, our hedging strategy may limit our flexibility by causing us to refrain from taking certain actions that would be potentially profitable but would cause adverse consequences under the terms of our hedging arrangements.

The REIT provisions of the Code limit our ability to hedge. In managing our hedge instruments, we consider the effect of the expected hedging income on the REIT qualification tests that limit the amount of gross income that a REIT may receive from hedging. We need to carefully monitor, and may have to limit, our hedging strategy to assure that we do not realize hedging income, or hold hedges having a value, in excess of the amounts that would cause us to fail the REIT gross income and asset tests.

Accounting for derivatives under U.S. generally accepted accounting principles (“GAAP”) is extremely complicated. Any failure by us to account for our derivatives properly in accordance with GAAP in our financial statements could adversely affect our earnings.

Maintenance of our 1940 Act exemption imposes limits on our operations.

We intend to conduct our operations in reliance on an exemption from registration as an investment company under the 1940 Act. The assets that we may acquire, therefore, are limited by the provisions of the 1940 Act and the rules and regulations promulgated under the 1940 Act.

We intend to conduct our operations so that we may rely upon the exemption from registration as an investment company under the 1940 Act pursuant to Section 3(c)(5)(C) of the 1940 Act. We expect to rely on guidance published by the SEC or its staff or on our analyses of such guidance to determine which assets are qualifying real estate assets and real estate related assets. To the extent that the SEC or its staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy and portfolio composition accordingly. In addition, we may be limited in our ability to make certain investments and these limitations could result in our holding assets that we might wish to sell or selling assets we might wish to hold. In addition, we could, among other things, be required either (a) to change the manner in which we conduct our operations in order to maintain our exemption from registration as an investment company or (b) to register as an investment company, either of which could adversely affect us and the market price for our stock.

In August 2011, the SEC issued a concept release pursuant to which they solicited public comments on a wide range of issues relating to companies engaged in the business of acquiring mortgages and mortgage-related

 

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instruments and that rely on Section 3(c)(5)(C) of the 1940 Act. The SEC solicited views about the application of the 1940 Act to mortgage REITs and suggestions on the steps that the SEC should take to provide greater clarity, consistency or regulatory certainty with respect to Section 3(c)(5)(C). The SEC noted that in light of the evolution of mortgage REITs and the development of new and complex mortgage-related instruments, the SEC was reviewing interpretive issues under Section 3(c)(5)(C) and the sufficiency of SEC guidance pursuant to which such companies make judgments regarding their qualification under Section 3(c)(5)(C). The SEC sought comments on topics including the operation of mortgage REITs and their role in the mortgage markets; the similarities and differences between mortgage REITs and investment companies, the nature of the assets that qualify for purposes of the exemption, the sufficiency of the SEC’s guidance with respect to such assets, types of assets where further guidance may be needed and whether the existing asset qualification tests are appropriate; and whether mortgage REITs should be regulated in a manner similar to investment companies. The SEC requested comments on the concept release by November 7, 2011. The concept release and the public comments thereto have not yet resulted in SEC rulemaking or interpretative guidance and we cannot predict what form any such rulemaking or interpretive guidance may take. There can be no assurance that the laws and regulations governing the 1940 Act status of REITs, or guidance from the SEC or its staff regarding these exemptions, will not change in a manner that adversely affects our operations. If the SEC takes action that could result in our failure to maintain an exception or exemption from the 1940 Act, we could, among other things, be required either to (a) change the manner in which we conduct our operations in order to maintain our exemption from registration as an investment company, (b) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or (c) register as an investment company, any of which could have a material adverse effect on us and the market price of our securities. If we were required to register as an investment company under the 1940 Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the 1940 Act), portfolio composition, including restrictions with respect to diversification and industry concentration, our ability to make distributions and other matters. Maintenance of our exemption under the 1940 Act generally limits the amount of our investments in non-real estate related assets to no more than 20% of our total assets. To the extent we acquire significant non-real estate related assets in the future, in order to maintain our exemption under the 1940 Act, we may need to offset those acquisitions with additional qualifying assets which may not generate risk-adjusted returns as attractive as those generated by the non-real estate related assets.

Rapid changes in the values of assets that we hold may make it more difficult for us to maintain our qualification as a REIT or our exemption from the 1940 Act.

If the market value or income potential of qualifying assets for purposes of our qualification as a REIT or our exemption from registration as an investment company under the 1940 Act declines as a result of increased interest rates, changes in prepayment rates or other factors, we may need to increase our investments in qualifying assets and/or liquidate our non-qualifying assets to maintain our REIT qualification or our exemption from registration under the 1940 Act. If the decline in market values or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any non-qualifying assets we may own. We may have to make investment decisions that we otherwise would not make absent the intent to maintain our qualification as a REIT and exemption from registration under the 1940 Act.

We are subject to significant competition, and we may not compete successfully.

We are subject to significant competition in seeking investments. We compete with other companies, including other REITs, insurance companies and other investors, including funds and companies affiliated with our Manager. Some of our competitors have greater resources than we possess or have greater access to capital or various types of financing structures than are available to us, and we may not be able to compete successfully for investments or provide attractive investment returns relative to our competitors. These competitors may be willing to accept lower returns on their investments and, as a result, our profit margins could be adversely affected. Furthermore, competition for investments that are suitable for us may lead to the returns available from

 

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such investments decreasing, which may further limit our ability to generate our desired returns. We cannot assure you that other companies will not be formed that compete with us for investments or otherwise pursue investment strategies similar to ours or that we will be able to complete successfully against any such companies.

Furthermore, we do not intend to build a mortgage servicing platform. Therefore, we may not be an attractive buyer for those sellers of MSRs that prefer to sell MSRs and their mortgage servicing platform in a single transaction. Since our business model does not currently include acquiring and running servicing platforms, to engage in a bid for such a business we would need to find a servicer to acquire and run the platform or we would need to incur additional costs to shut down the acquired servicing platform. The need to work with a servicer in these situations increases the complexity of such potential acquisitions, and Nationstar may be unwilling or unable to act as servicer or subservicer on any Excess MSRs acquisition we want to execute. The complexity of these transactions and the additional costs incurred by us if we were to execute future acquisitions of this type could adversely affect our future operating results.

There is not anticipated to be an active market for most of the assets in which we will invest.

There is not anticipated to be an active market for most of the assets in which we will invest. In the absence of market comparisons, we will use other pricing methodologies, including, for example, models based on assumptions regarding expected trends, historical trends following market conditions believed to be comparable to the then current market conditions and other factors believed at the time to be likely to influence the potential resale price of, or the potential cash flows derived from, an investment. Such methodologies may not prove to be accurate and any inability to accurately price assets may result in adverse consequences for us. A valuation is only an estimate of value and is not a precise measure of realizable value. Ultimate realization of the market value of a private asset depends to a great extent on economic and other conditions beyond our control. Further, valuations do not necessarily represent the price at which a private investment would sell since market prices of private investments can only be determined by negotiation between a willing buyer and seller. If we were to liquidate a particular private investment, the realized value may be more than or less than the valuation of such asset as carried on our books.

Changes in accounting rules could occur at any time and could impact us in significantly negative ways that we are unable to predict or protect against.

As has been widely publicized, the SEC, the Financial Accounting Standards Board (the “FASB”) and other regulatory bodies that establish the accounting rules applicable to us have recently proposed or enacted a wide array of changes to accounting rules. Moreover, in the future these regulators may propose additional changes that we do not currently anticipate. Changes to accounting rules that apply to us could significantly impact our business or our reported financial performance in negative ways that we cannot predict or protect against. We cannot predict whether any changes to current accounting rules will occur or what impact any codified changes will have on our business, results of operations, liquidity or financial condition.

A prolonged economic slowdown, a lengthy or severe recession, or declining real estate values could harm our operations.

We believe the risks associated with our business are more severe during periods similar to those we recently experienced in which an economic slowdown or recession is accompanied by declining real estate values. Declining real estate values generally reduce the level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase of, or investment in, additional properties. Borrowers may also be less able to pay principal and interest on the loans underlying our securities and our Excess MSRs, if the real estate economy weakens. Further, declining real estate values significantly increase the likelihood that we will incur losses on our securities in the event of default because the value of our collateral may be insufficient to cover our basis. Any sustained period of increased payment delinquencies,

 

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foreclosures or losses could adversely affect our net interest income from the assets in our portfolio, which would significantly harm our revenues, results of operations, financial condition, liquidity, business prospects and our ability to make distributions to our stockholders.

Compliance with changing regulation of corporate governance and public disclosure has and will continue to result in increased compliance costs and pose challenges for our management team.

Many aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us and, more generally, the financial services and mortgage industries. Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect us, whether or when such changes may be adopted, how such changes may be interpreted and enforced or how such changes may affect us. However, the costs of complying with any additional laws or regulations could have a material effect on our financial condition and results of operations.

As has been widely publicized, the recent market conditions have resulted in a number of financial institutions recording an unprecedented amount of impairment charges, and we were also affected by these conditions. These challenging conditions have reduced the market trading activity for many real estate securities, resulting in less liquid markets for those securities.

RISKS RELATED TO OUR MANAGER

We are dependent on our Manager and may not find a suitable replacement if our Manager terminates the Management Agreement.

We have no employees. Our officers and other individuals who perform services for us are employees of our Manager. We are completely reliant on our Manager, which has significant discretion as to the implementation of our operating policies and strategies, to conduct our business. We are subject to the risk that our Manager will terminate the Management Agreement and that we will not be able to find a suitable replacement for our Manager in a timely manner, at a reasonable cost or at all. Furthermore, we are dependent on the services of certain key employees of our Manager whose compensation is partially or entirely dependent upon the amount of incentive or management compensation earned by our Manager and whose continued service is not guaranteed, and the loss of such services could adversely affect our operations.

There are conflicts of interest in our relationship with our Manager.

Our Management Agreement with our Manager was not negotiated at arm’s-length, and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party.

There are conflicts of interest inherent in our relationship with our Manager insofar as our Manager and its affiliates—including investment funds, private investment funds, or businesses managed by our Manager, including Newcastle, Nationstar and Springleaf—invest in real estate related securities, consumer loans and Excess MSRs and whose investment objectives overlap with our investment objectives. Certain investments appropriate for us may also be appropriate for one or more of these other investment vehicles. Members of our board of directors and employees of our Manager who are our officers may serve as officers and/or directors of these other entities. For example, after the distribution, we will have some of the same directors and officers as Newcastle. Although we have the same Manager, we may compete with entities affiliated with our Manager or Fortress, including Newcastle, for certain target assets. From time to time, affiliates of Fortress may seek to acquire the same or similar types of assets that we may seek to acquire. These affiliates currently have meaningful purchasing capacity, which may change over time depending upon a variety of factors, including, but not limited to, available equity capital and debt financing, market conditions and cash on hand. For example,

 

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Fortress has a fund primarily focused on investments in Excess MSRs with approximately $600 million in capital commitments. Fortress funds generally have a fee structure similar to ours, but the fees actually paid will vary depending on the size, terms and performance of each fund.

Our Management Agreement with our Manager generally does not limit or restrict our Manager or its affiliates from engaging in any business or managing other pooled investment vehicles that invest in investments that meet our investment objectives. Our Manager intends to engage in additional real estate related management and real estate and other investment opportunities in the future, which may compete with us for investments or result in a change in our current investment strategy. In addition, our certificate of incorporation provides that if Newcastle or Fortress or any of their officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us, our stockholders or our affiliates. In the event that any of our directors and officers who is also a director, officer or employee of Newcastle or Fortress acquires knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s capacity as a director or officer of New Residential and such person acts in good faith, then to the fullest extent permitted by law such person is deemed to have fully satisfied such person’s fiduciary duties owed to us and is not liable to us if Newcastle or Fortress, or their affiliates, pursues or acquires the corporate opportunity or if such person did not present the corporate opportunity to us.

The ability of our Manager and its officers and employees to engage in other business activities, subject to the terms of our Management Agreement with our Manager, may reduce the amount of time our Manager, its officers or other employees spend managing us. In addition, we may engage (subject to our investment guidelines) in material transactions with our Manager or another entity managed by our Manager or one of its affiliates, including Newcastle, Nationstar and Springleaf, which may include, but are not limited to, certain financing arrangements, purchases of debt, co-investments in Excess MSRs, consumer loans, servicing advances and other assets that present an actual, potential or perceived conflict of interest. It is possible that actual, potential or perceived conflicts could give rise to investor dissatisfaction, litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential, actual or perceived conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation, which could materially adversely affect our business in a number of ways, including causing an inability to raise additional funds, a reluctance of counterparties to do business with us, a decrease in the prices of our equity securities and a resulting increased risk of litigation and regulatory enforcement actions.

The management compensation structure that we have agreed to with our Manager, as well as compensation arrangements that we may enter into with our Manager in the future (in connection with new lines of business or other activities), may incentivize our Manager to invest in high risk investments. In addition to its management fee, our Manager is currently entitled to receive incentive compensation. In evaluating investments and other management strategies, the opportunity to earn incentive compensation may lead our Manager to place undue emphasis on the maximization of such measures at the expense of other criteria, such as preservation of capital, in order to achieve higher incentive compensation. Investments with higher yield potential are generally riskier or more speculative than lower-yielding investments. Moreover, because our Manager receives compensation in the form of options in connection with the completion of our common equity offerings, our Manager may be incentivized to cause us to issue additional common stock, which could be dilutive to existing stockholders.

It would be difficult and costly to terminate our Management Agreement with our Manager.

It would be difficult and costly for us to terminate our Management Agreement with our Manager. The Management Agreement may only be terminated annually upon (i) the affirmative vote of at least two-thirds of our independent directors, or by a vote of the holders of a simple majority of the outstanding shares of our common stock, that there has been unsatisfactory performance by our Manager that is materially detrimental to us or (ii) a determination by a simple majority of our independent directors that the management fee payable to

 

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our Manager is not fair, subject to our Manager’s right to prevent such a termination by accepting a mutually acceptable reduction of fees. Our Manager will be provided 60 days’ prior notice of any termination and will be paid a termination fee equal to the amount of the management fee earned by the Manager during the twelve-month period preceding such termination. In addition, following any termination of the Management Agreement, our Manager may require us to purchase its right to receive incentive compensation at a price determined as if our assets were sold for their fair market value (as determined by an appraisal, taking into account, among other things, the expected future value of the underlying investments) or otherwise we may continue to pay the incentive compensation to our Manager. These provisions may increase the effective cost to us of terminating the Management Agreement, thereby adversely affecting our ability to terminate our Manager without cause.

Our directors have approved broad investment guidelines for our Manager and do not approve each investment decision made by our Manager. In addition, we may change our investment strategy without stockholder consent, which may result in our making investments that are different, riskier or less profitable than our current investments.

Our Manager is authorized to follow broad investment guidelines. For more information about our investment guidelines, see “Business—Investment Guidelines” included elsewhere in this information statement. Consequently, our Manager has great latitude in determining the types and categories of assets it may decide are proper investments for us, including the latitude to invest in types and categories of assets that may differ from those in which we currently invest. Our directors will periodically review our investment guidelines and our investment portfolio. However, our board does not review or pre-approve each proposed investment or our related financing arrangements. In addition, in conducting periodic reviews, the directors rely primarily on information provided to them by our Manager. Furthermore, transactions entered into by our Manager may be difficult or impossible to unwind by the time they are reviewed by the directors even if the transactions contravene the terms of the Management Agreement.

Our investment strategy may evolve in light of existing market conditions and investment opportunities, and this evolution may involve additional risks depending upon the nature of the assets in which we invest and our ability to finance such assets on a short or long-term basis. Investment opportunities that present unattractive risk-return profiles relative to other available investment opportunities under particular market conditions may become relatively attractive under changed market conditions and changes in market conditions may therefore result in changes in the investments we target. Decisions to make investments in new asset categories present risks that may be difficult for us to adequately assess and could therefore reduce our ability to pay dividends on our common stock or have adverse effects on our liquidity or financial condition. A change in our investment strategy may also increase our exposure to interest rate, foreign currency, real estate market or credit market fluctuations. In addition, a change in our investment strategy may increase our use of non-match-funded financing, increase the guarantee obligations we agree to incur or increase the number of transactions we enter into with affiliates. Our failure to accurately assess the risks inherent in new asset categories or the financing risks associated with such assets could adversely affect our results of operations and our financial condition.

Our Manager will not be liable to us for any acts or omissions performed in accordance with the Management Agreement, including with respect to the performance of our investments.

Pursuant to our Management Agreement, our Manager will not assume any responsibility other than to render the services called for thereunder in good faith and will not be responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Our Manager, its members, managers, officers and employees will not be liable to us or any of our subsidiaries, to our board of directors, or our or any subsidiary’s stockholders or partners for any acts or omissions by our Manager, its members, managers, officers or employees, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of our Manager’s duties under our Management Agreement. We shall, to the full extent lawful, reimburse, indemnify and hold our Manager, its members, managers, officers and employees and each other person, if any, controlling our Manager harmless of and from any and all expenses, losses, damages, liabilities,

 

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demands, charges and claims of any nature whatsoever (including attorneys’ fees) in respect of or arising from any acts or omissions of an indemnified party made in good faith in the performance of our Manager’s duties under our Management Agreement and not constituting such indemnified party’s bad faith, willful misconduct, gross negligence or reckless disregard of our Manager’s duties under our Management Agreement.

Our Manager’s due diligence of investment opportunities or other transactions may not identify all pertinent risks, which could materially affect our business, financial condition, liquidity and results of operations.

Our Manager intends to conduct due diligence with respect to each investment opportunity or other transaction it pursues. It is possible, however, that our Manager’s due diligence processes will not uncover all relevant facts, particularly with respect to any assets we acquire from third parties. In these cases, our Manager may be given limited access to information about the investment and will rely on information provided by the target of the investment. In addition, if investment opportunities are scarce, the process for selecting bidders is competitive, or the timeframe in which we are required to complete diligence is short, our ability to conduct a due diligence investigation may be limited, and we would be required to make investment decisions based upon a less thorough diligence process than would otherwise be the case. Accordingly, investments and other transactions that initially appear to be viable may prove not to be over time, due to the limitations of the due diligence process or other factors.

RISKS RELATED TO THE SEPARATION

We may be unable to achieve some or all of the benefits that we expect to achieve from our separation from Newcastle.

We may not be able to achieve the full strategic and financial benefits that we expect will result from our separation from Newcastle or such benefits may be delayed or may not occur at all. For example, there can be no assurance that analysts and investors will regard our corporate structure as clearer and simpler than the current Newcastle corporate structure or place a greater value on our company as a stand-alone REIT than on our businesses being a part of Newcastle.

Our agreements with Newcastle may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties.

The agreements related to our separation from Newcastle, including the Separation and Distribution Agreement, were negotiated in the context of our separation from Newcastle while we were still part of Newcastle and, accordingly, may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties. The terms of the agreements we negotiated in the context of our separation related to, among other things, allocation of assets, liabilities, rights, indemnifications and other obligations among Newcastle and us. See “Certain Relationships and Transactions with Related Persons, Affiliates and Affiliated Entities.”

The ownership by our executive officers and some of our directors of shares of common stock, options, or other equity awards of Newcastle may create, or may create the appearance of, conflicts of interest.

Because some of our directors, officers and other employees of our Manager also currently hold positions with Newcastle, they own Newcastle common stock, options to purchase Newcastle common stock or other equity awards. Ownership by some of our directors and officers, after our separation, of common stock or options to purchase common stock of Newcastle, or any other equity awards, creates, or, may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for Newcastle than they do for us.

 

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The distribution of our common stock will not qualify for tax-free treatment and may be taxable to you as a dividend.

The distribution of our common stock will not qualify for tax-free treatment. An amount equal to the fair market value of our common stock received by you on the distribution date will be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of Newcastle, with the excess treated first as a non-taxable return of capital to the extent of your tax basis in Newcastle common stock and then as capital gain. In addition, Newcastle or other applicable withholding agents may be required or permitted to withhold at the applicable rate on all or a portion of the distribution payable to non-U.S. shareholders, and any such withholding would be satisfied by Newcastle or such agent withholding and selling a portion of the New Residential stock otherwise distributable to non-U.S. shareholders. Your tax basis in shares of Newcastle held at the time of the distribution will be reduced (but not below zero) to the extent the fair market value of our shares distributed by Newcastle to you in the distribution exceeds your ratable share of Newcastle’s current and accumulated earnings and profits. Your holding period for such Newcastle shares will not be affected by the distribution. Newcastle will not be able to advise stockholders of the amount of earnings and profits of Newcastle until after the end of the 2013 calendar year.

Although Newcastle will be ascribing a value to our shares in the distribution for tax purposes, this valuation is not binding on the Internal Revenue Service (the “IRS”) or any other tax authority. These taxing authorities could ascribe a higher valuation to our shares, particularly if our stock trades at prices significantly above the value ascribed to our shares by Newcastle in the period following the distribution. Such a higher valuation may cause a larger reduction in the tax basis of your Newcastle shares or may cause you to recognize additional dividend or capital gain income. You should consult your own tax advisor as to the particular tax consequences of the distribution to you.

We may compete with affiliates of our Manager, including Newcastle, which could adversely affect our and their results of operations.

Affiliates of our Manager, including Newcastle, are primarily engaged in the business of real estate investment and finance, and invest in, and actively manage, portfolios of real estate securities, loans and other assets. Affiliates of our Manager, including Newcastle, are not restricted in any manner from competing with us. After the distribution, affiliates of our Manager, including Newcastle, may decide to invest in the same types of assets that we invest in. Furthermore, after the distribution, we will have the same Manager and directors and officers as Newcastle and certain of our Manager’s other affiliates. See “—Risks Related to Our Manager—There are conflicts of interest in our relationship with our Manager.”

RISKS RELATED TO THE FINANCIAL MARKETS

We do not know what impact the Dodd-Frank Act will have on our business.

On July 21, 2010, the U.S. enacted the Dodd-Frank Act. The Dodd-Frank Act affects almost every aspect of the U.S. financial services industry, including certain aspects of the markets in which we operate. The Dodd-Frank Act imposes new regulations on us and how we conduct our business. For example, the Dodd-Frank Act will impose additional disclosure requirements for public companies and generally require issuers or originators of asset-backed securities to retain at least five percent of the credit risk associated with the securitized assets. In addition, as a result of the Dodd-Frank Act, we may be required to register as an investment adviser with the SEC, which increases our regulatory compliance costs and subjects us to the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Advisers Act imposes numerous obligations on registered investment advisers, including record-keeping, reporting, operational and marketing requirements, disclosure obligations and prohibitions on fraudulent activities. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from fines and censure to termination of an investment adviser’s

 

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registration. Investment advisers also are subject to certain state securities laws and regulations. Non-compliance with the Advisers Act or other federal and state securities laws and regulations could result in investigations, sanctions, disgorgement, fines and reputational damage.

The Dodd-Frank Act will impose mandatory clearing, exchange-trading and margin requirements on many derivatives transactions (including formerly unregulated over-the-counter derivatives) in which we may engage. The Dodd-Frank Act also creates new categories of regulated market participants, such as “swap-dealers,” “security-based swap dealers,” “major swap participants” and “major security-based swap participants,” who will be subject to significant new capital, registration, recordkeeping, reporting, disclosure, business conduct and other regulatory requirements that will give rise to new administrative costs.

Even if certain new requirements are not directly applicable to us, they may still increase our costs of entering into transactions with the parties to whom the requirements are directly applicable. Moreover, new exchange-trading and trade reporting requirements may lead to reductions in the liquidity of derivative transactions, causing higher pricing or reduced availability of derivatives, or the reduction of arbitrage opportunities for us, which could adversely affect the performance of certain of our trading strategies. Importantly, many key aspects of the changes imposed by the Dodd-Frank Act will be established by various regulatory bodies and other groups over the next several years. As a result, we do not know how significantly the Dodd-Frank Act will affect us. It is possible that the Dodd-Frank Act could, among other things, increase our costs of operating as a public company, impose restrictions on our ability to securitize assets and reduce our investment returns on securitized assets.

We do not know what impact certain U.S. government programs intended to stabilize the economy and the financial markets will have on our business.

In recent years, the U.S. government has taken a number of steps to attempt to strengthen the financial markets and U.S. economy, including direct government investments in, and guarantees of, troubled financial institutions as well as government-sponsored programs such as the Term Asset-Backed Securities Loan Facility program and the Public Private Investment Partnership Program. The U.S. government continues to evaluate or implement an array of other measures and programs intended to help improve U.S. financial and market conditions. While conditions appear to have improved relative to the depths of the global financial crisis, it is not clear whether this improvement is real or will last for a significant period of time. It is not clear what impact the government’s future actions to improve financial and market conditions will have on our business. We may not derive any meaningful benefit from these programs in the future. Moreover, if any of our competitors are able to benefit from one or more of these initiatives, they may gain a significant competitive advantage over us.

The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between these agencies and the U.S. government, may adversely affect our business.

Due to increased market concerns about the ability of Fannie Mae and Freddie Mac to withstand future credit losses associated with securities held in their investment portfolios, and on which they provide guarantees without the direct support of the U.S. federal government, on July 30, 2008, the U.S. government passed the Housing and Economic Recovery Act of 2008. On September 7, 2008, the FHFA, placed Fannie Mae and Freddie Mac into conservatorship and, together with the U.S. Treasury, established a program designed to boost investor confidence in their respective debt and MBS.

As the conservator of Fannie Mae and Freddie Mac, the FHFA controls and directs the operations of Fannie Mae and Freddie Mac and may (i) take over the assets and operations of Fannie Mae and Freddie Mac with all the powers of the shareholders, the directors and the officers of Fannie Mae and Freddie Mac and conduct all business of Fannie Mae and Freddie Mac; (ii) collect all obligations and money due to Fannie Mae and Freddie Mac; (iii) perform all functions of Fannie Mae and Freddie Mac which are consistent with the conservator’s appointment; (iv) preserve and conserve the assets and property of Fannie Mae and Freddie Mac; and (v) contract for assistance in fulfilling any function, activity, action or duty of the conservator.

 

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In addition to the FHFA becoming the conservator of Fannie Mae and Freddie Mac, the U.S. Treasury and the FHFA have entered into preferred stock purchase agreements among the U.S. Treasury, Fannie Mae and Freddie Mac pursuant to which the U.S. Treasury will ensure that each of Fannie Mae and Freddie Mac maintains a positive net worth.

Although the U.S. Treasury has committed capital to Fannie Mae and Freddie Mac, these actions may not be adequate for their needs. If these actions are inadequate, Fannie Mae and Freddie Mac could continue to suffer losses and could fail to honor their guarantees and other obligations. The future roles of Fannie Mae and Freddie Mac could be significantly reduced and the nature of their guarantees could be considerably limited relative to historical measurements. Any changes to the nature of the guarantees provided by Fannie Mae and Freddie Mac could redefine what constitute agency and government conforming MBS and could have broad adverse market implications. Such market implications could adversely affect our business and prospects.

Legislation that permits modifications to the terms of outstanding loans may negatively affect our business, financial condition and results of operations.

The U.S. government has enacted legislation that enables government agencies to modify the terms of a significant number of residential and other loans to provide relief to borrowers without the applicable investor’s consent. These modifications allow for outstanding principal to be deferred, interest rates to be reduced, the term of the loan to be extended or other terms to be changed in ways that can permanently eliminate the cash flow (principal and interest) associated with a portion of the loan. These modifications are currently reducing, or in the future may reduce, the value of a number of our current or future investments, including investments in mortgage backed securities and Excess MSRs. As a result, such loan modifications are negatively affecting our business, results of operations and financial condition. In addition, certain market participants propose reducing the amount of paperwork required by a borrower to modify a loan, which could increase the likelihood of fraudulent modifications and materially harm the U.S. mortgage market and investors that have exposure to this market. Additional legislation intended to provide relief to borrowers may be enacted and could further harm our business, results of operations and financial condition.

RISKS RELATED TO OUR TAXATION AS A REIT

Our failure to qualify as a REIT would result in higher taxes and reduced cash available for distribution to our stockholders.

Following the distribution, we intend to operate in a manner intended to qualify us as a REIT for U.S. federal income tax purposes. Our ability to satisfy the asset tests depends upon our analysis of the fair market values of our assets, some of which are not susceptible to a precise determination, and for which we do not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. Moreover, the proper classification of one or more of our investments may be uncertain in some circumstances, which could affect the application of the REIT qualification requirements. Accordingly, there can be no assurance that the IRS, will not contend that our investments violate the REIT requirements.

If we were to fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of, and trading prices for, our stock. Unless entitled to relief under certain provisions of the Code, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we initially ceased to qualify as a REIT. The rule against re-electing REIT status following a loss of such status would also apply to us if Newcastle fails to

 

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qualify as a REIT, and we are treated as a successor to Newcastle for U.S. federal income tax purposes. Although, as described under the heading “Certain Relationships and Transactions with Related Persons, Affiliates and Affiliated Entities,” Newcastle represented in the Separation and Distribution Agreement that it has no knowledge of any fact or circumstance that would cause us to fail to qualify as a REIT, and covenanted in the Separation and Distribution Agreement to use its reasonable best efforts to maintain its REIT status for each of Newcastle’s taxable years ending on or before December 31, 2014 (unless Newcastle obtains an opinion from a nationally recognized tax counsel or a private letter ruling from the IRS to the effect that Newcastle’s failure to maintain its REIT status will not cause us to fail to qualify as a REIT under the successor REIT rule referred to above), no assurance can be given that such representation and covenant would prevent us from failing to qualify as a REIT. Although, in the event of a breach, we may be able to seek damages from Newcastle, there can be no assurance that such damages, if any, would appropriately compensate us. In addition, if Newcastle were to fail to qualify as a REIT despite its reasonable best efforts, we would have no claim against Newcastle. See “Federal Income Tax Considerations” for a discussion of material U.S. federal income tax consequences relating to us and our common stock.

Our failure to qualify as a REIT would cause our stock to be delisted from the NYSE.

The NYSE requires, as a condition to the listing of our shares, that we maintain our REIT status. Consequently, if we fail to maintain our REIT status, our shares would promptly be delisted from the NYSE, which would decrease the trading activity of such shares. This could make it difficult to sell shares and could cause the market volume of the shares trading to decline.

If we were delisted as a result of losing our REIT status and desired to relist our shares on the NYSE, we would have to reapply to the NYSE to be listed as a domestic corporation. As the NYSE’s listing standards for REITs are less onerous than its standards for domestic corporations, it would be more difficult for us to become a listed company under these heightened standards. We might not be able to satisfy the NYSE’s listing standards for a domestic corporation. As a result, if we were delisted from the NYSE, we might not be able to relist as a domestic corporation, in which case our shares could not trade on the NYSE.

The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT.

We intend to enter into financing arrangements that are structured as sale and repurchase agreements pursuant to which we would nominally sell certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase these assets at a later date in exchange for a purchase price. Economically, these agreements are financings that are secured by the assets sold pursuant thereto. We believe that, for purposes of the REIT asset and income tests, we should be treated as the owner of the assets that are the subject of any such sale and repurchase agreement, notwithstanding that those agreements may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the assets during the term of the sale and repurchase agreement, in which case we might fail to qualify as a REIT.

The failure of our Excess MSRs to qualify as real estate assets or the income from our Excess MSRs to qualify as mortgage interest could adversely affect our ability to qualify as a REIT.

We have received from the IRS a private letter ruling substantially to the effect that our Excess MSRs represent interests in mortgages on real property and thus are qualifying “real estate assets” for purposes of the REIT asset test, which generate income that qualifies as interest on obligations secured by mortgages on real property for purposes of the REIT income test. The ruling is based on, among other things, certain assumptions as well as on the accuracy of certain factual representations and statements that we and Newcastle have made to the IRS. If any of the representations or statements that we have made in connection with the private letter ruling, are, or

 

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become, inaccurate or incomplete in any material respect with respect to one or more Excess MSR investments, or if we acquire an Excess MSR investment with terms that are not consistent with the terms of the Excess MSR investments described in the private letter ruling, then we will not be able to rely on the private letter ruling. If we are unable to rely on the private letter ruling with respect to an Excess MSR investment, the IRS could assert that such Excess MSR investments do not qualify under the REIT asset and income tests, and if successful, we might fail to qualify as a REIT.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

Dividends payable to domestic stockholders that are individuals, trusts, and estates are generally taxed at reduced tax rates. Dividends payable by REITs, however, generally are not eligible for the reduced rates. The more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock. In addition, the relative attractiveness of real estate in general may be adversely affected by the favorable tax treatment given to non-REIT corporate dividends, which could affect the value of our real estate assets negatively.

Qualifying as a REIT involves highly technical and complex provisions of the Code.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. Compliance with these requirements must be carefully monitored on a continuing basis, and there can be no assurance that our Manager’s personnel responsible for doing so will be able to successfully monitor our compliance.

REIT distribution requirements could adversely affect our liquidity and our ability to execute our business plan.

We generally must distribute annually at least 90% of our REIT taxable income, excluding any net capital gain, in order for corporate income tax not to apply to earnings that we distribute. We intend to make distributions to our stockholders to comply with the REIT requirements of the Code. However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet the 90% distribution requirement of the Code. Certain of our assets may generate substantial mismatches between taxable income and available cash. As a result, the requirement to distribute a substantial portion of our net taxable income could cause us to: (i) sell assets in adverse market conditions; (ii) borrow on unfavorable terms; (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt; or (iv) make taxable distributions of our capital stock or debt securities in order to comply with REIT requirements. Further, amounts distributed will not be available to fund investment activities. If we fail to obtain debt or equity capital in the future, it could limit our ability to satisfy our liquidity needs, which could adversely affect the value of our common stock.

We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them.

Based on IRS guidance concerning the classification of Excess MSRs, we intend to treat our Excess MSRs as ownership interests in the interest payments made on the underlying mortgage loans, akin to an “interest only” strip. Under this treatment, for purposes of determining the amount and timing of taxable income, each Excess MSR is treated as a bond that was issued with original issue discount on the date we acquired such Excess MSR. In general, we will be required to accrue original issue discount based on the constant yield to maturity of each

 

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Excess MSR, and to treat such original issue discount as taxable income in accordance with the applicable U.S. federal income tax rules. The constant yield of an Excess MSR will be determined, and we will be taxed, based on a prepayment assumption regarding future payments due on the mortgage loans underlying the Excess MSR. If the mortgage loans underlying an Excess MSR prepay at a rate different than that under the prepayment assumption, our recognition of original issue discount will be either increased or decreased depending on the circumstances. Thus, in a particular taxable year, we may be required to accrue an amount of income in respect of an Excess MSR that exceeds the amount of cash collected in respect of that Excess MSR. Furthermore, it is possible that, over the life of the investment in an Excess MSR, the total amount we pay for, and accrue with respect to, the Excess MSR may exceed the total amount we collect on such Excess MSR. No assurance can be given that we will be entitled to a deduction for such excess, meaning that we may be required to recognize phantom income over the life of an Excess MSR.

Other debt instruments that we may acquire, including consumer loans, may be issued with, or treated as issued with, original issue discount. Those instruments would be subject to the same original issue discount accrual and income computations which are described above with regard to Excess MSRs.

We may acquire debt instruments in the secondary market for less than their face amount. The discount at which such debt instruments are acquired may reflect doubts about their ultimate collectability rather than current market interest rates. The amount of such discount will nevertheless generally be treated as “market discount” for U.S. federal income tax purposes. Accrued market discount is reported as income when, and to the extent that, any payment of principal of the debt instrument is made. If we collect less on the debt instrument than our purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting loss deductions.

In addition, we may acquire debt instruments that are subsequently modified by agreement with the borrower. If the amendments to the outstanding instrument are “significant modifications” under the applicable Treasury regulations, the modified instrument will be considered to have been reissued to us in a debt-for-debt exchange with the borrower. In that event, we may be required to recognize taxable gain to the extent the principal amount of the modified instrument exceeds our adjusted tax basis in the unmodified instrument, even if the value of the instrument or the payment expectations have not changed. Following such a taxable modification, we would hold the modified loan with a cost basis equal to its principal amount for U.S. federal tax purposes.

Finally, in the event that any debt instruments acquired by us are delinquent as to mandatory principal and interest payments, or in the event payments with respect to a particular instrument are not made when due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectability. Similarly, we may be required to accrue interest income with respect to debt instruments at the stated rate regardless of whether corresponding cash payments are received or are ultimately collectible. In each case, while we would in general ultimately have an offsetting loss deduction available to us when such interest was determined to be uncollectible, the utility of that deduction could depend on our having taxable income of an appropriate character in that later year or thereafter.

In any event, if our investments generate more taxable income than cash in any given year, we may have difficulty satisfying our annual REIT distribution requirement. See “Federal Income Tax Considerations— Annual Distribution Requirements.”

We may be unable to generate sufficient revenue from operations to pay our operating expenses and to pay distributions to our stockholders.

As a REIT, we are generally required to distribute at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and not including net capital losses) each year to our stockholders. To qualify for the tax benefits accorded to REITs, we intend to make distributions to our stockholders in amounts such that we distribute all or substantially all of our net taxable income each year, subject to certain adjustments. However, our ability to make distributions may be adversely affected by the risk factors described herein.

 

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The stock ownership limit imposed by the Code for REITs and our certificate of incorporation may inhibit market activity in our stock and restrict our business combination opportunities.

In order for us to maintain our qualification as a REIT under the Code, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year after our first taxable year. Our certificate of incorporation, with certain exceptions, authorizes our board of directors to take the actions that are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own more than 9.9% of the aggregate value of our outstanding capital stock, treating classes and series of our stock in the aggregate. Our board may grant an exemption in its sole discretion, subject to such conditions, representations and undertakings as it may determine in its sole discretion. These ownership limits could delay or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. Moreover, if a REIT distributes less than 85% of its taxable income to its stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then it is required to pay an excise tax on 4% of any shortfall between the required 85% and the amount that was actually distributed. Any of these taxes would decrease cash available for distribution to our stockholders. In addition, in order to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we may hold some of our assets through taxable REIT subsidiaries (“TRS”). Such subsidiaries will be subject to corporate level income tax at regular rates.

Complying with the REIT requirements may negatively impact our investment returns or cause us to forego otherwise attractive opportunities, liquidate assets or contribute assets to a TRS.

To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. As a result of these tests, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, forego otherwise attractive investment opportunities, liquidate assets in adverse market conditions or contribute assets to a TRS that is subject to regular corporate federal income tax. Our ability to acquire Excess MSRs and other investments will be subject to the applicable REIT qualification tests, and we may have to hold these interests through TRSs, which would negatively impact our returns from these assets. In general, compliance with the REIT requirements may hinder our ability to make and retain certain attractive investments.

Complying with the REIT requirements may limit our ability to hedge effectively.

The existing REIT provisions of the Code may substantially limit our ability to hedge our operations because a significant amount of the income from those hedging transactions is likely to be treated as non-qualifying income for purposes of both REIT gross income tests. In addition, we must limit our aggregate income from non-qualified hedging transactions, from our provision of services and from other non-qualifying sources, to less than 5% of our annual gross income (determined without regard to gross income from qualified hedging transactions). As a result, we may have to limit our use of certain hedging techniques or implement those hedges through total return swaps. This could result in greater risks associated with changes in interest rates than we would otherwise want to incur or could increase the cost of our hedging activities. If we fail to comply with these limitations, we could lose our REIT qualification for U.S. federal income tax purposes, unless our failure was due to reasonable cause, and not due to willful neglect, and we meet certain other technical requirements. Even if our failure were due to reasonable cause, we might incur a penalty tax.

 

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Distributions to tax-exempt investors may be classified as unrelated business taxable income.

Neither ordinary nor capital gain distributions with respect to our stock nor gain from the sale of stock should generally constitute unrelated business taxable income to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:

 

   

part of the income and gain recognized by certain qualified employee pension trusts with respect to our stock may be treated as unrelated business taxable income if shares of our stock are predominantly held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as unrelated business taxable income;

 

   

part of the income and gain recognized by a tax-exempt investor with respect to our stock would constitute unrelated business taxable income if the investor incurs debt in order to acquire the stock; and

 

   

to the extent that we are (or a part of us, or a disregarded subsidiary of ours, is) a “taxable mortgage pool,” or if we hold residual interests in a real estate mortgage investment conduit (“REMIC”), a portion of the distributions paid to a tax-exempt stockholder that is allocable to excess inclusion income may be treated as unrelated business taxable income.

The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations.

We may enter into securitization or other financing transactions that result in the creation of taxable mortgage pools for U.S. federal income tax purposes. As a REIT, so long as we own 100% of the equity interests in a taxable mortgage pool, we would generally not be adversely affected by the characterization of a securitization as a taxable mortgage pool. Certain categories of stockholders, however, such as foreign stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to the taxable mortgage pool. In addition, to the extent that our stock is owned by tax-exempt “disqualified organizations,” such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business income, we could incur a corporate level tax on a portion of our income from the taxable mortgage pool. In that case, we might reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise to the tax. Moreover, we may be precluded from selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.

Uncertainty exists with respect to the treatment of TBAs for purposes of the REIT asset and income tests.

We may purchase and sell Agency RMBS through “to-be-announced” forward contracts (“TBAs”) and recognize income or gains from the disposition of those TBAs, through dollar roll transactions or otherwise. There is no direct authority with respect to the qualification of TBAs as real estate assets or U.S. Government securities for purposes of the 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the sale of real property (including interests in real property and interests in mortgages on real property) or other qualifying income for purposes of the 75% gross income test. To the extent we enter into any TBAs in the future, we intend to treat such TBAs as qualifying assets for purposes of the REIT asset tests, and we intend to treat income and gains from such TBAs as qualifying income for purposes of the 75% gross income test, based on an opinion we would expect to receive from Skadden, Arps, Slate, Meagher & Flom LLP substantially to the effect that (i) for purposes of the REIT asset tests, our ownership of a TBA should be treated as ownership of the underlying Agency RMBS, and (ii) for purposes of the 75% REIT gross income test, any gain recognized by us in connection with the settlement of such TBAs should be treated as gain from the sale or disposition of the underlying Agency RMBS. Opinions of

 

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counsel are not binding on the IRS, and no assurance can be given that the IRS will not successfully challenge the conclusions set forth in such opinions. In addition, it must be emphasized that the opinion of Skadden, Arps, Slate, Meagher & Flom LLP would be based on various assumptions relating to any TBAs that we may enter into and would be conditioned upon fact-based representations and covenants made by our management regarding such TBAs. No assurance can be given that the IRS would not assert that such assets or income are not qualifying assets or income. If the IRS were to successfully challenge the conclusions of Skadden, Arps, Slate, Meagher & Flom LLP, we could be subject to a penalty tax or we could fail to qualify as a REIT if a sufficient portion of our assets consists of TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs.

The tax on prohibited transactions will limit our ability to engage in transactions which would be treated as prohibited transactions for U.S. federal income tax purposes.

Net income that we derive from a prohibited transaction is subject to a 100% tax. The term “prohibited transaction” generally includes a sale or other disposition of property (including mortgage loans, but other than foreclosure property, as discussed below) that is held primarily for sale to customers in the ordinary course of our trade or business. We might be subject to this tax if we were to dispose of or securitize loans or Excess MSRs in a manner that was treated as a prohibited transaction for U.S. federal income tax purposes.

We intend to conduct our operations so that no asset that we own (or are treated as owning) will be treated as, or as having been, held for sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary course of our business. As a result, we may choose not to engage in certain sales of loans or Excess MSRs at the REIT level, and may limit the structures we utilize for our securitization transactions, even though the sales or structures might otherwise be beneficial to us. In addition, whether property is held “primarily for sale to customers in the ordinary course of a trade or business” depends on the particular facts and circumstances. No assurance can be given that any property that we sell will not be treated as property held for sale to customers, or that we can comply with certain safe-harbor provisions of the Code that would prevent such treatment. The 100% prohibited transaction tax does not apply to gains from the sale of property that is held through a TRS or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate rates. We intend to structure our activities to prevent prohibited transaction characterization.

New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT.

The present U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the U.S. federal income tax treatment of an investment in us. The U.S. federal income tax rules dealing with REITs constantly are under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. Revisions in U.S. federal tax laws and interpretations thereof could affect or cause us to change our investments and commitments and affect the tax considerations of an investment in us.

Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.

To qualify as a REIT, we must comply with requirements regarding the composition of our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.

 

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RISKS RELATED TO OUR COMMON STOCK

There is no existing market for our common stock and a trading market that will provide you with adequate liquidity may not develop for our common stock. In addition, once our common stock begins trading, the market price of our shares may fluctuate widely.

There is currently no public market for our common stock. It is anticipated that on or prior to the record date for the distribution, trading of shares of our common stock will begin on a “when-issued” basis and will continue up to and including through the distribution date. However, there can be no assurance that an active trading market for our common stock will develop as a result of the distribution or be sustained in the future.

We cannot predict the prices at which our common stock may trade after the distribution. The market price of our common stock may fluctuate widely, depending upon many factors, some of which may be beyond our control, including:

 

   

our business profile and market capitalization may not fit the investment objectives of Newcastle stockholders;

 

   

a shift in our investor base;

 

   

our quarterly or annual earnings, or those of other comparable companies;

 

   

actual or anticipated fluctuations in our operating results;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

announcements by us or our competitors of significant investments, acquisitions or dispositions;

 

   

the failure of securities analysts to cover our common stock after the distribution;

 

   

changes in earnings estimates by securities analysts or our ability to meet those estimates;

 

   

the operating and stock price performance of other comparable companies;

 

   

overall market fluctuations; and

 

   

general economic conditions.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.

Substantial sales of common stock may occur in connection with the distribution, which could cause our stock price to decline.

The shares of our common stock that Newcastle intends to distribute to its stockholders generally may be sold immediately in the public market. Although we have no actual knowledge of any plan or intention on the part of any 5% or greater stockholder to sell our common stock following the distribution. It is possible that some Newcastle stockholders, including possibly some of our large stockholders, will sell our common stock received in the distribution. In addition, Newcastle stockholders may sell our stock because our business profile or market capitalization as an independent company does not fit their investment objectives or because our common stock is not included in certain indices after the distribution. The sales of significant amounts of our common stock or the perception in the market that this will occur may result in the lowering of the market price of our common stock.

 

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We are an emerging growth company within the meaning of the Securities Act, and if we decide to take advantage of certain exemptions from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As a result, our stockholders may not have access to certain information they may deem important. We will remain an emerging growth company until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (b) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, (c) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (d) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. If we take advantage of any of these exemptions, we do not know if some investors will find our common stock less attractive as a result. The result may be a less active trading market for our common stock and our stock price may be more volatile.

Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

As a public company, we will be required to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Internal control over financial reporting is complex and may be revised over time to adapt to changes in our business, or changes in applicable accounting rules. We cannot assure you that our internal control over financial reporting will be effective in the future or that a material weakness will not be discovered with respect to a prior period for which we had previously believed that internal controls were effective. If we are not able to maintain or document effective internal control over financial reporting, our independent registered public accounting firm will not be able to certify as to the effectiveness of our internal control over financial reporting. Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis, or may cause us to restate previously issued financial information, and thereby subject us to adverse regulatory consequences, including sanctions or investigations by the SEC, or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to suffer if we or our independent registered public accounting firm reports a material weakness in our internal control over financial reporting. This could materially adversely affect us by, for example, leading to a decline in our share price and impairing our ability to raise capital.

Your percentage ownership in New Residential may be diluted in the future.

Your percentage ownership in New Residential may be diluted in the future because of equity awards that we expect will be granted to our Manager, to the directors, officers and employees of our Manager who perform services for us, and to our directors, officers and employees, as well as other equity instruments such as debt and equity financing. In addition, following the distribution, we expect Newcastle options held by our Manager, by the directors, officers and employees of our Manager, and by our directors, officers and employees will be equitably adjusted to become separate options relating to both Newcastle common stock and our common stock, resulting in additional dilution to your ownership percentage in New Residential. It is anticipated that                  options relating to our common stock will be distributed pursuant to such adjustment. For a description of the equitable adjustments expected to be made to Newcastle options, see “Management—Equitable Adjustment of Options.” Prior to the separation and record date for the distribution, we expect the board of directors of New

 

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Residential to approve a Nonqualified Stock Option and Incentive Award Plan (the “Plan”) which will provide for the grant of equity-based awards, including restricted stock, stock options, stock appreciation rights, performance awards, tandem awards and other equity-based and non equity based awards, in each case to our Manager, to the directors, officers, employees, service providers, consultants and advisor of our Manager who perform services for us, and to our directors, officers, employees, service providers, consultants and advisors. We have initially reserved 30,000,000 shares of our common stock for issuance under the Plan; on the first day of each fiscal year beginning during the ten-year term of the Plan and in and after calendar year 2014, that number will be increased by a number of shares of our common stock equal to 10% of the number of shares of our common stock newly issued by us during the immediately preceding fiscal year (and, in the case of fiscal year 2013, after the effective date of the Plan). For a more detailed description of the New Residential Equity Incentive Plan, see “Management—Stock Option Plan.” Our board of directors may also determine to issue options to the Manager that are not subject to the Plan, provided that the number of shares underlying any options granted to the Manager in connection with capital raising efforts would not exceed 10% of the shares sold in such offering and would be subject to NYSE rules.

We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future.

We intend to make quarterly distributions of all or substantially all of our net taxable income to holders of our common stock out of assets legally available therefore. We have not established a minimum distribution payment level and our ability to pay distributions may be adversely affected by a number of factors, including the risk factors described in this information statement. Distributions will be authorized by our board of directors and declared by us based upon a number of factors, including actual results of operations, restrictions under Delaware law or applicable debt covenants, our financial condition, our taxable income, the annual distribution requirements under the REIT provisions of the Code, our operating expenses and other factors our directors deem relevant. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions in the future.

Furthermore, while we are required to make distributions in order to maintain our REIT status (as described above under “Risks Related to our Taxation as a REIT—We may be unable to generate sufficient revenue from operations to pay our operating expenses and to pay distributions to our stockholders”), we may elect not to maintain our REIT status, in which case we would no longer be required to make such distributions. Moreover, even if we do elect to maintain our REIT status, we may elect to comply with the applicable requirements by, after completing various procedural steps, distributing, under certain circumstances, a portion of the required amount in the form of shares of our common stock in lieu of cash. If we elect not to maintain our REIT status or to satisfy any required distributions in shares of common stock in lieu of cash, such action could negatively affect our business and financial condition as well as the price of our common stock. No assurance can be given that we will pay any dividends on shares of our common stock in the future.

We may in the future choose to pay dividends in our own stock, in which case you could be required to pay income taxes in excess of the cash dividends you receive.

We may in the future distribute taxable dividends that are payable in cash and shares of our common stock at the election of each stockholder. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, stockholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the stock that it receives as a dividend in order to pay this tax, the sale proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.

 

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It is unclear whether and to what extent we will be able to pay taxable dividends in cash and stock in later years. Moreover, various aspects of such a taxable cash/stock dividend are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose additional requirements in the future with respect to taxable cash/stock dividends, including on a retroactive basis, or assert that the requirements for such taxable cash/stock dividends have not been met.

An increase in market interest rates may have an adverse effect on the market price of our common stock.

One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is our distribution rate as a percentage of our share price relative to market interest rates. If the market price of our common stock is based primarily on the earnings and return that we derive from our investments and income with respect to our investments and our related distributions to stockholders, and not from the market value of the investments themselves, then interest rate fluctuations and capital market conditions will likely affect the market price of our common stock. For instance, if market interest rates rise without an increase in our distribution rate, the market price of our common stock could decrease as potential investors may require a higher distribution yield on our common stock or seek other securities paying higher distributions or interest. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and pay distributions.

Provisions in our certificate of incorporation and bylaws and of Delaware law may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.

Our certificate of incorporation, bylaws and Delaware law contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the raider and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include, among others:

 

   

a classified board of directors with staggered three-year terms;

 

   

amendment of provisions in our certificate of incorporation and bylaws regarding the election of directors, classes of directors, the term of office of directors, the filling of director vacancies and the resignation and removal of directors only upon the affirmative vote of at least 80% of the then issued and outstanding shares of our capital stock entitled to vote thereon;

 

   

amendment of provisions in our certificate of incorporation regarding corporate opportunity only upon the affirmative vote of at least 80% of the then issued and outstanding shares of our capital stock entitled to vote thereon;

 

   

removal of directors only for cause and only with the affirmative vote of at least 80% of the then issued and outstanding shares of our capital stock entitled to vote in the election of directors;

 

   

our board of directors to determine the powers, preferences and rights of our preferred stock and to issue such preferred stock without stockholder approval;

 

   

advance notice requirements applicable to stockholders for director nominations and actions to be taken at annual meetings;

 

   

a prohibition, in our certificate of incorporation, stating that no holder of shares of our common stock will have cumulative voting rights in the election of directors, which means that the holders of a majority of the issued and outstanding shares of common stock can elect all the directors standing for election; and

 

   

a requirement in our bylaws specifically denying the ability of our stockholders to consent in writing to take any action in lieu of taking such action at a duly called annual or special meeting of our stockholders.

Public stockholders who might desire to participate in these types of transactions may not have an opportunity to do so, even if the transaction is considered favorable to stockholders. These anti-takeover provisions could

 

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substantially impede the ability of public stockholders to benefit from a change in control or a change in our management and board of directors and, as a result, may adversely affect the market price of our common stock and your ability to realize any potential change of control premium. See “Description of Our Capital Stock— Anti-Takeover Effects of Delaware Law, Our Certificate of Incorporation and Bylaws.”

ERISA may restrict investments by plans in our common stock.

A plan fiduciary considering an investment in our common stock should consider, among other things, whether such an investment is consistent with the fiduciary obligations under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), including whether such investment might constitute or give rise to a prohibited transaction under ERISA, the Code or any substantially similar federal, state or local law and, if so, whether an exemption from such prohibited transaction rules is available.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This information statement contains certain “forward-looking statements” that are subject to risks and uncertainties. These statements are not historical facts but instead represent only our belief regarding future events, many of which are inherently uncertain and outside of our control. These statements may address, among other things, our possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may,” “will” or similar expressions, we intend to identify forward-looking statements. Our actual results, liquidity and financial condition may differ from the anticipated results, liquidity and financial condition indicated in these forward-looking statements. The important factors, many of which are outside of our control, that could cause our actual results to differ, possibly materially, include, but are not limited to, the following:

 

   

reductions in cash flows received from our investments;

 

   

our ability to take advantage of investment opportunities at attractive risk-adjusted prices;

 

   

our ability to take advantage of investment opportunities in Excess MSRs;

 

   

our ability to deploy capital accretively;

 

   

our counterparty concentration and default risks in Nationstar, Springleaf and other third-parties;

 

   

a lack of liquidity surrounding our investments which could impede our ability to vary our portfolio in an appropriate manner;

 

   

the impact that risks associated with subprime mortgage loans and consumer loans, as well as deficiencies in servicing and foreclosure practices, may have on the value of our RMBS and consumer loan portfolios;

 

   

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

 

   

changes in prepayment rates on the loans underlying certain of our assets, including, but not limited to, our Excess MSRs;

 

   

the risk that projected recapture rates on the portfolios underlying our Excess MSRs are not achieved;

 

   

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 bond markets specifically;

 

   

adverse changes in the financing markets we access affecting our ability to finance our investments;

 

   

the quality and size of the investment pipeline and the rate at which we can invest our cash;

 

   

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;

 

   

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;

 

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the availability and cost of capital for future investments;

 

   

competition within the finance and real estate industries;

 

   

the legislative/regulatory environment, including, but not limited to, the impact of the Dodd-Frank Act, U.S. government programs intended to stabilize the economy, the federal conservatorship of Fannie Mae and Freddie Mac and legislation that permits modification of the terms of loans;

 

   

our ability to maintain our qualification as a REIT for U.S. federal income tax purposes and the potentially onerous consequences that any failure to maintain such qualification would have on our business; and

 

   

our ability to maintain our exemption from registration under the 1940 Act and the fact that maintaining such exemption imposes limits on our operations.

We also direct readers to other risks and uncertainties referenced in this information statement, including those set forth under “Risk Factors.” We caution that you should not place undue reliance on any of our forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. Except as required by law, we are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statement, whether written or oral, that we may make from time to time, whether as a result of new information, future events or otherwise.

 

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OUR SEPARATION FROM NEWCASTLE

GENERAL

The board of directors of Newcastle has determined upon careful review and consideration in accordance with the applicable standard of review under Maryland law that the separation of New Residential’s assets from the rest of Newcastle and the establishment of New Residential as a separate, publicly traded company is in Newcastle’s best interests.

In furtherance of this plan, Newcastle will distribute all of the shares of our common stock held by Newcastle to holders of Newcastle common stock, subject to certain conditions. The distribution of the shares of our common stock will take place on May 15, 2013. On the distribution date, each holder of Newcastle common stock will receive one share of our common stock for each share of Newcastle common stock held at the close of business on the record date, as described below. Immediately following the distribution, Newcastle’s stockholders will own 100% of our common stock. You will not be required to make any payment, surrender or exchange your shares of Newcastle common stock or take any other action to receive your shares of our common stock.

The distribution of our common stock as described in this information statement is subject to the satisfaction or waiver of certain conditions. We cannot provide any assurances that the distribution will be completed. For a more detailed description of these conditions, see the section entitled “—Conditions to the Distribution” included elsewhere in this information statement.

The Number of Shares You Will Receive

For each share of Newcastle common stock that you owned at the close of business on May 6, 2013, the record date, you will receive one share of our common stock on the distribution date.

Transferability of Shares You Receive

The shares of New Residential common stock distributed to Newcastle stockholders will be freely transferable, except for shares received by persons who may be deemed to be New Residential “affiliates” under the Securities Act. Persons who may be deemed to be affiliates of New Residential after the separation generally include individuals or entities that control, are controlled by or are under common control with New Residential and may include directors and certain officers or principal stockholders of New Residential. New Residential affiliates will be permitted to sell their shares of New Residential common stock only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as the exemptions afforded by Rule 144.

When and How You Will Receive the Distributed Shares

Newcastle will distribute the shares of our common stock on May 15, 2013, the distribution date. American Stock Transfer & Trust Company, LLC, will serve as distribution agent and registrar for our common stock and as distribution agent in connection with the distribution.

If you own Newcastle common stock as of the close of business on the record date, the shares of New Residential common stock that you are entitled to receive in the distribution will be issued electronically, as of the distribution date, to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. Registration in book-entry form refers to a method of recording stock ownership when no physical share certificates are issued to stockholders, as is the case in the distribution. Unless specifically requested by a stockholder, no physical stock certificates of New Residential will be issued.

 

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If you sell shares of Newcastle common stock in the “regular-way” market prior to the distribution date, you will be selling your right to receive shares of our common stock in the distribution.

For more information see the section entitled “—Market for Common Stock—Trading Between the Record Date and Distribution Date” included elsewhere in this information statement.

Commencing on or shortly after the distribution date, if you hold physical stock certificates that represent your shares of Newcastle common stock, or if you hold your shares in book-entry form, and you are the registered holder of such shares, the distribution agent will mail to you an account statement that indicates the number of shares of our common stock that have been registered in book-entry form in your name.

Most Newcastle stockholders hold their shares of Newcastle common stock through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the stock in “street name” and ownership would be recorded on the bank’s or brokerage firm’s books. If you hold your Newcastle common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares of our common stock that you are entitled to receive in the distribution. If you have any questions concerning the mechanics of having shares of our common stock held in “street name,” we encourage you to contact your bank or brokerage firm.

Results of the Separation

After our separation from Newcastle, we will be a separate, publicly-traded company. Immediately following the distribution, we expect to have approximately 64 stockholders of record, based on the number of registered stockholders of Newcastle common stock on April 23, 2013, and 253,025,645 shares of our common stock outstanding. The actual number of shares to be distributed will be determined on the record date and will reflect any changes in the number of shares of Newcastle common stock between April 23, 2013 and the record date for the distribution.

We have entered into a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with Newcastle after the separation. This agreement will govern the relationship between us and Newcastle subsequent to the completion of the separation plan and provide for the allocation of the New Residential assets, as well as certain liabilities related thereto, attributable to periods prior to, at and after our separation from Newcastle.

For a more detailed description of these agreements, see the section entitled “Certain Relationships and Transactions with Related Persons, Affiliates and Affiliated Entities.”

The distribution will not affect the number of outstanding shares of Newcastle common stock or any rights of Newcastle stockholders.

Incurrence of Debt

As of April 22, 2013, we had outstanding repurchase agreements with an aggregate face amount of approximately $302.0 million to finance non-Agency RMBS and approximately $1.0 billion to finance Agency RMBS. Under these agreements, we sold a security to a counterparty and concurrently agreed to repurchase the same security at a later date for a higher specified price. The sale price represents financing proceeds, and the difference between the sale and repurchase prices represents interest on the financing. The price at which the security is sold generally represents the market value of the security less a discount or “haircut,” which can range broadly, for example from 5% for Agency RMBS to between 20% and 40% for non-Agency RMBS. During the term of the repurchase agreement, which can be as short as 30 days, the counterparty holds the security as collateral. The counterparty monitors and calculates what it estimates to be the value of the collateral during the term of the agreement. If this value declines by more than a de minimis threshold, the counterparty could require us to post margin in order to maintain the initial haircut on the collateral. This margin is typically required to be posted in the form of cash and cash equivalents.

 

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These repurchase agreements have terms that generally conform to the terms of the standard master repurchase agreement published by SIFMA as to repayment, margin requirements and segregation of all securities sold under any repurchase transactions. In addition, each counterparty typically requires that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions include changes to the margin maintenance requirements, required haircuts, purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction and cross default provisions. These provisions may differ for each of our counterparties and are not determined until we engage in a specific repurchase transaction.

CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE SEPARATION

The following is a summary of the material U.S. federal income tax consequences of our separation from Newcastle, and in particular the distribution by Newcastle of our common stock to stockholders of Newcastle. For purposes of this section under the heading “Certain U.S. Federal Income Tax Consequences of the Separation”: (i) any references to the “separation” shall mean only the distribution of shares of our common stock by Newcastle to stockholders of Newcastle; (ii) references to “New Residential,” “we,” “our” and “us” mean only New Residential Investment Corp. and not its subsidiaries or other lower-tier entities, except as otherwise indicated; and (iii) references to Newcastle refer to Newcastle Investment Corp. This summary is based upon the Code, the regulations promulgated by the U.S. Treasury Department, rulings and other administrative pronouncements issued by the IRS, and judicial decisions, all as currently in effect, and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. We have not sought and do not intend to seek an advance ruling from the IRS regarding any matter discussed herein. The summary is also based upon the assumption that Newcastle, New Residential and their respective subsidiaries and affiliated entities will operate in accordance with their applicable organizational documents or partnership agreements and the agreements and other documents applicable to our separation from Newcastle. This summary is for general information only and is not tax advice. The Code provisions governing the federal income tax treatment of REITs (such as Newcastle) and their stockholders are highly technical and complex, and this summary is qualified in its entirety by the express language of applicable Code provisions, Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof. This summary does not address all possible tax considerations that may be material to an investor and does not constitute legal or tax advice. Moreover, this summary does not purport to discuss all aspects of federal income taxation that may be important to a particular investor in light of its investment or tax circumstances, or to investors subject to special tax rules, such as:

 

   

financial institutions;

 

   

insurance companies;

 

   

broker-dealers;

 

   

regulated investment companies;

 

   

partnerships and trusts;

 

   

persons who hold our stock on behalf of another person as a nominee;

 

   

persons who receive our stock through the exercise of employee stock options or otherwise as compensation;

 

   

persons holding our stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security” or other integrated investment;

and, except to the extent discussed below:

 

   

tax-exempt organizations; and

 

   

foreign investors.

 

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This summary assumes that investors will hold their common stock as a capital asset, which generally means as property held for investment.

For purposes of this discussion under the heading “Certain U.S. Federal Income Tax Consequences of the Separation,” a domestic holder is a stockholder of Newcastle that is for federal income tax purposes:

 

   

a citizen or resident of the U.S.,

 

   

a corporation created or organized in the U.S. or under the laws of the U.S., or of any state thereof, or the District of Columbia,

 

   

an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of its source, or

 

   

a trust if a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. fiduciaries have the authority to control all substantial decisions of the trust.

A “non-U.S. holder” is a stockholder of Newcastle that is neither a domestic holder nor a partnership (or other entity treated as a partnership) for federal income tax purposes. If a partnership, including for this purpose any entity that is treated as a partnership for U.S. federal income tax purposes, holds Newcastle stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. An investor that is a partnership and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of the separation.

THE FEDERAL INCOME TAX TREATMENT OF THE SEPARATION TO STOCKHOLDERS OF NEWCASTLE DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF FACT AND INTERPRETATIONS OF COMPLEX PROVISIONS OF FEDERAL INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY BE AVAILABLE. IN ADDITION, THE TAX CONSEQUENCES OF THE SEPARATION TO ANY PARTICULAR STOCKHOLDER OF NEWCASTLE WILL DEPEND ON THE STOCKHOLDER’S PARTICULAR TAX CIRCUMSTANCES. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES TO YOU OF THE SEPARATION IN LIGHT OF YOUR PARTICULAR INVESTMENT OR TAX CIRCUMSTANCES.

Tax Classification of the Separation in General

For U.S. federal income tax purposes, the separation will not be eligible for treatment as a tax-free distribution by Newcastle with respect to its stock. Accordingly, the separation will be treated as if Newcastle had distributed to each Newcastle stockholder an amount equal to the fair market value of the New Residential common stock received by such stockholder, determined as of the date of the separation (such amount, the “separation distribution amount”). The tax consequences of the separation on Newcastle’s stockholders are thus generally the same as the tax consequences of Newcastle’s cash distribution. The discussion below describes the U.S. federal income tax consequences to a domestic holder, a non-U.S. holder, and a tax-exempt holder of Newcastle stock upon the receipt of New Residential common stock in the separation.

Although Newcastle will ascribe a value to the New Residential shares distributed in the separation, this valuation is not binding on the IRS or any other tax authority. These taxing authorities could ascribe a higher valuation to the distributed New Residential shares, particularly if, following the separation, those shares trade at prices significantly above the value ascribed to those shares by Newcastle. Such a higher valuation may affect the distribution amount and thus the tax consequences of the separation to Newcastle’s stockholders.

Newcastle will be required to recognize any gain, but will not be permitted to recognize any loss, with respect to the New Residential shares that it distributes in the separation.

 

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Tax Basis and Holding Period of New Residential Shares Received by Holders of Newcastle Stock

A Newcastle stockholder’s tax basis in shares of New Residential common stock received in the separation generally will equal the fair market value of such shares on the date of the separation, and the holding period for such shares will begin the day after the date of the separation.

Tax Treatment of the Separation to Domestic Holders

The following discussion describes the U.S. federal income tax consequences to a domestic holder of Newcastle stock upon the receipt of New Residential common stock in the separation.

Ordinary Dividends . The portion of the separation distribution amount received by a domestic holder that is payable out of Newcastle’s current or accumulated earnings and profits and that is not designated by Newcastle as a capital gain dividend will generally be taken into account by such domestic holder as ordinary income and will not be eligible for the dividends received deduction for corporations. With limited exceptions, dividends paid by Newcastle are not eligible for taxation at the preferential income tax rates for qualified dividends received by domestic holders that are individuals, trusts and estates from taxable C corporations. Such domestic holders, however, are taxed at the preferential rates on dividends designated by and received from a REIT such as Newcastle to the extent that the dividends are attributable to

 

   

income retained by the REIT in the prior taxable year on which the REIT was subject to corporate level income tax (less the amount of tax),

 

   

dividends received by the REIT from TRSs or other taxable C corporations, or

 

   

income in the prior taxable year from the sales of “built-in gain” property acquired by the REIT from C corporations in carryover basis transactions (less the amount of corporate tax on such income).

If any “excess inclusion income” (as defined for U.S. federal income tax purposes) from a taxable mortgage pool or REMIC residual interest is allocated by Newcastle to any stockholder of Newcastle, that income will be taxable in the hands of the stockholder and would not be offset by any net operating losses of the stockholder that would otherwise be available. As required by IRS guidance, Newcastle intends to notify its stockholders if a portion of a distribution paid by Newcastle is attributable to excess inclusion income.

Non-Dividends Distribution . A distribution to Newcastle’s domestic holders in excess of Newcastle’s current and accumulated earnings and profits will generally represent a return of capital and will not be taxable to a stockholder to the extent that the amount of such distribution does not exceed the adjusted basis of the holder’s Newcastle shares in respect of which the distribution was made. Rather, the distribution will reduce the adjusted basis of the holder’s shares in Newcastle. To the extent that such distribution exceeds the adjusted basis of a domestic holder’s Newcastle shares, the holder generally must include such distribution in income as long-term capital gain, or short-term capital gain if the holder’s Newcastle shares have been held for one year or less.

Capital Gain Dividends . A distribution that Newcastle designates as a capital gain dividend will generally be taxed to domestic holders as long-term capital gain, to the extent that such distribution does not exceed Newcastle’s actual net capital gain for the taxable year, without regard to the period for which the holder that receives such distribution has held its Newcastle stock. Corporate domestic holders may be required to treat up to 20% of some capital gain dividends as ordinary income. Long-term capital gains are generally taxable at reduced maximum federal rates in the case of domestic holders that are individuals, trusts and estates, and ordinary income rates in the case of stockholders that are corporations.

Tax Treatment of the Separation to Non-U.S. Holders

The following discussion describes the U.S. federal income tax consequences to a non-U.S. holder of Newcastle stock upon the receipt of New Residential common stock in the separation.

Ordinary Dividends . The portion of the separation distribution amount received by a non-U.S. holder that is (1) payable out of Newcastle’s earnings and profits, (2) not attributable to Newcastle’s capital gains, and (3) not

 

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effectively connected with a U.S. trade or business of the non-U.S. holder, will be treated as a dividend that is subject to U.S. withholding tax at the rate of 30%, unless reduced or eliminated by treaty. Reduced treaty rates and other exemptions are not available to the extent that income is attributable to “excess inclusion income” allocable to the non-U.S. holder. Accordingly, Newcastle will withhold at a rate of 30% on any portion of a dividend that is paid to a non-U.S. holder and is or may be treated as attributable to that non-U.S. holder’s share of Newcastle’s excess inclusion income. As required by IRS guidance, Newcastle intends to notify its stockholders if a portion of a dividend paid by it is attributable to excess inclusion income.

In general, non-U.S. holders will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of Newcastle stock. In cases where the dividend income from a non-U.S. holder’s investment in Newcastle stock is, or is treated as, effectively connected with the non-U.S. holder’s conduct of a U.S. trade or business, the non-U.S. holder generally will be subject to U.S. federal income tax at graduated rates, in the same manner as domestic holders are taxed with respect to such dividends. Such income must generally be reported on a U.S. income tax return filed by or on behalf of the non-U.S. holder. The income may also be subject to the 30% branch profits tax in the case of a non-U.S. holder that is a corporation.

Non-Dividend Distributions . Unless Newcastle’s stock constitutes a U.S. real property interest (“USRPI”), the separation distribution amount, to the extent not made out of Newcastle’s earnings and profits, will not be subject to U.S. income tax. If Newcastle cannot determine at the time of the separation whether or not the separation distribution amount will exceed current and accumulated earnings and profits, the separation distribution will be subject to withholding at the rate applicable to ordinary dividends, as described above.

If Newcastle’s stock constitutes a USRPI, as described below, distributions that it makes in excess of the sum of (a) the stockholder’s proportionate share of Newcastle’s earnings and profits, plus (b) the stockholder’s basis in its Newcastle stock, will be taxed under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) in the same manner as if the Newcastle stock had been sold. In such situations, the non-U.S. holder would be required to file a U.S. federal income tax return and would be subject to the same treatment and same tax rates as a domestic holder with respect to such excess, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals.

Newcastle’s stock will not be treated as a USRPI if less than 50% of Newcastle’s assets throughout a prescribed testing period consist of interests in real property located within the U.S., excluding, for this purpose, interests in real property solely in a capacity as a creditor. It is not currently anticipated that Newcastle’s stock will constitute a USRPI. However, no assurance can be given that Newcastle’s stock will not become a USRPI.

Even if the foregoing 50% test is not met, Newcastle’s stock nonetheless will not constitute a USRPI if Newcastle is a “domestically-controlled qualified investment entity.” A domestically-controlled qualified investment entity includes a REIT, less than 50% of value of which is held directly or indirectly by non-U.S. holders at all times during a specified testing period. It is anticipated that Newcastle will be a domestically-controlled qualified investment entity, and that a distribution with respect to Newcastle’s stock in excess of Newcastle’s earnings and profits will not be subject to taxation under FIRPTA. No assurance can be given that Newcastle will remain a domestically-controlled qualified investment entity.

In the event that Newcastle is not a domestically-controlled qualified investment entity, but its stock is “regularly traded,” as defined by applicable Treasury regulations, on an established securities market, a distribution to a non-U.S. holder nonetheless would not be subject to tax under FIRPTA, provided that the non-U.S. holder held 5% or less of Newcastle’s stock at all times during a specified testing period. It is anticipated that Newcastle’s stock will be regularly traded.

In addition, if a non-U.S. holder owning more than 5% of Newcastle’s common stock disposes of such stock during the 30-day period preceding the ex-dividend date of any dividend payment by Newcastle, and such non-U.S. holder acquires or enters into a contract or option to acquire Newcastle’s common stock within 61 days

 

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of the first day of such 30-day period described above, and any portion of such dividend payment would, but for the disposition, be treated as USRPI capital gain (as defined below) to such non-U.S. holder under FIRPTA, then such non-U.S holder will be treated as having USRPI capital gain in an amount that, but for the disposition, would have been treated as USRPI capital gain.

Gain in respect of a non-dividend distribution that would not otherwise be subject to FIRPTA will nonetheless be taxable in the U.S. to a non-U.S. holder in two cases: (1) if the non-U.S. holder’s investment in Newcastle stock is effectively connected with a U.S. trade or business conducted by such non-U.S. holder, the non-U.S. holder will be subject to the same treatment as a domestic holder with respect to such gain, or (2) if the non-U.S. holder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and has a “tax home” in the U.S., the nonresident alien individual will be subject to a 30% tax on the individual’s capital gain.

Capital Gain Dividends . Under FIRPTA, a dividend that Newcastle makes to a non-U.S. holder, to the extent attributable to gains from dispositions of USRPIs that Newcastle held directly or through pass-through subsidiaries (such gains, “USRPI capital gains”), will, except as described below, be considered effectively connected with a U.S. trade or business of the non-U.S. holder and will be subject to U.S. income tax at the rates applicable to U.S. individuals or corporations. Newcastle will be required to withhold tax equal to 35% of the maximum amount that could have been designated as a USRPI capital gain dividend. Distributions subject to FIRPTA may also be subject to a 30% branch profits tax in the hands of a non-U.S. holder that is a corporation. A distribution is not a USRPI capital gain dividend if Newcastle held an interest in the underlying asset solely as a creditor. It is not anticipated that any portion of the separation distribution amount will be attributable to USRPI capital gains. However, no assurance can be given in this regard.

Capital gain dividends received by a non-U.S. holder that are attributable to dispositions of Newcastle’s assets other than USRPIs are not subject to U.S. federal income tax, unless (1) the gain is effectively connected with the non-U.S. holder’s U.S. trade or business, in which case the non-U.S. holder would be subject to the same treatment as U.S. holders with respect to such gain, or (2) the non-U.S. holder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and has a “tax home” in the U.S., in which case the non-U.S. holder will incur a 30% tax on his capital gains.

A dividend that would otherwise have been treated as a USRPI capital gain dividend will not be so treated or be subject to FIRPTA, and generally will not be treated as income that is effectively connected with a U.S. trade or business, but instead will be treated in the same manner as ordinary income dividends (discussed above), provided that (1) the dividend is received with respect to a class of stock that is regularly traded on an established securities market located in the U.S., and (2) the recipient non-U.S. holder does not own more than 5% of that class of stock at any time during the year ending on the date on which the dividend is received. Newcastle anticipates that its stock will be “regularly traded” on an established securities exchange.

Withholding of Amounts Distributable to Non-U.S. Holders in the Separation . If Newcastle is required to withhold any amounts otherwise distributable to a non-U.S. holder in the separation, Newcastle or other applicable withholding agents will collect the amount required to be withheld by reducing to cash for remittance to the IRS a sufficient portion of New Residential common stock that such non-U.S. holder would otherwise receive, and such holder may bear brokerage or other costs for this withholding procedure. A non-U.S. holder may seek a refund from the IRS of any amounts withheld if it is subsequently determined that the amounts withheld exceeded the holder’s U.S. tax liability for the year in which the separation occurred.

Tax Treatment of the Separation to Tax-Exempt Entities

Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, generally are exempt from federal income taxation. Such entities, however, may be subject to taxation on their unrelated business taxable income (“UBTI”). While some investments in real estate may generate UBTI, the IRS has ruled that dividend distributions from a REIT to a tax-exempt entity do not constitute UBTI. Based

 

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on that ruling, and provided that (1) a tax-exempt stockholder has not held Newcastle stock as “debt financed property” within the meaning of the Code (i.e., where the acquisition or holding of the property is financed through a borrowing by the tax-exempt stockholder), and (2) such Newcastle stock is not otherwise used in an unrelated trade or business, the separation generally should not give rise to UBTI to a tax-exempt stockholder.

To the extent that Newcastle (or a part of Newcastle, or a disregarded subsidiary of Newcastle) is a taxable mortgage pool for U.S. federal income tax purposes, or if Newcastle holds residual interests in a REMIC, a portion of the dividends paid to a tax-exempt stockholder that is allocable to excess inclusion income may be treated as UBTI. If, however, excess inclusion income is allocable to some categories of tax-exempt stockholders that are not subject to UBTI, Newcastle might be subject to corporate level tax on such income, and, in that case, may reduce the amount of distributions to those stockholders whose ownership gave rise to the tax. As required by IRS guidance, Newcastle intends to notify its stockholders if a portion of a dividend paid by it is attributable to excess inclusion income.

Tax-exempt stockholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from federal income taxation under sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code are subject to different UBTI rules, which generally require such stockholders to characterize distributions that Newcastle makes as UBTI.

In certain circumstances, a pension trust that owns more than 10% of Newcastle’s stock could be required to treat a percentage of the dividends as UBTI, if Newcastle is a “pension-held REIT.” Newcastle will not be a pension-held REIT unless (1) it is required to “look through” one or more of its pension stockholders in order to satisfy certain REIT requirements and (2) either (i) one pension trust owns more than 25% of the value of Newcastle’s stock, or (ii) a group of pension trusts, each individually holding more than 10% of the value of Newcastle’s stock, collectively owns more than 50% of Newcastle’s stock. Certain restrictions on ownership and transfer of Newcastle’s stock should generally prevent a tax-exempt entity from owning more than 10% of the value of Newcastle’s stock, and should generally prevent Newcastle from becoming a pension-held REIT.

Time for Determination of the Tax Impact of the Separation

The actual tax impact of the separation will be affected by a number of factors that are unknown at this time, including Newcastle’s final earnings and profits for 2013 (including as a result of the gain, if any, Newcastle recognizes in the separation), the fair market value of New Residential’s common stock on the date of the separation, the extent to which Newcastle recognizes excess inclusion income during the year of the separation and sales of FIRPTA or other capital assets. Thus, a definitive calculation of the U.S. federal income tax impact of the separation will not be possible until after the end of the 2013 calendar year. Newcastle will notify its stockholders of the tax attributes of the separation (including the separation distribution amount) on an IRS Form 1099-DIV.

MARKET FOR COMMON STOCK

There is currently no public market for our common stock. A condition to the distribution is the listing on the NYSE of our common stock. We have been approved to list our common stock on the NYSE under the symbol “NRZ.”

Trading Between the Record Date and Distribution Date

Beginning shortly before the record date and continuing up to and through the distribution date, we expect that there will be two markets in Newcastle common stock: a “regular-way” market and an “ex-distribution” market. Shares of Newcastle common stock that trade on the regular way market will trade with an entitlement to shares of our common stock distributed pursuant to the distribution. Shares that trade on the ex-distribution market will trade without an entitlement to shares of our common stock distributed pursuant to the distribution. Therefore, if you sell shares of Newcastle common stock in the “regular-way” market through the distribution date, you will

 

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be selling your right to receive shares of New Residential common stock in the distribution. If you own shares of Newcastle common stock at the close of business on the record date and sell those shares on the “ex-distribution” market through the distribution date, you will still receive the shares of our common stock that you would be entitled to receive pursuant to your ownership of the shares of Newcastle common stock on the record date.

Furthermore, beginning on or shortly before the record date and continuing up to and through the distribution date, we expect that there will be a “when-issued” market in our common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for shares of our common stock that will be distributed to Newcastle stockholders on the distribution date. If you owned shares of Newcastle common stock at the close of business on the record date, you would be entitled to shares of our common stock distributed pursuant to the distribution. You may trade this entitlement to shares of our common stock, without trading the shares of Newcastle common stock you own, on the “when-issued” market. On the first trading day following the distribution date, “when-issued” trading with respect to our common stock will end and “regular-way” trading will begin.

CONDITIONS TO THE DISTRIBUTION

We expect that the distribution will occur on May 15, 2013, the distribution date, provided that, among other conditions described in this information statement, the following conditions shall have been satisfied:

 

   

the SEC shall have declared effective our registration statement on Form 10, of which this information statement is a part, under the Exchange Act, and no stop order relating to the registration statement is in effect;

 

   

the listing of our common stock on the NYSE shall have been approved, subject to official notice of issuance; and

 

   

no order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing consummation of the distribution or any of the transactions related thereto, including the transfers of assets and liabilities contemplated by the Separation and Distribution Agreement, shall be in effect.

Newcastle has the right not to complete the distribution if, at any time, the board of directors of Newcastle determines, in its sole discretion, that the distribution is not in the best interests of Newcastle or that market conditions are such that it is not advisable to separate New Residential from Newcastle.

REASONS FOR THE SEPARATION

Newcastle’s board of directors periodically reviews strategic alternatives. The board determined upon careful review and consideration in accordance with the applicable standard of review under Maryland law that the separation of New Residential is in the best interests of Newcastle. The board’s determination was based on a number of factors, including those set forth below:

 

   

Creation of two focused companies . After the separation, New Residential will focus primarily on investments in residential real estate assets, and Newcastle will focus primarily on investments in commercial real estate related assets. We believe investors may find it more appealing to be able to invest in two distinct businesses. Each business will have the opportunity to cultivate a distinct identity, which we expect will facilitate investor understanding by reducing the complexity associated with a company that has diverse business objectives.

 

   

Potential for a higher aggregate market value for stockholders . The separation will enable potential investors and the financial community to evaluate the performance of each company separately, which may result in a higher aggregate market value than the value of the combined company.

 

   

Tailored capital structure and financing options . Each company will have the flexibility to create a capital structure tailored to its needs, and each may be able to attain more favorable financing terms separately. In addition, tailored capital structures will facilitate each company’s ability to pursue acquisitions, possibly using common stock as currency, and other strategic alliances.

 

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The anticipated benefits of the separation are based on a number of assumptions, and there can be no assurance that such benefits will materialize to the extent anticipated or at all. In the event that the separation does not result in such benefits, the costs associated with the transaction, including an expected increase in management compensation and general and administrative expenses, could have a negative effect on our financial condition and ability to make distributions to our stockholders. For more information about the risks associated with the separation, see “Risk Factors.”

REASONS FOR FURNISHING THIS INFORMATION STATEMENT

This information statement is being furnished solely to provide information to Newcastle stockholders who are entitled to receive shares of New Residential common stock in the distribution. The information statement is not, and is not to be construed as, an inducement or encouragement to buy, hold or sell any of our securities or securities of Newcastle. We believe that the information in this information statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither Newcastle nor we undertake any obligation to update such information.

 

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DISTRIBUTION POLICY

We intend to make regular quarterly distributions of all or substantially all of our taxable income to holders of our common stock out of assets legally available therefore. To qualify as a REIT we must distribute annually to our stockholders an amount at least equal to:

 

   

90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains (which does not necessarily equal net income as calculated in accordance with GAAP); plus

 

   

90% of the excess of our taxable income from foreclosure property (as defined in Section 856 of the Code) over the tax imposed on such income by the Code; less

 

   

Any excess non-cash income (as determined under the Code). See “Federal Income Tax Considerations.”

We will be subject to income tax on our taxable income that is not distributed and to an excise tax to the extent that certain percentages of our taxable income are not distributed by specified dates. See “Federal Income Tax Considerations—Taxation of New Residential—Annual Distribution Requirements.” Income as computed for purposes of the foregoing tax rules will not necessarily correspond to our income as determined for financial reporting purposes.

Distributions will be authorized by our board of directors and declared by us based upon a number of factors, including actual results of operations, restrictions under Delaware law or applicable debt covenants, our financial condition, our taxable income, the annual distribution requirements under the REIT provisions of the Code, our operating expenses and other factors our directors deem relevant. Our ability to make distributions to our stockholders will depend upon the performance of our asset portfolio, and, in turn, upon our Manager’s management of our business. Distributions will be made in cash to the extent that cash is available for distribution. We may not be able to generate sufficient net interest income to pay distributions to our stockholders. In addition, our board of directors may change our distribution policy in the future. See “Risk Factors.”

Distributions to stockholders will generally be taxable to our stockholders as ordinary income. However, a portion of such distributions may be designated by us as long-term capital gain to the extent that such portion is attributable to our sale of capital assets held for more than one year. If we pay distributions in excess of our current and accumulated earnings and profits, such distributions will be treated as a tax-free return of capital to the extent of each stockholder’s tax basis in our common stock and as capital gain thereafter. We will furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding year and their U.S. federal income tax status. For a discussion of the U.S. federal income tax treatment of our distributions, see “Federal Income Tax Considerations—Taxation of New Residential” and “Federal Income Tax Considerations—Taxation of Stockholders.”

Our certificate of incorporation will allow us to issue preferred stock that could have a preference on distributions. We currently have no intention to issue any preferred stock, but if we do, the distribution preference on the preferred stock could limit our ability to make distributions to the holders of our common stock.

To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may consider various funding sources to cover any such shortfall, including borrowing under available debt facilities, selling certain of our assets or using a portion of the net proceeds we receive in future offerings. Our distribution policy enables us to review the alternative funding sources available to us from time to time.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

We were formed in September 2011 as NIC MSR LLC, a Delaware limited liability company and wholly owned subsidiary of Newcastle. We converted to a Delaware corporation and changed our name to New Residential Investment Corp. in December 2012. Since the commencement of our operations on December 8, 2011, we have acquired investments in Excess MSRs on five pools of mortgage loans and non-Agency RMBS through December 31, 2012.

The following table presents our selected historical financial information for the period from the commencement of our operations on December 8, 2011 through December 31, 2011 and for the year ended December 31, 2012.

The selected historical consolidated statements of income for the year ended December 31, 2012 and the period from December 8, 2011 (commencement of operations) to December 31, 2011 and the selected historical consolidated balance sheets as of December 31, 2012 and 2011 have been derived from our audited financial statements included elsewhere in this information statement. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 or for any future period.

 

     December 8,  2011
through
December 31, 2011
     Year Ended
December 31,  2012
 
     (in thousands, except per share data)  

Statement of income data

     

Interest income

   $ 1,260       $ 33,759   

Interest expense

     0         704   

Change in fair value of investments in excess mortgage servicing rights

     367         9,023   

Other income (loss)

     0         8,400   

Expenses

     913         9,231   
  

 

 

    

 

 

 

Net income

   $ 714       $ 41,247   
  

 

 

    

 

 

 

Net income per share:

     

Basic

     N/A         N/A   

Diluted

     N/A         N/A   

Number of shares outstanding:

     

Basic

     N/A         N/A   

Diluted

     N/A         N/A   

 

     December 31, 2011      December 31, 2012  
     (in thousands)  

Balance sheet data:

     

Total assets

   $ 43,971       $ 534,876   

Total liabilities

     4,163         156,520   

Total Newcastle’s equity

     39,808         378,356   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

GENERAL

New Residential will be a newly listed public REIT primarily focused on investing in residential mortgage related assets. We will be externally managed by an affiliate of Fortress. Our goal is to drive strong risk-adjusted returns primarily through investments in residential real estate related investments including, but not limited to, Excess MSRs, RMBS and residential mortgage loans. New Residential’s investment guidelines will be purposefully broad to enable us to make investments in a wide array of assets, including mortgage servicing advances and non-real estate related assets such as consumer loans. We will generally target assets that generate significant current cash flows and/or have the potential for meaningful capital appreciation. We will aim to generate attractive returns for our stockholders without excessive use of financial leverage.

Our initial holdings will include all of Newcastle’s co-investments in Excess MSRs, a portion of its Agency RMBS, all of the non-Agency RMBS it has acquired (other than through securitization vehicles) since the beginning of 2012, all mortgage loans acquired since the beginning of 2013 and all consumer loans it has acquired. Our initial holdings may also include other investments in residential mortgage related, or other, assets that Newcastle could make and contribute to us prior to the distribution. A majority of our assets will consist of qualifying real estate assets for purposes of Section 3(c)(5)(C) of the 1940 Act, including investments in Agency RMBS. After the distribution, our asset allocation and target assets may change over time, depending on our Manager’s investment decisions in light of prevailing market conditions. The assets in our initial portfolio are described in more detail below under “—Results of Operations—Initial Portfolio.”

Market Opportunity and Target Assets

We believe that unfolding developments in the U.S. residential housing market are generating significant investment opportunities. The U.S. residential market is vast: the value of the housing market totaled $18 trillion as of December 31, 2012, including approximately $10 trillion of outstanding mortgages, according to Inside Mortgage Finance. In the aftermath of the U.S. financial crisis, the residential mortgage industry is undergoing major structural changes that are transforming the way mortgages are originated, owned and serviced. We believe these changes are creating a compelling set of investment opportunities.

We also believe that New Residential is one of only a select number of market participants that have the combination of capital, industry expertise and key business relationships we think are necessary to take advantage of this opportunity. We intend to focus on the investment opportunities described below, as well as other opportunities that may arise as the residential mortgage market evolves.

Excess MSRs

In our view, the mortgage servicing sector presents a number of compelling investment opportunities. An MSR provides a mortgage servicer with the right to service a pool of mortgages in exchange for a portion of the interest payments made on the underlying mortgages. This amount typically ranges from 25 to 50 bps times the UPB of the mortgages. Approximately 83% of MSRs are currently owned by banks. We expect this number to decline as banks face pressure to reduce their MSR exposure as a result of heightened capital reserve requirements under Basel III, regulatory scrutiny and a more challenging servicing environment.

As banks sell MSRs, there is an opportunity for entities such as New Residential to participate through co-investment in the corresponding Excess MSRs. An MSR is made up of two components: a basic fee and an Excess MSR. The basic fee is the amount of compensation for the performance of servicing duties, and the Excess MSR is the amount that exceeds the basic fee. For example, if an MSR is 30 bps and the basic fee is 5 bps, then the Excess MSR is 25 bps. As the owner of an Excess MSR, we are not required to assume any servicing duties, advance obligations or liabilities associated with the portfolios underlying our investment.

 

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There are a number of reasons why we believe Excess MSRs are a compelling investment opportunity:

 

   

Supply-Demand Imbalance . Since 2010, banks have sold or committed to sell MSRs totaling more than $1 trillion of the approximately $10 trillion mortgage market. As a result of the legal and other pressures facing bank servicers, we believe the volume of MSR sales is likely to be substantial for some period of time. We estimate that MSRs on approximately $300 billion of mortgages are currently for sale, requiring a capital investment of approximately $2 billion based on current pricing dynamics, and approximately $2 trillion of MSRs could be sold over the next several years. In addition, we estimate that Excess MSRs on $25 - 50 billion UPB could be sold in the form of “flow arrangements,” whereby loan originators agree to sell Excess MSRs on a recurring basis (often monthly or quarterly) on newly originated or delinquent loans. We expect that non-bank servicers such as Nationstar—which pursues a “capital light” investment model—will need companies to invest in the Excess MSR portion of these investments.

 

   

Attractive Pricing . MSRs are currently being sold at a material discount to historical pricing levels. We estimate that prices in many cases are down nearly 50% or more from their peak. At current prices, we believe investments in Excess MSRs can generate attractive returns without leverage.

 

   

Significant Barrier to Entry . Non-servicers cannot own the basic fee component of an MSR directly and would therefore need to co-invest with a servicer in order to invest in an Excess MSR. The number of strong, scalable non-bank servicers is limited. Moreover, in the case of Excess MSRs on Agency pools, the servicer must be Agency-approved. As a result, non-servicers seeking to invest in Excess MSRs generally face a significant barrier to entering the market, particularly if they do not have a relationship with a quality servicer. We believe New Residential’s track record of investing in Excess MSRs and its established relationship with Nationstar give us a competitive advantage over other investors.

As a wholly owned subsidiary of Newcastle, New Residential pioneered investments in Excess MSRs. We believe it remains the most active REIT in the sector. For details about New Residential’s investments in Excess MSRs, see “—Results of Operations—Initial Portfolio—Excess MSRs” below.

RMBS

RMBS are securities created through the securitization of a pool of residential mortgage loans. Currently, approximately $6 trillion of the $10 trillion of residential mortgages outstanding has been securitized, according to Inside Mortgage Finance as of June 2012. Of the securitized mortgages, approximately $5 trillion are Agency RMBS, which are RMBS issued or guaranteed by a U.S. Government agency, such as Ginnie Mae, or by a GSE, such as Fannie Mae or Freddie Mac. The balance has been securitized by either public or private trusts (“private label securitizations”), and these securities are referred to as non-Agency RMBS. For more information about the securitization market, see “Business—Mortgage Industry—Overview” included elsewhere in this information statement.

We invest in Agency RMBS, which we believe complement our Excess MSR and non-Agency RMBS investments. Agency RMBS offer more stable cash flows and historically have been subject to lower credit risk and greater price stability than the other types of residential mortgage investments we intend to target. For details about New Residential investments in Agency RMBS see “Business—Market Opportunity and Target Assets—RMBS—Agency RMBS” included elsewhere in this information statement.

Since the onset of the financial crisis in 2007, there has been significant volatility in the prices for non-Agency RMBS. This has resulted from a widespread contraction in capital available for this asset class, deteriorating housing fundamentals, and an increase in forced selling by institutional investors (often in response to rating agency downgrades). While the prices of these assets have started to recover from their lows, we believe a meaningful gap still exists between current prices and the recovery value of many non-Agency RMBS.

 

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Accordingly, we believe there are opportunities to acquire non-Agency RMBS at attractive risk-adjusted yields, with the potential for meaningful upside if the U.S. economy and housing market continue to strengthen. We believe the value of existing non-Agency RMBS may also rise if the number of buyers returns to pre-2007 levels. Furthermore, we believe that in many non-Agency RMBS vehicles there is a meaningful discrepancy between the value of the non-Agency RMBS and the value of the underlying collateral. We intend to pursue opportunities to structure transactions that would enable us to realize this difference. For details about New Residential’s investments in Non-Agency RMBS, see “—Results of Operations—Initial Portfolio—Non-Agency RMBS” below.

The non-Agency RMBS we may acquire could be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. The mortgage loan collateral may be classified as “conforming” or “nonconforming,” depending on a variety of factors. For more information about these categories, see “Business—Mortgage Industry—Segments of the Residential Mortgage Loan Market” included elsewhere in this information statement.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ from these estimates. Management believes that the estimates and assumptions utilized in the preparation of the consolidated financial statements are prudent and reasonable. Actual results historically have been in line with management’s estimates and judgments used in applying each of the accounting policies described below, as modified periodically to reflect current market conditions. Our critical accounting policies will be expanded over time as we fully implement our strategy. The following is a summary of our accounting policies that are most affected by judgments, estimates and assumptions and that we initially expect to be most critical to an investor’s understanding of our financial results and conditions.

Excess MSRs

Upon acquisition, we elected to record each investment in Excess MSRs at fair value. We elected to record our investments in Excess MSRs at fair value in order to provide users of the financial statements with better information regarding the prepayment risk and other market factors on the Excess MSRs.

GAAP establishes a framework for measuring fair value of financial instruments and a set of related disclosure requirements. A three-level valuation hierarchy has been established based on the transparency of inputs to the valuation of a financial instrument as of the measurement date. The three levels are defined as follows:

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.

 

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The level in the fair value hierarchy within which a fair value measurement or disclosure in its entirety is based on the lowest level of input that is significant to the fair value measurement or disclosure in its entirety.

Our Excess MSRs will be categorized as Level 3 under the GAAP hierarchy. The inputs used in the valuation of Excess MSRs include prepayment speed, delinquency rate, recapture rate, excess mortgage servicing amount and discount rate. The determination of estimated cash flows used in pricing models is inherently subjective and imprecise. The methods used to estimate fair value may not result in an amount that is indicative of net realizable value or reflective of future fair values. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in fair value. Management validates the inputs and outputs of our models by comparing them to available independent third party market parameters and models for reasonableness. We believe the assumptions we use are within the range that a market participant would use, and factor in the liquidity conditions in the markets. Any changes to the valuation methodology will be reviewed by management to ensure the changes are appropriate.

In order to evaluate the reasonableness of its fair value determinations, management engages an independent valuation firm to separately measure the fair value of its Excess MSRs. The independent valuation firm determines an estimated fair value range based on its own models and issues a “fairness opinion” with this range. Management compares the range included in the opinion to the value generated by its internal models. For Excess MSRs acquired prior to the current quarter, the fairness opinion relates to the valuation at the current quarter end date. For Excess MSRs acquired during the current quarter, the fairness opinion relates to the valuation at the time of acquisition. To date, New Residential has not made any significant valuation adjustments as a result of these fairness opinions.

For Excess MSRs acquired during the current quarter, New Residential revalues the Excess MSRs at the quarter end date if a payment is received between the acquisition date and the end of the quarter. Otherwise, Excess MSRs acquired during the current quarter are carried at their amortized cost basis if there has been no change in assumptions since acquisition.

Investments in Excess MSRs are aggregated into pools as applicable; each pool of Excess MSRs is accounted for in the aggregate. Interest income for Excess MSRs is accreted using an effective yield or “interest” method, based upon the expected income from the Excess MSRs through the expected life of the underlying mortgages. Changes to expected cash flows result in a cumulative retrospective adjustment, which will be recorded in the period in which the change in expected cash flows occurs. Under the retrospective method, the interest income recognized for a reporting period would be measured as the difference between the amortized cost basis at the end of the period and the amortized cost basis at the beginning of the period, plus any cash received during the period. The amortized cost basis is calculated as the present value of estimated future cash flows using an effective yield, which is the yield that equates all past actual and current estimated future cash flows to the initial investment. In addition, our policy is to recognize interest income only on Excess MSRs in existing eligible underlying mortgages.

Under the fair value election, the difference between the fair value of Excess MSRs and their amortized cost basis is recorded as “Change in fair value of investments in excess mortgage servicing rights,” as applicable. Fair value is generally determined by discounting the expected future cash flows using discount rates that incorporate the market risks and liquidity premium specific to the Excess MSRs, and therefore may differ from their effective yields.

RMBS

Our non-Agency and Agency RMBS are classified as available-for-sale. As such, they will be carried at fair value, with net unrealized gains or losses reported as a component of accumulated other comprehensive income, to the extent impairment losses are considered temporary, as described below.

We expect that any RMBS we acquire will be categorized under Level 2 or Level 3 of the GAAP hierarchy described above under “—Application of Critical Account Policies—Excess MSRs,” depending on the

 

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observability of the inputs. Fair value may be based upon broker quotations, counterparty quotations, pricing services quotations or internal pricing models. The significant inputs used in the valuation of our securities may include the discount rate, prepayment speeds, default rates and loss severities, as well as other variables.

The determination of estimated cash flows used in pricing models is inherently subjective and imprecise. The methods to estimate fair value may not be indicative of net realizable value or reflective of future fair values. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in fair value. Management validates the inputs and outputs of our models by comparing them to available independent third party market parameters and models for reasonableness. We believe the assumptions we use are within the range that a market participant would use, and factor in the liquidity conditions in the markets. Any changes to the valuation methodology will be reviewed by management to ensure the changes are appropriate.

Pursuant to ASC 320-10-35, we must also assess whether unrealized losses on securities, if any, reflect a decline in value that is other-than-temporary and, if so, record an other-than-temporary impairment through earnings. A decline in value is deemed to be other-than-temporary if (i) it is probable that we will be unable to collect all amounts due according to the contractual terms of a security that was not impaired at acquisition (there is an expected credit loss), or (ii) if we have the intent to sell a security in an unrealized loss position or it is more likely than not that we will be required to sell a security in an unrealized loss position prior to its anticipated recovery (if any). For the purposes of performing this analysis, we will assume the anticipated recovery period is until the expected maturity of the applicable security. Also, for securities that represent beneficial interests in securitized financial assets within the scope of ASC 325-40, whenever there is a probable adverse change in the timing or amounts of estimated cash flows of a security from the cash flows previously projected, an other-than-temporary impairment will be deemed to have occurred. Our non-Agency RMBS acquired with evidence of deteriorated credit quality for which it was probable, at acquisition, that we would be unable to collect all contractually required payments receivable, fall within the scope of ASC 310-30, as opposed to ASC 325-40. All of our other non-Agency RMBS, those not acquired with evidence of deteriorated credit quality, fall within the scope of ASC 325-40.

Pursuant to ASC 835-30-35, income on these securities is recognized using a level yield methodology based upon a number of cash flow assumptions that are subject to uncertainties and contingencies. Such assumptions will include the rate and timing of principal and interest receipts (which may be subject to prepayments and defaults). These assumptions will be updated on at least a quarterly basis to reflect changes related to a particular security, actual historical data, and market changes. These uncertainties and contingencies are difficult to predict and are subject to future events, and economic and market conditions, which may alter the assumptions. For securities acquired at a discount for credit losses, we will recognize the excess of all cash flows expected over our investment in the securities as Interest Income on a “loss adjusted yield” basis. The loss-adjusted yield will be determined based on an evaluation of the credit status of securities, as described in connection with the analysis of impairment above.

Loans

We invest in loans, including but not limited to, residential mortgage loans. Loans for which we have the intent and ability to hold for the foreseeable future, or until maturity or payoff, are classified as held-for-investment. Loans are presented in the consolidated balance sheet net of any unamortized discount (or gross of any unamortized premium). We determine at acquisition whether loans will be aggregated into pools based on common risk characteristics (credit quality, loan type, and date of origination or acquisition); loans aggregated into pools are accounted for as if each pool were a single loan.

Income on these loans is recognized similarly to that on our securities using a level yield methodology and is subject to similar uncertainties and contingencies, which are also analyzed on at least a quarterly basis.

 

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Impairment of Loans

To the extent that they are classified as held-for-investment, we must periodically evaluate each of these loans or loan pools for possible impairment. Impairment is indicated when it is deemed probable that we will be unable to collect all amounts due according to the contractual terms of the loan, or for loans acquired at a discount for credit losses, when it is deemed probable that we will be unable to collect as anticipated. Upon determination of impairment, we would establish a specific valuation allowance with a corresponding charge to earnings. We continually evaluate our loans receivable for impairment. Our residential mortgage loans are aggregated into pools for evaluation based on like characteristics, such as loan type and acquisition date. Pools of loans are evaluated based on criteria such as an analysis of borrower performance, credit ratings of borrowers, loan to value ratios, the estimated value of the underlying collateral, the key terms of the loans and historical and anticipated trends in defaults and loss severities for the type and seasoning of loans being evaluated. This information is used to estimate provisions for estimated unidentified incurred losses on pools of loans. Significant judgment is required in determining impairment and in estimating the resulting loss allowance. Furthermore, we must assess our intent and ability to hold our loan investments on a periodic basis. If we do not have the intent to hold a loan for the foreseeable future or until its expected payoff, the loan must be classified as “held for sale” and recorded at the lower of cost or estimated value.

Derivatives

Subject to maintaining our qualification as a REIT, we may utilize a variety of derivative instruments, including interest rate swap agreements, interest rate cap agreements or other derivative instruments, to manage our interest rate risk. Derivative instruments are required to be recorded on the balance sheet at fair value. Fair value will be based on counterparty quotations. The fair value of derivative instruments will be recorded gross of cash paid or received pursuant to credit support agreements, and fair value will be reflected on a net by counterparty basis when we believe a legal right of offset exists under an enforceable netting agreement. To the extent they are designated and qualify as cash flow hedges, net unrealized gains or losses will be reported as a component of accumulated other comprehensive income; otherwise, the net unrealized gains and losses will be reported in earnings. To the extent they are designated and qualify as fair value hedges, net unrealized gains or losses on both the derivative and the related portion of the hedged item will be reported currently in earnings. To the extent they are not designated as hedges or do not qualify for hedge accounting, net unrealized gains or losses will be reported in earnings. Fair values of derivatives are subject to significant variability, including counterparty credit risk. The results of such variability, the effectiveness of our hedging strategies and the extent to which a forecasted hedged transaction remains probable of occurring, could result in a significant increase or decrease in our GAAP equity and/or earnings.

Investment Consolidation

The analysis as to whether to consolidate an entity is subject to a significant amount of judgment. Some of the criteria considered are the determination as to the degree of control over an entity by its various equity holders, the design of the entity, how closely related the entity is to each of its equity holders, the relation of the equity holders to each other and a determination of the primary beneficiary in entities in which we have a variable interest. These analyses involve estimates, based on the assumptions of management, as well as judgments regarding significance and the design of entities.

Variable interest entities (“VIEs”) are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, and only by its primary beneficiary, which is defined as the party who has the power to direct the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Our investments in non-Agency RMBS are variable interests. We monitor these investments and analyze the potential need to consolidate the related securitization entities pursuant to the VIE consolidation requirements.

 

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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.

We have not consolidated the securitization entities that issued our non-Agency RMBS. This determination is based, in part, on our assessment that we do not have the power to direct the activities that most significantly impact the economic performance of these entities, such as if we owned a majority of the currently controlling class. In addition, we are not obligated to provide, and have not provided, any financial support to these entities.

We have not consolidated the entities in which we hold a 50% interest that made an investment in Excess MSRs. We have determined that the decisions that most significantly impact the economic performance of these entities will be made collectively by us 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 our analysis, these entities do not meet any of the VIE criteria under ASC 810-10-15-14.

We have not consolidated the entities that made the investment in consumer loans. We hold a 30% interest in these entities. We have determined that the managing member, Springleaf, makes the decisions that most significantly impact the economic performance of these entities. Although, the voting rights in the entity are not proportional to the investors’ obligations to absorb the expected losses of the entities and their rights to receive the expected residual returns of the entities, substantially all of the entities’ activities are not conducted on behalf of either us or Blackstone. In addition, there is sufficient equity to finance the entities’ activities without additional subordinated financial support. Based on our analysis, these entities do not meet any of the VIE criteria under ASC 810-10-15-14.

Investments in Equity Method Investees

We account for our interests in entities over which we exercise significant influence, but with respect to which the requirements for consolidation are not met, as investments in equity method investees. These investments are recorded based on the equity method of accounting, unless we elect to measure them at fair value.

Our investment in equity method investees that own consumer loans will be accounted for based on the equity method of accounting. Pursuant to ASC 825-10-25, we have elected to measure our investments in equity method investees which are invested in Excess MSRs at fair value. The equity method investees have also elected to measure their investments in Excess MSRs at fair value pursuant to ASC 825-10-25.

Income Taxes

Our financial results are generally not expected to reflect provisions for current or deferred income taxes. We intend to operate in a manner that will allow us to qualify for taxation as a REIT. As a result of our expected REIT qualification, we do not generally expect to pay U.S. federal or state and local corporate level taxes. Many of the REIT requirements, however, are highly technical and complex. If we were to fail to meet the REIT requirements, we would be subject to U.S. federal, state and local income and franchise taxes.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the FASB issued new guidance regarding the measurement and disclosure of fair value, which become effective on January 1, 2012. The adoption of this guidance did not have a material effect on our financial position, liquidity or results of operations.

In June 2011, the FASB issued a new accounting standard that eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be

 

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required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. We early-adopted this accounting standard in 2011 and opted to present two separate statements.

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 the 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. New Residential 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, financial instruments, hedging, and contingencies. Some of the proposed changes are significant and could have a material impact on our financial reporting. We will evaluate the potential impact of these proposals as the standards are finalized.

We are an emerging growth company as defined in the JOBS Act, and we have irrevocably elected not to take advantage of the delayed adoption of new or revised accounting standards applicable to public companies. We will therefore be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

RESULTS OF OPERATIONS

As of the date of this information statement, we have a limited operating history. We acquired our first portfolio of Excess MSRs in December 2011. Below we describe our principal assets and the primary components of our income.

Initial Portfolio

Our initial holdings will include all of Newcastle’s co-investments in Excess MSRs, a portion of its Agency RMBS, all of the non-Agency RMBS it has acquired (other than through securitization vehicles) since the beginning of 2012, all mortgage loans acquired since the beginning of 2013 and all consumer loans it has acquired. Our initial holdings may also include other investments in residential mortgage related assets that Newcastle could make and contribute to us prior to the distribution. A majority of our assets will consist of qualifying real estate assets for purposes of Section 3(c)(5)(C) of the 1940 Act, including investments in Agency RMBS. After the distribution, our asset allocation and target assets may change over time, depending on our Manager’s investment decisions in light of prevailing market conditions. The assets in our initial portfolio are described in more detail below.

Excess MSRs

As of December 31, 2012, we had approximately $245 million estimated carrying value of Excess MSRs. In addition, since December 31, 2012, we have agreed to invest in Excess MSRs in two additional transactions, as described below.

On January 6, 2013, we agreed to co-invest in Excess MSRs on a portfolio of residential mortgage loans with a UPB of approximately $215 billion as of November 30, 2012. Approximately 53% of the loans in this portfolio are in private label securitizations, and the remainder are owned, insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Nationstar has agreed to acquire the related servicing rights from Bank of America. We committed to invest approximately $340 million (based on the November 30, 2012 UPB) to acquire an

 

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approximately one-third interest in the Excess MSRs on this portfolio. The remaining interests in the Excess MSRs will be owned by a Fortress-managed fund and Nationstar on a pari passu basis. As the servicer, Nationstar will perform all servicing and advancing functions, and it will retain the ancillary income, servicing obligations and liabilities associated with this portfolio. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs will be shared pro rata among the Fortress-managed fund, Nationstar and us, subject to certain limitations.

On January 31, 2013, we completed the first closing of this co-investment. The first closing relates to Excess MSRs on loans with an aggregate UPB of approximately $58 billion as of December 31, 2012, that are owned, insured or guaranteed by Fannie Mae or Freddie Mac. Our purchase price for this portion of the investment was approximately $108 million. We are entitled to one-third of the Excess MSRs. Nationstar also closed on servicing rights to Ginnie Mae loans with a UPB of approximately $39 billion as of December 31, 2012. The closing of the remainder of the co-investment, which corresponds to loans in private label securitizations and the Ginnie Mae loans, is expected to occur in the second quarter of 2013, subject to the receipt of regulatory and third-party approvals, including Ginnie Mae approval and certain rating agency approvals. There can be no assurance that we will complete this investment as anticipated or at all. However, we believe that it is probable that we will be able to obtain pending approvals and subsequently complete this investment. The investment is owned by (i) Nationstar and (ii) limited liability companies in which we have a 50% membership interest. These entities do not have a managing member. These entities were formed on December 12, 2012 or January 3, 2013, as applicable, for the purpose of making this investment, and they commenced operations (or will commence operations) upon the completion of their respective portions of the investment. Our voting rights and economic rights are pro rata to our equity ownership in these entities.

In addition, on January 4, 2013, we completed a co-investment in Excess MSRs on a portfolio of Ginnie Mae residential mortgage loans with a UPB of approximately $13 billion as of November 30, 2012. Nationstar acquired the related servicing rights from Bank of America in November 2012. We invested approximately $27 million to acquire a 33% interest in the Excess MSRs on this portfolio. The remaining interests in the Excess MSRs will be owned by a Fortress-managed fund and Nationstar on a pari passu basis. The investment is owned by (i) Nationstar and (ii) a limited liability company in which we have a 50% membership interest. This entity does not have a managing member. This entity was formed on December 12, 2012 for the purpose of making this investment and commenced operations upon the completion of the investment. Our voting rights and economic rights are pro rata to our equity ownership in this entity.

 

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As of December 31, 2012, our completed investments represent a 65% interest in the Excess MSRs on five pools of mortgage loans with an aggregate UPB of approximately $77 billion. Nationstar is the servicer of the loans underlying all of our investments in Excess MSRs to date, and it earns a basic fee in exchange for providing all servicing functions. In addition, Nationstar retains a 33-35% interest in the Excess MSRs and all ancillary income associated with the portfolios. We do not have any servicing duties, liabilities or obligations associated with the servicing of the portfolios underlying any of our investments. Each of our investments to date is subject to a recapture agreement with Nationstar. Under the recapture agreements, we are generally entitled to a pro rata interest in the Excess MSRs on any initial or subsequent refinancing by Nationstar of a loan in the original portfolio. In other words, we are generally entitled to a pro rata interest in the Excess MSRs on both (i) a loan resulting from a refinancing by Nationstar of a loan in the original portfolio, and (ii) a loan resulting from a refinancing by Nationstar of a previously recaptured loan. The table below summarizes the terms of our completed investments in Excess MSRs as of December 31, 2012.

 

Summary of Excess MSR Investments as of December 31, 2012

 
     Investment
Date
     Initial
UPB
(bn)
     Current 1
UPB
(bn)
     Loan
Type 2
     MSR Component     Interest in
Excess MSR
(%)
    Excess MSR  
                 MSR
(bps)
    Excess
MSR
(bps)
      Purchase
Price
(mm)
     Carrying
Value
(mm)
 

Pool 1

     12/2011       $ 9.9       $ 8.4         GSE         35  bps      29  bps      65   $ 43.6       $ 40.9   

Pool 2

     06/2012         10.4         9.4         GSE         31        23        65     42.3         39.3   

Pool 3

     06/2012         9.8         9.1         GSE         32        23        65     36.2         35.5   

Pool 4

     06/2012         6.3         5.8         GSE         26        17        65     15.4         15.0   

Pool 5

     06/2012         47.6         43.9         PLS         32        13        65     124.8         114.3   
     

 

 

    

 

 

       

 

 

   

 

 

     

 

 

    

 

 

 

Total/Weighted Avg.

      $ 84.0       $ 76.6            32 bps        17 bps        $ 262.3       $ 245.0   
     

 

 

    

 

 

       

 

 

   

 

 

     

 

 

    

 

 

 

 

(1) As of December 31, 2012.
(2) “GSE” refers to loans in Fannie Mae or Freddie Mac securitizations. “PLS” refers to loans in private label securitizations.

 

Summary of Excess MSR Investments Through Equity Method Investees Subsequent to December 31, 2012  
                      MSR Component     Interest
Investee
(%)
    Investee
Interest
in Excess
MSR (%)
    Excess  MSR
Initial
Investment
(mm)
 
    Investment
Date
    UPB  (bn) 2     Loan
type 3
    MSR
(bps)
    Excess
MSR (bps)
       
Pool 6     01/2013      $ 13        GM        40  bps      10  bps      50%        67%      $ 27   
Pool 7     01/2013        40        GSE        27        5        50%        67%        70   
Pool 8     01/2013        18        GSE        28        10        50%        67%        37   
Pool 9 1     01/2013        39        GM        40        22        50%        67%        85 4  
Pool 10 1     01/2013        107        PLS        34        10        50%        67%        141 4  
   

 

 

     

 

 

   

 

 

       

 

 

 
Total/Weighted Avg.     $ 216          34 bps        11 bps          $ 360   
   

 

 

     

 

 

   

 

 

       

 

 

 

 

(1) This investment has been committed to but has not yet closed. This investment is subject to certain closing requirements and regulatory approvals.
(2) As of December 31, 2012.
(3) “GSE” refers to loans in Fannie Mae or Freddie Mac securitizations. “PLS” refers to loans in private label securitizations. “GM” refers to loans in Ginnie Mae securitizations.
(4) The actual amount invested will be based on the UPB at the time of close.

 

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The following table summarizes the collateral characteristics of the loans underlying our Excess MSR investments as of December 31, 2012:

 

Collateral Characteristics

 
    Current
Carrying
Amount
    Original
Principal
Balance
    Current
Principal
Balance
    Number
of Loans
    WA
FICO
Score
(A)
    WA
Coupon
    WA
Maturity
(months)
    Average
Loan
Age
(months)
    Adjustable
Rate
Mortgage

% (B)
    Uncollected
Payments
(C)
    Delinquency
30 Days (C)
    Delinquency
60 Days (C)
    Delinquency
90+ Days

(C)
    Loans in
Foreclosure
    Real
Estate
Owned
    Loans in
Bankruptcy
    1 Month
CPR (D)
    1 Month
CRR (E)
    1 Month
CDR (F)
    1 Month
Recapture
Rate
 

Pool 1

                                       

Original Pool

  $ 33,977      $ 9,940,385      $ 7,927,465        53,477        685        6.0     277        73        19.5     9.9     5.8     2.1     1.2     3.9     0.9     2.6     23.2     19.5     4.5     40.8

Recaptured Loans

    1,997        —          475,746        2,305        753        4.3     324        5        0.2     0.3     0.4     0.0     0.0     0.0     0.0     0.1     2.8     2.8     0.0     0.0

Recapture Agreements

    4,936        —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    40,910        9,940,385        8,403,211        55,782        689        5.9     280        69        18.4     9.3     5.5     1.9     1.1     3.7     0.8     2.5     22.2     18.7     4.2     40.6

Pool 2

                                       

Original Pool

    33,187        10,383,891        9,239,244        47,285        680        5.3     319        61        11.0     14.1     5.1     1.9     1.5     7.4     0.2     5.1     19.6     16.4     3.7     43.2

Recaptured Loans

    748        —          157,876        721        747        4.2     327        1        0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.2     0.2     0.0     0.0

Recapture Agreements

    5,387        —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    39,322        10,383,891        9,397,120        48,006        681        5.2     319        60        10.8     13.9     5.0     1.9     1.4     7.3     0.2     5.0     19.3     16.1     3.6     43.2

Pool 3

                                       

Original Pool

    30,272        9,844,114        9,030,073        55,496        668        4.7     290        73        37.2     14.4     4.4     1.6     1.4     7.5     2.2     3.5     15.1     10.7     4.9     22.9

Recaptured Loans

    202        —          39,653        232        728        4.0     323        1        0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.7     0.7     0.0     0.0

Recapture Agreements

    4,960        —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    35,434        9,844,114        9,069,726        55,728        668        4.7     290        73        37.0     14.4     4.3     1.6     1.4     7.5     2.2     3.5     15.0     10.7     4.9     22.9

Pool 4

                                       

Original Pool

    12,076        6,250,549        5,768,822        28,523        671        3.8     316        61        58.3     19.1     3.8     1.6     1.3     12.1     2.1     4.7     14.2     5.4     9.3     22.4

Recaptured Loans

    73        —          19,311        93        750        4.1     341        2        0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.3     0.3     0.0     0.0

Recapture Agreements

    2,887        —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    15,036        6,250,549        5,788,133        28,616        671        3.8     316        61        58.1     19.0     3.7     1.6     1.3     12.1     2.1     4.7     14.2     5.4     9.3     22.4

Pool 5

                                       

Original Pool

    109,652        47,572,905        43,895,651        185,761        650        4.8     300        65        57.1     28.8     9.5 %     2.3     4.5     17.4     3.0     5.1     16.5     5.2     11.9     1.7

Recapture Loans

    30        —          6,910        29        739        3.6     343        1        6.0     0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.0

Recapture Agreements

    4,652        —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    114,334        47,572,905        43,902,561        185,790        650        4.8     300        65        57.1     28.8     9.5     2.3     4.5     17.4     3.0     5.1     16.5     5.2     11.9     1.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total/WA

  $ 245,036      $ 83,991,844      $ 76,560,751        373,922        662        4.9     300        65        44.9     22.4     7.4     2.1     3.2     13.1     2.2     4.6     17.1     8.7     9.0     25.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Weighted average FICO scores are reported based on information provided by the loan servicer on a monthly basis. The loan servicer generally updates the FICO score on a monthly basis.
(B) Adjustable Rate Mortgage % represents the percentage of the total principal balance of the pool that corresponds to adjustable rate mortgages.
(C) Uncollected Payments represents the percentage of the total principal balance of the pool that corresponds to loans for which the most recent payment was not made. Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30 – 59 days, 60 – 89 days or more than 90 days, respectively.
(D) Constant prepayment rate represents the annualized rate of the prepayments during the month as a percentage of the total principal balance of the pool.
(E) 1 Month CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during the month as a percentage of the total principal balance of the pool.
(F) 1 Month CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments (defaults) during the month as a percentage of the total principal balance of the pool.

 

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The following table summarizes the collateral characteristics as of December 31, 2012 of the loans underlying Excess MSR investments made through equity method investees subsequent to December 31, 2012. For each of these pools, we own a 50% interest in an entity that invested in a 67% interest in the Excess MSRs.

 

    Collateral Characteristics  
    Unpaid
Principal
Balance
(bn)
    Number of
Loans
    WA
Original
FICO
Score
(A)
    WA
Coupon
    WA
Maturity
(months)
    Average
Loan
Age
(months)
    Adjustable
Rate
Mortgage %
(B)
    Uncollected
Payments (C)
    Delinquency
30 Days (C)
    Delinquency
60 Days (C)
    Delinquency
90+ Days
(C)
    Loans in
Foreclosure
    Real
Estate
Owned
    Loans in
Bankruptcy
    1 Month
CPR (D)
    1 Month
CRR (E)
    1 Month
CDR (F)
 

Pool 6

  $ 13        86,290        682        5.6     314        45        0.0     11.9     6.5     2.2     5.7     2.9     0.4     2.0     14.1     14.1     0.0

Pool 7

    40        277,436        711        5.3     287        74        23.4     14.8     3.4     1.1     6.8     6.8     0.0     4.0     N/A (G)      N/A (G)      N/A (G) 

Pool 8

    18        116,380        719        5.5     297        66        14.3     11.8     3.2     1.3     5.8     4.1     0.0     3.2     N/A (G)      N/A (G)      N/A (G) 

Pool 9

    39        273,508        688        5.0     309        39        3.9     8.4     4.6     1.5     4.5     0.9     0.0     1.1     N/A (G)      N/A (G)      N/A (G) 

Pool 10

    107        632,533        704        5.4     272        85        47.2     28.3     3.3     1.7     20.7     10.7     1.2     4.8     N/A (G)      N/A (G)      N/A (G) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total/Weighted Avg

  $ 216        1,386,147        702        5.3     286        71        29.5     19.9     3.7     1.5     13.1     7.2     0.6     3.7     N/A (G)      N/A (G)      N/A (G) 

 

(A) WA original FICO score represents the FICO score at the time the loan was originated.
(B) Adjustable Rate Mortgage % represents the percentage of the total principal balance of the pool that corresponds to adjustable rate mortgages.
(C) Uncollected Payments represents the percentage of the total principal balance of the pool that corresponds to loans for which the most recent payment was not made. Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30-59 days, 60-89 days or more than 90 days, respectively.
(D) Constant prepayment rate represents the annualized rate of the prepayments during the month as a percentage of the total principal balance of the pool.
(E) 1 Month CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during the month as a percentage of the total principal balance of the pool.
(F) 1 Month CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments (defaults) during the month as a percentage of the total principal balance of the pool.
(G) Data not available due to changes in the composition of the loan pools underlying the Excess MSRs.

 

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For information about the weighted average yield of our investments in Excess MSRs and about the geographic diversification of the underlying loans, see Note 4 to the consolidated financial statements included elsewhere in this information statement.

We currently expect to continue to make co-investments with Nationstar, and we may also acquire Excess MSRs from other servicers. Nationstar does not, however, have any obligation to offer us any future co-investment opportunity. In the event that we cannot co-invest in Excess MSRs with Nationstar, we may not be able to find other suitable counterparties from which to acquire Excess MSRs, which could have a material adverse effect on our business. At the same time, our co-investments with Nationstar expose us to counterparty concentration risk, which could increase if we do not or cannot acquire Excess MSRs from other counterparties.

Agency RMBS

Subsequent to December 31, 2012, Newcastle contributed to us approximately $1.0 billion face amount of Agency RMBS with a fair value of approximately $1.1 billion. We financed these Agency RMBS with approximately $1.0 billion of repurchase agreements. The counterparties of these repurchase agreements are Goldman Sachs & Co., Barclays Capital Inc., Citigroup Global Markets Inc., Nomura Securities International, Inc. and Morgan Stanley & Co. LLC. These repurchase agreements have a 95% advance rate and contain customary margin call provisions. The initial term of these repurchase agreements is 30 days.

The following table summarizes the characteristics of our Agency RMBS portfolio and of the collateral underlying our Agency RMBS.

 

     Agency RMBS Characteristics (A)

Vintage (B)

   Number of
Securities
   Outstanding
Face
Amount
   Amortized
Cost Basis
   Percentage
of Total
Amortized
Cost Basis
  Carrying
Value
   Weighted
Average
Maturity,
Years

Pre-2005

       10          75,398          79,777          7.39 %       79,777          4.0  

2006

                                                    

2007

       3          13,605          14,093          1.31 %       14,093          4.4  

2008

       2          13,836          14,739          1.37 %       14,739          3.8  

2009

       8          101,731          108,575          10.06 %       108,575          3.3  

2010

       18          321,069          338,882          31.40 %       338,882          3.4  

2011

       10          357,511          377,178          34.96 %       377,178          3.3  

2012 and later

       2          136,923          145,785          13.51 %       145,785          4.1  
    

 

 

      

 

 

      

 

 

      

 

 

     

 

 

      

 

 

 

Total/WA

       53          1,020,073          1,079,029          100.00 %       1,079,029          3.5  
    

 

 

      

 

 

      

 

 

      

 

 

     

 

 

      

 

 

 
    

 

Agency RMBS Collateral

Characteristics (A)

Vintage (B)

   Avg Loan
Age
(Years)
   3 Month
CPR (C)

Pre-2005

       8.2          21.21  

2006

       —            —    

2007

       5.1          13.88  

2008

       6.0          13.33  

2009

       3.9          31.40  

2010

       2.6          29.67  

2011

       1.9          31.82  

2012 and later

       4.8          22.95  
    

 

 

      

 

 

 
       3.26          28.63  
    

 

 

      

 

 

 

 

(A) Represents characteristics as of the date of contribution to us.
(B) The year in which the securities were issued.
(C) Three month average constant prepayment rate.

 

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The following table summarizes the net interest spread of our Agency RMBS portfolio.

 

Net Interest Spread 1

 

Weighted Average Asset Yield

     1.45

Weighted Average Interest Expense

     0.44
  

 

 

 

Net Interest Spread

     1.01
  

 

 

 

 

1 Represents the net interest spread on the contribution date.

Non-Agency RMBS

As of December 31, 2012, we had approximately $434 million face amount of non-Agency RMBS. The table below summarizes our investments in non-Agency RMBS.

 

Summary of non-Agency RMBS as of December 31, 2012

 
                   Gross Unrealized               

Asset Type

   Outstanding
Face  Amount
     Amortized
Cost  Basis
     Gains      Losses     Carrying
Value (1)
     Outstanding
Repurchase

Amounts
 

Non-Agency RMBS

   $ 433,510       $ 274,230       $ 15,856       $ (330   $ 289,756       $ 150,922   

 

(1) Fair value, which is equal to carrying value for all securities.

Subsequent to December 31, 2012, we acquired an additional approximately $392 million face amount of non-Agency RMBS for approximately $243 million. For more details about our initial portfolio of non-Agency RMBS, see “Business—Initial Portfolio—Non-Agency RMBS.”

In July 2012, we financed two of the securities with approximately $59.2 million of repurchase agreements guaranteed by Newcastle, at a cost of one-month LIBOR plus 200 bps and a 65% advance rate. These repurchase agreements, which contain customary margin call provisions, had an initial 90-day term, which was extended on October 11, 2012 to January 26, 2013.

In December 2012, we financed previously acquired non-Agency RMBS with approximately $90.2 million of repurchase agreements guaranteed by Newcastle, at a cost of one-month LIBOR plus 200 bps. The weighted average advance rate for these repurchase agreements is approximately 65%. These repurchase agreements, which contain customary margin call provisions, have an initial term ending on January 28, 2013.

In January 2013, we extended these repurchase agreements to April 29, 2013. On April 22, 2013, these repurchase agreements had an outstanding principal balance of approximately $158.0 million. Prior to the separation, we intend to amend these agreements to replace the guaranty by Newcastle with a guaranty by New Residential.

In April 2013, we financed additional non-Agency RMBS with approximately $144 million of repurchase agreements guaranteed by Newcastle, at a cost of one-month LIBOR plus 200 bps. The weighted average advance rate for these repurchase agreements is approximately 70%. These repurchase agreements, which contain customary margin call provisions, have an initial term ending on July 9, 2013. Prior to the separation, we intend to amend these agreements to replace the guaranty by Newcastle with a guaranty by New Residential.

 

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The following tables summarize the characteristics of our non-Agency RMBS portfolio and of the collateral underlying our non-Agency RMBS as of December 31, 2012.

 

    Non-Agency RMBS Characteristics (A)  

Vintage (B)

  Average
Minimum
Rating (C)
  Number of
Securities
    Outstanding
Face Amount
    Amortized
Cost Basis
    Percentage
of
Total
Amortized
Cost
Basis
    Carrying
Value
    Principal
Subordination
(D)
    Excess
Spread
(E)
    Weighted
Average
Maturity
(Years)
 

Pre 2004

  CC     12      $ 28,738      $ 22,266        8.1   $ 22,909        18.8     3.7     6.1   

2004

   B-     4        41,434        21,047        7.7     24,722        16.6     3.8     10.4   

2005

  D     1        2,529        1,410        0.5     1,603        0.0     0.0     7.8   

2006

  CC     5        220,749        133,911        48.8     139,678        5.8     2.7     7.0   

2007 and later

  CCC-     7        140,060        95,596        34.9     100,844        13.1     3.3     5.6   
 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total/WA (I)

  CC     29      $ 433,510      $ 274,230        100.0   $ 289,756        10.0     3.0     6.8   
 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Collateral Characteristics

 

Vintage (B)

   Average Loan Age
(years)
     Collateral Factor
(F)
     3 month CPR
(G)
    Delinquency (H)     Cumulative Losses to Date  

Pre 2004

     9.7         0.07         10.2     16.3     3.3

2004

     8.3         0.08         11.0     20.5     3.7

2005

     7.1         0.22         10.1     22.0     14.3

2006

     6.5         0.28         7.2     28.6     22.1

2007 and later

     6.0         0.46         10.6     29.8     26.5
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total / WA

     6.7         0.31         8.9     27.4     20.5
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(A) As of December 31, 2012.
(B) The year in which the securities were issued.
(C) Ratings provided above were determined by third party rating agencies as of a particular date, may not be current and are subject to change at any time. We had approximately $1.5 million of non-Agency RMBS assets that were on negative watch for possible downgrade by at least one rating agency as of December 31, 2012.
(D) The percentage of the outstanding face amount of securities and residual interests that is subordinate to our investments.
(E) The annualized amount of interest received on the underlying loans in excess of the interest paid on the securities, as a percentage of the outstanding collateral balance.
(F) The ratio of original unpaid principal balance of loans still outstanding.
(G) Three month average constant prepayment rate.
(H) The percentage of underlying loans that are 90+ days delinquent, or in foreclosure or considered real estate owned (REO).
(I) The total face amount of fixed rate securities was $1.1 million, and of floating rate securities was $432.4 million.

The following table sets forth the geographic diversification of the loans underlying our non-Agency RMBS as of December 31, 2012.

 

Geographic Location

   Outstanding  Face
Amount
     Percentage  

Western U.S.

   $ 151,227         34.9%   

Southeastern U.S.

     100,636         23.2%   

Northeastern U.S.

     95,565         22.0%   

Midwestern U.S.

     43,230         10.0%   

Southwestern U.S.

     42,852         9.9%   
  

 

 

    

 

 

 
   $ 433,510         100.0%   
  

 

 

    

 

 

 

 

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The following table summarizes the net interest spread of our non-Agency RMBS portfolio as of December 31, 2012.

 

Net Interest Spread

 
     As of December 31, 2012  

Weighted Average Asset Yield

     6.55%   

Weighted Average Interest Expense

     2.21%   
  

 

 

 

Net Interest Spread

     4.34%   
  

 

 

 

The following tables summarize the characteristics of our non-Agency RMBS and of the collateral underlying our non-Agency RMBS purchased subsequent to December 31, 2012.

 

     Non-Agency RMBS Characteristics (A)  

Vintage (B)

   Average
Minimum
Rating (C)
   Number of
Securities
     Outstanding
Face Amount
     Amortized
Cost Basis
     Percentage of
Total
Amortized
Cost Basis
     Carrying
Value
     Principal
Subordination
(D)
     Excess
Spread (E)
     Weighted
Average
Maturity
(Years)
 

Pre 2004

   B+      3       $ 1,309       $ 721         0.3%       $ 721         17.5%         3.4%         2.8   

2004

   CCC-      4         22,497         19,779         8.1%         19,779         16.9%         3.3%         6.2   

2005

   CC-      3         33,381         20,106         8.3%         20,106         13.5%         1.6%         12.0   

2006

   CC-      10         243,285         151,529         62.4%         151,529         4.9%         2.1%         8.6   

2007 and later

   D      8         91,187         50,616         20.9%         50,616         3.3%         1.6%         9.6   
  

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total/WA (I)

   CC-      28       $ 391,659       $ 242,751         100.0%       $ 242,751         6.0%         2.0%         9.0   
  

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Collateral Characteristics  

Vintage (B)

   Average Loan
Age (years)
     Collateral
Factor (F)
     3 month
CPR (G)
    Delinquency (H)     Cumulative Losses
to Date
 

Pre 2004

     10.5         0.06         16.6     16.9     3.8

2004

     10.1         0.09         9.9     9.5     5.3

2005

     7.4         0.11         11.8     33.1     18.8

2006

     6.8         0.29         16.5     40.4     35.9

2007 and later

     6.1         0.33         17.2     42.3     45.3
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total / WA

     6.9         0.27         15.9     38.3     34.8
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(A) As of the purchase dates.
(B) The year in which the securities were issued.
(C) Ratings provided above were determined by third party rating agencies as of a particular date, may not be current and are subject to change at any time.
(D) The percentage of the outstanding face amount of securities and residual interests that is subordinate to our investments.
(E) The annualized amount of interest received on the underlying loans in excess of the interest paid on the securities, as a percentage of the outstanding collateral balance.
(F) The ratio of original unpaid principal balance of loans still outstanding.
(G) Three month average constant prepayment rate.
(H) The percentage of underlying loans that are 90+ days delinquent, or in foreclosure or considered real estate owned (REO).
(I) The total face amount of floating rate securities was $373.8 million.

The following table sets forth the geographic diversification of the loans underlying our non-Agency RMBS purchased subsequent to December 31, 2012 as of the purchase dates.

 

Geographic Location

   Outstanding
Face
Amount
     Percentage  

Western U.S.

   $ 155,445         39.7%   

Northeastern U.S.

     97,448         24.9%   

Southeastern U.S.

     74,074         18.9%   

Midwestern U.S.

     41,902         10.7%   

Southwestern U.S.

     22,790         5.8%   
  

 

 

    

 

 

 
   $ 391,659         100.0%   
  

 

 

    

 

 

 

 

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The weighted average asset yield of the non-Agency RMBS purchased subsequent to December 31, 2012 is 5.41%. These assets are currently unlevered.

Residential Mortgage Loans

On February 27, 2013, we entered into an agreement to co-invest in residential mortgage loans with a UPB of approximately $83 million as of December 31, 2012. We invested approximately $35 million to acquire a 70% interest in the mortgage loans. Nationstar has co-invested pari passu with us in 30% of the mortgage loans and will be the servicer of the loans performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities as the servicer.

Other Investments

On March 5, 2013, we agreed to co-invest in a portfolio of consumer loans with a UPB of approximately $4.2 billion as of December 31, 2012. The portfolio includes over 400,000 personal unsecured loans and personal homeowner loans originated through subsidiaries of HSBC Finance Corporation. On April 1, 2013, we completed this co-investment through the consumer loan companies. The consumer loan companies acquired the portfolio from HSBC Finance Corporation and its affiliates. We 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 our Manager, acquired 47%, and an affiliate of Blackstone Tactical Opportunities Advisors L.L.C. acquired 23%. Springleaf will act 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 consumer loan companies were formed on March 19, 2013, for the purpose of making this investment and commenced operations upon the completion of the investment. After a servicing transition period, Springleaf will be the servicer of the loans and will provide all servicing and advancing functions for the portfolio. Springleaf is a leading provider of consumer credit based in Evansville, Indiana that makes secured and unsecured personal loans through its more than 800 branches located across the United States.

The following table summarizes the characteristics of the loans in this consumer loan portfolio as of December 31, 2012. We hold a 30% interest in the entities that acquired this consumer loan portfolio.

 

    Collateral Characteristics
    Unpaid
Principal
Balance
(bn)
  Personal
Unsecured
Loans %
  Personal
Homeowner
Loans %
  Number of
Loans
  WA
Original
FICO
Score
(A)
  WA
Coupon
  Adjustable
Rate Loan
% (B)
  Average
Loan Age
(months)
  Average
Expected
Life
(Years)
  Delin-
quency
30
Days
(C)
  Delinquency
60 Days (C)
  Delin-
quency
90+
Days
(C)
  3 Month
CRR
(D)
  3 Month
CDR
(E)

Consumer Loans

    $ 4.2         84.0 %       16.0 %       439,573         636         18.5 %       10.0 %       90         3.0         4.0 %       2.5 %       5.5 %       13.7 %       13.5 %

 

(A) WA original FICO score represents the FICO score at the time the loan was originated.
(B) The weighted average margin, floor and ceiling on variable loans are 16.12%, 1.31% and 22.33%, respectively.
(C) Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30-59 days, 60-89 days or more than 90 days, respectively.
(D) 3 Month CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during the three months as a percentage of the total principal balance of the pool.
(E) 3 Month CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments (defaults) during the three months as a percentage of the total principal balance of the pool.

Prior to the separation, Newcastle will also contribute to us approximately $260 million of cash. Over time, we expect to opportunistically adjust our portfolio composition in response to market conditions. Our Manager will make decisions about our investments in accordance with broad investment guidelines adopted by our board of directors. Accordingly, we may acquire a variety of assets that may be different from, and may be riskier than, the assets that comprise our initial portfolio. For more information about our investment guidelines, see “Business—Investment Guidelines” included elsewhere in this information statement.

 

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Primary Components of Income

Our current operations involve the acquisition and ownership of Excess MSRs, RMBS, mortgage loans and consumer loans. The primary components of our net income under GAAP would be:

 

  (i) interest income on our investments in Excess MSRs;

 

  (ii) interest income on Agency and non-Agency RMBS;

 

  (iii) interest income on mortgage loans;

 

  (iv) interest expense on our liabilities;

 

  (v) management fees and incentive compensation payable to our Manager;

 

  (vi) general and administrative expenses;

 

  (vii) changes in the fair value of our Excess MSRs; and realized gains/losses on our RMBS and mortgage loans, any impairment charges on our RMBS and mortgage loans, and gains/losses on hedges; and

 

  (viii) earnings (losses) from equity method investees.

For a further understanding of how we account for items (i), (ii), (vi) and (vii) listed above, please refer to “—application of Critical Accounting Policies” above.

TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES

Management Agreement

Prior to the completion of the distribution, we will enter into a Management Agreement with our Manager. Our Management Agreement will require our Manager to manage our business affairs in conformity with the broad investment guidelines adopted and monitored by our board of directors. For more information about our investment guidelines, see “Business—Investment Guidelines” included elsewhere in this information statement.

Our Management Agreement has an initial one-year term and will be automatically renewed for one-year terms thereafter unless terminated either by us or our Manager. Our Manager is entitled to receive from us a management fee and incentive compensation that is based on our performance. In addition, we are obligated to reimburse certain expenses incurred by our Manager. Our Manager is also entitled to receive a termination fee from us under certain circumstances. The terms of our Management Agreement are summarized below and described in more detail under “Our Manager and Management Agreement” elsewhere in this information statement.

 

Type    Description

Management Fee

   1.5% per annum of our gross equity calculated and payable monthly in arrears in cash. Gross equity is generally the equity transferred by Newcastle on the distribution date, plus total net proceeds from stock offerings, plus certain capital contributions to subsidiaries, less capital distributions and repurchases of common stock. For illustrative purposes only, the amount of the management fee payable to the manager in the first fiscal year following the completion of the separation would be approximately $5.7 million if our average annual gross equity during such period were equal to the amount of total Newcastle’s Equity shown on our consolidated balance sheet as of December 31, 2012, which was $378 million, and no equity offerings, capital distributions or repurchases occurred during such period.

 

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Type    Description
Incentive Compensation    Our Manager will be entitled to receive annual incentive compensation in an amount equal to the product of (A) 25% of the dollar amount by which (1)(a) the funds from operations before the incentive compensation per share of common stock, plus (b) gains (or losses) from debt restructuring and gains (or losses) from sales of property and other assets per share of common stock, exceed (2) an amount equal to (a) the weighted average of the book value per share of the equity transferred by Newcastle on the distribution date and the prices per share of our common stock in any offerings by us (adjusted for prior capital dividends or capital distributions) multiplied by (b) a simple interest rate of 10% per annum, multiplied by (B) the weighted average number of shares of common stock outstanding.
   “Funds from operations” means net income (computed in accordance with GAAP), excluding gains (losses) from debt restructuring and gains (or losses) from sales of property, plus depreciation on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations will be computed on an unconsolidated basis. The computation of funds from operations may be adjusted at the direction of our independent directors based on changes in, or certain applications of, GAAP. Funds from operations will be determined from the date of the spin-off and without regard to Newcastle’s prior performance. Funds from operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of our performance or to cash flows as a measure of liquidity or ability to make distributions.

Reimbursement of Expenses

   We will pay, or reimburse our Manager’s employees for performing certain legal, accounting, due diligence tasks and other services that outside professionals or outside consultants otherwise would perform, provided that such costs and reimbursements are no greater than those which would be paid to outside professionals or consultants on an arm’s-length basis and shall not be reimbursed in excess of $500,000 per annum. We also pay all operating expenses, except those specifically required to be borne by our Manager under our Management Agreement.
  

 

Our Manager is responsible for all costs incident to the performance of its duties under the Management Agreement, including compensation of our Manager’s employees, rent for facilities and other “overhead” expenses. The expenses required to be paid by us include, but are not limited to, issuance and transaction costs incident to the acquisition, disposition and financing of our investments, legal and auditing fees and expenses, the compensation and expenses of our independent directors, the costs associated with the establishment and maintenance of any credit facilities and other indebtedness of ours (including commitment fees, legal fees, closing costs, etc.), expenses associated with other securities offerings of ours, the costs of printing and mailing proxies and reports to our stockholders, costs incurred by employees of our manager for travel on our behalf, costs associated with any computer software or hardware that is used solely for us, costs to obtain liability insurance

 

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Type    Description
   to indemnify our directors and officers and the compensation and expenses of our transfer agent.
   We will not reimburse our Manager for the salaries of our officers, rent attributable to the space occupied by our Manager, and all other “overhead” expenses of our Manager.

Termination Fee

   The termination fee is a fee equal to the sum of (1) the amount of the management fee during the 12 months immediately preceding the date of termination, and (2) the “Incentive Compensation Fair Value Amount.” The Incentive Compensation Fair Value Amount is an amount equal to the Incentive Compensation that would be paid to the Manager if our assets were sold for cash at their then current fair market value (as determined by an appraisal, taking into account, among other things, the expected future value of the underlying investments).

Relationship with Nationstar

We intend to capitalize on our Manager’s relationship with Nationstar, which is majority-owned by Fortress funds managed by our Manager, to source opportunities to acquire Excess MSRs. Nationstar (NYSE: NSM) is the largest non-bank servicer of residential loans, according to Inside Mortgage Finance, and it was ranked among the highest quality servicers by Fannie Mae in August 2012. We have developed an innovative strategy for co-investing in Excess MSRs with Nationstar. Given that non-servicers cannot own the basic fee component of an MSR directly, this strategy creates the opportunity for us to co-invest in Excess MSRs and affords Nationstar the opportunity to invest in MSRs on a “capital light” basis. As of December 31, 2012, we have acquired a 65% interest in the Excess MSRs on portfolios with an aggregate UPB of approximately $77 billion. For details about these transactions, see “—Results of Operations—Initial Portfolio—Excess MSRs” above. In addition, we have capitalized on Nationstar’s origination capabilities by entering into a “recapture agreement” in each of our Excess MSR investments to date. Under the recapture agreements, we are generally entitled to a pro rata interest in the Excess MSRs on any initial or subsequent refinancing by Nationstar of a loan in the original portfolio. In other words, we are generally entitled to a pro rata interest in the Excess MSRs on both (i) a loan resulting from a refinancing by Nationstar of a loan in the original portfolio, and (ii) a loan resulting from a refinancing by Nationstar of a previously recaptured loan. We believe this arrangement mitigates our exposure to the prepayment risk associated with Excess MSRs. Furthermore, all of the Non-Agency RMBS included in our initial portfolio is serviced by Nationstar.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, and other general business needs. Additionally, to maintain our status as a REIT under the Code, we must distribute annually at least 90% of our REIT taxable income. We note that a portion of this requirement may be able to be met in future years through stock dividends, rather than cash, subject to limitations based on the value of our stock.

Our primary sources of funds for liquidity will consist of cash provided by operating activities (primarily income from our investments in Excess MSRs and consumer loans and interest income from RMBS), sales or repayments of Agency and non-Agency RMBS, potential debt financing sources and the issuance of equity securities, when feasible. Our primary uses of funds will be the payment of interest, management fees, incentive compensation, outstanding commitments and other operating expenses and the repayment of borrowings.

We have funded the acquisition of Excess MSRs on an unlevered basis, but we may invest in Excess MSRs on a levered basis in the future. We currently expect that our primary sources of financing, including potential

 

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financing for our investment in consumer loans, will include bank credit facilities, repurchase agreements, securitizations and other secured and unsecured forms of borrowing. As of April 22, 2013, we had outstanding repurchase agreements with an aggregate face amount of approximately $302.0 million to finance non-Agency RMBS and approximately $1.0 billion to finance Agency RMBS. Under these agreements, we sold a security to a counterparty and concurrently agreed to repurchase the same security at a later date for a higher specified price. The sale price represents financing proceeds, and the difference between the sale and repurchase prices represents interest on the financing. The price at which the security is sold generally represents the market value of the security less a discount or “haircut,” which can range broadly, for example from 5% for Agency RMBS to between 20% and 40% for non-Agency RMBS. During the term of the repurchase agreement, which can be as short as 30 days, the counterparty holds the security as collateral. The counterparty monitors and calculates what it estimates to be the value of the collateral during the term of the agreement. If this value declines by more than a de minimis threshold, the counterparty could require us to post additional collateral (or “margin”) in order to maintain the initial haircut on the collateral. This margin is typically required to be posted in the form of cash and cash equivalents. Furthermore, we may, from time to time, be a party to derivative agreements or financing arrangements that may be subject to margin calls based on the value of such instruments. We seek to maintain adequate cash reserves and other sources of available liquidity to meet any margin calls resulting from decreases in value related to a reasonably possible (in the opinion of management) change in interest rates.

Our ability to obtain borrowings and to raise future equity capital is dependent on our ability to access borrowings and the capital markets on attractive terms. Our Manager’s senior management team has extensive long-term relationships with investment banks, brokerage firms and commercial banks, which we believe will enhance our ability to source and finance asset acquisitions on attractive terms and access borrowings and the capital markets at attractive levels.

DIVIDENDS

We are organized and intend to conduct our operations to qualify as a REIT for U.S. federal income tax purposes. We intend to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. We intend to make regular quarterly distributions of all or substantially all of our taxable income to holders of our common stock out of assets legally available for this purpose, if and to the extent authorized by our board of directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

We make distributions based on our current estimate of taxable earnings per common share, but not GAAP earnings. Dividends distributed and taxable and GAAP earnings will typically differ due to items such as fair value adjustments, differences in premium amortization and discount accretion, and non-deductible general and administrative expenses. Our quarterly dividend per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share.

OFF-BALANCE SHEET ARRANGEMENTS

As of the date of this information statement, we do not have any off-balance sheet arrangements. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities.

 

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CONTRACTUAL OBLIGATIONS

We had no contractual obligations as of the date of this information statement, other than repurchase agreements on certain Agency and non-Agency RMBS, and our agreements with Nationstar with respect to certain Excess MSR transactions. Prior to the completion of our separation from Newcastle, we will enter into a Management Agreement with our Manager. Pursuant to our Management Agreement, our Manager will be entitled to receive a management fee, incentive compensation and the reimbursement of certain expenses. See “—Transactions with Affiliates and Affiliated Entities—Management Agreement.”

The Separation and Distribution Agreement contains certain indemnification obligations and we expect to enter into certain contracts that may contain a variety of indemnification obligations, principally with brokers, underwriters and counterparties to repurchase agreements. The amounts we could be required to pay under these indemnification obligations may be unlimited.

INFLATION

Virtually all of our assets and liabilities are financial in nature. As a result, interest rates and other factors affect our performance more so than inflation, although inflation rates can often have a meaningful influence over the direction of interest rates. Furthermore, our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors primarily based on our taxable income, and, in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation. See “—Quantitative and Qualitative Disclosure About Market Risk—Interest Rate Risk” below.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to loss resulting from changes in interest rates, credit spreads, foreign currency exchange rates, commodity prices, equity prices and other market based risks. The primary market risks that we are exposed to are interest rate risk, prepayment speed risk, credit spread risk and credit risk. These risks are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. All of our market risk sensitive assets, liabilities and derivative positions are for non-trading purposes only. For a further understanding of how market risk may affect our financial position or results of operations, please refer to “—Application of Critical Accounting Policies.”

Interest Rate Risk

Changes in interest rates, including changes in expected interest rates or “yield curves,” affect our investments in two distinct ways, each of which is discussed below.

First, changes in interest rates affect our net interest income, which is the difference between the interest income earned on assets and the interest expense incurred in connection with our debt obligations and hedges.

We may use match funded structures, when appropriate and available. This means that we seek to match the maturities of our debt obligations with the maturities of our assets to reduce the risk that we have to refinance our liabilities prior to the maturities of our assets, and to reduce the impact of changing interest rates on our earnings. In addition, we seek to match fund interest rates on our assets with like-kind debt (i.e., fixed rate assets are financed with fixed rate debt and floating rate assets are financed with floating rate debt), directly or through the use of interest rate swaps, caps or other financial instruments (see below), or through a combination of these strategies, which we believe allows us to reduce the impact of changing interest rates on our earnings.

However, increases in interest rates can nonetheless reduce our net interest income to the extent that we are not completely match funded. Furthermore, a period of rising interest rates can negatively impact our return on certain floating rate investments. Although these investments may be financed with floating rate debt, the interest rate on the debt may reset prior to, and in some cases more frequently than, the interest rate on the assets, causing a decrease in return on equity during a period of rising interest rates.

 

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Second, changes in the level of interest rates also affect the yields required by the marketplace on interest rate instruments. Increasing interest rates would decrease the value of the fixed rate assets we hold at the time because higher required yields result in lower prices on existing fixed rate assets in order to adjust their yield upward to meet the market.

Changes in unrealized gains or losses resulting from changes in market interest rates do not directly affect our cash flows, or our ability to pay a dividend, to the extent the related assets are expected to be held, as their fair value is not relevant to their underlying cash flows. As long as these fixed rate assets continue to perform as expected, our cash flows from these assets would not be affected by increasing interest rates. Changes in unrealized gains or losses would impact our ability to realize gains on existing investments if they were sold. Furthermore, with respect to changes in unrealized gains or losses on investments which are carried at fair value, changes in unrealized gains or losses would impact our net book value and, in the cases of impaired assets and non-hedge derivatives, our net income.

Changes in the value of our assets could affect our ability to borrow and access capital. Also, if the value of our assets subject to short term financing were to decline, it could cause us to fund margin and affect our ability to refinance such assets upon the maturity of the related financings, adversely impacting our rate of return on such securities.

Interest rate swaps are agreements in which a series of interest rate flows are exchanged with a third party (counterparty) over a prescribed period. The notional amount on which swaps are based is not exchanged. In general, any swaps we enter into will be “pay fixed” swaps involving the exchange of floating rate interest payments from the counterparty for fixed interest payments from us. This can effectively convert a floating rate debt obligation into a fixed rate debt obligation. Interest rate swaps may be subject to margin calls.

Similarly, an interest rate cap or floor agreement is a contract in which we purchase a cap or floor contract on a notional face amount. We will make an up-front payment to the counterparty for which the counterparty agrees to make future payments to us should the reference rate (typically LIBOR) rise above (cap agreements) or fall below (floor agreements) the “strike” rate specified in the contract. Payments on an annualized basis will equal the contractual notional face amount multiplied by the difference between the actual reference rate and the contracted strike rate.

While a REIT may utilize these types of derivative instruments to hedge interest rate risk on its liabilities or for other purposes, such derivative instruments could generate income that is not qualified income for purposes of maintaining REIT status. As a consequence, we may only engage in such instruments to hedge such risks within the constraints of maintaining our standing as a REIT. We do not enter into derivative contracts for speculative purposes or as a hedge against changes in credit risk.

Our hedging transactions using derivative instruments also involve certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. There can be no assurance that we will be able to adequately protect against the foregoing risks and will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging strategies.

Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. Our Excess MSRs will be subject to interest rate risk. Generally, in a declining interest rate environment, prepayment speeds increase which in turn would cause the value of Excess MSRs to decrease. Conversely, in an increasing interest rate environment, prepayment speeds decrease which in turn would cause the value of Excess MSRs to increase. To the extent we do not utilize derivatives to hedge against changes in the fair value of Excess MSRs, our balance sheet, results of operations and cash flows would be susceptible to significant volatility due to changes in the fair value of, or cash flows from, Excess MSRs as interest rates change. The effects of such a decrease in values on our financial position, results of operations and liquidity are discussed below under “—Prepayment Speed Exposure.”

 

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Prepayment Speed Exposure

Prepayment speeds significantly affect the value of Excess MSRs. Prepayment speed is the measurement of how quickly borrowers pay down the UPB of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. The price we pay to acquire Excess MSRs will be based on, among other things, our projection of the cash flows from the related pool of mortgage loans. Our expectation of prepayment speeds is a significant assumption underlying those cash flow projections. If prepayment speeds are significantly greater than expected, the carrying value of Excess MSRs could exceed their estimated fair value. If the fair value of Excess MSRs decreases, we would be required to record a non-cash charge, which would have a negative impact on our financial results. Furthermore, a significant increase in prepayment speeds could materially reduce the ultimate cash flows we receive from Excess MSRs, and we could ultimately receive substantially less than what we paid for such assets.

We seek to reduce our exposure to prepayment through the structuring of our investments in Excess MSRs. For example, we will seek to enter into “recapture agreements” whereby we will receive a new Excess MSR with respect to a loan that was originated by the servicer and used to repay a loan underlying an Excess MSR that we previously acquired from that same servicer. In lieu of receiving an Excess MSR with respect to the loan used to repay a prior loan, the servicer may supply a similar Excess MSR. We will seek to enter into such recapture agreements in order to protect our returns in the event of a rise in voluntary prepayment rates.

The following tables summarize the estimated change in fair value of our Excess MSRs as of December 31, 2012 given several parallel shifts in the discount rate, prepayment speed, delinquency rate and recapture rate (dollars in thousands):

 

Fair value at December 31, 2012

   $ 245,036         

Discount rate shift in %

  

-20%

   

-10%

   

+10%

   

+20%

 

Estimated fair value

   $ 270,219      $ 256,841      $ 234,363      $ 224,733   

Change in estimated fair value:

        

Amount

   $ 25,183      $ 11,805      $ (10,673   $ (20,303

%

     10.3     4.8     -4.4     -8.3

Prepayment rate shift in %

  

-20%

   

-10%

   

+10%

   

+20%

 

Estimated fair value

   $ 267,927      $ 255,999      $ 234,910      $ 225,538   

Change in estimated fair value:

        

Amount

   $ 22,891      $ 10,963      $ (10,126   $ (19,498

%

     9.3     4.5     -4.1     -8.0

Delinquency rate shift in %

  

-20%

   

-10%

   

+10%

   

+20%

 

Estimated fair value

   $ 249,957      $ 247,557      $ 242,757      $ 240,357   

Change in estimated fair value:

        

Amount

   $ 4,921      $ 2,521      $ (2,279   $ (4,679

%

     2.0     1.0     -0.9     -1.9

Recapture rate shift in %

  

-20%

   

-10%

   

+10%

   

+20%

 

Estimated fair value

   $ 240,270      $ 242,637      $ 247,364      $ 249,612   

Change in estimated fair value:

        

Amount

   $ (4,766   $ (2,399   $ 2,328      $ 4,576   

%

     -1.9     -1.0     1.0     1.9

 

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Set forth below is the quantitative impact of a hypothetical 1% increase in short term interest rates on the net interest income and net book value of our RMBS portfolio:

 

   

As of December 31, 2012, a 1% increase in short term interest rates would increase our earnings by approximately $2.8 million per annum, based on the net floating rate exposure as of December 31, 2012 from our investments and financings.

 

   

As of December 31, 2012, a 1% increase in short term interest rates would impact our net book value by approximately $0.1 million, based on the net fixed rate exposures as of December 31, 2012 from our investments.

The sensitivity analysis is hypothetical and should be used with caution. In particular, the results are calculated by stressing a particular economic assumption independent of changes in any other assumption; in practice, changes in one factor may result in changes in another, which might counteract or amplify the sensitivities. Also, changes in the fair value based on a 10% variation in an assumption generally may not be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear.

Credit Spread Risk

Credit spreads measure the yield demanded on loans and securities by the market based on their credit relative to U.S. Treasuries, for fixed rate credit, or LIBOR, for floating rate credit. Our floating rate securities are valued based on a market credit spread over LIBOR. Excessive supply of such securities combined with reduced demand will generally cause the market to require a higher yield on such securities, resulting in the use of a higher (or “wider”) spread over the benchmark rate to value them.

Widening credit spreads would result in higher yields being required by the marketplace on securities. This widening would reduce the value of the securities we hold at the time because higher required yields result in lower prices on existing securities in order to adjust their yield upward to meet the market. The effects of such a decrease in values on our financial position, results of operations and liquidity are discussed above under “—Interest Rate Risk.”

In an environment where spreads are tightening, if spreads tighten on the assets we purchase to a greater degree than they tighten the liabilities we issue, our net spread will be reduced.

Credit Risk

We are subject to varying degrees of credit risk in connection with our assets. Credit risk refers to the ability of each individual borrower underlying our investments in Excess MSRs, loans and securities to make required interest and principal payments on the scheduled due dates. We may also invest in non-Agency RMBS which represent “first loss” pieces; in other words, they do not benefit from credit support although we believe they predominantly benefit from underlying collateral value in excess of their carrying amounts. Although we do not expect to encounter credit risk in our Agency RMBS, we do anticipate credit risk related to non-Agency RMBS.

We seek to reduce credit risk through prudent asset selection, actively monitoring our asset portfolio and the underlying credit quality of our holdings and, where appropriate and achievable, repositioning our investments to upgrade their credit quality. Our pre-acquisition due diligence and processes for monitoring performance include the evaluation of, among other things, credit and risk ratings, principal subordination, prepayment rates, delinquency and default rates, and vintage of collateral.

Liquidity Risk

The assets that will comprise our asset portfolio will not be publicly traded. A portion of these assets may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly-traded securities. The illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises, including in response to changes in economic and other conditions.

 

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BUSINESS

COMPANY OVERVIEW

New Residential will be a newly listed public REIT focused primarily on investing in residential mortgage related assets. We will be externally managed by an affiliate of Fortress. Our goal is to drive strong risk-adjusted returns primarily through investments in residential real estate related investments including, but not limited to, Excess MSRs, RMBS and residential mortgage loans. New Residential’s investment guidelines will be purposefully broad to enable us to make investments in a wide array of assets, including mortgage servicing advances and non-real estate related assets such as consumer loans. We will generally target assets that generate significant current cash flows and/or have the potential for meaningful capital appreciation. We will aim to generate attractive returns for our stockholders without excessive use of financial leverage.

Our initial holdings will include all of Newcastle’s co-investments in Excess MSRs, all of the non-Agency RMBS it has acquired (other than through securitization vehicles) since the beginning of 2012, all mortgage loans acquired since the beginning of 2013, all consumer loans it has acquired and a portion of its Agency RMBS. Our initial holdings may also include other investments in residential mortgage related, or other, assets that Newcastle could make and contribute to us prior to the distribution. A majority of our assets will consist of qualifying real estate assets for purposes of Section 3(c)(5)(C) of the 1940 Act, including investments in Agency RMBS. After the distribution, our asset allocation and target assets may change over time, depending on our Manager’s investment decisions in light of prevailing market conditions. The assets in our initial portfolio are described in more detail below under “Initial Portfolio.”

MARKET OPPORTUNITY AND TARGET ASSETS

We believe that unfolding developments in the U.S. residential housing market are generating significant investment opportunities. The U.S. residential market is vast: the value of the housing market totaled $18 trillion as of December 31, 2012, including approximately $10 trillion of outstanding mortgages, according to Inside Mortgage Finance. In the aftermath of the U.S. financial crisis, the residential mortgage industry is undergoing major structural changes that are transforming the way mortgages are originated, owned and serviced. We believe these changes are creating a compelling set of investment opportunities.

We also believe that New Residential is one of only a select number of market participants that have the combination of capital, industry expertise and key business relationships we think are necessary to take advantage of this opportunity. We intend to focus on the investment opportunities described below, as well as other opportunities that may arise as the residential mortgage market evolves.

For more information about the mortgage industry, see “—Mortgage Industry” below.

Excess MSRs

In our view, the mortgage servicing sector presents a number of compelling investment opportunities. An MSR provides a mortgage servicer with the right to service a pool of mortgages in exchange for a portion of the interest payments made on the underlying mortgages. This amount typically ranges from 25 to 50 bps times the UPB of the mortgages. Approximately 83% of MSRs are currently owned by banks. We expect this number to decline as banks face pressure to reduce their MSR exposure as a result of heightened capital reserve requirements under Basel III, regulatory scrutiny and a more challenging servicing environment.

As banks sell MSRs, there is an opportunity for entities such as New Residential to participate through co-investment in the corresponding Excess MSRs. An MSR is made up of two components: a basic fee and an Excess MSR. The basic fee is the amount of compensation for the performance of servicing duties, and the Excess MSR is the amount that exceeds the basic fee. For example, if an MSR is 30 bps and the basic fee is 5 bps, then the Excess MSR is 25 bps. As the owner of an Excess MSR, we are not required to assume any servicing duties, advance obligations or liabilities associated with the portfolios underlying our investment.

 

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There are a number of reasons why we believe Excess MSRs are a compelling investment opportunity:

 

   

Supply-Demand Imbalance . Since 2010, banks have sold or committed to sell MSRs totaling more than $1 trillion of the approximately $10 trillion mortgage market. As a result of the legal and other pressures facing bank servicers, we believe the volume of MSR sales is likely to be substantial for some period of time. We estimate that MSRs on approximately $300 billion of mortgages are currently for sale, requiring a capital investment of approximately $2 billion based on current pricing dynamics, and approximately $2 trillion of MSRs could be sold over the next several years. In addition, we estimate that Excess MSRs on $25 - 50 billion UPB could be sold in the form of “flow arrangements,” whereby loan originators agree to sell Excess MSRs on a recurring basis (often monthly or quarterly) on newly originated or delinquent loans. We expect that non-bank servicers such as Nationstar—which pursues a “capital light” investment model— will need companies to invest in the Excess MSR portion of these investments.

 

   

Attractive Pricing . MSRs are currently being sold at a material discount to historical pricing levels. We estimate that prices in many cases are down nearly 50% or more from their peak. At current prices, we believe investments in Excess MSRs can generate attractive returns without leverage.

 

   

Significant Barrier to Entry . Non-servicers cannot own the basic fee component of an MSR directly and would therefore need to co-invest with a servicer in order to invest in an Excess MSR. The number of strong, scalable non-bank servicers is limited. Moreover, in the case of Excess MSRs on Agency pools, the servicer must be Agency-approved. As a result, non-servicers seeking to invest in Excess MSRs generally face a significant barrier to entering the market, particularly if they do not have a relationship with a quality servicer. We believe New Residential’s track record of investing in Excess MSRs and its established relationship with Nationstar give us a competitive advantage over other investors.

As a wholly owned subsidiary of Newcastle, New Residential pioneered investments in Excess MSRs. We believe it remains the most active REIT in the sector. For more details about New Residential’s investments in Excess MSRs, see “Initial Portfolio—Excess MSRs” below.

RMBS

RMBS are securities created through the securitization of a pool of residential mortgage loans. Currently, approximately $6 trillion of the $10 trillion of residential mortgages outstanding has been securitized, according to Inside Mortgage Finance as of June 2012. Of the securitized mortgages, approximately $5 trillion are Agency RMBS, which are RMBS issued or guaranteed by a U.S. Government agency, such as Ginnie Mae, or by a GSE, such as Fannie Mae or Freddie Mac. The balance has been securitized by either public or private trusts (“private label securitizations), and these securities are referred to as non-Agency RMBS. For more information about the securitization market, see “—Mortgage Industry—Overview.”

Since the onset of the financial crisis in 2007, there has been significant volatility in the prices for non-Agency RMBS. This has resulted from a widespread contraction in capital available for this asset class, deteriorating housing fundamentals, and an increase in forced selling by institutional investors (often in response to rating agency downgrades). While the prices of these assets have started to recover from their lows, we believe a meaningful gap still exists between current prices and the recovery value of many non-Agency RMBS. Accordingly, we believe there are opportunities to acquire non-Agency RMBS at attractive risk-adjusted yields, with the potential for meaningful upside if the U.S. economy and housing market continue to strengthen. We believe the value of existing non-Agency RMBS may also rise if the number of buyers returns to pre-2007 levels. Furthermore, we believe that in many non-Agency RMBS vehicles there is a meaningful discrepancy between the value of the non-Agency RMBS and the value of the underlying collateral. We intend to pursue opportunities to structure transactions that would enable us to realize this difference.

 

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For details about New Residential’s Investments in non-Agency RMBS see “Initial Portfolio—Non-Agency RMBS” below.

The non-Agency RMBS we may acquire could be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. The mortgage loan collateral may be classified as “conforming” or “non-conforming,” depending on a variety of factors. For more information about these categories, see “—Mortgage Industry—Segments of the Residential Mortgage Loan Market.”

We invest in Agency RMBS, which we believe complement our Excess MSR and non-Agency RMBS investments. Agency RMBS offer more stable cash flows and historically have been subject to lower credit risk and greater price stability than the other types of residential mortgage investments we intend to target.

Agency RMBS

Agency RMBS are RMBS issued or guaranteed by a U.S. Government agency, such as Ginnie Mae, or by a GSE, such as Fannie Mae or Freddie Mac. The Agency RMBS that we may acquire could be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. More information about the types of Agency RMBS that we may acquire is set forth below.

Mortgage pass-through certificates . Mortgage pass-through certificates are securities representing interests in “pools” of mortgage loans secured by residential real property where payments of both interest and principal, plus pre-paid principal, on the securities are made monthly to holders of the securities, in effect “passing through” monthly payments made by the individual borrowers on the mortgage loans that underlie the securities, net of fees paid to the issuer/guarantor and servicers of the securities.

Collateralized Mortgage Obligations (“CMOs”) . CMOs are securities that are structured from residential pass-through certificates, which receive monthly payments of principal and interest. CMOs divide the cash flows which come from the underlying mortgage pass-through certificates into different classes of securities that may have different maturities and different weighted average lives than the underlying pass-through certificates. CMOs include stripped securities, which are mortgage backed securities structured with two or more classes that receive different distributions of principal or interest on a pool of Agency RMBS. Stripped securities include interest only Agency RMBS and inverse interest only Agency RMBS, each of which we may invest in subject to maintaining our qualification as a REIT.

Interest Only Agency RMBS . This type of stripped security only entitles the holder to interest payments. The yield to maturity of interest only Agency RMBS is extremely sensitive to the rate of principal payments (particularly prepayments) on the underlying pool of mortgages. If we decide to invest in these types of securities, we anticipate doing so primarily to take advantage of particularly attractive prepayment-related or structural opportunities in the Agency RMBS markets.

Inverse Interest Only Agency RMBS . This type of stripped security has a coupon with an inverse relationship to its index and is subject to caps and floors. Inverse interest only Agency RMBS entitles the holder to interest only payments based on a notional principal balance, which is typically equal to a fixed rate of interest on the notional principal balance less a floating rate of interest on the notional principal balance that adjusts according to an index subject to set minimum and maximum rates. The value of inverse interest only Agency RMBS will generally decrease when its related index rate increases and increase when its related index rate decreases.

TBAs . We may utilize “to-be-announced” forward contracts, which we refer to as TBAs, in order to invest in Agency RMBS. Pursuant to these TBAs, we would agree to purchase, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered would not be identified until shortly before the TBA settlement date. Our ability to purchase Agency RMBS through TBAs may be limited by the 75% income and asset tests applicable to REITs. See “Federal Income Tax Considerations.”

 

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Residential Mortgage Loans

We believe there may be attractive opportunities to invest in portfolios of non-performing and other residential mortgage loans. In these investments, we would expect to acquire the loans at a deep discount to their face amount, and we (either independently or with a servicing co-investor) would seek to resolve the loans at a substantially higher valuation. We would seek to improve performance by transferring the servicing to Nationstar or another reputable servicer, which we believe could increase unlevered yields. In addition, we may seek to employ leverage to increase returns, either through traditional financing lines or securitization options.

While a number of portfolios of non-performing residential loans have been sold since the financial crisis, we believe the volume of such sales may increase for a number of reasons. For example, with improved balance sheets, many large banks have more financial flexibility to recognize losses on non-performing assets. HUD, which acquires the non-performing loans from Ginnie Mae securitizations, has been increasing the number of portfolio sales. In addition, we believe that residential loan servicers—which have traditionally resorted to loan foreclosure procedures and subsequent property sales to maximize recoveries on non-performing loans—may increase sales of defaulted loans. To the extent any of these dynamics results in a meaningful volume of non-performing loan sales, we believe they may represent attractive investment opportunities for New Residential.

Residential Mortgage Servicing Advances

We believe there may be attractive opportunities to invest in servicing advances. Servicing advances are reimbursable cash payments made by a loan servicer to the owner of a loan when the borrower fails to make required payments. Servicing advances typically fall into one of three categories:

 

   

Principal and Interest Advances : Cash payments made by the servicer to the owner of the mortgage loan to cover scheduled payments of principal and interest on a mortgage loan that have not been paid on a timely basis by the borrower.

 

   

Escrow Advances (Taxes and Insurance Advances) : Cash payments made by the servicer to third parties on behalf of the borrower for real estate taxes and insurance premiums on the property that have not been paid on a timely basis by the borrower.

 

   

Foreclosure Advances : Cash payments made by the servicer to third parties for the costs and expenses incurred in connection with the foreclosure, preservation and sale of the mortgaged property, including attorneys’ and other professional fees.

Servicing advances are usually reimbursed from amounts received with respect to the related mortgage loan, including payments from the borrower or amounts received from the liquidation of the property securing the loan, which is referred to as “loan level recovery.”

Servicing advances are structured to provide liquidity to mortgage loan securitization trusts. Servicers customarily have the right to cease making servicing advances on a loan if they determine that advances cannot be repaid from the proceeds of the loan or related property.

Servicing advances are typically financed through securitizations or loans structured by third parties such as investment banks. When servicing advances are financed through securitizations, recovery of advances are senior in the payment “waterfall.” In addition, in the event that the loan level recovery is not sufficient to reimburse the servicer in full for servicing advances, most pooling and servicing agreements provide that the servicer is entitled to be reimbursed from collections received with respect to other loans in the same securitized mortgage pool, which is referred to as “pool level recovery.”

We believe there is an evolving market in the financing of servicing advances that could present us with a significant investment opportunity. We intend to make investments in servicing advance by providing financing to servicers through senior, mezzanine or equity positions. The status of investments in servicing advances for purposes of the REIT requirements is uncertain, and therefore our ability to make these kinds of investments may be limited.

 

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Other Investments

We may pursue other types of investments as the market evolves, such as our recent investment in consumer loans. See “—Initial Portfolio—Other Investments.” Our Manager will make decisions about our investments in accordance with broad investment guidelines adopted by our board of directors. Accordingly, we may change our target asset classes, and we may opportunistically acquire a variety of assets that may be different from, and may be riskier than, our initial portfolio or target assets. For more information about our investment guidelines, see “—Investment Guidelines” included elsewhere in this information statement.

MORTGAGE INDUSTRY

Overview

Over the last few decades the complexity of the market for residential mortgage loans in the U.S. has dramatically increased. A borrower seeking credit for a home purchase will typically obtain financing from a financial institution, such as a bank, savings association or credit union. In the past, these institutions would generally have held a majority of their originated mortgage loans as interest-earning assets on their balance sheets and would have performed all activities associated with servicing the loans, including accepting principal and interest payments, making advances for real estate taxes and property and casualty insurance premiums, initiating collection actions for delinquent payments and conducting foreclosures.

Now, institutions that originate mortgage loans generally hold a smaller portion of such loans as assets on their balance sheets and instead sell a significant portion of the loans they originate to third parties. Fannie Mae and Freddie Mac are currently the largest purchasers of home mortgage loans. Under a process known as securitization, the GSEs and financial institutions typically package residential mortgage loans into pools that are sold to securitization trusts. These securitization trusts fund the acquisition of mortgage loans by issuing securities, known as MBS, that entitle the owner of such securities to receive a portion of the interest and principal collected on the mortgage loans in the pool. The purchasers of the MBS are typically large institutions, such as pension funds, mutual funds, insurance companies and REITs. The agreement that governs the packaging of mortgage loans into a pool, the servicing of such mortgage loans and the terms of the MBS issued by the securitization trust is often referred to as a pooling and servicing agreement.

In the ten years prior to the credit dislocation in 2007, the securitization market drove an increase in the number of residential mortgage loans outstanding. Since 2007, the mortgage industry has been characterized by reduced origination and securitization activities, particularly for subprime and Alt-A mortgage loans.

In connection with a securitization, a number of entities perform specific roles with respect to the mortgage loans in a pool, including the trustee and the mortgage servicer. The trustee holds legal title to the mortgage loans on behalf of the owner of the MBS and either maintains the mortgage note and related documents itself or with a custodian. The trustee or a separate securities administrator for the trust receives the payments collected by the servicer on the mortgage loans and distributes them to the investors in the MBS pursuant to the terms of the pooling and servicing agreement. One or more other entities are appointed pursuant to the pooling and servicing agreement to service the mortgage loans. In some cases, the servicer is the same institution that originated the loan, and, in other cases, it may be a different institution. The duties of servicers for mortgage loans that have been securitized are generally discussed below, and are generally required to be performed in accordance with industry-accepted servicing practices and the terms of the mortgage note and applicable law. A servicer generally takes actions, such as foreclosure, in the name and on behalf of the trustee.

Segments of the Residential Mortgage Loan Market

The residential mortgage market is commonly divided into a number of categories based on certain mortgage loan characteristics, including the credit quality of borrowers and the types of institutions that originate or finance such loans. While there are no universally accepted definitions, the residential mortgage loan market is commonly divided by market participants into the following categories.

 

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GSE and Government Guaranteed Loans

This category of mortgage loans includes “conforming loans,” which are first lien mortgage loans issued to prime borrowers and are secured by single-family residences that meet or “conform” to the underwriting standards established by Fannie Mae or Freddie Mac. Prime borrowers are borrowers that have strong credit histories and who generally purchase their properties with at least a 10% down payment. The conforming loan limit is established by statute and currently is $417,000 with certain exceptions for high-priced real estate markets. This category also includes mortgage loans issued to borrowers that do not meet conforming loan standards, but who qualify for a loan that is insured or guaranteed by the government through Ginnie Mae, primarily through federal programs operated by the Federal Housing Administration and the Department of Veterans Affairs.

Non-GSE or Government Guaranteed Loans

Residential mortgage loans that are not guaranteed by the GSEs or the government are generally referred to as “non-conforming loans” and fall into one of the following categories: jumbo, subprime, Alt-A or second lien loans. The loans may be non-conforming due to various factors, including mortgage balances in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and level of documentation.

Jumbo . Jumbo mortgage loans have original principal amounts that exceed the statutory conforming limit for GSE loans. Jumbo borrowers generally have strong credit histories and provide full loan documentation, including verification of income and assets.

Subprime . Subprime mortgage loans are generally issued to borrowers with blemished credit histories, who make low or no down payments on the properties they purchase or have limited documentation of their income or assets. Subprime borrowers generally pay higher interest rates and fees than prime borrowers.

Alt-A . Alt-A mortgage loans are generally issued to borrowers with risk profiles that fall between prime and subprime. These loans have one or more high-risk features, such as the borrower having a high debt-to-income ratio, limited documentation verifying the borrower’s income or assets, or the option of making monthly payments that are lower than required for a fully amortizing loan. Alt-A mortgage loans generally have interest rates that fall between the interest rates on conforming loans and subprime loans.

Second Lien . Second mortgages and home equity lines are often referred to as second liens and fall into a separate category of the residential mortgage market. These loans typically have higher interest rates than loans secured by first liens because the lender generally will only receive proceeds from a foreclosure of a property after the first lien holder is paid in full. In addition, these loans often feature higher loan-to-value ratios and are less secure than first lien mortgages.

OUR STRENGTHS

We believe that the following factors will provide us with significant competitive advantages.

Focused Strategy

New Residential will pursue an investment strategy focused primarily on attractive opportunities across the residential spectrum. With an $18 trillion residential housing market undergoing major structural change, we believe a dedicated strategy presents investors with an opportunity to participate in that restructuring.

Experienced Management Team

Our Manager is an affiliate of Fortress, a leading alternative asset manager with $53.4 billion of assets under management as of December 31, 2012. Residential and other real estate related assets, including those in our initial portfolio, have been a significant component of the investment strategies of both Fortress and Newcastle.

 

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Through our Manager, we have access to Fortress’s extensive and long-standing relationships with major issuers of real estate related securities and the broker-dealers that trade these securities, as well as their banking relationships in the mortgage servicing industry. We believe these relationships, together with Fortress’s infrastructure, will provide us access to an ongoing pipeline of attractive investment opportunities, many of which may not be available to our competitors. We also believe that the breadth of Fortress’s experience will enable New Residential to react nimbly to the changing residential landscape in order to execute on emerging investment opportunities. For instance, in 2012, we obtained a private letter ruling from the Internal Revenue Service that permits us to treat Excess MSRs as qualifying assets that generate qualifying income for purposes of the REIT asset and income tests, which gave us an early advantage for investing in Excess MSRs.

Existing Portfolio of Residential Mortgage Related Assets

Our initial holdings will include all of Newcastle’s co-investments in Excess MSRs, a portion of its Agency RMBS, all of the non-Agency RMBS it has acquired (other than through securitization vehicles) since the beginning of 2012, all mortgage loans acquired since the beginning of 2013 and all consumer loans it has acquired. We target returns on invested equity that average in the mid-teens. We believe these returns are attainable given the performance of our existing investments to date and based on market dynamics that we believe will foster significant opportunities to invest in additional residential real estate assets at similar returns. For example, our underwriting assumptions projected a weighted average IRR of 18% for the Excess MSRs we owned as of December 31, 2012, and this portfolio has performed better than our underwriting assumptions. We believe that various market dynamics, including the current low-interest rate environment, a supply-demand imbalance for investments in Excess MSRs, and barriers to entry with respect to this asset class, support our target returns. However, the returns of individual assets, as well as different asset classes, will vary, and there can be no assurance that any of our assets, or our portfolio as a whole, will generate target returns. In addition, our ability to achieve target returns on our Agency and non-Agency RMBS, and potentially other assets, depends in part on the use of leverage and our ability to quickly deploy the proceeds of any financing at attractive returns. There can be no assurance that we will be able to secure financing on favorable terms, or at all. In addition, there can be no assurance that we will be able to source, or quickly complete, attractive investments for which the proceeds of any such financing could be used.

Relationship with Nationstar

We intend to capitalize on our Manager’s relationship with Nationstar, which is majority-owned by Fortress funds managed by our Manager, to source opportunities to acquire Excess MSRs. Nationstar (NYSE: NSM) is the largest non-bank servicer of residential loans, according to Inside Mortgage Finance, and it was ranked among the highest quality servicers by Fannie Mae in August 2012. We have developed an innovative strategy for co-investing in Excess MSRs with Nationstar. Given that non-servicers cannot own the basic fee component of an MSR directly, this strategy creates the opportunity for us to co-invest in Excess MSRs and affords Nationstar the opportunity to invest in MSRs on a “capital light” basis. To date, we have completed several co-investments with Nationstar, as described under “—Initial Portfolio—Excess MSRs” below. In addition, we have capitalized on Nationstar’s origination capabilities by entering into a “recapture agreement” in each of our Excess MSR investments to date. Under the recapture agreements, we are generally entitled to a pro rata interest in the Excess MSRs on any initial or subsequent refinancing by Nationstar of a loan in the original portfolio. In other words, we are generally entitled to a pro rata interest in the Excess MSRs on both (i) a loan resulting from a refinancing by Nationstar of a loan in the original portfolio, and (ii) a loan resulting from a refinancing by Nationstar of a previously recaptured loan. We believe this arrangement mitigates our exposure to the prepayment risk associated with Excess MSRs. Furthermore, all of the Non-Agency RMBS included in our initial portfolio is serviced by Nationstar.

Tax Efficient REIT Status

We will elect to be treated as, and expect to operate in conformity with the requirements for qualification and taxation as, a REIT. REIT status will provide us with certain tax advantages compared to some of our

 

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competitors. Those advantages include an ability to reduce our corporate-level income taxes by making dividend distributions to our stockholders, and an ability to pass our capital gains through to our stockholders in the form of capital gains dividends. We believe our REIT status provides us with a significant advantage as compared to other companies or industry participants who do not have a similar tax efficient structure.

INITIAL PORTFOLIO

Our initial holdings will include all of Newcastle’s co-investments in Excess MSRs, a portion of its Agency RMBS, all of the non-Agency RMBS it has acquired (other than through securitization vehicles) since the beginning of 2012, all mortgage loans acquired since the beginning of 2013 and all consumer loans it has acquired. Our initial holdings may also include other investments in residential mortgage related assets that Newcastle could make and contribute to us prior to the distribution. A majority of our assets will consist of qualifying real estate assets for purposes of Section 3(c)(5)(C) of the 1940 Act, including investments in Agency RMBS. After the distribution, our asset allocation and target assets may change over time, depending on our Manager’s investment decisions in light of prevailing market conditions. The assets in our initial portfolio are described in more detail below.

Excess MSRs

As of December 31, 2012, we had approximately $245 million estimated carrying value of Excess MSRs. In addition, since December 31, 2012, we have agreed to invest in Excess MSRs in two additional transactions, as described below.

On January 6, 2013, we agreed to co-invest in Excess MSRs on a portfolio of residential mortgage loans with a UPB of approximately $215 billion as of November 30, 2012. Approximately 53% of the loans in this portfolio are in private label securitizations, and the remainder are owned, insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Nationstar has agreed to acquire the related servicing rights from Bank of America. We committed to invest approximately $340 million (based on the November 30, 2012 UPB) to acquire an approximately one-third interest in the Excess MSRs on this portfolio. The remaining interests in the Excess MSRs will be owned by a Fortress-managed fund and Nationstar on a pari passu basis. As the servicer, Nationstar will perform all servicing and advancing functions, and it will retain the ancillary income, servicing obligations and liabilities associated with this portfolio. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs will be shared pro rata among the Fortress-managed fund, Nationstar and us, subject to certain limitations.

On January 31, 2013, we completed the first closing of this co-investment. The first closing relates to Excess MSRs on loans with an aggregate UPB of approximately $58 billion as of December 31, 2012, that are owned, insured or guaranteed by Fannie Mae or Freddie Mac. Our purchase price for this portion of the investment was approximately $108 million. We are entitled to one-third of the Excess MSRs. Nationstar also closed on servicing rights to Ginnie Mae loans with a UPB of approximately $39 billion as of December 31, 2012. The closing of the remainder of the co-investment, which corresponds to loans in private label securitizations and the Ginnie Mae loans, is expected to occur in the second quarter of 2013, subject to the receipt of regulatory and third-party approvals, including Ginnie Mae approval and certain rating agency approvals. There can be no assurance that we will complete this investment as anticipated or at all. However, we believe that it is probable that we will be able to obtain pending approvals and subsequently complete this investment. The investment is owned by (i) Nationstar and (ii) limited liability companies in which we have a 50% membership interest. These entities do not have a managing member. These entities were formed on December 12, 2012 or January 3, 2013, as applicable, for the purpose of making this investment, and they commenced operations (or will commence operations) upon the completion of their respective portions of the investment. Our voting rights and economic rights are pro rata to our equity ownership in these entities.

 

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In addition, on January 4, 2013, we completed a co-investment in Excess MSRs on a portfolio of Ginnie Mae residential mortgage loans with a UPB of approximately $13 billion as of November 30, 2012. Nationstar acquired the related servicing rights from Bank of America in November 2012. We invested approximately $27 million to acquire a 33% interest in the Excess MSRs on this portfolio. The remaining interests in the Excess MSRs will be owned by a Fortress-managed fund and Nationstar on a pari passu basis. The investment is owned by (i) Nationstar and (ii) a limited liability company in which we have a 50% membership interest. This entity does not have a managing member. This entity was formed on December 12, 2012 for the purpose of making this investment and commenced operations upon the completion of the investment. Our voting rights and economic rights are pro rata to our equity ownership in this entity.

As of December 31, 2012, our completed investments represent a 65% interest in the Excess MSRs on five pools of mortgage loans with an aggregate UPB of approximately $77 billion. Nationstar is the servicer of the loans underlying all of our investments in Excess MSRs to date, and it earns a basic fee in exchange for providing all servicing functions. In addition, Nationstar retains a 33-35% interest in the Excess MSRs and all ancillary income associated with the portfolios. We do not have any servicing duties, liabilities or obligations associated with the servicing of the portfolios underlying any of our investments. Each of our investments to date is subject to a recapture agreement with Nationstar. Under the recapture agreements, we are generally entitled to a pro rata interest in the Excess MSRs on any initial or subsequent refinancing by Nationstar of a loan in the original portfolio. In other words, we are generally entitled to a pro rata interest in the Excess MSRs on both (i) a loan resulting from a refinancing by Nationstar of a loan in the original portfolio, and (ii) a loan resulting from a refinancing by Nationstar of a previously recaptured loan. The table below summarizes the terms of our completed investments in Excess MSRs as of December 31, 2012.

 

Summary of Excess MSR Investments as of December 31, 2012

 
    Investment
Date
     Initial
UPB
(bn)
     Current 1
UPB
(bn)
     Loan
Type 2
     MSR Component           Excess MSR  
                MSR
(bps)
    Excess
MSR
(bps)
    Interest in
Excess  MSR

(%)
    Purchase
Price
(mm)
     Carrying
Value
(mm)
 

Pool 1

    12/2011       $ 9.9       $ 8.4         GSE         35  bps      29  bps      65   $ 43.6       $ 40.9   

Pool 2

    06/2012         10.4         9.4         GSE         31        23        65     42.3         39.3   

Pool 3

    06/2012         9.8         9.1         GSE         32        23        65     36.2         35.5   

Pool 4

    06/2012         6.3         5.8         GSE         26        17        65     15.4         15.0   

Pool 5

    06/2012         47.6         43.9         PLS         32        13        65     124.8         114.3   
    

 

 

    

 

 

       

 

 

   

 

 

     

 

 

    

 

 

 

Total/Weighted Avg.

     $ 84.0       $ 76.6            32 bps        17 bps        $ 262.3       $ 245.0   
    

 

 

    

 

 

       

 

 

   

 

 

     

 

 

    

 

 

 

 

(1) As of December 31, 2012.
(2) “GSE” refers to loans in Fannie Mae or Freddie Mac securitizations. “PLS” refers to loans in private label securitizations.

 

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Summary of Excess MSR Investments Through Equity Method Investees Subsequent to December 31, 2012

 
                          MSR Component     Interest
Investee
(%)
    Investee
Interest
in Excess
MSR (%)
    Excess  MSR
Initial
Investment
(mm)
 
     Investment
Date
     UPB  (bn) 2      Loan
type 3
     MSR
(bps)
    Excess
MSR (bps)
       

Pool 6

     01/2013       $ 13         GM         40  bps      10  bps      50     67   $ 27   

Pool 7

     01/2013         40         GSE         27        5        50     67     70   

Pool 8

     01/2013         18         GSE         28        10        50     67     37   

Pool 9 1

     01/2013         39         GM         40        22        50     67     85 4  

Pool 10 1

     01/2013         107         PLS         34        10        50     67     141 4  
     

 

 

       

 

 

   

 

 

       

 

 

 

Total/Weighted Avg.

  

   $ 216            34 bps        11 bps          $ 360   
     

 

 

       

 

 

   

 

 

       

 

 

 

 

(1) This investment has been committed to but has not yet closed. This investment is subject to certain closing requirements and regulatory approvals.
(2) As of December 31, 2012.
(3) “GSE” refers to loans in Fannie Mae or Freddie Mac securitizations. “PLS” refers to loans in private label securitizations. “GM” refers to loans in Ginnie Mae securitizations.
(4) The actual amount invested will be based on the UPB at the time of close.

We currently expect to continue to make co-investments with Nationstar, and we may also acquire Excess MSRs from other servicers. Nationstar does not, however, have any obligation to offer us any future co-investment opportunity. In the event that we cannot co-invest in Excess MSRs with Nationstar, we may not be able to find other suitable counterparties from which to acquire Excess MSRs, which could have a material adverse effect on our business. At the same time, our co-investments with Nationstar expose us to counterparty concentration risk, which could increase if we do not or cannot acquire Excess MSRs from other counterparties. Nationstar publicly discloses its financial statements and other material information in filings with the SEC, which may be obtained at the SEC’s website, www.sec.gov. The contents of Nationstar’s public disclosure are not incorporated by reference herein, do not form part of this information statement and have not been verified by us. For more details about our initial portfolio of Excess MSRs, see “Business—Initial Portfolio—Excess MSRs.”

 

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The following table summarizes the collateral characteristics of the loans underlying our Excess MSR investments as of December 31, 2012:

 

Collateral Characteristics

 
    Current
Carrying
Amount
    Original
Principal
Balance
    Current
Principal
Balance
    Number of
Loans
    WA
FICO
Score
(A)
    WA
Coupon
    WA
Maturity
(months)
    Average
Loan
Age
(months)
    Adjustable
Rate
Mortgage %
(B)
    Uncollected
Payments
(C)
    Delinquency
30 Days (C)
    Delinquency
60 Days (C)
    Delinquency
90+ Days
(C)
    Loans in
Foreclosure
    Real
Estate
Owned
    Loans in
Bankruptcy
    1 Month
CPR (D)
    1 Month
CRR (E)
    1 Month
CDR (F)
    1 Month
Recapture
Rate
 

Pool 1

                                       

Original Pool

  $ 33,977      $ 9,940,385      $ 7,927,465        53,477        685        6.0     277        73        19.5     9.9     5.8     2.1     1.2     3.9     0.9     2.6     23.2     19.5     4.5     40.8

Recaptured Loans

    1,997        —          475,746        2,305        753        4.3     324        5        0.2     0.3     0.4     0.0     0.0     0.0     0.0     0.1     2.8     2.8     0.0     0.0

Recapture Agreements

    4,936        —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    40,910        9,940,385        8,403,211        55,782        689        5.9     280        69        18.4     9.3     5.5     1.9     1.1     3.7     0.8     2.5     22.2     18.7     4.2     40.6

Pool 2

                                       

Original Pool

    33,187        10,383,891        9,239,244        47,285        680        5.3     319        61        11.0     14.1     5.1     1.9     1.5     7.4     0.2     5.1     19.6     16.4     3.7     43.2

Recaptured Loans

    748        —          157,876        721        747        4.2     327        1        0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.2     0.2     0.0     0.0

Recapture Agreements

    5,387        —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    39,322        10,383,891        9,397,120        48,006        681        5.2     319        60        10.8     13.9     5.0     1.9     1.4     7.3     0.2     5.0     19.3     16.1     3.6     43.2

Pool 3

                                       

Original Pool

    30,272        9,844,114        9,030,073        55,496        668        4.7     290        73        37.2     14.4     4.4     1.6     1.4     7.5     2.2     3.5     15.1     10.7     4.9     22.9

Recaptured Loans

    202        —          39,653        232        728        4.0     323        1        0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.7     0.7     0.0     0.0

Recapture Agreements

    4,960        —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    35,434        9,844,114        9,069,726        55,728        668        4.7     290        73        37.0     14.4     4.3     1.6     1.4     7.5     2.2     3.5     15.0     10.7     4.9     22.9

Pool 4

                                       

Original Pool

    12,076        6,250,549        5,768,822        28,523        671        3.8     316        61        58.3     19.1     3.8     1.6     1.3     12.1     2.1     4.7     14.2     5.4     9.3     22.4

Recaptured Loans

    73        —          19,311        93        750        4.1     341        2        0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.3     0.3     0.0     0.0

Recapture Agreements

    2,887        —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    15,036        6,250,549        5,788,133        28,616        671        3.8     316        61        58.1     19.0     3.7     1.6     1.3     12.1     2.1     4.7     14.2     5.4     9.3     22.4

Pool 5

                                       

Original Pool

    109,652        47,572,905        43,895,651        185,761        650        4.8     300        65        57.1     28.8     9.5 %     2.3     4.5     17.4     3.0     5.1     16.5     5.2     11.9     1.7

Recapture Loans

    30        —          6,910        29        739        3.6     343        1        6.0     0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.0     0.0

Recapture Agreements

    4,652        —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    114,334        47,572,905        43,902,561        185,790        650        4.8     300        65        57.1     28.8     9.5     2.3     4.5     17.4     3.0     5.1     16.5     5.2     11.9     1.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total/WA

  $ 245,036      $ 83,991,844      $ 76,560,751        373,922        662        4.9     300        65        44.9     22.4     7.4     2.1     3.2     13.1     2.2     4.6     17.1     8.7     9.0     25.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Weighted average FICO scores are reported based on information provided by the loan servicer on a monthly basis. The loan servicer generally updates the FICO score on a monthly basis.
(B) Adjustable Rate Mortgage % represents the percentage of the total principal balance of the pool that corresponds to adjustable rate mortgages.
(C) Uncollected Payments represents the percentage of the total principal balance of the pool that corresponds to loans for which the most recent payment was not made. Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30 – 59 days, 60 – 89 days or more than 90 days, respectively.
(D) Constant prepayment rate represents the annualized rate of the prepayments during the month as a percentage of the total principal balance of the pool.
(E) 1 Month CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during the month as a percentage of the total principal balance of the pool.
(F) 1 Month CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments (defaults) during the month as a percentage of the total principal balance of the pool.

 

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The following table summarizes the collateral characteristics as of December 31, 2012 of the loans underlying Excess MSR investments made through equity method investees subsequent to December 31, 2012. For each of these pools, we own a 50% interest in an entity that invested in a 67% interest in the Excess MSRs.

 

    Collateral Characteristics  
    Unpaid
Principal
Balance
(bn)
    Number of
Loans
    WA
Original
FICO
Score
(A)
    WA
Coupon
    WA
Maturity
(months)
    Average
Loan
Age
(months)
    Adjustable
Rate
Mortgage %
(B)
    Uncollected
Payments (C)
    Delinquency
30 Days (C)
    Delinquency
60 Days (C)
    Delinquency
90+ Days
(C)
    Loans in
Foreclosure
    Real
Estate
Owned
    Loans in
Bankruptcy
    1 Month
CPR (D)
    1 Month
CRR (E)
    1 Month
CDR (F)
 

Pool 6

  $ 13        86,290        682        5.6     314        45        0.0     11.9     6.5     2.2     5.7     2.9     0.4     2.0     14.1     14.1     0.0

Pool 7

    40        277,436        711        5.3     287        74        23.4     14.8     3.4     1.1     6.8     6.8     0.0     4.0     N/A (G)      N/A (G)      N/A (G) 

Pool 8

    18        116,380        719        5.5     297        66        14.3     11.8     3.2     1.3     5.8     4.1     0.0     3.2     N/A (G)      N/A (G)      N/A (G) 

Pool 9

    39        273,508        688        5.0     309        39        3.9     8.4     4.6     1.5     4.5     0.9     0.0     1.1     N/A (G)      N/A (G)      N/A (G) 

Pool 10

    107        632,533        704        5.4     272        85        47.2     28.3     3.3     1.7     20.7     10.7     1.2     4.8     N/A (G)      N/A (G)      N/A (G) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total/Weighted Avg

  $ 216        1,386,147        702        5.3     286        71        29.5     19.9     3.7     1.5     13.1     7.2     0.6     3.7     N/A (G)      N/A (G)      N/A (G) 

 

(A) WA original FICO score represents the FICO score at the time the loan was originated.
(B) Adjustable Rate Mortgage % represents the percentage of the total principal balance of the pool that corresponds to adjustable rate mortgages.
(C) Uncollected Payments represents the percentage of the total principal balance of the pool that corresponds to loans for which the most recent payment was not made. Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30-59 days, 60-89 days or more than 90 days, respectively.
(D) Constant prepayment rate represents the annualized rate of the prepayments during the month as a percentage of the total principal balance of the pool.
(E) 1 Month CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during the month as a percentage of the total principal balance of the pool.
(F) 1 Month CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments (defaults) during the month as a percentage of the total principal balance of the pool.
(G) Data not available due to changes in the composition of the loan pools underlying the Excess MSRs.

 

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For information about the weighted average yield of our investments in Excess MSRs and about the geographic diversification of the underlying loans, see Note 4 to the consolidated financial statements included elsewhere in this information statement.

We currently expect to continue to make co-investments with Nationstar, and we may also acquire Excess MSRs from other servicers. Nationstar does not, however, have any obligation to offer us any future co-investment opportunity. In the event that we cannot co-invest in Excess MSRs with Nationstar, we may not be able to find other suitable counterparties from which to acquire Excess MSRs, which could have a material adverse effect on our business. At the same time, our co-investments with Nationstar expose us to counterparty concentration risk, which could increase if we do not or cannot acquire Excess MSRs from other counterparties.

Agency RMBS

Subsequent to December 31, 2012, Newcastle contributed to us approximately $1.0 billion face amount of Agency RMBS with a fair value of approximately $1.1 billion. We financed these Agency RMBS with approximately $1.0 billion of repurchase agreements. The counterparties of these repurchase agreements are Goldman Sachs & Co., Barclays Capital Inc., Citigroup Global Markets Inc., Nomura Securities International, Inc. and Morgan Stanley & Co. LLC. These repurchase agreements have a 95% advance rate and contain customary margin call provisions. The initial term of these repurchase agreements is 30 days.

The following table summarizes the characteristics of our Agency RMBS portfolio and of the collateral underlying our Agency RMBS.

 

     Agency RMBS Characteristics (A)

Vintage (B)

   Number of
Securities
   Outstanding
Face Amount
   Amortized
Cost Basis
   Percentage of
Total Amortized
Cost Basis
  Carrying
Value
   Weighted Average
Maturity, Years

Pre-2005

       10          75,398          79,777          7.39 %       79,777          4.0  

2006

                                                    

2007

       3          13,605          14,093          1.31 %       14,093          4.4  

2008

       2          13,836          14,739          1.37 %       14,739          3.8  

2009

       8          101,731          108,575          10.06 %       108,575          3.3  

2010

       18          321,069          338,882          31.40 %       338,882          3.4  

2011

       10          357,511          377,178          34.96 %       377,178          3.3  

2012 and later

       2          136,923          145,785          13.51 %       145,785          4.1  
    

 

 

      

 

 

      

 

 

      

 

 

     

 

 

      

 

 

 

Total/WA

       53          1,020,073          1,079,029          100.00 %       1,079,029          3.5  
    

 

 

      

 

 

      

 

 

      

 

 

     

 

 

      

 

 

 
     Agency RMBS  Collateral
Characteristics (A)
                  

Vintage (B)

   Avg Loan Age
(Years)
   3 Month
CPR (C)
                  

Pre-2005

       8.2          21.21                     

2006

       —            —                       

2007

       5.1          13.88                     

2008

       6.0          13.33                     

2009

       3.9          31.40                     

2010

       2.6          29.67                     

2011

       1.9          31.82                     

2012 and later

       4.8          22.95                     
    

 

 

      

 

 

                    
       3.26          28.63                     
    

 

 

      

 

 

                    

 

(A) Represents characteristics as of the date of contribution to us.
(B) The year in which the securities were issued.
(C) Three month average constant prepayment rate.

 

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The following table summarizes the net interest spread of our Agency RMBS portfolio.

 

Net Interest Spread 1

 

Weighted Average Asset Yield

     1.45

Weighted Average Interest Expense

     0.44
  

 

 

 

Net Interest Spread

     1.01
  

 

 

 

 

1 Represents the net interest spread on the contribution date.

Non-Agency RMBS

As of December 31, 2012, we had approximately $434 million face amount of non-Agency RMBS. The table below summarizes our investments in non-Agency RMBS.

 

Summary of non-Agency RMBS as of December 31, 2012

 
                   Gross Unrealized               

Asset Type

   Outstanding
Face  Amount
     Amortized
Cost  Basis
     Gains      Losses     Carrying
Value (1)
     Outstanding
Repurchase
Amounts
 

Non-Agency RMBS

   $ 433,510       $ 274,230       $ 15,856       $ (330   $ 289,756       $ 150,922   

 

(1) Fair value, which is equal to carrying value for all securities.

Subsequent to December 31, 2012, we acquired an additional approximately $392 million face amount of non-Agency RMBS for approximately $243 million. For more details about our initial portfolio of non-Agency RMBS, see “Business—Initial Portfolio—Non-Agency RMBS.”

In July 2012, we financed two of the securities with approximately $59.2 million of repurchase agreements guaranteed by Newcastle, at a cost of one-month LIBOR plus 200 bps and a 65% advance rate. These repurchase agreements, which contain customary margin call provisions, had an initial 90-day term, which was extended on October 11, 2012 to January 26, 2013.

In December 2012, we financed previously acquired non-Agency RMBS with approximately $90.2 million of repurchase agreements guaranteed by Newcastle, at a cost of one-month LIBOR plus 200 bps. The weighted average advance rate for these repurchase agreements is approximately 65%. These repurchase agreements, which contain customary margin call provisions, have an initial term ending on January 28, 2013.

In January 2013, we extended these repurchase agreements to April 29, 2013. On April 22, 2013, these repurchase agreements had an outstanding principal balance of approximately $158.0 million. Prior to the separation, we intend to amend these agreements to replace the guaranty by Newcastle with a guaranty by New Residential.

In April 2013, we financed additional non-Agency RMBS with approximately $144 million of repurchase agreements guaranteed by Newcastle, at a cost of one-month LIBOR plus 200 bps. The weighted average advance rate for these repurchase agreements is approximately 70%. These repurchase agreements, which contain customary margin call provisions, have an initial term ending on July 9, 2013. Prior to the separation, we intend to amend these agreements to replace the guaranty by Newcastle with a guaranty by New Residential.

 

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The following tables summarize the characteristics of our non-Agency RMBS portfolio and of the collateral underlying our non-Agency RMBS as of December 31, 2012.

 

    Non-Agency RMBS Characteristics (A)  

Vintage (B)

  Average
Minimum
Rating (C)
  Number of
Securities
    Outstanding
Face Amount
    Amortized
Cost Basis
    Percentage
of
Total
Amortized
Cost
Basis
    Carrying
Value
    Principal
Subordination
(D)
    Excess
Spread
(E)
    Weighted
Average
Maturity
(Years)
 

Pre 2004

  CC     12      $ 28,738      $ 22,266        8.1   $ 22,909        18.8     3.7     6.1   

2004

   B-     4        41,434        21,047        7.7     24,722        16.6     3.8     10.4   

2005

  D     1        2,529        1,410        0.5     1,603        0.0     0.0     7.8   

2006

  CC     5        220,749        133,911        48.8     139,678        5.8     2.7     7.0   

2007 and later

  CCC-     7        140,060        95,596        34.9     100,844        13.1     3.3     5.6   
 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total/WA (I)

  CC     29      $ 433,510      $ 274,230        100.0   $ 289,756        10.0     3.0     6.8   
 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Collateral Characteristics

 

Vintage (B)

   Average Loan Age
(years)
     Collateral Factor
(F)
     3 month CPR
(G)
    Delinquency (H)     Cumulative Losses to Date  

Pre 2004

     9.7         0.07         10.2     16.3     3.3

2004

     8.3         0.08         11.0     20.5     3.7

2005

     7.1         0.22         10.1     22.0     14.3

2006

     6.5         0.28         7.2     28.6     22.1

2007 and later

     6.0         0.46         10.6     29.8     26.5
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total / WA

     6.7         0.31         8.9     27.4     20.5
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(A) As of December 31, 2012.
(B) The year in which the securities were issued.
(C) Ratings provided above were determined by third party rating agencies as of a particular date, may not be current and are subject to change at any time. We had approximately $1.5 million of non-Agency RMBS assets that were on negative watch for possible downgrade by at least one rating agency as of December 31, 2012.
(D) The percentage of the outstanding face amount of securities and residual interests that is subordinate to our investments.
(E) The annualized amount of interest received on the underlying loans in excess of the interest paid on the securities, as a percentage of the outstanding collateral balance.
(F) The ratio of original unpaid principal balance of loans still outstanding.
(G) Three month average constant prepayment rate.
(H) The percentage of underlying loans that are 90+ days delinquent, or in foreclosure or considered real estate owned (REO).
(I) The total face amount of fixed rate securities was $1.1 million, and of floating rate securities was $432.4 million.

The following table sets forth the geographic diversification of the loans underlying our non-Agency RMBS as of December 31, 2012.

 

Geographic Location

   Outstanding  Face
Amount
     Percentage  

Western U.S.

   $ 151,227         34.9

Southeastern U.S.

     100,636         23.2

Northeastern U.S.

     95,565         22.0

Midwestern U.S.

     43,230         10.0

Southwestern U.S.

     42,852         9.9
  

 

 

    

 

 

 
   $ 433,510         100.0
  

 

 

    

 

 

 

 

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Table of Contents

The following table summarizes the net interest spread of our non-Agency RMBS portfolio as of December 31, 2012.

 

Net Interest Spread

 
     As of December 31, 2012  

Weighted Average Asset Yield

     6.55

Weighted Average Interest Expense

     2.21
  

 

 

 

Net Interest Spread

     4.34
  

 

 

 

The following tables summarize the characteristics of our non-Agency RMBS and of the collateral underlying our non-Agency RMBS purchased subsequent to December 31, 2012.

 

     Non-Agency RMBS Characteristics (A)  

Vintage (B)

   Average
Minimum
Rating (C)
   Number of
Securities
     Outstanding
Face Amount
     Amortized
Cost Basis
     Percentage of
Total
Amortized
Cost Basis
     Carrying
Value
     Principal
Subordination
(D)
     Excess
Spread (E)
     Weighted
Average
Maturity
(Years)
 

Pre 2004

   B+      3       $ 1,309       $ 721         0.3%       $ 721         17.5%         3.4%         2.8   

2004

   CCC-      4         22,497         19,779         8.1%         19,779         16.9%         3.3%         6.2   

2005

   CC-      3         33,381         20,106         8.3%         20,106         13.5%         1.6%         12.0   

2006

   CC-      10         243,285         151,529         62.4%         151,529         4.9%         2.1%         8.6   

2007 and later

   D      8         91,187         50,616         20.9%         50,616         3.3%         1.6%         9.6   
  

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total/WA (I)

   CC-      28       $ 391,659       $ 242,751         100.0%       $ 242,751         6.0%         2.0%         9.0   
  

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Collateral Characteristics  

Vintage (B)

   Average Loan
Age (years)
     Collateral
Factor (F)
     3 month
CPR (G)
    Delinquency (H)     Cumulative Losses
to Date
 

Pre 2004

     10.5         0.06         16.6     16.9     3.8

2004

     10.1         0.09         9.9     9.5     5.3

2005

     7.4         0.11         11.8     33.1     18.8

2006

     6.8         0.29         16.5     40.4     35.9

2007 and later

     6.1         0.33         17.2     42.3     45.3
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total / WA

     6.9         0.27         15.9     38.3     34.8
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(A) As of the purchase dates.
(B) The year in which the securities were issued.
(C) Ratings provided above were determined by third party rating agencies as of a particular date, may not be current and are subject to change at any time.
(D) The percentage of the outstanding face amount of securities and residual interests that is subordinate to our investments.
(E) The annualized amount of interest received on the underlying loans in excess of the interest paid on the securities, as a percentage of the outstanding collateral balance.
(F) The ratio of original unpaid principal balance of loans still outstanding.
(G) Three month average constant prepayment rate.
(H) The percentage of underlying loans that are 90+ days delinquent, or in foreclosure or considered real estate owned (REO).
(I) The total face amount of floating rate securities was $373.8 million.

 

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Table of Contents

The following table sets forth the geographic diversification of the loans underlying our non-Agency RMBS purchased subsequent to December 31, 2012 as of the purchase dates.

 

Geographic Location

   Outstanding
Face Amount
     Percentage  

Western U.S.

   $ 155,445         39.7%   

Northeastern U.S.

     97,448         24.9%   

Southeastern U.S.

     74,074         18.9%   

Midwestern U.S.

     41,902         10.7%   

Southwestern U.S.

     22,790         5.8%   
  

 

 

    

 

 

 
   $ 391,659         100.0%   
  

 

 

    

 

 

 

The weighted average asset yield of the non-Agency RMBS purchased subsequent to December 31, 2012 is 5.41%. These assets are currently unlevered.

Residential Mortgage Loans

On February 27, 2013, we entered into an agreement to co-invest in residential mortgage loans with a UPB of approximately $83 million as of December 31, 2012. We invested approximately $35 million to acquire a 70% interest in the mortgage loans. Nationstar has co-invested pari passu with us in 30% of the mortgage loans and will be the servicer of the loans performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities as the servicer.

Other Investments

On March 5, 2013, we agreed to co-invest in a portfolio of consumer loans with a UPB of approximately $4.2 billion as of December 31, 2012. The portfolio includes over 400,000 personal unsecured loans and personal homeowner loans originated through subsidiaries of HSBC Finance Corporation. On April 1, 2013, we completed this co-investment through the consumer loan companies. The consumer loan companies acquired the portfolio from HSBC Finance Corporation and its affiliates. We 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 our Manager, acquired 47%, and an affiliate of Blackstone Tactical Opportunities Advisors L.L.C. acquired 23%. Springleaf will act 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 consumer loan companies were formed on March 19, 2013, for the purpose of making this investment and commenced operations upon the completion of the investment. After a servicing transition period, Springleaf will be the servicer of the loans and will provide all servicing and advancing functions for the portfolio. Springleaf is a leading provider of consumer credit based in Evansville, Indiana that makes secured and unsecured personal loans through its more than 800 branches located across the United States.

 

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Table of Contents

The following table summarizes the characteristics of the loans in this consumer loan portfolio as of December 31, 2012. We hold a 30% interest in the entities that acquired this consumer loan portfolio.

 

    Collateral Characteristics
    Unpaid
Principal
Balance
(bn)
  Personal
Unsecured
Loans %
  Personal
Homeowner
Loans %
  Number of
Loans
  WA
Original
FICO
Score
(A)
  WA
Coupon
  Adjustable
Rate Loan
% (B)
  Average
Loan Age
(months)
  Average
Expected
Life
(Years)
  Delinquency
30 Days (C)
  Delinquency
60 Days (C)
  Delinquency
90+ Days
(C)
  3 Month
CRR
(D)
  3 Month
CDR
(E)

Consumer Loans

    $ 4.2         84.0 %       16.0 %       439,573         636         18.5 %       10.0 %       90         3.0         4.0 %       2.5 %       5.5 %       13.7 %       13.5 %

 

(A) WA original FICO score represents the FICO score at the time the loan was originated.
(B) The weighted average margin, floor and ceiling on variable loans are 16.12%, 1.31% and 22.33%, respectively.
(C) Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30-59 days, 60-89 days or more than 90 days, respectively.
(D) 3 Month CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during the three months as a percentage of the total principal balance of the pool.
(E) 3 Month CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments (defaults) during the three months as a percentage of the total principal balance of the pool.

Prior to the separation, Newcastle will also contribute to us approximately $260 million of cash. Over time, we expect to opportunistically adjust our portfolio composition in response to market conditions. Our Manager will make decisions about our investments in accordance with broad investment guidelines adopted by our board of directors. Accordingly, we may acquire a variety of assets that may be different from, and may be riskier than, the assets that comprise our initial portfolio. For more information about our investment guidelines, see “—Investment Guidelines” included elsewhere in this information statement.

FINANCING STRATEGY

Our objective is to generate attractive risk-adjusted returns for our stockholders without excessive use of leverage. We do not have a predetermined target leverage level. The amount of leverage we deploy for a particular investment will depend upon an assessment of a variety of factors, which may include the anticipated liquidity and price volatility of our assets; the gap between the duration of assets and liabilities, including hedges; the availability and cost of financing the assets; our opinion of the creditworthiness of financing counterparties; the health of the U.S. economy and the residential mortgage and housing markets; our outlook for the level, slope and volatility of interest rates; the credit quality of the loans underlying our RMBS; and our outlook for asset spreads relative to financing costs.

We have funded the acquisition of Excess MSRs on an unlevered basis, but we may invest in Excess MSRs on a levered basis in the future. We currently expect that our primary sources of financing will include bank credit facilities, repurchase agreements, securitizations and other secured and unsecured forms of borrowing.

As of April 22, 2013, we had outstanding repurchase agreements with an aggregate face amount of approximately $302.0 million to finance non-Agency RMBS and approximately $1.0 billion to finance Agency RMBS. Under these agreements, we sold a security to a counterparty and concurrently agreed to repurchase the same security at a later date for a higher specified price. The sale price represents financing proceeds, and the difference between the sale and repurchase prices represents interest on the financing. The price at which the security is sold generally represents the market value of the security less a discount or “haircut,” which can range broadly, for example from 5% for Agency RMBS to between 20% and 40% for non-Agency RMBS. During the term of the repurchase agreement, which can be as short as 30 days, the counterparty holds the security as collateral. The counterparty monitors and calculates what it estimates to be the value of the collateral during the term of the agreement. If this value declines by more than a de minimis threshold, the counterparty could require us to post margin in order to maintain the initial haircut on the collateral. This margin is typically required to be posted in the form of cash and cash equivalents.

 

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These repurchase agreements have terms that generally conform to the terms of the standard master repurchase agreement published by SIFMA as to repayment, margin requirements and segregation of all securities sold under any repurchase transactions. In addition, each counterparty typically requires that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions include changes to the margin maintenance requirements, required haircuts, purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction and cross default provisions. These provisions may differ for each of our counterparties and are not determined until we engage in a specific repurchase transaction.

HEDGING STRATEGY

Subject to maintaining our qualification as a REIT and exemption from registration under the 1940 Act, we may, from time to time, utilize derivative financial instruments to hedge the interest rate risk associated with our borrowings. Under the U.S. federal income tax laws applicable to REITs, we generally will be able to enter into certain transactions to hedge indebtedness that we may incur, or plan to incur, to acquire or carry real estate assets, although our total gross income from interest rate hedges that do not meet this requirement and other non-qualifying sources generally must not exceed 5% of our gross income.

Subject to maintaining our qualification as a REIT and exemption from registration under the 1940 Act, we may also engage in a variety of interest rate management techniques that seek on the one hand to mitigate the influence of interest rate changes on the values of some of our assets and on the other hand help us achieve our risk management objectives. The U.S. federal income tax rules applicable to REITs may require us to implement certain of these techniques through a domestic TRS that is fully subject to U.S. federal corporate income taxation. Our interest rate management techniques may include:

 

   

interest rate swap agreements, interest rate cap agreements, exchange-traded derivatives and swaptions;

 

   

puts and calls on securities or indices of securities;

 

   

U.S. Treasury securities and options on U.S. Treasury securities; and

 

   

other similar transactions.

Subject to maintaining our REIT qualification, we may utilize hedging instruments, including interest rate swap agreements, interest rate cap agreements, interest rate floor or collar agreements or other financial instruments that we deem appropriate. Specifically, we may attempt to reduce interest rate risks and to minimize exposure to interest rate fluctuations through the use of match funded financing structures, when appropriate, whereby we may seek (1) to match the maturities of our debt obligations with the maturities of our assets and (2) to match the interest rates on our assets with like-kind debt (i.e., we may finance floating rate assets with floating rate debt and fixed-rate assets with fixed-rate debt), directly or through the use of interest rate swap agreements, interest rate cap agreements, or other financial instruments, or through a combination of these strategies. We expect these instruments will allow us to minimize, but not eliminate, the risk that we have to refinance our liabilities before the maturities of our assets and to reduce the impact of changing interest rates on our earnings and liquidity.

INVESTMENT GUIDELINES

Our board of directors will adopt a broad set of investment guidelines to be used by our Manager to evaluate specific investments. Our general investment guidelines will prohibit any investment that would cause us to fail to qualify as a REIT, and any investment that would cause us to be regulated as an investment company. These investment guidelines may be changed by our board of directors without the approval of our stockholders. If our board changes any of our investment guidelines, we will disclose such changes in our next required periodic report. For information regarding our policy with respect to approving transactions with affiliates, see “Certain Relationships and Transactions with Related Persons, Affiliates and Affiliated Entities.”

 

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POLICIES WITH RESPECT TO CERTAIN OTHER ACTIVITIES

Subject to the approval of our board of directors, we have the authority to offer our common stock or other equity or debt securities in exchange for property and to repurchase or otherwise reacquire our shares or any other securities and may engage in such activities in the future.

We also may make loans to, or provide guarantees of certain obligations of, our subsidiaries.

Subject to the percentage ownership and gross income and asset tests necessary for REIT qualification, we may invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities.

We may engage in the purchase and sale of investments.

Our officers and directors may change any of these policies and our investment guidelines without a vote of our stockholders.

In the event that we determine to raise additional equity capital, our board of directors has the authority, without stockholder approval (subject to certain NYSE requirements), to issue additional common stock or preferred stock in any manner and on such terms and for such consideration it deems appropriate, including in exchange for property.

Decisions regarding the form and other characteristics of the financing for our investments are made by our Manager subject to the general investment guidelines adopted by our board of directors.

CONFLICTS OF INTEREST

Although we have established certain policies and procedures designed to mitigate conflicts of interest, there can be no assurance that these policies and procedures will be effective in doing so. It is possible that actual, potential or perceived conflicts of interest could give rise to investor dissatisfaction, litigation or regulatory enforcement actions.

One or more of our officers and directors have responsibilities and commitments to entities other than us, including, but not limited to, Newcastle. For example, after the distribution, we will have some of the same directors and officers as Newcastle. In addition, we do not have a policy that expressly prohibits our directors, officers, securityholders or affiliates from engaging for their own account in business activities of the types conducted by us. In addition, our certificate of incorporation provides that if Newcastle or Fortress or any of their officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us, our stockholders or our affiliates. In the event that any of our directors and officers who is also a director, officer or employee of Newcastle or Fortress acquires knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s capacity as a director or officer of New Residential and such person acts in good faith, then to the fullest extent permitted by law such person is deemed to have fully satisfied such person’s fiduciary duties owed to us and is not liable to us if Newcastle or Fortress, or their affiliates, pursues or acquires the corporate opportunity or if such person did not present the corporate opportunity to us. However, our code of business conduct and ethics will, subject to the terms of our certificate of incorporation, prohibit the directors, officers and employees of our Manager from engaging in any transaction that involves an actual conflict of interest with us. See “Risk Factors—Risks Relating to Our Manager—There are conflicts of interest in our relationship with our Manager.”

Our key agreements, including our Management Agreement, have been negotiated among related parties, and their respective terms, including fees and other amounts payable, may not be as favorable to us as terms

 

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negotiated on an arm’s-length basis with unaffiliated parties. Our independent directors may not vigorously enforce the provisions of our Management Agreement against our Manager. For example, our independent directors may refrain from terminating our Manager because doing so could result in the loss of key personnel.

The structure of the Manager’s compensation arrangement may have unintended consequences for us. We have agreed to pay our Manager a management fee that is not tied to our performance and incentive compensation that is based entirely on our performance. The management fee may not sufficiently incentivize our Manager to generate attractive risk-adjusted returns for us, while the performance-based incentive compensation component may cause our Manager to place undue emphasis on the maximization of earnings, including through the use of leverage, at the expense of other objectives, such as preservation of capital, to achieve higher incentive distributions. Investments with higher yield potential are generally riskier or more speculative than investments with lower yield potential. This could result in increased risk to the value of our portfolio of assets and your investment in us.

We may compete entities affiliated with our Manager or Fortress, including Newcastle, for certain target assets. From time to time, affiliates of Fortress may seek to acquire the same or similar types of assets that we may seek to acquire. These affiliates currently have meaningful purchasing capacity, which may change over time depending upon a variety of factors, including, but not limited to, available equity capital and debt financing, market conditions and cash on hand. For example, Fortress has a fund primarily focused on investments in Excess MSRs with approximately $600 million in capital commitments. Fortress funds generally have a fee structure similar to ours, but the fees actually paid will vary depending on the size, terms and performance of each fund.

Our Manager may determine, in its discretion, to make a particular investment through an investment vehicle other than us. Investment allocation decisions will reflect a variety of factors, such as a particular vehicle’s availability of capital (including financing), investment objectives and concentration limits, legal, regulatory, tax and other similar considerations, the source of the investment opportunity and other factors that the Manager, in its discretion, deems appropriate. Our Manager will not have an obligation to offer us the opportunity to participate in any particular investment, even if it meets our investment objectives.

OPERATIONAL AND REGULATORY STRUCTURE

REIT Qualification

We will elect to be taxed and intend to qualify as a REIT for U.S. federal income tax purposes commencing with our initial taxable year ending December 31, 2013. Our qualification as a REIT will depend upon our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels to our stockholders and the concentration of ownership of our capital stock. We believe that, commencing with our initial taxable year ending December 31, 2013, we will be organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our intended manner of operation will enable us to meet the requirements for qualification and taxation as a REIT. In connection with the distribution, we will receive an opinion of Skadden, Arps, Slate, Meagher & Flom LLP to the effect that we have been organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT.

1940 Act Exemption

We intend to conduct our operations in reliance on an exemption from registration as an investment company under the 1940 Act. We intend to rely upon the exemption from registration as an investment company under the 1940 Act pursuant to Section 3(c)(5)(C) of the 1940 Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exemption generally requires that at least 55% of our assets must be comprised of qualifying real estate assets and at least 80% of each of our assets must be comprised of qualifying real estate assets and real estate related

 

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assets under the 1940 Act. We will monitor our holdings to ensure continuing and ongoing compliance with this test. In satisfying the 55% requirement, based on guidance from the SEC and its staff, we will treat Agency RMBS issued with respect to an underlying pool of mortgage loans in which we hold all of the certificates issued by the pool as qualifying real estate assets. The SEC and its staff have not issued guidance with respect to whole pool non-Agency RMBS for purposes of the Section 3(c)(5)(C) exemption. Accordingly, based on our own judgment and analysis of the guidance with respect to Agency whole pool certificates, we will treat non-Agency RMBS issued with respect to an underlying pool of mortgage loans in which we hold all of the certificates issued by the pool as qualifying real estate assets. We will also treat whole mortgage loans that we acquire directly as qualifying real estate assets provided that 100% of the loan is secured by real estate when we acquire the loan and we have the unilateral right to foreclose on the mortgage. We will treat Excess MSRs and any servicing advances we may acquire as real estate related assets for purposes of satisfying the 80% test. In addition, we will treat investments in Agency partial pool RMBS and non-Agency partial pool RMBS as real estate related assets. Maintenance of our exemption under the 1940 Act generally limits the amount of our investments in non-real estate assets, including consumer loans, to no more than 20% of our total assets.

We expect to rely on guidance published by the SEC or its staff or on our analyses of such guidance to determine which assets are qualifying real estate assets and real estate related assets. To the extent that the SEC or its staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy and portfolio composition accordingly. Any additional guidance from the SEC or its staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen. In addition, we may be limited in our ability to make certain investments and these limitations could result in our holding assets we might wish to sell or selling assets we might wish to hold.

Qualification for exemption from registration under the 1940 Act will limit our ability to make certain investments. See “Risk Factors—Risks Related to Our Business—Maintenance of our 1940 Act exemption imposes limits on our operations.”

COMPETITION

Our success depends, in large part, on our ability to acquire Excess MSRs and RMBS on terms consistent with our business and economic model. In acquiring these assets, we expect to compete with banks, independent mortgage loan servicers, private equity firms, hedge funds and other large financial services companies. Many of our anticipated competitors are significantly larger than we are, have access to greater capital and other resources and may have other advantages over us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could lead them to offer higher prices for assets that we might be interested in acquiring and cause us to lose bids for those assets. In addition, other potential purchasers of Excess MSRs and RMBS may be more attractive to sellers of Excess MSRs and RMBS if the sellers believe that these potential purchasers could obtain any necessary third party approvals and consents more easily than us.

In the face of this competition, we expect to take advantage of the experience of members of our management team and their industry expertise which may provide us with a competitive advantage and help us assess potential risks and determine appropriate pricing for certain potential acquisitions of Excess MSRs and RMBS. In addition, we expect that these relationships will enable us to compete more effectively for attractive acquisition opportunities. However, we may not be able to achieve our business goals or expectations due to the competitive risks that we face.

EMPLOYEES

We will be managed by our Manager pursuant to our Management Agreement between our Manager and us. All of our officers are employees of our Manager or an affiliate of our Manager. We will not have any employees.

LEGAL PROCEEDINGS

We are not currently subject to any legal proceedings.

 

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OUR MANAGER AND MANAGEMENT AGREEMENT

GENERAL

We will be externally managed by FIG LLC, a Delaware limited liability company, which we refer to as our Manager, pursuant to the terms of a management agreement (the “Management Agreement”). Our Manager also manages Newcastle and is an affiliate of Fortress. Our principal executive offices are located at 1345 Avenue of the Americas, New York, New York 10105, c/o New Residential Investment Corp. Our telephone number is 212-479-3150.

We will not have any employees. Our officers and the other individuals who will execute our business strategy will be employees of our Manager or its affiliates. These individuals will not be required to exclusively dedicate their services to us and may provide services for other entities affiliated with our Manager, including, but not limited to, Newcastle. After the distribution, we will have some of the same officers as Newcastle.

EXECUTIVE OFFICERS

The following table lists each of our executive officers, each of whom is an employee of our Manager.

 

Name

   Age     

Position

Kenneth M. Riis

     52       Chief Executive Officer and President

Robert Williams

     53       Chief Financial Officer and Treasurer

Jonathan Brown

     46       Chief Accounting Officer

Cameron MacDougall

     36       Secretary

BIOGRAPHICAL INFORMATION

For biographical information for our executive officers, see “Management” included elsewhere in this information statement.

MANAGEMENT AGREEMENT

Prior to the completion of the distribution, we will enter into a Management Agreement with our Manager, which will provide for the day-to-day management of our operations. Our Management Agreement will require our Manager to manage our business affairs in conformity with the policies and the investment guidelines that are approved and monitored by our board of directors. There will be no limit on the amount our Manager may invest on our behalf without seeking the approval of our board of directors. Our Management Agreement will become effective upon completion of the distribution. For more information about our investment guidelines, see “Business—Investment Guidelines” included elsewhere in this information statement.

Our Manager will be responsible for, among other things, (i) the purchase and sale of our investments, (ii) the financing of our investments, and (iii) investment advisory services. Our Manager will be responsible for our day-to-day operations and will perform (or cause to be performed) such services and activities relating to our assets and operations as may be appropriate, which may include, without limitation, the following:

(i)            serving as our consultant with respect to the periodic review of the investment criteria and parameters for investments, borrowings and operations, any modifications to which shall be approved by a majority of our independent directors, and other policies for approval by our board of directors;

(ii)            investigating, analyzing, valuing and selecting possible investment opportunities;

(iii)            with respect to our prospective investments and dispositions of investments, conducting negotiations with real estate brokers, sellers and purchasers and their respective agents and representatives, investment bankers and owners of privately and publicly held real estate companies;

 

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(iv)            engaging and supervising, on our behalf and at our expense, independent contractors which provide real estate brokerage, investment banking, leasing services, mortgage servicings, mortgage brokerage, securities brokerage and other financial services and such other services as may be required relating to the investments;

(v)             negotiating on our behalf for the sale, exchange or other disposition of any investments;

(vi)            coordinating and managing operations of any of our joint venture or co-investment interests and conducting all matters with respect to those joint ventures or co-investments;

(vii)           coordinating and supervising, on our behalf and at our expense, all property matters, leasing agents and developers for the administration, leasing, management and/or development of any of our investments;

(viii)          providing executive and administrative personnel, office space and office services required in rendering services to us;

(ix)            administering the day-to-day operations and performing and supervising the performance of such other administrative functions necessary to our management as may be agreed upon by our Manager and our board of directors, including, without limitation, the collection of revenues and the payment of our debts and obligations and maintenance of appropriate computer services to perform such administrative functions;

(x)             communicating on our behalf with the holders of any of our equity or debt securities as required to satisfy the reporting and other requirements of any governmental bodies or agencies or trading markets and to maintain effective relations with such holders;

(xi)            counseling us in connection with policy decisions to be made by our board of directors;

(xii)           evaluating and recommending to our board of directors modifications to our hedging strategies and engaging in hedging activities on our behalf, consistent with our status as a REIT and with our investment guidelines;

(xiii)          counseling us regarding the maintenance of our status as a REIT and monitoring compliance with the various REIT qualifications and other rules set out in the Code and Treasury Regulations thereunder;

(xiv)          counseling us regarding the maintenance of our exemption from the 1940 Act and monitoring compliance with the requirements for maintaining such an exemption;

(xv)           assisting us in developing criteria that are specifically tailored to our investment objectives and making available to us its knowledge and experience with respect to our target assets;

(xvi)          representing and making recommendations to us in connection with the purchase and finance, and commitment to purchase and finance, of our target assets, and in connection with the sale and commitment to sell such assets;

(xvii)         monitoring the operating performance of our investments and providing periodic reports with respect thereto to our board of directors, including comparative information with respect to such operating performance, valuation and budgeted or projected operating results;

(xviii)        investing and re-investing any of our moneys and securities (including investing in short-term investments pending investment, payment of fees; costs and expenses; or payments of dividends or distributions to our stockholders and partners) and advising us as to our capital structure and capital raising;

(xix)        causing us to retain qualified accountants and legal counsel, as applicable, to assist in developing appropriate accounting procedures, compliance procedures and testing systems with respect to financial reporting obligations and compliance with the provisions of the Code applicable to REITs and to conduct quarterly compliance reviews with respect thereto;

(xx)         causing us to qualify to do business in all applicable jurisdictions and to obtain and maintain all appropriate licenses;

 

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(xxi)        assisting us in complying with all regulatory requirements applicable to us in respect of our business activities, including preparing or causing to be prepared all financial statements required under applicable regulations and contractual undertakings and all reports and documents required under the Exchange Act;

(xxii)      taking all necessary actions to enable us to make required tax filings and reports, including soliciting stockholders for required information to the extent provided by the provisions of the Code applicable to REITs;

(xxiii)     handling and resolving all claims, disputes or controversies (including all litigation, arbitration, settlement or other proceedings or negotiations) in which we may be involved or to which we may be subject arising out of our day-to-day operations, subject to such limitations or parameters as may be imposed from time to time by our board of directors;

(xxiv)      using commercially reasonable efforts to cause expenses incurred by us or on our behalf to be reasonable or customary and within any budgeted parameters or expense guidelines set by our board of directors from time to time;

(xxv)      performing such other services as may be required from time to time for management and other activities relating to our investments as our board of directors shall reasonably request or our Manager shall deem appropriate under the particular circumstances; and

(xxvi)      using commercially reasonable efforts to cause us to comply with all applicable laws.

Indemnification

Pursuant to our Management Agreement, our Manager will not assume any responsibility other than to render the services called for thereunder in good faith and will not be responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Our Manager, its members, managers, officers and employees will not be liable to us or any of our subsidiaries, to our board of directors, or our or any subsidiary’s stockholders or partners for any acts or omissions by our Manager, its members, managers, officers or employees, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of our Manager’s duties under our Management Agreement. We shall, to the full extent lawful, reimburse, indemnify and hold our Manager, its members, managers, officers and employees and each other person, if any, controlling our Manager, harmless of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever (including attorneys’ fees) in respect of or arising from any acts or omissions of an indemnified party made in good faith in the performance of our Manager’s duties under our Management Agreement and not constituting such indemnified party’s bad faith, willful misconduct, gross negligence or reckless disregard of our Manager’s duties under our Management Agreement.

Our Manager will, to the full extent lawful, reimburse, indemnify and hold us, our stockholders, directors, officers and employees and each other person, if any, controlling us, harmless of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever (including attorneys’ fees) in respect of or arising from our Manager’s bad faith, willful misconduct, gross negligence or reckless disregard of its duties under our Management Agreement. Our Manager carries errors and omissions and other customary insurance.

Management Team

Pursuant to the terms of our Management Agreement, our Manager will provide us with a management team, including a chief executive officer, chief financial officer and chief accounting officer, to provide the management services to be provided by our Manager to us. The members of our management team shall devote such of their time to the management of us as our board of directors reasonably deems necessary and appropriate, commensurate with our level of activity from time to time.

 

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Assignment

Our Manager may generally only assign our Management Agreement with the written approval of a majority of our independent directors; provided, however, that our Manager may assign our Management Agreement to an entity whose day-to-day business and operations are managed and supervised by Messrs. Wesley R. Edens and Randal A. Nardone (collectively, the “Principals”), provided, further, that such transaction is determined at the time not to be an “assignment” for purposes of Section 205 of the Investment Advisers Act of 1940, as amended, and the rules and regulations promulgated under such act and the interpretations thereof issued by the Securities and Exchange Commission. We may not assign our Management Agreement without the prior written consent of our Manager, except in the case of an assignment to another REIT or other organization which is our successor, in which case such successor organization shall be bound under our Management Agreement and by the terms of such assignment in the same manner as we are bound under our Management Agreement.

Term; Termination

The initial term of our Management Agreement will expire on the first anniversary of the distribution and will be renewed automatically each year for an additional one-year period unless (i) a majority consisting of at least two-thirds of our independent directors or a simple majority of the holders of outstanding shares of our common stock, agree that there has been unsatisfactory performance that is materially detrimental to us or (ii) a simple majority of our independent directors agree that the management fee payable to our Manager is unfair; provided, that we shall not have the right to terminate our Management Agreement under clause (ii) foregoing if the Manager agrees to continue to provide the services under the Management Agreement at a fee that our independent directors have determined to be fair.

If we elect not to renew our Management Agreement at the expiration of the original term or any such one-year extension term as set forth above, our Manager will be provided with 60 days’ prior notice of any such termination. In the event of such termination, we would be required to pay the termination fee described below.

We may also terminate our Management Agreement at any time for cause effective upon sixty (60) days prior written notice of termination from us to our Manager, in which case no termination fee would be due, for the following reasons:

 

   

the willful violation of the Management Agreement by the Manager in its corporate capacity (as distinguished from the acts of any employees of the Manager which are taken without the complicity of any of the Manager’s management) under the Management Agreement;

 

   

our Manager’s fraud, misappropriation of funds, or embezzlement against us; and

 

   

our Manager’s gross negligence of duties under our Management Agreement.

In addition, our Manager may terminate our Management Agreement effective upon sixty (60) days prior written notice of termination to us in the event that we default in the performance or observance of any material term, condition or covenant contained in our Management Agreement and such default continues for a period of thirty (30) days after written notice thereof specifying such default and requesting that the same be remedied in such 30 day period.

If our Management Agreement is terminated by our Manager upon our breach, we would be required to pay our Manager the termination fee described below.

Management Fee

We will pay our Manager an annual management fee equal to 1.5% of our gross equity. Gross equity is generally the equity transferred by Newcastle on the distribution date, plus total net proceeds from stock offerings, plus certain capital contributions to subsidiaries, less capital distributions and repurchases of common stock.

Our Manager shall compute each installment of the management fee within 15 days after the end of the calendar month with respect to which such installment is payable.

 

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Incentive Compensation

Our Manager will be entitled to receive annual incentive compensation on a cumulative, but not compounding basis, in an amount equal to the product of (A) 25% of the dollar amount by which (1)(a) the funds from operations before the incentive compensation per share of common stock, plus (b) gains (or losses) from debt restructuring and gains (or losses) from sales of property and other assets per share of common stock, exceed (2) an amount equal to (a) the weighted average of the book value per share of the equity transferred by Newcastle on the distribution date and the prices per share of our common stock in any offerings by us (adjusted for prior capital dividends or capital distributions) multiplied by (b) a simple interest rate of 10% per annum, multiplied by (B) the weighted average number of shares of common stock outstanding.

“Funds from operations” means net income (computed in accordance with GAAP), excluding gains (losses) from debt restructuring and gains (or losses) from sales of property, plus depreciation on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations will be computed on an unconsolidated basis. The computation of funds from operations may be adjusted at the direction of our independent directors based on changes in, or certain applications of, GAAP. Funds from operations will be determined from the date of the spin-off and without regard to Newcastle’s prior performance. Funds from operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of our performance or to cash flows as a measure of liquidity or ability to make distributions.

Upon any termination of our Management Agreement by either party, we shall be entitled to purchase our Manager’s right to receive incentive compensation from our Manager for a cash purchase price equal to the amount that would be distributed to our Manager if all of our assets were sold for cash at their then current fair market value (taking into account, among other things, expected future performance of the underlying investments) or otherwise continue to pay the incentive compensation to the Manager. In addition, if we do not elect to so purchase the Manager’s right to receive incentive compensation, our manager will have the right to require us to purchase the same at the price described above. In either case, such fair market value shall be determined by independent appraisal to be conducted by a nationally recognized appraisal firm mutually agreed upon by us and our Manager.

Our board of directors may request that our Manager accept all or a portion of its incentive compensation in shares of our common stock, and our Manager may elect, in its discretion, to accept such payment in the form of shares, subject to limitations that may be imposed by the rules of the NYSE or otherwise.

Reimbursement of Expenses

Because our Manager’s employees perform certain legal, accounting, due diligence tasks and other services that outside professionals or outside consultants otherwise would perform, our Manager is paid or reimbursed for the cost of performing such tasks, provided that such costs and reimbursements are no greater than those which would be paid to outside professionals or consultants on an arm’s-length basis. Our Management Agreement provides that such costs shall not be reimbursed in excess of $500,000 per annum.

We also pay all operating expenses, except those specifically required to be borne by our Manager under our Management Agreement. Our Manager is responsible for all costs incident to the performance of its duties under the Management Agreement, including compensation of our Manager’s employees, rent for facilities and other “overhead” expenses. The expenses required to be paid by us include, but are not limited to, issuance and transaction costs incident to the acquisition, disposition and financing of our investments, legal and auditing fees and expenses, the compensation and expenses of our independent directors, the costs associated with the establishment and maintenance of any credit facilities and other indebtedness of ours (including commitment fees, legal fees, closing costs, etc.), expenses associated with other securities offerings of ours, the costs of printing and mailing proxies and reports to our stockholders, costs incurred by employees of our manager for

 

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travel on our behalf, costs associated with any computer software or hardware that is used solely for us, costs to obtain liability insurance to indemnify our directors and officers and the compensation and expenses of our transfer agent.

Termination Fee

As described above, we are required to pay our Manager a Termination Fee if we terminate the Management Agreement on the basis of a board determination that our Manager’s performance is unsatisfactory and materially detrimental to us or that the management fees payable by us to our Manager are not fair, or if the Manager terminates the Management Agreement due to a material breach by us.

The termination fee is a fee equal to the sum of (1) the amount of the management fee during the 12 months immediately preceding the date of termination, and (2) the “Incentive Compensation Fair Value Amount.” The Incentive Compensation Fair Value Amount is an amount equal to the Incentive Compensation that would be paid to the Manager if our assets were sold for cash at their then current fair market value (as determined by an appraisal, taking into account, among other things, the expected future value of the underlying investments).

 

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MANAGEMENT

DIRECTORS AND OFFICERS

Set forth below is certain biographical information and ages for our directors. Each director holds office until his or her successor is duly elected or appointed and qualified or until his or her earlier death, retirement, disqualification, resignation or removal. Upon completion of the distribution, our board of directors will consist of five members, a majority of whom will be “independent” as defined under the rules of the NYSE.

Our bylaws provide that our board of directors shall consist of not less than three and not more than nine directors as the board of directors may from time to time determine. Our board of directors will initially consist of five directors. Our board of directors is divided into three classes that are, as nearly as possible, of equal size. Each class of directors is elected for a three-year term of office, but the terms are staggered so that the term of only one class of directors expires at each annual general meeting. The initial terms of the Class I, Class II and Class III directors will expire in 2014, 2015 and 2016, respectively. Mr. Tyson will serve as a Class I director, Messrs. Riis and Saltzman will each serve as a Class II director and Messrs. Edens and Finnerty will each serve as a Class III director. All officers serve at the discretion of the board of directors.

Upon completion of the distribution, we will have five directors, three of whom we believe will be determined to be independent as defined under the rules of the NYSE. We believe our board of directors will determine that Messrs. Finnerty, Saltzman and Tyson are independent directors. In making such determination, we expect that our board of directors will take into consideration, (i) in the case of Messrs. Finnerty and Tyson, that Messrs. Finnerty and Tyson are independent directors and stockholder of Newcastle, (ii) that Mr. Finnerty received a loan in the amount of $500 thousand from each of Messrs. Edens and Nardone in 2009 and (iii) that certain directors have invested in the securities of private investment funds or companies managed by or affiliated with our Manager.

Our certificate of incorporation does not provide for cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of common stock can elect all of the directors standing for election, and the holders of the remaining shares will not be able to elect any directors.

 

Name, Position, Age

  

Description

Wesley R. Edens

 

Chairman of the board of directors

 

Age: 51

   Mr. Edens will be a member of our board of directors. Mr. Edens has been Chairman of Newcastle’s board of directors since its inception and served as its Chief Executive Officer from its inception until February 2007. Mr. Edens is a principal and a Co-Chairman of the board of directors of Fortress, an affiliate of our Manager. Mr. Edens has been a principal and a member of the Management Committee of Fortress since co-founding Fortress in May 1998. Mr. Edens is responsible for the private equity and publicly traded alternative investment businesses of Fortress. He is also Chairman of the board of directors of each of GateHouse Media, Inc., Nationstar Mortgage Holdings Inc., Seacastle Inc. and Mapeley Limited, Chairman and Chief Executive Officer of Newcastle Investment Holdings LLC (the predecessor of Newcastle) and a director of GAGFAH S.A., Brookdale Senior Living Inc. and Penn National Gaming Inc. Mr. Edens was the Chief Executive Officer of Global Signal Inc. from February 2004 to April 2006 and Chairman of the board of directors from October 2002 to January 2007. Mr. Edens serves or has served in various capacities in the following five current or former registered investment companies: Chairman, Chief Executive Officer and Trustee of Fortress Registered Investment Trust and Fortress Investment Trust II; Chairman and Chief Executive Officer of Fortress Brookdale Investment Fund LLC and Fortress

 

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   Pinnacle Investment Fund LLC and Chief Executive Officer of RIC Coinvestment Fund GP LLC. Prior to forming Fortress Investment Group LLC, Mr. Edens was a partner and a managing director of BlackRock Financial Management Inc., where he headed BlackRock Asset Investors, a private equity fund. In addition, Mr. Edens was formerly a partner and a managing director of Lehman Brothers. As a result of his past experiences, Mr. Edens has private equity finance and management expertise. These factors and his other qualifications and skills, led our board of directors to conclude that Mr. Edens should serve as a director.

Kevin J. Finnerty

 

Age: 58

   Mr. Finnerty will be a member of our board of directors. Mr. Finnerty has been a member of Newcastle’s board of directors and its Audit Committee, Nominating and Corporate Governance Committee and Compensation Committee of its board of directors since August 2005. Mr. Finnerty has been a director of Newcastle Investment Holdings LLC (the predecessor of Newcastle) since its inception in 1998. Mr. Finnerty is the Founding Partner of Galton Capital Group, a residential mortgage credit fund manager. Mr. Finnerty is a former founder and the Managing Partner of F.I. Capital Management, an investment company focused on agency-mortgage related strategies. Previously, Mr. Finnerty was a Managing Director at J.P. Morgan Securities Inc., where he headed the Residential Mortgage Securities Department. Mr. Finnerty joined Chase Securities Inc. in December of 1999. Prior to joining Chase Securities Inc., Mr. Finnerty worked at Union Bank of Switzerland from November 1996 until February 1998, where he headed the Mortgage Backed Securities Department, and at Freddie Mac from January 1999 until June 1999, where he was a Senior Vice President. Between 1986 and 1996, Mr. Finnerty was with Bear Stearns & Co. Inc., where he was a Senior Managing Director and ultimately headed the MBS Department and served as a member of the board of directors from 1993 until 1996. Mr. Finnerty was Co-Chair of the North American People Committee at JPMorganChase and Chairman of the Mortgage and Asset-Backed Division of the Bond Market Association for the year 2003. Mr. Finnerty’s knowledge, skill, expertise and experience as described above, led the board of directors to conclude that Mr. Finnerty should serve as a director.

Kenneth M. Riis

 

Age: 52

   Mr. Riis will be a member of our board of directors. Mr. Riis was appointed Chief Executive Officer of Newcastle on February 21, 2007. On that date, Mr. Riis was also unanimously elected as one of Newcastle’s directors. Mr. Riis has been Newcastle’s President since Newcastle’s inception and a managing director of our Manager, an affiliate of Fortress since December 2001. Mr. Riis is also the President of Newcastle Investment Holdings LLC (the predecessor of Newcastle). From November 1996 to December 2001, Mr. Riis was an independent consultant for our Manager as well as other financial companies. From 1989 to 1996, Mr. Riis was a Principal and Managing Director of the real estate finance group at Donaldson, Lufkin & Jenrette. Mr. Riis’s knowledge, skill, expertise and experience as described above, led the board of directors to conclude that Mr. Riis should serve as a director.

David Saltzman

 

Age: 51

   David Saltzman will be a member of our board of directors. Mr. Saltzman is the Executive Director of The Robin Hood Foundation since 1989. Prior to joining Robin Hood, Mr. Saltzman served as the Special Assistant to the President of the Board of Education of the City of New York for three

 

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   years. Before working at the Board of Education, he ran AIDS education programs for the New York City Department of Health. Mr. Saltzman began his career in public service working with homeless families for the Human Resources Administration of the City of New York, the city’s Department of Social Services. Mr. Saltzman earned a Masters of Public Policy and Administration from Columbia University and a Bachelor’s degree from Brown University. In 2001, Mr. Saltzman was named as one of Time Magazine’s 100 Innovators. Mr. Saltzman’s knowledge, skill, expertise and experience as described above led the board of directors to conclude that Mr. Saltzman should serve as a director.

Alan L. Tyson

 

Age: 56

   Mr. Tyson will be a member of our board of directors. Mr. Tyson has been a member of Newcastle’s board of directors and a member of the Audit Committee, Nominating and Corporate Governance Committee, and Compensation Committee of Newcastle’s board of directors since November 2011. Mr. Tyson is a private investor. He retired as Managing Director of Credit Suisse in October 2011, where he worked for 18 years in the Sales and Trading area of the Fixed Income Department of the Investment Bank. Mr. Tyson began his career at L. F. Rothschild, Unterberg Towbin and subsequently worked at Smith Barney and Lehman Brothers before joining Donaldson, Lufkin and Jenrette in 1994, which was acquired by Credit Suisse in 2000. Mr. Tyson’s knowledge, skill, expertise and experience as described above led the board of directors to conclude that Mr. Tyson should serve as a director.

The following table shows the names and ages of our executive officers and the positions they will hold following the completion of the distribution. A description of the business experience of each for at least the past five years follows the table.

 

Name

   Age     

Position

Kenneth M. Riis

     52       Chief Executive Officer and President

Robert Williams

     53       Chief Financial Officer and Treasurer

Jonathan Brown

     46       Chief Accounting Officer

Cameron MacDougall

     36       Secretary

Kenneth M. Riis For information regarding Mr. Riis, see above.

Robert Williams is the Chief Financial Officer and Treasurer of New Residential. Mr. Williams became a managing director of our Manager, an affiliate of Fortress in February 2013. Mr. Williams has nearly 25 years of experience in banking, mortgage banking and corporate treasury. Prior to becoming managing director of our Manager, Mr. Williams was Vice President at Occidental Petroleum from April 2009 until December 2012. Mr. Williams previously served as Treasurer of Washington Mutual from February 2005 until October 2008 and as President of Washington Mutual Inc. from October 2008 until May 2012. Prior to joining Washington Mutual, Mr. Williams was a Senior Vice President with SunTrust and served in multiple capacities from January 1985 until January 2005. Mr. Williams holds a B.S. in science from Clemson University and a Master’s in Business Administration from Furman University. Additionally, he holds a Chartered Financial Analyst designation.

Jonathan Brown is the Chief Accounting Officer of New Residential. He joined Fortress in 1999 and is its Chief Accounting Officer and a managing director. Prior to joining Fortress, Mr. Brown was the controller of Wellsford Real Properties Inc., a real estate merchant banking firm, from 1997 to 1999 and of Wellsford Residential Property Trust, a real estate investment trust, from 1994 to 1997. From 1988 to 1994, he was with Kenneth Leventhal & Co., a public accounting firm which later merged with Ernst & Young LLP, leaving as a manager focused on real estate and related financial products. Mr. Brown received a BS in Accounting from New York University.

 

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Cameron MacDougall is the Secretary of New Residential. Mr. MacDougall is a managing director at Fortress. He joined Fortress in February 2007. Prior to joining Fortress, Mr. MacDougall was an associate at Sullivan & Cromwell LLP from 2006 to 2007. Prior to that, Mr. MacDougall was an associate at Cravath, Swaine & Moore LLP from 2001 to 2006. At both firms, Mr. MacDougall’s practice focused on a broad array of capital markets and corporate governance matters. He is a member of the Board of Directors of Mapeley Limited, a UK commercial real estate company, and Shanghai Starcastle Senior Living Services Ltd, a Sino-foreign joint venture company formed in Shanghai, China to engage in senior living residential and eldercare services. Mr. MacDougall graduated Phi Beta Kappa, magna cum laude from Yale College with B.A. in history and received a J.D. from Harvard Law School.

COMMITTEES OF THE BOARD OF DIRECTORS

Upon completion of the distribution, we will establish the following committees of our board of directors:

Audit Committee

The audit committee:

 

   

reviews the audit plans and findings of our independent registered public accounting firm and our internal audit and risk review staff, as well as the results of regulatory examinations, and tracks management’s corrective action plans where necessary;

 

   

reviews our financial statements, including any significant financial items and/or changes in accounting policies, with our senior management and independent registered public accounting firm;

 

   

reviews our financial risk and control procedures, compliance programs and significant tax, legal and regulatory matters; and

 

   

has the sole discretion to appoint annually our independent registered public accounting firm, evaluate its independence and performance and set clear hiring policies for employees or former employees of the independent registered public accounting firm.

The members of our audit committee will be Messrs. Finnerty and Tyson, each of whom we believe will be determined to be an independent director.

Nominating and Corporate Governance Committee

The nominating and corporate governance committee:

 

   

recommends to the board of directors individuals qualified to serve as directors and on committees of the board of directors;

 

   

advises the board with respect to board composition, procedures and committees;

 

   

advises the board with respect to the corporate governance principles applicable to us; and

 

   

oversees the evaluation of the board of directors.

Mr. Tyson will be the chairman of our nominating and corporate governance committee, and the other members of our nominating and corporate governance committee will be Messrs. Finnerty and Saltzman, each of whom we believe will be determined to be an independent director.

Compensation Committee

The compensation committee:

 

   

evaluates the performance of our Manager;

 

   

reviews the compensation and fees payable to our Manager under our Management Agreement;

 

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prepares compensation committee reports;

 

   

oversees our equity-based remuneration plans and programs; and

 

   

determines from time to time the remuneration for our independent directors.

Mr. Saltzman will be the chairman of our compensation committee, and the other members of our compensation committee will be Messrs. Finnerty and Tyson, each of whom we believe will be determined to be an independent director.

COMPENSATION OF DIRECTORS

We have not yet paid any compensation to our directors. Following completion of the distribution, we will pay an annual fee to each independent director equal to $125 thousand, payable semi-annually. In addition, an annual fee of $10 thousand will be paid to the chair of the audit committee of the board of directors. Fees to independent directors may be made by issuance of common stock, based on the value of such common stock at the date of issuance, rather than in cash, provided that any such issuance does not prevent such director from being determined to be independent and such shares are granted pursuant to a stockholder-approved plan or the issuance is otherwise exempt from NYSE listing requirements. Each independent director will also receive (i) an initial one time grant of options to purchase 2,000 shares of our common stock under the Plan upon the date of the first meeting of our board of directors attended by such director, and (ii) beginning on the first business day after our first annual stockholders’ meeting following December 31, 2013, and on the first business day after each such annual meeting thereafter during the term of the Plan, automatic annual awards of shares of our common stock in an amount to be determined by the compensation committee from time to time, based on the fair market value of shares of our common stock on the date of grant. For additional information on director equity compensation, see “—Nonqualified Stock Option and Incentive Award Plan.” Affiliated directors, however, will not be separately compensated by us. All members of the board of directors will be reimbursed for reasonable costs and expenses incurred in attending meetings of our board of directors.

EXECUTIVE OFFICER COMPENSATION

Each of our officers is an employee of our Manager or an affiliate of our Manager. Because our Management Agreement provides that our Manager is responsible for managing our affairs, our officers do not receive cash compensation from us for serving as our officers. Our officers, in their capacities as officers or personnel of our Manager or its affiliates, will devote such portion of their time to our affairs as is necessary to enable us to operate our business.

CODE OF BUSINESS CONDUCT AND ETHICS

Our board of directors has established a code of business conduct and ethics that applies to our directors and to our Manager’s officers, directors and personnel when such individuals are acting for or on our behalf. Among other matters, our code of business conduct and ethics is designed to deter wrongdoing and to promote:

 

   

honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

 

   

full, fair, accurate, timely and understandable disclosure in our SEC reports and other public communications;

 

   

compliance with applicable governmental laws, rules and regulations;

 

   

prompt internal reporting of violations of the code to appropriate persons identified in the code; and

 

   

accountability for adherence to the code.

Any waiver of the code of business conduct and ethics for our officers or directors may be made only by our board of directors as a whole or by the audit committee and will be promptly disclosed as required by law or stock exchange regulations.

 

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NONQUALIFIED STOCK OPTION AND INCENTIVE AWARD PLAN

Prior to the completion of the distribution, we will adopt a Nonqualified Stock Option and Incentive Award Plan, which we refer to as the “Plan.” The Plan is intended to facilitate the use of long-term equity-based awards and incentives for the benefit of the service providers to New Residential and our Manager.

A summary of the Plan is set forth below. This summary does not purport to be complete and is subject to and qualified in its entirety by the full text of the Plan, which is filed as an exhibit to the registration statement on Form 10 of which this information statement forms a part.

Summary of the Plan Terms

The Plan will be administered by our board of directors, or by any committee our board of directors may appoint to administer the Plan (the “Committee”). We anticipate that our Compensation Committee will be appointed to administer the Plan. As the administrator of the Plan, the Committee will have the authority to grant awards under the Plan and to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it deems advisable for the administration of the Plan. The Committee will also have the authority to interpret the terms and provisions of the Plan, any award issued under the plan and any award agreements relating thereto, and to otherwise supervise the administration of the Plan. In particular, the Committee will have the authority to determine the terms and conditions of awards under the Plan, including, without limitation, the exercise price, the number of shares of our common stock subject to awards, the term of the awards and the vesting schedule applicable to awards, and to waive or amend the terms and conditions of outstanding awards. All decisions made by the Committee pursuant to the provisions of the Plan will be final, conclusive and binding on all persons.

The terms of the Plan provide for the grant of stock options that are not intended to qualify as “incentive stock options” under Section 422 of the Code, stock appreciation rights (“SARs”), restricted stock, performance awards, tandem awards and other stock-based and non-stock based awards, in each case to our Manager, to the employees, officers, directors, consultants, service providers or advisors of our Manager who perform services for us, to our employees, officers, directors, consultants, service providers or advisors, and to such other persons who are selected by the Committee to be participants in the Plan. Such awards may be granted singly, in tandem, or in combination with each of the other awards.

We have initially reserved 30,000,000 shares of our common stock for issuance under the Plan; on the first day of each fiscal year beginning during the ten-year term of the Plan and in and after calendar year 2014, that number will be increased by a number of shares of our common stock equal to 10% of the number of shares of our common stock newly issued by us during the immediately preceding fiscal year (and, in the case of fiscal year 2013, after the effective date of the Plan). The shares of our common stock which may be issued pursuant to an award under the Plan may be treasury stock, authorized but unissued stock or stock acquired on the open market to satisfy the requirements of the Plan. Awards may consist of any combination of such stock, or, at our election cash. The aggregate number of shares of our common stock that may be granted during any calendar year to any participant who is a “covered employee” for purposes of Section 162(m) of the Code during such calendar year may not be greater than 30,000,000. If any shares of our common stock subject to an award are forfeited, cancelled, exchanged or surrendered or if an award otherwise terminates or expires without a distribution of shares to the participant, such shares will again be available for grants under the Plan. The grant of a tandem award will not reduce the number of shares of our common stock reserved and available for issuance under the Plan.

Upon the occurrence of any event which affects the shares of our common stock in such a way that an adjustment of outstanding awards is appropriate to prevent the dilution or enlargement of rights under the awards, the Committee will make appropriate equitable adjustments. The Committee may also provide for other substitutions or adjustments in its sole discretion, including, without limitation, the cancellation of any outstanding award and payment in cash or other property in exchange thereof, equal to the excess, if any, of the fair market value of the shares or other property subject to the award over the exercise price, if any.

 

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We anticipate that we will grant our Manager options in connection with our equity offerings as compensation for our Manager’s role in raising capital for us. In the event that we offer shares of our common stock to the public, we intend to simultaneously grant to our Manager or an affiliate of our Manager a number of options equal to up to 10% of the aggregate number of shares being issued in such offering at an exercise price per share equal to the offering price per share, as determined by the Committee. In each case, the Plan provides that such options will be fully vested as of the date of grant and exercisable as to 1/30 of the shares subject to the option on the first day of each of the 30 calendar months following the date of the grant. The exercise price of such options may be paid in cash or its equivalent, as determined by the Committee. Payment in whole or in part may also be made by the following cashless exercise procedures: (i) by withholding from shares of our common stock otherwise issuable upon exercise of such option, (ii) in the form of our unrestricted common stock already owned by our Manager which has a fair market value on the date of surrender equal to the aggregate option price of our common stock as to which such option shall be exercised or (iii) by means of any other cashless exercise procedure approved by the Committee.

In addition, the Committee will have the authority to grant such other awards to our Manager as it deems advisable, provided that no such award may be granted to our Manager in connection with any issuance by us of equity securities in excess of 10% of the maximum number of equity securities then being issued. Our board of directors may also determine to issue options to the Manager that are not subject to the Plan, provided that the number of shares underlying any options granted to the Manager in connection with capital raising efforts would not exceed 10% of the shares sold in such offering and would be subject to NYSE rules.

In addition, each of the Committee and our Manager will have the authority under the terms of the Plan to direct awards of tandem options (“Tandem Awards”) to employees of our Manager who act as officers or perform other services for us that correspond on a one-to-one basis with the options granted to our Manager, such that exercise by such employee of the Tandem Awards would result in the corresponding options held by our Manager being cancelled. As a condition to the grant of Tandem Awards, our Manager will be required to agree that so long as such Tandem Awards remain outstanding, our Manager will not exercise any options under any designated Manager options that relate to the options outstanding under such Tandem Awards. If any Tandem Awards are forfeited, expire or are cancelled without being exercised, the related options under the designated Manager options will again become exercisable in accordance with their terms. The terms and conditions of any Tandem Awards (e.g., the per-share exercise price, the schedule of vesting, exercisability and delivery, etc.) will be determined by the Committee or the Manager, as the case may be, in its sole discretion and must be included in an award agreement, provided, that the term of such Tandem Awards may not be greater than the term of the designated Manager options to which they relate. As determined by our Manager, in its sole discretion, payment of the exercise price of such Tandem Awards in whole or in part may be made by the following cashless exercise procedures: (i) by withholding from shares of our common stock otherwise issuable upon exercise of such Tandem Award, (ii) in the form of our unrestricted common stock already owned by the holder of such Tandem Award which has a fair market value on the date of surrender equal to the aggregate option price of our common stock as to which such Tandem Award shall be exercised or (iii) by means of any other cashless exercise procedure approved by the Committee. All options granted to our Manager will become fully vested and exercisable upon a “change of control” (as defined in the Plan) or a termination of the Manager’s services to us for any reason, and any Tandem Awards will be governed by the terms and condition set forth in the applicable award agreements, as determined by the Committee or the Manager, as the case may be.

As a general matter, the Plan provides that the Committee has the power to determine at what time or times each option may be exercised and, subject to the provisions of the Plan, the period of time, if any, after death, disability or other termination of employment during which options may be exercised. Options may become vested and exercisable in installments, and the exercisability of options may be accelerated by the Committee. To the extent permitted by applicable law, we may make loans available to the optionee in connection with the exercise of stock options. Such loans must be evidenced by the delivery of a promissory note and will bear interest and be subject to such other terms and conditions (including, without limitation, the execution by the optionee of a pledge agreement) as the Committee may determine. In any event, such loan amount may not

 

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exceed the sum of (x) the exercise price less the par value of the shares of our common stock subject to such option then being exercised plus (y) any federal, state or local income taxes attributable to such exercise.

The Committee may also grant SARs in tandem with all or part of, or completely independent of, a grant of options or any other award under the Plan. A SAR issued in tandem with an option may be granted at the time of grant of the related option or at any time during the term of such option. The amount payable in cash and/or shares of our common stock with respect to each SAR will be equal in value to a percentage (including up to 100%) of the amount by which the fair market value per share of our common stock on the exercise date exceeds the fair market value per share of our common stock on the date of grant of the SAR. The applicable percentage will be established by the Committee. The award agreement under which the SAR is granted may state whether the amount payable is to be paid wholly in cash, wholly in shares of our common stock or in any combination of the foregoing, and if the award agreement does not state the manner of payment, the Committee will determine such manner of payment at the time of payment. The amount payable in shares of our common stock, if any, is determined with reference to the fair market value per share of our common stock on the date of exercise.

SARs issued in tandem with options shall be exercisable only to the extent that the options to which they relate are exercisable. Upon exercise of the tandem SAR, and to the extent of such exercise, the participant’s underlying option shall automatically terminate. Similarly, upon the exercise of the tandem option, and to the extent of such exercise, the participant’s related SAR will automatically terminate.

The Committee may also grant restricted stock, performance awards, and other stock and non-stock-based awards under the Plan. These awards will be subject to such conditions and restrictions as the Committee may determine, which may include, without limitation, the achievement of certain performance goals or continued employment with us through a specific period.

The Plan provides for automatic annual awards of shares of our common stock to our non-officer or non-employee directors, in any case in an amount to be determined by the Committee from time to time, based on the fair market value of shares of our common stock on the date of grant. Such automatic annual awards, which will be fully vested on the date of grant, will begin on the first business day after our first annual stockholders’ meeting following December 31, 2013, and will continue to be made on the first business day after each such annual meeting thereafter during the term of the Plan. In addition, each new non-officer or non-employee member of our board of directors will be granted an initial one-time grant of an option to purchase                      shares of our common stock upon the date of the first meeting of our board of directors attended by such director. Such initial option grant, which will be fully vested on the date of grant, will have an exercise price equal to the fair market value of the underlying shares of our common stock on the date of grant.

Equitable Adjustment of Options

In connection with the distribution, each Newcastle option held as of the date of the distribution by our Manager or by the directors, officers, employees, service providers, consultants and advisors of our Manager will be converted into an adjusted Newcastle option and a new New Residential option. The exercise price of each adjusted Newcastle option and New Residential option will be set to collectively maintain the intrinsic value of the Newcastle option immediately prior to the distribution and to maintain the ratio of the exercise price of the adjusted Newcastle option and the New Residential option, respectively, to the fair market value of the underlying shares as of the distribution. The terms and conditions applicable to each New Residential option will be substantially similar to the terms and condition otherwise applicable to the Newcastle option as of the date of distribution. The grant of such New Residential options will not reduce the number of shares of our common stock otherwise available for issuance under the Plan.

 

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PRINCIPAL STOCKHOLDERS

As of the date hereof, all of the outstanding shares of our common stock are owned by Newcastle. After the distribution, Newcastle will own none of our common stock. The following table provides information with respect to the expected beneficial ownership of our common stock by (i) each person who we believe will be a beneficial owner of more than 5% of our outstanding common stock, (ii) each of our directors and named executive officers, and (iii) all directors, director nominees and executive officers as a group. We based the share amounts on each person’s beneficial ownership of Newcastle common stock as of April 23, 2013, unless we indicate some other basis for the share amounts, and assuming a distribution ratio of one share of our common stock for every share of Newcastle common stock.

To the extent our directors and officers own Newcastle common stock at the time of the separation, they will participate in the distribution on the same terms as other holders of Newcastle common stock. In addition, following the distribution, Newcastle options held by these individuals will be equitably adjusted to become separate options relating to both Newcastle common stock and our common stock. Such options relating to our common stock are reflected in the table below based upon our expected adjustment formula. For a description of the equitable adjustments expected to be made to Newcastle options, see “Management—Equitable Adjustment of Options.”

Except as otherwise noted in the footnotes below, each person or entity identified below has sole voting and investment power with respect to such securities. Following the distribution, we will have outstanding an aggregate of 253,025,645 shares of common stock based upon 253,025,645 shares of Newcastle common stock outstanding on April 23, 2013, assuming no exercise of Newcastle options and applying the distribution ratio of one share of our common stock for every share of Newcastle common stock held as of the record date.

 

Name and Address of Beneficial Owner (1)

   Amount and Nature  of
Beneficial Ownership
     Percent of  Class (2)  

Wesley R. Edens(3)(5)

     10,446,577         4.0

Kevin J. Finnerty(4)

     310,985         *

David Saltzman

     —           *

Alan L. Tyson(4)

     46,605         *

Kenneth M. Riis(4)

     1,645,890         *

Robert Williams

     —           *

Jonathan Brown

     20,355         *

Cameron MacDougall

     100,000         *
  

 

 

    

 

 

 

All directors, nominees and executive officers as a group (8 persons)

     12,570,412         5.0
  

 

 

    

 

 

 

 

* Denotes less than 1%.
(1) The address of all of the officers and directors listed above are in the care of Fortress Investment Group LLC, 1345 Avenue of the Americas, 46th Floor, New York, New York 10105.
(2) Percentages shown assume the exercise by such persons of all options to acquire shares of our Common Stock that are exercisable within 60 days of April 23, 2013 and no exercise by any other person.
(3) Includes 2,083,215 shares held by Mr. Edens, 1,037,091 shares held by FOE I, which is an affiliate of our Manager that holds the options granted to our Manager, and 7,326,271 shares issuable upon the exercise of options held by FOE I. Mr. Edens disclaims beneficial ownership of the shares held by FOE I and of the shares issuable upon the exercise of options held by FOE I except, in each case, to the extent of his pecuniary interest therein. Does not include 100,000 shares held by a charitable trust of which Mr. Edens’s spouse is sole trustee, and Mr. Edens disclaims beneficial ownership of the shares held by this charitable trust; does not include 100,000 shares held by a charitable trust of which Mr. Edens is trustee, and Mr. Edens disclaims beneficial ownership of these shares.
(4) Includes with respect to each of these individuals the following number of shares issuable upon the exercise of options that are currently exercisable or exercisable within 60 days of April 23, 2013: Riis – 1,370,890; Finnerty – 2,000; and Tyson – 2,000.
(5) Mr. Edens, as a beneficial owner of FOE I, may be considered to have, together with the other beneficial owners of FOE I, shared voting and investment power with respect to the shares held by FOE I and the shares issuable upon the exercise of options held by FOE I.

 

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CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH RELATED PERSONS,

AFFILIATES AND AFFILIATED ENTITIES

We expect our board of directors to adopt a policy regarding the approval of any “related person transaction,” which is any transaction or series of transactions in which we or any of our subsidiaries is or are to be a participant, the amount involved exceeds $120,000, and a “related person” (as defined under SEC rules) has a direct or indirect material interest. Under the policy, a related person would need to promptly disclose to the legal department of our Manager any proposed related person transaction and all material facts about the proposed transaction. The legal department would then assess and promptly communicate that information to our independent directors. Based on their consideration of all of the relevant facts and circumstances, our independent directors will decide whether or not to approve such transaction and will generally approve only those transactions that are in, or are not inconsistent with, the best interests of New Residential, as determined by at least a majority of the independent directors acting with ordinary care and in good faith. If we become aware of an existing related person transaction that has not been pre-approved under this policy, the transaction will be referred to our independent directors, who will evaluate all options available, including ratification, revision or termination of such transaction. Our policy requires any director who may be interested in a related person transaction to recuse himself or herself from any consideration of such related person transaction.

Management Agreement

We intend to enter into a Management Agreement with FIG LLC, an affiliate of Fortress Investment Group LLC, pursuant to which our Manager provides for the day-to-day management of our operations. The Management Agreement will require our Manager to manage our business affairs in conformity with the policies and the investment guidelines that are approved and monitored by our board of directors. See “Our Manager and Management Agreement” included elsewhere in this information statement.

FOE I is the sole member of FIG LLC, our Manager. The beneficial owners of FOE I include Messrs. Wesley R. Edens, Peter L. Briger, Jr., Randal A. Nardone and Michael E. Novogratz.

Investments in Excess MSRs

As described elsewhere in this information statement, since the end of 2011, we have entered into the following transactions with Nationstar, which is majority-owned by Fortress funds managed by our Manager. The agreements relating to these transactions have previously been filed and are incorporated by reference, or will be filed and incorporated by reference, as exhibits to the registration statement on Form 10, of which this information statement is a part. The descriptions of each of these agreements are qualified in their entirety by reference to the full text of the applicable agreements.

Pool 1 : In the fourth quarter of 2011, we acquired from Nationstar a 65% interest in the Excess MSRs on a portfolio of Agency residential mortgage loans for approximately $43.7 million. Nationstar co-invested pari passu with us in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared pro rata by us and Nationstar, subject to certain limitations.

Pool 2 . In the second quarter of 2012, we committed to invest approximately $44 million to acquire from Nationstar a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans. As of December 31, 2012, New Residential had a remaining purchase price payable of less than $0.1 million which is expected to be funded in 2013, pursuant to the payment terms of the agreement. Nationstar co-invested pari passu with us in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared pro rata by us and Nationstar, subject to certain limitations.

 

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Pools 3, 4 and 5 . In the second quarter of 2012, we acquired from Nationstar a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans for approximately $176.5 million. Nationstar co-invested pari passu with us in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared pro rata by us and Nationstar, subject to certain limitations.

ResCap . On May 14, 2012, we 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 which was returned on November 26, 2012. The auction commenced on October 23, 2012, and Nationstar did not submit the highest bid on October 24, 2012. Therefore, we will not complete this co-investment and are entitled to our portion of the breakup fee of approximately $8.4 million.

$215 Billion UPB Excess MSR Transaction . On January 6, 2013 we agreed to co-invest in Excess MSRs on a portfolio of residential mortgage loans with a UPB of approximately $215 billion as of November 30, 2012. Approximately 53% of the loans in this portfolio are in private label securitizations, and the remainder are owned, insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Nationstar has agreed to acquire the related servicing rights from Bank of America. We committed to invest approximately $340 million (based on the November 30, 2012 UPB) to acquire an approximately one-third interest in the Excess MSRs on this portfolio. The remaining interests in the Excess MSRs will be owned by a Fortress-managed fund and Nationstar on a pari passu basis. As the servicer, Nationstar will perform all servicing and advancing functions, and it will retain the ancillary income, servicing obligations and liabilities associated with this portfolio. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs will be shared pro rata among the Fortress-managed fund, Nationstar and us, subject to certain limitations.

On January 31, 2013, we completed the first closing of this co-investment. The first closing relates to Excess MSRs on loans with an aggregate UPB of approximately $58 billion as of December 31, 2012, that are owned, insured or guaranteed by Fannie Mae or Freddie Mac. Our purchase price for this portion of the investment was approximately $108 million. We are entitled to one-third of the Excess MSRs. Nationstar also closed on servicing rights to Ginnie Mae loans with a UPB of approximately $39 billion as of December 31, 2012. The closing of the remainder of the co-investment, which corresponds to loans in private label securitizations and the Ginnie Mae Loans, is expected to occur in the second quarter of 2013, subject to the receipt of regulatory and third-party approval, including Ginnie Mae approval and certain rating agency approvals. There can be no assurance that we will complete this investment as anticipated or at all. However, we believe that it is probable that we will be able to obtain pending approvals and subsequently complete this investment.

$13 Billion UPB Excess MSR Transaction . On January 4, 2013, we agreed to co-invest in Excess MSRs on a portfolio of Ginnie Mae residential mortgage loans with a UPB of approximately $13 billion as of November 30, 2012. Nationstar acquired the related servicing rights from Bank of America in November 2012. We invested approximately $27 million to acquire a 33% interest in the Excess MSRs on this portfolio. The remaining interests in the Excess MSRs will be owned by a Fortress-managed fund and Nationstar on a pari passu basis. As the servicer, Nationstar will perform all servicing and advancing functions, and it will retain the ancillary income, servicing obligations and liabilities associated with this portfolio. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs will be shared pro rata among the Fortress-managed fund, Nationstar and us, subject to certain limitations.

Non-Agency RBMS. Nationstar is the servicer of all of our non-Agency RMBS. As of December 31, 2012, our non-Agency RMBS had a face amount of $433.5 million and the total UPB of the loans underlying our non-Agency RMBS was approximately $5.7 billion.

 

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$4.2 Billion UPB Consumer Loan Transaction. On March 5, 2013, we agreed to co-invest in a portfolio of consumer loans with a UPB of approximately $4.2 billion as of December 31, 2012. The portfolio includes over 400,000 personal unsecured loans and personal homeowner loans originated through subsidiaries of HSBC Finance Corporation. On April 1, 2013, we completed this co-investment through the consumer loan companies. The consumer loan companies acquired the portfolio from HSBC Finance Corporation and its affiliates. We 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 our Manager, acquired 47%, and an affiliate of Blackstone Tactical Opportunities Advisors L.L.C. acquired 23%. Springleaf will act 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 consumer loan companies were formed on March 19, 2013, for the purpose of making this investment and commenced operations upon the completion of the investment. After a servicing transition period, Springleaf will be the servicer of the loans and will provide all servicing and advancing functions for the portfolio.

Separation and Distribution Agreement with Newcastle

We have entered into a Separation and Distribution Agreement with Newcastle to effect the separation and provide a framework for our relationship with Newcastle after the separation. This agreement will govern the relationship between us and Newcastle subsequent to the completion of the separation plan and provide for the allocation between us and Newcastle of Newcastle’s assets, liabilities and obligations (including tax-related assets and liabilities) attributable to periods prior to the respective separations of the businesses from Newcastle. The Separation and Distribution Agreement has been filed as an exhibit to the registration statement on Form 10, of which this information statement is a part, and the summary below is qualified in its entirety by reference to the full text of the agreement, which is incorporated by reference into this information statement.

The Separation and Distribution Agreement sets forth our agreements with Newcastle regarding the principal transactions necessary to separate us from Newcastle. It also sets forth other agreements that govern certain aspects of our relationship with Newcastle after the completion of the separation plan. For purposes of the Separation and Distribution Agreement: (i) the “New Residential Group” means New Residential and its subsidiaries and (ii) the “Newcastle Group” means Newcastle and its subsidiaries other than New Residential and the New Residential subsidiaries.

Transfer of Assets and Assumption of Liabilities . The Separation and Distribution Agreement identifies the assets and liabilities to be retained by, transferred to, assumed by, or assigned to, as the case may be, each of us and Newcastle as part of the separation of Newcastle into two companies, and describes when and how these transfers, assumptions and assignments will occur, although, many of the transfers, assumptions and assignments may have already occurred prior to the parties’ entering into the Separation and Distribution Agreement. In particular, the Separation and Distribution Agreement provides that, subject to the terms and conditions contained in the Separation and Distribution Agreement immediately prior to the time of effectiveness of the Separation and Distribution Agreement, Newcastle and New Residential will take all actions necessary so that the New Residential Group will:

 

  (a) own, to the extent it does not already own, all of Newcastle’s Excess MSR assets, a portion of Newcastle’s Agency RMBS, all of Newcastle’s non-Agency RMBS acquired since the beginning of 2012, all of the mortgage loans Newcastle has acquired since the beginning of 2013, all of Newcastle’s consumer loans and certain cash transferred to the New Residential Group by Newcastle; and

 

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  (b) assume, to the extent it is not already liable for:

 

  (i) any liabilities relating to or arising out of our initial portfolio of assets described under (a) above whether arising prior to, at the time of, or after, the effectiveness of the Separation and Distribution Agreement;

 

  (ii) any liabilities arising out of claims by our directors, officers and affiliates arising after the time of effectiveness of the Separation and Distribution Agreement against either Newcastle or us to the extent they relate to our initial portfolio of assets described under (a) above as of the date of the Separation and Distribution Agreement; and

 

  (iii) any other potential liabilities related to (A) recent Newcastle equity offerings in certain specified percentages as disclosed in the Separation and Distribution Agreement; (B) Newcastle’s Exchange Act reports relating to disclosures about our initial portfolio of assets described under (a) above; and (C) indemnification obligations under the Management Agreement with respect to our initial portfolio of assets described under (a) above.

Except as otherwise provided in the Separation and Distribution Agreement, Newcastle will retain all other assets and liabilities.

Except as may expressly be set forth in the Separation and Distribution Agreement or any ancillary agreement, all assets will be transferred on an “as is,” “where is” basis without representation or warranty.

Information in this information statement with respect to the assets and liabilities of the parties following the separation is presented based on the allocation of such assets and liabilities as set forth in the Separation and Distribution Agreement, unless the context otherwise requires. Certain of the liabilities and obligations to be assumed by one party or for which one party will have an indemnification obligation under the Separation and Distribution Agreement are, and following the separation may continue to be, the legal or contractual liabilities or obligations of another party. Each such party that continues to be subject to such legal or contractual liability or obligation will rely on the applicable party that assumed the liability or obligation or the applicable party that undertook an indemnification obligation with respect to the liability or obligation, as applicable, under the Separation and Distribution Agreement, to satisfy the performance and payment obligations or indemnification obligations with respect to such legal or contractual liability or obligation.

Further Assurances . Each party will cooperate with the other and use commercially reasonable efforts, prior to, on and after the distribution date, to take promptly, or cause to be taken promptly, all actions to do promptly, or cause to be done promptly, all things reasonably necessary, proper or advisable on its part to consummate and make effective the transactions contemplated by, and the intent and purposes of, the Separation and Distribution Agreement. In addition, neither party will, nor will either party allow its respective subsidiaries to, without the prior consent of the other party, take any action which would reasonably be expected to prevent or materially impede, interfere with or delay the transactions contemplated by the Separation and Distribution Agreement and the ancillary agreements thereto, if any. Both parties will also use commercially reasonable efforts to cause third parties, such as insurers or trustees, to fulfill any obligations they are required to fulfill under the Separation and Distribution Agreement.

The Distribution . The Separation and Distribution Agreement also governs the rights and obligations of the parties regarding the proposed distribution. We have agreed to distribute to Newcastle, as a stock dividend, the number of shares of our common stock distributable in the distribution to effectuate the separation. In addition, Newcastle has agreed to cause its agent to distribute to Newcastle stockholders that hold shares of Newcastle common stock as of the applicable record date all the shares of common stock of the company being separated from Newcastle.

Additionally, the Separation and Distribution Agreement provides that the distribution is subject to several conditions that must be satisfied or waived by Newcastle in its sole discretion. For further information regarding our separation from Newcastle, see “Our Separation from Newcastle—Conditions to the distribution.”

 

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Termination of Other Agreement Arrangements; Bank Accounts . The Separation and Distribution Agreement provides that, other than the Separation and Distribution Agreement, the ancillary agreements to the Separation and Distribution Agreement (if any), certain confidentiality and non-disclosure agreements among any members of the New Residential Group, the Newcastle Group or employees of our Manager and certain contribution agreements related to Agency RMBS and non-Agency RMBS between Newcastle and certain third parties as disclosed in the Separation and Distribution Agreement, all prior agreements and arrangements, whether written or not, between any member of the Newcastle Group on the one hand, and any member of the New Residential Group on the other hand (except to the extent any person that is not a member of the New Residential Group or Newcastle Group is also a party to such agreements or arrangements), are terminated and will cease to be of further force and effect as of the time of effectiveness of the Separation and Distribution Agreement. At the time of such termination, all parties will be released from liability under such agreements and arrangements, other than with respect to the settlement of intercompany accounts, which will be satisfied and/or settled in full in cash or otherwise cancelled and terminated or extinguished by the relevant members of the New Residential Group or Newcastle Group prior to the time of effectiveness of the Separation and Distribution Agreement.

Releases and Indemnification . Subject to certain exceptions, including with respect to liabilities assumed by, or allocated to, us or Newcastle, the Separation and Distribution Agreement provides that we and Newcastle will generally agree to release each other from all liabilities existing or arising from acts or events prior to or on the distribution date.

In addition, the Separation and Distribution Agreement provides that, except as otherwise provided for in other documents related to the separation, we will indemnify Newcastle and its affiliates and representatives against losses arising from:

 

  (a) any liabilities relating to our initial portfolio of assets, which shall include all of Newcastle’s Excess MSR assets, a portion of Newcastle’s Agency RMBS, all of Newcastle’s non-Agency RMBS acquired since the beginning of 2012, all of the mortgage loans Newcastle has acquired since the beginning of 2013, all of Newcastle’s consumer loans and certain cash transferred to the New Residential Group by Newcastle, whether arising prior to, at the time of, or after, the effectiveness of the Separation and Distribution Agreement;

 

  (b) any liabilities arising out of claims by our directors, officers and affiliates arising after the time of effectiveness of the Separation and Distribution Agreement against either Newcastle or us to the extent they relate to the our initial portfolio of assets described under (a) above as of the date of the Separation and Distribution Agreement;

 

  (c) any other potential liabilities related to (A) recent Newcastle equity offerings in certain specified percentages as disclosed in the Separation and Distribution Agreement; (B) Newcastle’s Exchange Act reports relating to disclosures about our initial portfolio of assets described under (a) above; and (C) indemnification obligations under the Management Agreement with respect to the our initial portfolio of assets described under (a) above;

 

  (d) any failure by any member of the New Residential Group or any other person to pay, perform or otherwise promptly discharge any liability listed under (a)-(c) above in accordance with their respective terms, whether prior to, at or after the time of effectiveness of the Separation and Distribution Agreement;

 

  (e) any breach by any member of the New Residential Group of any provision of the Separation and Distribution Agreement and any agreements ancillary thereto (if any), subject to any limitations of liability provisions and other provisions applicable to any such breach set forth therein; and

 

  (f)

any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in this information statement or the registration statement of which this information statement is a part other than information that relates solely to any

 

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  assets owned, directly or indirectly by Newcastle, excluding the assets that will comprise our initial portfolio described under (a) above.

Newcastle shall indemnify us and our affiliates and representatives against losses arising from:

 

  (a) any liability related to Newcastle’s junior subordinated notes due 2035 issued pursuant to the Junior Subordinated Indenture, dated April 30, 2009, between Newcastle and The Bank of New York Mellon Trust Company, National Association;

 

  (b) any other liability of Newcastle or its subsidiaries (excluding any liabilities related to New Residential);

 

  (c) any failure of any member of the Newcastle Group or any other person to pay, perform or otherwise promptly discharge any liability listed under (a) and (b) above in accordance with their respective terms, whether prior to, at or after the time of effectiveness of the Separation and Distribution Agreement;

 

  (d) any breach by any member of the Newcastle Group of any provision of the Separation and Distribution Agreement and any agreements ancillary thereto (if any), subject to any limitations of liability provisions and other provisions applicable to any such breach set forth therein; and

 

  (e) any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in this information statement or the registration statement of which this information statement is a part that relates solely to any assets owned, directly or indirectly by Newcastle, other than our initial portfolio of assets, which shall include all of Newcastle’s Excess MSR assets, a portion of Newcastle’s Agency RMBS, all of Newcastle’s non-Agency RMBS acquired since the beginning of 2012, all of the mortgage loans Newcastle has acquired since the beginning of 2013, all of Newcastle’s consumer loans and certain cash transferred to the New Residential Group by Newcastle.

Indemnification obligations shall generally be net of any insurance proceeds actually received by the indemnified person. The Separation and Distribution Agreement provides that we and Newcastle will waive any right to special, indirect, punitive, exemplary, remote, speculative or similar damages in excess of compensatory damages provided that any such liabilities with respect to third party claims shall be considered direct damages. The Separation and Distribution Agreement also contains customary procedures relating to the receipt of any indemnification payments that may constitute non-qualifying REIT income.

Competition: The Separation and Distribution Agreement does not include any non-competition or other similar restrictive arrangements with respect to the range of business activities that may be conducted, or investments that may be made, by either the Newcastle Group or the New Residential Group. Each of the parties will agree that nothing set forth in the agreement shall be construed to create any restriction or other limitation on the ability of any of the Newcastle Group or New Residential Group to engage in any business or other activity that overlaps or competes with the business of any other party, including investing in residential mortgage related securities.

Certain Tax-Related Covenants . If we are treated as a successor to Newcastle under applicable U.S. federal income tax rules, and if Newcastle fails to qualify as a REIT, we could be prohibited from electing to be a REIT. Accordingly, in the Separation and Distribution Agreement, Newcastle has (i) represented that it has no knowledge of any fact or circumstance that would cause us to fail to qualify as a REIT, (ii) covenanted to use commercially reasonable efforts to cooperate with us as necessary to enable us to qualify for taxation as a REIT and receive customary legal opinions concerning REIT status, including providing information and representations to us and our tax counsel with respect to the composition of Newcastle’s income and assets, the composition of its stockholders, and its operation as a REIT; and (iii) covenanted to use its reasonable best efforts to maintain its REIT status for each of Newcastle’s taxable years ending on or before December 31, 2014

 

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(unless Newcastle obtains an opinion from a nationally recognized tax counsel or a private letter ruling from the IRS to the effect that Newcastle’s failure to maintain its REIT status will not cause us to fail to qualify as a REIT under the successor REIT rule referred to above). Additionally, in the Separation and Distribution Agreement, we covenant to use our reasonable best efforts to qualify for taxation as a REIT for our taxable year ending December 31, 2013.

Insurance . Following the distribution date, Newcastle shall maintain its currently existing insurance policies related to director and officer liability (the “Newcastle D&O Policies”). Prior to the distribution date, Newcastle and New Residential shall use commercially reasonable efforts to obtain separate insurance policies for New Residential on substantially similar terms as the Newcastle D&O Policies. New Residential will be responsible for all premiums, costs and fees associated with any new insurance policies placed for the benefit of New Residential.

Dispute Resolution . In the event of any dispute arising out of the Separation and Distribution Agreement, the parties, each having designated a representative for such purpose, will negotiate in good faith for 30 days to resolve any disputes between the parties. If the parties are unable to resolve disputes in this manner within 30 days, the disputes will be resolved through binding arbitration.

Other Matters Governed by the Separation and Distribution Agreement . Other matters governed by the Separation and Distribution Agreement include, amongst others, access to financial and other information, confidentiality, assignability and treatment of stock options.

 

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DESCRIPTION OF OUR CAPITAL STOCK

The following descriptions are summaries of the material terms of our certificate of incorporation and bylaws as will be in effect upon the consummation of the distribution. These descriptions may not contain all of the information that is important to you. To understand them fully, you should read our certificate of incorporation and bylaws, copies of which are filed with the SEC as exhibits to the registration statement of which this information statement is a part.

Please note that, with respect to any of our shares held in book-entry form through The Depository Trust Company or any other share depository, the depository or its nominee will be the sole registered and legal owner of those shares, and references in this information statement to any “stockholder” or “holder” of those shares means only the depository or its nominee. Persons who hold beneficial interests in our shares through a depository will not be registered or legal owners of those shares and will not be recognized as such for any purpose. For example, only the depository or its nominee will be entitled to vote the shares held through it, and any dividends or other distributions to be paid, and any notices to be given, in respect of those shares will be paid or given only to the depository or its nominee. Owners of beneficial interests in those shares will have to look solely to the depository with respect to any benefits of share ownership, and any rights they may have with respect to those shares will be governed by the rules of the depository, which are subject to change from time to time. We have no responsibility for those rules or their application to any interests held through the depository.

Prior to completion of the distribution, our certificate of incorporation will be amended so that our authorized capital stock will consist of:

 

   

2,000,000,000 shares of common stock, par value $0.01 per share; and

 

   

100,000,000 shares of preferred stock, par value $0.01 per share.

Upon completion of the distribution, there will be 253,025,645 outstanding shares of common stock based on 253,025,645 shares of Newcastle common stock outstanding on April 23, 2013 and no outstanding shares of preferred stock.

COMMON STOCK

Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Except as provided with respect to any other class or series of stock, the holders of our common stock will possess the exclusive right to vote for the election of directors and for all other purposes. Our certificate of incorporation does not provide for cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of common stock can elect all of the directors standing for election, and the holders of the remaining shares will not be able to elect any directors.

Subject to any preference rights of holders of any preferred stock that we may issue in the future, holders of our common stock are entitled to receive dividends, if any, declared from time to time by our board of directors out of legally available funds. In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in all assets remaining after the payment of liabilities, subject to any rights of holders of our preferred stock to prior distribution.

Holders of our common stock have no preemptive, subscription, redemption or conversion rights. Any shares of common stock issued under this information statement will be validly issued, fully paid and nonassessable.

PREFERRED STOCK

Our board of directors has the authority, without action by our stockholders, to issue preferred stock and to fix voting powers for each class or series of preferred stock, and to provide that any class or series may be subject to

 

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redemption, entitled to receive dividends, entitled to rights upon dissolution, or convertible or exchangeable for shares of any other class or classes of capital stock. The rights with respect to a series or class of preferred stock may be greater than the rights attached to our common stock. It is not possible to state the actual effect of the issuance of any shares of our preferred stock on the rights of holders of our common stock until our board of directors determines the specific rights attached to that preferred stock. The effect of issuing preferred stock could include, among other things, one or more of the following:

 

   

restricting dividends in respect of our common stock;

 

   

diluting the voting power of our common stock or providing that holders of preferred stock have the right to vote on matters as a class;

 

   

impairing the liquidation rights of our common stock; or

 

   

delaying, deferring or preventing a change of control of us.

RESTRICTIONS ON OWNERSHIP AND TRANSFER OF OUR CAPITAL STOCK

In order to qualify as a REIT under the Code, for each taxable year beginning after December 31, 2013, our shares of capital stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. Also, for our taxable years beginning after December 31, 2013, no more than 50% of the value of our outstanding shares of capital stock may be owned, directly or constructively, by five or fewer individuals (as defined in the Code to include certain entities) during the second half of any calendar year.

Our certificate of incorporation, subject to certain exceptions, contains restrictions on the number of shares of our capital stock that a person may own and may prohibit certain entities from owning our shares. Our certificate of incorporation provides that (subject to certain exceptions described below) no person may beneficially or constructively own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.8% in value or in number of shares, whichever is more restrictive, of our outstanding shares of common or capital stock. Pursuant to our certificate of incorporation, our board of directors has the power to increase or decrease the percentage of common or capital stock that a person may beneficially or constructively own. However, any decreased stock ownership limit will not apply to any person whose percentage ownership of our common or capital stock, as the case may be, is in excess of such decreased stock ownership limit until that person’s percentage ownership of our common or capital stock, as the case may be, equals or falls below the decreased stock ownership limit. Until such a person’s percentage ownership of our common or capital stock, as the case may be, falls below such decreased stock ownership limit, any further acquisition of common stock will be in violation of the decreased stock ownership limit.

Our certificate of incorporation also prohibits any person from beneficially or constructively owning shares of our capital stock that would result in our being “closely held” under Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT (including through ownership that results in our owning (actually or constructively) an interest in a tenant as described in Section 856(d)(2)(B) of the Code) and from transferring shares of our capital stock if the transfer would result in our capital stock being beneficially owned by fewer than 100 persons. Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of our capital stock that will or may violate any of the foregoing restrictions on transferability and ownership, or who is the intended transferee of shares of our capital stock that are transferred to the trust (as described below), is required to give written notice immediately to us and provide us with such other information as we may request in order to determine the effect of such transfer on our qualification as a REIT. The foregoing restrictions on transferability and ownership will not apply if our board of directors determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT.

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our board of directors may deem reasonably necessary to conclude that granting the exemption will not cause us to lose our qualification as a REIT. Our board of directors may also require a ruling from the IRS or an opinion of counsel in order to determine or ensure our qualification as a REIT in the context of granting such exemptions.

Any attempted transfer of our capital stock which, if effective, would result in a violation of the foregoing restrictions will cause the number of shares causing the violation (rounded up to the nearest whole share) to be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries, and the proposed transferee will not acquire any rights in such shares. The automatic transfer will be deemed to be effective as of the close of business on the business day (as defined in our certificate of incorporation) prior to the date of the transfer. If, for any reason, the transfer to the trust does not occur or would not prevent a violation of the restrictions on ownership contained in our certificate of incorporation, our certificate of incorporation provides that the purported transfer will be void ab initio. Shares of our capital stock held in the trust will be issued and outstanding shares. The proposed transferee will not benefit economically from ownership of any shares of our capital stock held in the trust, will have no rights to dividends and no rights to vote or other rights attributable to the shares of capital stock held in the trust. The trustee of the trust will have all voting rights and rights to dividends or other distributions with respect to shares held in the trust. These rights will be exercised for the exclusive benefit of the charitable beneficiary. Any dividend or other distribution paid prior to our discovery that shares of capital stock have been transferred to the trust will be paid by the recipient to the trustee upon demand. Any dividend or other distribution authorized but unpaid will be paid when due to the trustee. Any dividend or distribution paid to the trustee will be held in trust for the charitable beneficiary. Subject to Delaware law, the trustee will have the authority to rescind as void any vote cast by the proposed transferee prior to our discovery that the shares have been transferred to the trust and to recast the vote in accordance with the desires of the trustee acting for the benefit of the charitable beneficiary. However, if we have already taken irreversible corporate action, then the trustee will not have the authority to rescind and recast the vote.

Within 20 days of receiving notice from us that shares of our capital stock have been transferred to the trust, the trustee will sell the shares to a person designated by the trustee, whose ownership of the shares will not violate the above ownership limitations. Upon such sale, the interest of the charitable beneficiary in the shares sold will terminate and the trustee will distribute the net proceeds of the sale to the proposed transferee and to the charitable beneficiary as follows: the proposed transferee will receive the lesser of (1) the price paid by the proposed transferee for the shares or, if the proposed transferee did not give value for the shares in connection with the event causing the shares to be held in the trust (e.g., a gift, devise or other similar transaction), the market price (as defined in our certificate of incorporation) of the shares on the day of the event causing the shares to be held in the trust and (2) the price received by the trustee from the sale or other disposition of the shares. The trust may reduce the amount payable to the proposed transferee by the amount of dividends and distributions paid to the proposed transferee and owned by the proposed transferee to the trust.

Any net sale proceeds in excess of the amount payable to the proposed transferee will be paid immediately to the charitable beneficiary. If, prior to our discovery that shares of our capital stock have been transferred to the trust, the shares are sold by the proposed transferee, then (1) the shares shall be deemed to have been sold on behalf of the trust and (2) to the extent that the proposed transferee received an amount for the shares that exceeds the amount the proposed transferee was entitled to receive, the excess shall be paid to the trustee upon demand.

In addition, shares of our capital stock held in the trust will be deemed to have been offered for sale to us, or our designee, at a price per share equal to the lesser of the price per share in the transaction that resulted in the transfer to the trust (or, in the case of a devise or gift, the market price at the time of the devise or gift) and the market price on the date we, or our designee, accept the offer. We will have the right to accept the offer until the trustee has sold the shares. Upon a sale to us, the interest of the charitable beneficiary in the shares sold will terminate and the trustee will distribute the net proceeds of the sale to the proposed transferee.

Every owner of more than 5% (or such lower percentage as required by the Code or the regulations promulgated thereunder) in number or in value of all classes or series of our capital stock, including shares of our common

 

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stock, within 30 days after the end of each taxable year, will be required to give written notice to us stating the name and address of such owner, the number of shares of each class and series of shares of our capital stock that the owner beneficially owns and a description of the manner in which the shares are held. Each owner shall provide to us such additional information as we may request to determine the effect, if any, of the beneficial ownership on our qualification as a REIT and to ensure compliance with the ownership limitations. In addition, each such owner shall, upon demand, be required to provide to us such information as we may request, in good faith, to determine our qualification as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance and to ensure compliance with the 9.8% ownership limitations in our certificate of incorporation.

These ownership limitations could delay, defer or prevent a transaction or a change in control that might involve a premium price for our common stock or might otherwise be in the best interests of our stockholders.

ANTI-TAKEOVER EFFECTS OF DELAWARE LAW, OUR CERTIFICATE OF INCORPORATION AND BYLAWS

The following is a summary of certain provisions of our certificate of incorporation and bylaws that may be deemed to have an anti-takeover effect and may delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders.

Authorized but Unissued Shares

The authorized but unissued shares of our common stock and our preferred stock will be available for future issuance without obtaining stockholder approval. These additional shares may be utilized for a variety of corporate purposes, including future offerings to raise additional capital and corporate acquisitions. The existence of authorized but unissued shares of our common stock and preferred stock could render more difficult or discourage an attempt to obtain control over us by means of a proxy contest, tender offer, merger or otherwise.

Delaware Business Combination Statute

We are organized under Delaware law. Some provisions of Delaware law may delay, defer or prevent a transaction that would cause a change in our control. Our certificate of incorporation provides that Section 203 of the Delaware General Corporation Law, as amended, an anti-takeover law, will not apply to us. In general, this statute prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction by which that person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a business combination includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an interested stockholder is a person who, together with affiliates and associates, owns, or within three years prior, did own, 15% or more of voting stock.

Other Provisions of Our Certificate of Incorporation and Bylaws

Our certificate of incorporation provides for a staggered board of directors consisting of three classes of directors. Directors of each class are chosen for three-year terms upon the expiration of their current terms and each year one class of our directors will be elected by our stockholders. The terms of the first, second and third classes will expire in 2014, 2015 and 2016, respectively. We believe that classification of our board of directors will help to assure the continuity and stability of our business strategies and policies as determined by our board of directors. Additionally, there is no cumulative voting in the election of directors. This classified board provision could have the effect of making the replacement of incumbent directors more time consuming and difficult. At least two annual meetings of stockholders, instead of one, will generally be required to effect a change in a majority of our board of directors.

 

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Thus, the classified board provision could increase the likelihood that incumbent directors will retain their positions. The staggered terms of directors may delay, defer or prevent a tender offer or an attempt to change control of us, even though a tender offer or change in control might be believed by our stockholders to be in their best interest. In addition, our bylaws provide that directors may be removed only for cause and only with the affirmative vote of at least 80% of the then issued and outstanding shares of our capital stock entitled to vote in the election of directors.

Pursuant to our certificate of incorporation, shares of our preferred stock may be issued from time to time, and the board of directors is authorized to determine and alter all rights, preferences, privileges, qualifications, limitations and restrictions without limitation. See “—Preferred Stock.” Our bylaws do not provide our stockholders with the ability to call a special meeting of the stockholders.

Ability of Our Stockholders to Act

Our certificate of incorporation and bylaws do not permit our stockholders to call special stockholders meetings. Written notice of any special meeting so called shall be given to each stockholder of record entitled to vote at such meeting not less than 10 or more than 60 days before the date of such meeting, unless otherwise required by law.

Our certificate of incorporation and bylaws also prohibits our stockholders from consenting in writing to take any action in lieu of taking such action at a duly called annual or special meeting of our stockholders.

Our bylaws provide that nominations of persons for election to our board of directors may be made at any annual meeting of our stockholders, or at any special meeting of our stockholders called for the purpose of electing directors, (a) by or at the direction of our board of directors or (b) by any of our stockholders. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to our Secretary. To be timely, a stockholder’s notice must be delivered to or mailed and received at our principal executive offices (i) in the case of an annual meeting, not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within 25 days before or after such anniversary date, notice by a stockholder in order to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs and (ii) in the case of a special meeting, not later than the tenth day following the day on which such notice of the date of the special meeting was mailed or such public disclosure of the date of the special meeting was made, whichever first occurs.

Limitations on Liability and Indemnification of Directors and Officers

Our certificate of incorporation and bylaws provide that our directors will not be personally liable to us or our stockholders for monetary damages for breach of a fiduciary duty as a director, except for:

 

   

any breach of the director’s duty of loyalty to us or our stockholders,

 

   

intentional misconduct or a knowing violation of law;

 

   

liability under Delaware corporate law for an unlawful payment of dividends or an unlawful stock purchase or redemption of stock; or

 

   

any transaction from which the director derives an improper personal benefit.

Our certificate of incorporation provides that we must indemnify our directors and officers to the fullest extent permitted by Delaware law. We are also expressly authorized to advance certain expenses (including attorneys’ fees and disbursements and court costs) to our directors and officers and carry directors’ and officers’ insurance providing indemnification for our directors and officers for some liabilities. We believe that these indemnification provisions and insurance are useful to attract and retain qualified directors and officers.

 

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Prior to the completion of the distribution, we intend to enter into separate indemnification agreements with each of our directors and executive officers. Each indemnification agreement will provide, among other things, for indemnification to the fullest extent permitted by law and our certificate of incorporation against (i) any and all expenses and liabilities, including judgments, fines, penalties and amounts paid in settlement of any claim with our approval and counsel fees and disbursements, (ii) any liability pursuant to a loan guarantee, or otherwise, for any of our indebtedness, and (iii) any liabilities incurred as a result of acting on our behalf (as a fiduciary or otherwise) in connection with an employee benefit plan. The indemnification agreements will provide for the advancement or payment of all expenses to the indemnitee and for reimbursement to us if it is found that such indemnitee is not entitled to such indemnification under applicable law and our certificate of incorporation. These provisions and agreements may have the practical effect in some cases of eliminating our stockholders’ ability to collect monetary damages from our directors and executive officers.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

CORPORATE OPPORTUNITY

Under our certificate of incorporation, to the extent permitted by law:

 

   

Newcastle and certain other of Newcastle’s affiliates, including Fortress and Fortress’s affiliates, and their permitted transferees have the right to, and have no duty to abstain from, exercising such right to, engage or invest in the same or similar business as us, do business with any of our clients, customers or vendors or employ or otherwise engage any of our officers, directors or employees;

 

   

if Newcastle or certain other of Newcastle’s affiliates, including Fortress and Fortress’s affiliates, and their permitted transferees or any of their officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, it has no duty to offer such corporate opportunity to us, our stockholders or affiliates;

 

   

we have renounced any interest or expectancy in, or in being offered an opportunity to participate in, such corporate opportunities; and

 

   

in the event that any of our directors and officers who is also a director, officer or employee of Newcastle or certain other of Newcastle’s affiliates, including Fortress and Fortress’s affiliates, or their permitted transferees acquire knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s capacity as our director or officer and such person acted in good faith, then such person is deemed to have fully satisfied such person’s fiduciary duty and is not liable to us if Newcastle or Fortress, or their affiliates, pursues or acquires the corporate opportunity or if such person did not present the corporate opportunity to us.

TRANSFER AGENT

The registrar and transfer agent for our common stock is American Stock Transfer & Trust Company, LLC.

LISTING

We have been approved to list our common stock on the NYSE under the symbol “NRZ.”

 

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FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of the material U.S. federal income tax consequences of an investment in common stock of New Residential For purposes of this section under the heading “Federal Income Tax Considerations,” references to “New Residential,” “we,” “our” and “us” mean only New Residential Investment Corp. and not its subsidiaries or other lower-tier entities, except as otherwise indicated and references to Newcastle refer to Newcastle Investment Corp. This summary is based upon the Code, the regulations promulgated by the U.S. Treasury Department, rulings and other administrative pronouncements issued by the IRS, and judicial decisions, all as currently in effect, and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. Except as indicated below, we have not sought and do not intend to seek, an advance ruling from the IRS regarding any matter discussed in this information statement. The summary is also based upon the assumption that we will operate New Residential and its subsidiaries and affiliated entities in accordance with their applicable organizational documents or partnership agreements. This summary is for general information only and is not tax advice. The Code provisions governing the U.S. federal income tax treatment of REITs and their stockholders are highly technical and complex, and this summary is qualified in its entirety by the express language of applicable Code provisions, Treasury regulations promulgated thereunder and administrative and judicial interpretations thereof. Moreover, this summary does not purport to discuss all aspects of U.S. federal income taxation that may be important to a particular investor in light of its investment or tax circumstances, or to investors subject to special tax rules, such as:

 

   

financial institutions;

 

   

insurance companies;

 

   

broker-dealers;

 

   

regulated investment companies;

 

   

partnerships and trusts;

 

   

persons who hold our stock on behalf of another person as a nominee;

 

   

persons who receive our stock through the exercise of employee stock options or otherwise as compensation;

 

   

persons holding our stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security” or other integrated investment;

and, except to the extent discussed below:

 

   

tax-exempt organizations; and

 

   

foreign investors.

This summary assumes that investors will hold their common stock as a capital asset, which generally means as property held for investment.

For purposes of this discussion, a domestic holder is a stockholder of Newcastle or New Residential, as applicable, that is for U.S. federal income tax purposes:

 

   

a citizen or resident of the U.S.,

 

   

a corporation created or organized in the U.S. or under the laws of the U.S., or of any state thereof, or the District of Columbia,

 

   

an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of its source, or

 

   

a trust if a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. fiduciaries have the authority to control all substantial decisions of the trust.

 

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A “non-U.S. holder” is a stockholder of Newcastle or New Residential, as applicable, that is neither a domestic holder nor a partnership (or other entity treated as a partnership) for U.S. federal income tax purposes. If a partnership, including for this purpose any entity that is treated as a partnership for U.S. federal income tax purposes, holds our stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. An investor that is a partnership and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of the acquisition, ownership and disposition of our stock.

THE U.S. FEDERAL INCOME TAX TREATMENT OF OUR COMMON STOCKHOLDERS DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF FACT AND INTERPRETATIONS OF COMPLEX PROVISIONS OF U.S. FEDERAL INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY BE AVAILABLE. IN ADDITION, THE TAX CONSEQUENCES TO ANY PARTICULAR STOCKHOLDER OF HOLDING OUR COMMON STOCK WILL DEPEND ON THE STOCKHOLDER’S PARTICULAR TAX CIRCUMSTANCES. FOR EXAMPLE, A STOCKHOLDER THAT IS A PARTNERSHIP OR TRUST WHICH HAS ISSUED AN EQUITY INTEREST TO CERTAIN TYPES OF TAX EXEMPT ORGANIZATIONS MAY BE SUBJECT TO A SPECIAL ENTITY-LEVEL TAX IF WE MAKE DISTRIBUTIONS ATTRIBUTABLE TO “EXCESS INCLUSION INCOME.” SEE “—TAXATION OF NEW RESIDENTIAL—TAXABLE MORTGAGE POOLS AND EXCESS INCLUSION INCOME” BELOW. A SIMILAR TAX MAY BE PAYABLE BY PERSONS WHO HOLD OUR STOCK AS NOMINEE ON BEHALF OF SUCH A TAX EXEMPT ORGANIZATION. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES TO YOU IN LIGHT OF YOUR PARTICULAR INVESTMENT OR TAX CIRCUMSTANCES OF ACQUIRING, HOLDING, EXCHANGING, OR OTHERWISE DISPOSING OF OUR COMMON STOCK.

Private Letter Ruling Regarding Our Excess MSRs

We have received from the IRS a private letter ruling substantially to the effect that our Excess MSRs represent interests in mortgages on real property and thus are qualifying “real estate assets” for purposes of the 75% REIT asset test (as described below), which generate income that qualifies as interest on obligations secured by mortgages on real property for purposes of the 75% REIT gross income test (as described below). The ruling is based on, among other things, certain assumptions as well as on the accuracy of certain factual representations and statements that we and Newcastle have made to the IRS (including factual representations and statements relating to the terms and conditions of our Excess MSR investments and our future actions). Although a private letter ruling from the IRS is generally binding on the IRS, if any of the representations or statements that we have made in connection with the private letter ruling, are, or become, inaccurate or incomplete in any material respect with respect to one or more Excess MSR investments, or if we acquire an Excess MSR investment with terms that are not consistent with the terms of the Excess MSR investments described in the private letter ruling, then we will not be able to rely on the private letter ruling. If we are unable to rely on the private letter ruling with respect to an Excess MSR investment, no assurance can be given as to the status of such Excess MSR investment for purposes of the REIT asset and income tests.

The remainder of this discussion assumes that we are able to rely on the private letter ruling.

Taxation of New Residential

We intend to elect to be taxed as a REIT, commencing with our initial taxable year ending December 31, 2013. We believe that we will be organized, and expect to operate in such a manner as to qualify for taxation, as a REIT.

The law firm of Skadden, Arps, Slate, Meagher & Flom LLP has acted as our tax counsel in connection with our formation and the filing of the registration statement on Form 10, of which this information statement forms a

 

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part. In connection with the separation, we expect to receive an opinion of Skadden, Arps, Slate, Meagher & Flom LLP to the effect that we have been organized in conformity with the requirements for qualification as a REIT under the Code, and that our actual method of operation has enabled, and our proposed method of operation will enable, us to meet the requirements for qualification and taxation as a REIT. It must be emphasized that the opinion of tax counsel will be based on various assumptions relating to our organization and operation, and will be conditioned upon fact-based representations and covenants made by our management regarding our organization, assets, income, and the past, present and future conduct of our business operations. While we intend to operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given by tax counsel or by us that we will qualify as a REIT for any particular year. The opinion will be expressed as of the date issued, and will not cover subsequent periods. Tax counsel will have no obligation to advise us or our stockholders of any subsequent change in the matters stated, represented or assumed, or of any subsequent change in the applicable law. You should be aware that opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not challenge the conclusions set forth in such opinions. Tax counsel’s opinion relies on a separate opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding Newcastle’s organization and operation as a REIT (the “Newcastle Opinion”). The Newcastle Opinion, in turn, relies upon various legal opinions issued by other counsel for Newcastle and its predecessors, including Sidley Austin Brown & Wood LLP and Thacher Proffitt & Wood, with respect to certain issues and transactions.

Qualification and taxation as a REIT depends on our ability to meet on a continuing basis, through actual operating results, distribution levels, and diversity of stock and asset ownership, various qualification requirements imposed upon REITs by the Code, the compliance with which will not be reviewed by tax counsel. In addition, our ability to qualify as a REIT depends in part upon the operating results, organizational structure and entity classification for U.S. federal income tax purposes of certain affiliated entities, the status of which may not have been reviewed by tax counsel. Our ability to qualify as a REIT also requires that we satisfy certain asset tests, some of which depend upon the fair market values of assets that we own directly or indirectly. Such values may not be susceptible to a precise determination. Accordingly, no assurance can be given that the actual results of our operations for any taxable year will satisfy such requirements for qualification and taxation as a REIT.

Taxation of REITs in General

As indicated above, our qualification and taxation as a REIT depends upon our ability to meet, on a continuing basis, various qualification requirements imposed upon REITs by the Code. The material qualification requirements are summarized below under “—Requirements for Qualification-General.” While we intend to operate so that we qualify as a REIT, no assurance can be given that the IRS will not challenge our qualification, or that we will be able to operate in accordance with the REIT requirements in the future. See “—Failure to Qualify.”

Provided that we qualify as a REIT, we generally will be entitled to a deduction for dividends that we pay and therefore will not be subject to U.S. federal corporate income tax on our net income that is currently distributed to our stockholders. This treatment substantially eliminates the “double taxation” at the corporate and stockholder levels that generally results from investment in a corporation. In general, the income that we generate is taxed only at the stockholder level upon a distribution of dividends to our stockholders.

Most domestic holders that are individuals, trusts or estates will be taxed on corporate dividends at a reduced maximum rate. With limited exceptions, however, dividends from us or from other entities that are taxed as REITs are generally not eligible for the reduced rates, and will continue to be taxed at rates applicable to ordinary income. See “—Taxation of Stockholders—Taxation of Taxable Domestic Holders—Distributions.”

Net operating losses, foreign tax credits and other tax attributes generally do not pass through to our stockholders, subject to special rules for certain items such as the capital gains that we recognize. See “Taxation of Stockholders.”

 

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Even if we qualify as a REIT, we will nonetheless be subject to U.S. federal tax in the following circumstances:

 

   

We will be taxed at regular corporate rates on any undistributed income, including undistributed net capital gains.

 

   

We may be subject to the “alternative minimum tax” on our items of tax preference, including any deductions of net operating losses.

 

   

If we have net income from prohibited transactions, which are, in general, sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, other than foreclosure property, such income will be subject to a 100% tax. See “—Prohibited Transactions,” and “—Foreclosure Property,” below.

 

   

If we elect to treat property that we acquire in connection with a foreclosure of a mortgage loan or certain leasehold terminations as “foreclosure property”, we may thereby avoid the 100% tax on gain from a resale of that property (if the sale would otherwise constitute a prohibited transaction), but the income from the sale or operation of the property may be subject to corporate income tax at the highest applicable rate (currently 35%).

 

   

If we derive “excess inclusion income” from an interest in certain mortgage loan securitization structures (i.e., a “taxable mortgage pool” or a residual interest in a REMIC, we could be subject to corporate level U.S. federal income tax at a 35% rate to the extent that such income is allocable to specified types of tax-exempt stockholders known as “disqualified organizations” that are not subject to unrelated business income tax. See “—Taxable Mortgage Pools and Excess Inclusion Income” below.

 

   

If we should fail to satisfy the 75% gross income test or the 95% gross income test, as discussed below, but nonetheless maintain our qualification as a REIT because we satisfy other requirements, we will be subject to a 100% tax on an amount based on the magnitude of the failure adjusted to reflect the profit margin associated with our gross income.

 

   

If we should fail to satisfy the asset or other requirements applicable to REITs, as described below, and yet maintain our qualification as a REIT because there is reasonable cause for the failure and other applicable requirements are met, we may be subject to an excise tax. In that case, the amount of the excise tax will be at least $50,000 per failure, and, in the case of certain asset test failures, will be determined as the amount of net income generated by the assets in question multiplied by the highest corporate tax rate (currently 35%) if that amount exceeds $50,000 per failure.

 

   

If we should fail to distribute during each calendar year at least the sum of (a) 85% of our REIT ordinary income for such year, (b) 95% of our REIT capital gain net income for such year, and (c) any undistributed taxable income from prior periods, we would be subject to a non-deductible 4% excise tax on the excess of the required distribution over the sum of (i) the amounts that we actually distributed, plus (ii) the amounts we retained and upon which we paid income tax at the corporate level.

 

   

We may be required to pay monetary penalties to the IRS in certain circumstances, including if we fail to meet record keeping requirements intended to monitor our compliance with rules relating to the composition of a REIT’s stockholders, as described below in “—Requirements for Qualification-General.”

 

   

A 100% tax may be imposed on transactions between us and a TRS (as described below) that do not reflect arm’s length terms.

 

   

If we acquire appreciated assets from a corporation that is not a REIT (i.e., a corporation taxable under subchapter C of the Code) in a transaction in which the adjusted tax basis of the assets in our hands is determined by reference to the adjusted tax basis of the assets in the hands of the subchapter C corporation, we may be subject to tax on such appreciation at the highest corporate income tax rate

 

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then applicable if we subsequently recognize gain on a disposition of any such assets during the ten-year period following their acquisition from the subchapter C corporation.

 

   

The earnings of any subsidiary that is a subchapter C corporation, including any TRS, may be subject to U.S. federal corporate income tax.

In addition, we and our subsidiaries may be subject to a variety of taxes, including payroll taxes and state, local, and foreign income, property and other taxes on assets and operations. We could also be subject to tax in situations and on transactions not presently contemplated.

Requirements for Qualification-General

The Code defines a REIT as a corporation, trust or association:

 

  (1) that is managed by one or more trustees or directors;

 

  (2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;

 

  (3) that would be taxable as a domestic corporation but for the special Code provisions applicable to REITs;

 

  (4) that is neither a financial institution nor an insurance company subject to specific provisions of the Code;

 

  (5) the beneficial ownership of which is held by 100 or more persons;

 

  (6) in which, during the last half of each taxable year, not more than 50% in value of the outstanding stock is owned, directly or indirectly, by five or fewer “individuals” (as defined in the Code to include specified tax-exempt entities);

 

  (7) which meets other tests described below, including with respect to the nature of its income and assets; and

 

  (8) that makes an election to be a REIT for the current taxable year or has made such an election for a previous taxable year that has not been terminated or revoked.

The Code provides that conditions (1) through (4) must be met during the entire taxable year, and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a shorter taxable year. Conditions (5) and (6) need not be met during a corporation’s initial tax year as a REIT (which, in our case, is 2013). Our certificate of incorporation provides restrictions regarding the ownership and transfers of our shares, which are intended to assist us in satisfying the share ownership requirements described in conditions (5) and (6) above.

To monitor compliance with the share ownership requirements, we generally are required to maintain records regarding the actual ownership of our shares. To do so, we must demand written statements each year from the record holders of significant percentages of our stock pursuant to which the record holders must disclose the actual owners of the shares (i.e., the persons required to include our dividends in their gross income). We must maintain a list of those persons failing or refusing to comply with this demand as part of our records. We could be subject to monetary penalties if we fail to comply with these record keeping requirements. If you fail or refuse to comply with the demands, you will be required by Treasury regulations to submit a statement with your tax return disclosing the actual ownership of the shares and other information.

In addition, a corporation generally may not elect to become a REIT unless its taxable year is the calendar year. We will adopt December 31 as our year end, and therefore satisfy this requirement.

The Code provides relief from violations of the REIT gross income requirements, as described below under “—Income Tests,” in cases where a violation is due to reasonable cause and not willful neglect, and other

 

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requirements are met, including the payment of a penalty tax that is based upon the magnitude of the violation. In addition, certain provisions of the Code extend similar relief in the case of certain violations of the REIT asset requirements (see “—Asset Tests” below) and other REIT requirements, again provided that the violation is due to reasonable cause and not willful neglect, and other conditions are met, including the payment of a penalty tax.

If we fail to satisfy any of the various REIT requirements, there can be no assurance that these relief provisions would be available to enable us to maintain our qualification as a REIT, and, if such relief provisions are available, the amount of any resultant penalty tax could be substantial.

Effect of Subsidiary Entities

Ownership of Partnership Interests . If we are a partner in an entity that is treated as a partnership for U.S. federal income tax purposes, Treasury regulations provide that we are deemed to own our proportionate share of the partnership’s assets, and to earn our proportionate share of the partnership’s income, for purposes of the asset and gross income tests applicable to REITs. Our proportionate share of a partnership’s assets and income is based on our capital interest in the partnership (except that for purposes of the 10% value test described below, our proportionate share of the partnership’s assets is based on our proportionate interest in the equity and certain debt securities issued by the partnership). In addition, the assets and gross income of the partnership are deemed to retain the same character in our hands. Thus, our proportionate share of the assets and items of income of any of our subsidiary partnerships will be treated as our assets and items of income for purposes of applying the REIT requirements. A summary of certain rules governing the U.S. federal income taxation of partnerships and their partners is provided below in “—Tax Aspects of Investments in Affiliated Partnerships.”

Disregarded Subsidiaries . If we own a corporate subsidiary that is a “qualified REIT subsidiary,” that subsidiary is generally disregarded for U.S. federal income tax purposes, and all of the subsidiary’s assets, liabilities and items of income, deduction and credit are treated as our assets, liabilities and items of income, deduction and credit, including for purposes of the gross income and asset tests applicable to REITs. A qualified REIT subsidiary is any corporation, other than a TRS as described below, that we wholly own, either directly or through one or more other qualified REIT subsidiaries or disregarded entities. Other entities that are wholly-owned by us, including single member limited liability companies that have not elected to be taxed as corporations for U.S. federal income tax purposes, are also generally disregarded as separate entities for U.S. federal income tax purposes, including for purposes of the REIT income and asset tests. Disregarded subsidiaries, along with any partnerships in which we hold an equity interest, are sometimes referred to herein as “pass-through subsidiaries.”

In the event that a disregarded subsidiary of ours ceases to be wholly-owned—for example, if any equity interest in the subsidiary is acquired by a person other than us or a disregarded subsidiary of ours—the subsidiary’s separate existence would no longer be disregarded for U.S. federal income tax purposes. Instead, the subsidiary would have multiple owners and would be treated as either a partnership or a taxable corporation. Such an event could, depending on the circumstances, adversely affect our ability to satisfy the various asset and gross income requirements applicable to REITs, including the requirement that REITs generally may not own, directly or indirectly, more than 10% of the securities of another corporation. See “—Asset Tests” and “—Income Tests.”

Taxable Subsidiaries . In general, we may jointly elect with a subsidiary corporation, whether or not wholly-owned, to treat the subsidiary corporation as a TRS. We generally may not own more than 10% of the securities of a taxable corporation, as measured by voting power or value, unless we and such corporation elect to treat such corporation as a TRS. The separate existence of a TRS or other taxable corporation is not ignored for U.S. federal income tax purposes. Accordingly, a TRS or other taxable corporation generally would be subject to corporate income tax on its earnings, which may reduce the cash flow that we and our subsidiaries generate in the aggregate, and may reduce our ability to make distributions to our stockholders.

We are not treated as holding the assets of a TRS or other taxable subsidiary corporation or as receiving any income that the subsidiary earns. Rather, the stock issued by a taxable subsidiary to us is an asset in our hands,

 

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and we treat the dividends paid to us from such taxable subsidiary, if any, as income. This treatment can affect our income and asset test calculations, as described below. Because we do not include the assets and income of TRSs or other taxable subsidiary corporations in determining our compliance with the REIT requirements, we may use such entities to undertake indirectly activities that the REIT rules might otherwise preclude us from doing directly or through pass-through subsidiaries. For example, we could use TRSs or other taxable subsidiary corporations to conduct activities that give rise to certain categories of income or to conduct activities that, if conducted by us directly, would be treated in our hands as prohibited transactions. We may also use a TRS to earn income in respect of Excess MSRs.

The TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. Further, the rules impose a 100% excise tax on certain transactions involving a TRS and its parent REIT that are not conducted on an arm’s-length basis. We intend that all of our transactions with any TRS will be conducted on an arm’s-length basis.

We may hold a significant amount of assets in one or more TRSs, subject to the limitation that securities in TRSs may not represent more than 25% of our assets. In general, we intend that loans that we originate or buy with an intention of selling in a manner that might expose us to a 100% tax on “prohibited transactions” will be sold by a TRS. We anticipate that the TRS through which any such sales are made may be treated as a dealer for U.S. federal income tax purposes. As a dealer, the TRS may in general mark all the loans it holds on the last day of each taxable year to their market value, and may recognize ordinary income or loss on such loans with respect to such taxable year as if they had been sold for that value on that day. In addition, the TRS may further elect to be subject to the mark-to-market regime described above in the event that the TRS is properly classified as a “trader” as opposed to a “dealer” for U.S. federal income tax purposes.

Income Tests

In order to qualify as a REIT, we must satisfy two annual gross income requirements. First, at least 75% of our gross income for each taxable year, excluding gross income from sales of inventory or dealer property in “prohibited transactions” and certain hedging transactions, generally must be derived from investments relating to real property or mortgages on real property, including interest income derived from mortgage loans secured by real property (including, generally, certain Agency RMBS and certain types of MBS), “rents from real property,” dividends received from other REITs, and gains from the sale of real estate assets, as well as specified income from temporary investments. Second, at least 95% of our gross income in each taxable year, excluding gross income from prohibited transactions and certain hedging transactions, must be derived from some combination of income that qualifies under the 75% gross income test described above, as well as other dividends, interest, and gain from the sale or disposition of stock or securities, which need not have any relation to real property. Income and gain from certain hedging transactions will be excluded from both the numerator and the denominator for purposes of both the 75% and 95% gross income tests. See “—Derivatives and Hedging Transactions” below.

As described above, we have received a private letter ruling from the IRS substantially to the effect that interest received by us from our Excess MSRs will be considered interest on obligations secured by mortgages on real property for purposes of the 75% REIT gross income test. Although a private letter ruling from the IRS is generally binding on the IRS, if any of the assumptions of the private letter ruling, or any of the representations or statements that we have made in connection therewith, are, or become, inaccurate or incomplete in any material respect with respect to one or more Excess MSR investments, or if we acquire an Excess MSR investment with terms that are not consistent with the terms of the Excess MSR investments described in the private letter ruling, then we will not be able to rely on the private letter ruling. If we are unable to rely on the private letter ruling with respect to an Excess MSR investment, no assurance can be given as to the status of such Excess MSR investment for purposes of the 75% gross income test.

We invest in RMBS whose principal and interest payments are guaranteed by a U.S. Government agency, such as Ginnie Mae, or a GSE that are pass-through certificates. We expect that these agency pass-through certificates

 

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will be treated as interests in grantor trusts for U.S. federal income tax purposes. We will be treated as owning an undivided beneficial ownership interest in the mortgage loans held by the grantor trust. The interest on such mortgage loans will be qualifying income for purposes of the 75% gross income test to the extent that the obligation is secured by real property, as discussed below. We also may invest in collateralized mortgage obligations (“CMOs”) representing interests in pass-through certificates or RMBS that are not issued or guaranteed by a U.S. Government agency or a GSE. We expect that our investments in CMOs and non-Agency RMBS will be treated as interests in REMICs for U.S. federal income tax purposes. In the case of CMOs and RMBS treated as interests in a REMIC, such interests will generally qualify as real estate assets and income derived from REMIC interests will generally be treated as qualifying income for purposes of the 75% and 95% gross income tests described above. If less than 95% of the assets of a REMIC are real estate assets, however, then only a proportionate part of our interest in the REMIC and income derived from the interest will qualify for purposes of the 75% gross income test. In addition, some REMIC securitizations include imbedded interest rate swap or cap contracts or other derivative instruments that potentially could produce non-qualifying income for the stockholder of the related REMIC securities. We expect that substantially all of our income from agency mortgage investments, RMBS, and other mortgage loans will be qualifying income for purposes of the REIT gross income tests. See below under “—Asset Tests” for a discussion of the effect of such investments on our qualification as a REIT.

To the extent that we hold mortgage participations or MBS that do not represent REMIC interests, such assets may not qualify as real estate assets, and, consequently, the income generated from them might not qualify for purposes of either or both of the REIT income tests, depending upon the circumstances and the specific structure of the investment. Our ability to invest in those assets may be limited by our intention to qualify as a REIT.

Interest income constitutes qualifying mortgage interest for purposes of the 75% gross income test to the extent that the obligation upon which such interest is paid is secured by a mortgage on real property. If we receive interest income with respect to a mortgage loan that is secured by both real property and other property, and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property on the date that we acquired or originated the mortgage loan, the interest income will be apportioned between the real property and the other collateral, and our income from the arrangement will qualify for purposes of the 75% gross income test only to the extent that the interest is allocable to the real property. In addition, in certain cases (unless a safe harbor applies pursuant to IRS guidance), the modification of a debt instrument could result in the conversion of the interest paid on the instrument from qualifying income to wholly or partially non-qualifying income, which may require that we dispose of the debt instrument or contribute it to our TRS in order to satisfy the income tests described above. Moreover, the IRS has taken the position that, for purposes of the REIT income tests, the principal amount of a loan is equal to its face amount, even in situations where the loan was acquired at a significant discount. Under this position, a portion of the income generated by the instrument would not qualify for purposes of the 75% gross income test in cases where the underlying real property has declined in value. Even if a loan is not secured by real property, or is undersecured, the income that it generates may nonetheless qualify for purposes of the 95% gross income test.

We may purchase and sell Agency RMBS through TBAs and recognize income or gains from the disposition of those TBAs, through dollar roll transactions or otherwise. There is no direct authority with respect to the qualification of income or gains from dispositions of TBAs as gains from the sale of real property (including interests in real property and interests in mortgages on real property) or other qualifying income for purposes of the 75% gross income test. To the extent we enter into any TBAs in the future, we intend to treat income and gains from such TBAs as qualifying income for purposes of the 75% gross income test, based on an opinion we would expect to receive from Skadden, Arps, Slate, Meagher & Flom LLP substantially to the effect that, for purposes of the 75% REIT gross income test, any gain recognized by us in connection with the settlement of such TBAs should be treated as gain from the sale or disposition of the underlying Agency RMBS. Opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not successfully challenge the conclusions set forth in such opinions. In addition, the opinion of Skadden, Arps, Slate, Meagher & Flom LLP would be based on various assumptions relating to such TBAs and would be conditioned upon fact-based

 

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representations and covenants made by our management regarding such TBAs. No assurance can be given that the IRS would not assert that such income is not qualifying income. If the IRS were to successfully challenge the conclusion of Skadden, Arps, Slate, Meagher & Flom LLP, we could be subject to a penalty tax or we could fail to qualify as a REIT if a sufficient portion of our income consists of income or gains from the disposition of TBAs.

We have invested in consumer loans. Our investments in consumer loans generally will not generate qualifying gross income for purposes of the 75% gross income test. However, to the extent the investments are purchased with new capital, such investments will generate qualifying gross income for purposes of both the 75% and 95% gross income tests for one year following the receipt of such new capital. Accordingly, our ability to make and retain ownership of these kinds of investments may be limited.

The status of investments in servicing advances for purposes of the REIT income tests is uncertain, and therefore our ability to make such investments may be limited.

To the extent that the terms of a loan provide for contingent interest that is based on the cash proceeds realized upon the sale of the property securing the loan, income attributable to the participation feature will be treated as gain from sale of the underlying property, which generally will be qualifying income for purposes of both the 75% and 95% gross income tests provided that the property is not held as inventory or dealer property. To the extent that we derive interest income from a mortgage loan, or income from the rental of real property, where all or a portion of the amount of interest or rental income payable is contingent, such income generally will qualify for purposes of the gross income tests only if it is based upon the gross receipts or sales, and not the net income or profits, of the borrower or lessee. This limitation does not apply, however, where the borrower or lessee leases substantially all of its interest in the property to tenants or subtenants, to the extent that the rental income derived by the borrower or lessee, as the case may be, would qualify as rents from real property had we earned the income directly.

We may invest in mezzanine loans, which are loans secured by equity interests in an entity that directly or indirectly owns real property, rather than by a direct mortgage of the real property. The IRS has issued Revenue Procedure 2003-65, which provides a safe harbor applicable to mezzanine loans. Under the Revenue Procedure, if a mezzanine loan meets each of the requirements contained in the Revenue Procedure, (1) the mezzanine loan will be treated by the IRS as a real estate asset for purposes of the asset tests described below, and (2) interest derived from the mezzanine loan will be treated as qualifying mortgage interest for purposes of the 75% gross income test. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law. We intend to structure any investments in mezzanine loans in a manner that complies with the various requirements applicable to our qualification as a REIT. To the extent that any of our mezzanine loans do not meet all of the requirements for reliance on the safe harbor set forth in the Revenue Procedure, however, there can be no assurance that the IRS will not challenge the tax treatment of these loans.

We may hold certain participation interests, including B-Notes, in mortgage loans and other instruments. Such interests in an underlying loan are created by virtue of a participation or similar agreement to which the originator of the loan is a party, along with one or more participants. The borrower on the underlying loan is typically not a party to the participation agreement. The performance of this investment depends upon the performance of the underlying loan, and if the underlying borrower defaults, the participant typically has no recourse against the originator of the loan. The originator often retains a senior position in the underlying loan, and grants junior participations which absorb losses first in the event of a default by the borrower. We intend that any participation interests in which we may invest will qualify as real estate assets for purposes of the REIT asset tests described below, and that any interest that we derive from such investments will be treated as qualifying mortgage interest for purposes of the 75% gross income test. The appropriate treatment of participation interests for U.S. federal income tax purposes is not entirely certain, however, and no assurance can be given that the IRS will not challenge our treatment of our participation interests. In the event of a determination that such participation interests do not qualify as real estate assets, or that the income that we derive from such

 

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participation interests does not qualify as mortgage interest for purposes of the REIT asset and income tests, we could be subject to a penalty tax, or could fail to qualify as a REIT, if we were to invest in such participation interests. See “—Taxation of REITs in General,” “—Requirements for Qualification-General,” “—Asset Tests” and “—Failure to Qualify.”

Rents received by us, if any, will qualify as “rents from real property” in satisfying the gross income requirements described above only if several conditions are met. If rent is partly attributable to personal property leased in connection with a lease of real property, the portion of the rent that is attributable to the personal property will not qualify as “rents from real property” unless it constitutes 15% or less of the total rent received under the lease. In addition, the amount of rent must not be based in whole or in part on the income or profits of any person. Amounts received as rent, however, generally will not be excluded from rents from real property solely by reason of being based on fixed percentages of gross receipts or sales. Moreover, for rents received by us, if any, to qualify as “rents from real property,” we generally must not operate or manage the property or furnish or render services to the tenants of such property, other than through an “independent contractor” from which we derive no revenue. We are permitted, however, to perform services that are “usually or customarily rendered” in connection with the rental of space for occupancy only and which are not otherwise considered rendered to the occupant of the property. In addition, we may directly or indirectly provide non-customary services to tenants of our properties without disqualifying all of the rent from the property if the payments for such services does not exceed 1% of the total gross income from the property. For purposes of this test, we are deemed to have received income from such non-customary services in an amount at least 150% of the direct cost of providing the services. Moreover, we are generally permitted to provide services to tenants or others through a TRS without disqualifying the rental income received from tenants for purposes of the income tests. Also, rental income will qualify as rents from real property only to the extent that we do not directly or constructively hold a 10% or greater interest, as measured by vote or value, in the lessee’s equity.

We may directly or indirectly receive distributions from TRSs or other corporations that are not REITs or qualified REIT subsidiaries. These distributions generally are treated as dividend income to the extent of the earnings and profits of the distributing corporation. Such distributions will generally constitute qualifying income for purposes of the 95% gross income test, but not for purposes of the 75% gross income test. Any dividends that we receive from a REIT, however, will be qualifying income for purposes of both the 95% and 75% gross income tests.

Fees will generally be qualifying income for purposes of both the 75% and 95% gross income tests if they are received in consideration for entering into an agreement to make a loan secured by real property and the fees are not determined by income and profits. Other fees generally will not be qualifying income for purposes of either gross income test and will not be favorably counted for purposes of either gross income test. Any fees earned by a TRS will not be included for purposes of the gross income tests.

Any income or gain that we or our pass-through subsidiaries derive from instruments that hedge certain risks, such as the risk of changes in interest rates, will be excluded from gross income for purposes of both the 75% and the 95% gross income tests, provided that specified requirements are met, including the requirement that the instrument hedge risks associated with our indebtedness that is incurred to acquire or carry “real estate assets” or risks associated with certain currency fluctuations (as described below under “—Asset Tests”), and the instrument is properly identified as a hedge along with the risk that it hedges within prescribed time periods.

If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may still qualify as a REIT for the year if we are entitled to relief under applicable provisions of the Code. Those relief provisions generally will be available if our failure to meet the gross income tests was due to reasonable cause and not due to willful neglect and we file a schedule of the sources of our gross income in accordance with Treasury regulations. It is not possible to state whether we would be entitled to the benefit of these relief provisions in all circumstances. If these relief provisions are inapplicable to a particular set of circumstances, we will not qualify as a REIT. As discussed above under “—Taxation of REITs in General,” even where these relief provisions apply, the Code imposes a tax based upon the amount by which we fail to satisfy the particular gross income test.

 

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Asset Tests

At the close of each calendar quarter, we must also satisfy four tests relating to the nature of our assets. First, at least 75% of the value of our total assets must be represented by some combination of “real estate assets,” cash, cash items, U.S. government securities, and, under some circumstances, stock or debt instruments purchased with new capital. For this purpose, real estate assets include interests in real property, such as land, buildings, leasehold interests in real property, stock of other corporations that qualify as REITs, and some kinds of MBS and mortgage loans. Assets that do not qualify for purposes of the 75% asset test are subject to the additional asset tests described below.

Second, the value of any one issuer’s securities that we own may not exceed 5% of the value of our total assets. Third, we may not own more than 10% of any one issuer’s outstanding securities, as measured by either voting power or value. The 5% and 10% asset tests do not apply to real estate assets, securities of TRSs, and qualified REIT subsidiaries and the value prong of the 10% asset test does not apply to “straight debt” having specified characteristics and to certain other securities described below. Solely for purposes of the 10% asset test, the determination of our interest in the assets of a partnership or limited liability company in which we own an interest will be based on our proportionate interest in any securities issued by the partnership or limited liability company, excluding for this purpose certain securities described in the Code. Fourth, the aggregate value of all securities of TRSs that we hold may not exceed 25% of the value of our total assets.

Notwithstanding the general rule, as noted above, that for purposes of the REIT income and asset tests, we are treated as owning our proportionate share of the underlying assets of a subsidiary partnership, if we hold indebtedness issued by a partnership, the indebtedness will be subject to, and may cause a violation of, the asset tests unless the indebtedness is a qualifying mortgage asset, or other conditions are met. Similarly, although stock of another REIT is a qualifying asset for purposes of the REIT asset tests, any non-mortgage debt that is issued by another REIT may not so qualify (such debt, however, will not be treated as a “security” for purposes of the 10% value test, as explained below).

The Code provides that certain securities will not cause a violation of the 10% value test described above. Such securities include instruments that constitute “straight debt,” which includes, among other things, securities having certain contingency features. A security does not qualify as “straight debt” where a REIT (or a controlled TRS of the REIT) owns other securities of the same issuer which do not qualify as straight debt, unless the value of those other securities constitute, in the aggregate, 1% or less of the total value of that issuer’s outstanding securities. In addition to straight debt, the Code provides that certain other securities will not violate the 10% value test. Such securities include (a) any loan made to an individual or an estate, (b) certain rental agreements pursuant to which one or more payments are to be made in subsequent years (other than agreements between a REIT and certain persons related to the REIT under attribution rules), (c) any obligation to pay rents from real property, (d) securities issued by governmental entities that are not dependent in whole or in part on the profits of (or payments made by) a non-governmental entity, (e) any security (including debt securities) issued by another REIT, and (f) any debt instrument issued by a partnership if the partnership’s income is of a nature that it would satisfy the 75% gross income test described above under “—Income Tests.” The Code also provides that in applying the 10% value test, a debt security issued by a partnership is not taken into account to the extent, if any, of the REIT’s proportionate interest in that partnership.

As described above, we have received a private letter ruling from the IRS substantially to the effect that our Excess MSRs represent interests in mortgages on real property and thus are qualifying “real estate assets” for purposes of the 75% REIT asset test. Although a private letter ruling from the IRS is generally binding on the IRS, if any of the assumptions of the private letter ruling, or any of the representations or statements that we have made in connection therewith, are, or become, inaccurate or incomplete in any material respect with respect to one or more Excess MSR investments, or if we acquire an Excess MSR investment with terms that are not consistent with the terms of the Excess MSR investments described in the private letter ruling, then we will not be able to rely on the private letter ruling. If we are unable to rely on the private letter ruling with respect to an

 

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Excess MSR investment, no assurance can be given as to the status of such Excess MSR investment for purposes of the 75% asset test.

We invest in RMBS whose principal and interest payments are guaranteed by a U.S. Government agency, such as Ginnie Mae, or a GSE, that are pass-through certificates. We expect that these agency pass-through certificates will be treated as interests in grantor trusts for U.S. federal income tax purposes. We will be treated as owning an undivided beneficial ownership interest in the mortgage loans held by the grantor trust.

We also may invest in CMOs representing interests in agency pass-through certificates and RMBS that are not issued or guaranteed by a U.S. Government agency or a GSE. We expect that our investments in CMOs and non-Agency RMBS will be treated as interests in REMICs for U.S. federal income tax purposes. Such interests will generally qualify as real estate assets, and income derived from REMIC interests will generally be treated as qualifying income for purposes of the REIT income tests described above. If less than 95% of the assets of a REMIC are real estate assets, however, then only a proportionate part of our interest in the REMIC and income derived from the interest qualifies for purposes of the REIT asset and income tests.

To the extent that we hold mortgage participations or MBS that do not represent REMIC interests, such assets may not qualify as real estate assets, depending upon the circumstances and the specific structure of the investment. Our ability to invest in those assets may be limited by our intention to qualify as a REIT.

In addition, in certain cases (unless a safe harbor applies pursuant to IRS guidance), the modification of a debt instrument or, potentially, an increase in the value of a debt instrument that we acquired at a significant discount, could result in the conversion of the instrument from a qualifying real estate asset to a wholly or partially non-qualifying asset that must be contributed to a TRS or disposed of in order for us to satisfy the asset tests described above.

We may purchase and sell Agency RMBS through TBAs. There is no direct authority with respect to the qualification of TBAs as real estate assets or Government securities for purposes of the 75% asset test. To the extent we enter into any TBAs in the future, we intend to treat such TBAs as qualifying assets for purposes of the 75% asset test, based on an opinion we would expect to receive from Skadden, Arps, Slate, Meagher & Flom LLP substantially to the effect that, for purposes of the REIT asset tests, our ownership of a TBA should be treated as ownership of the underlying Agency RMBS. Opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not successfully challenge the conclusions set forth in such opinions. In addition, the opinion of Skadden, Arps, Slate, Meagher & Flom LLP would be based on various assumptions relating to such TBAs and would be conditioned upon fact-based representations and covenants made by our management regarding such TBAs. No assurance can be given that the IRS would not assert that such assets are not qualifying assets. If the IRS were to successfully challenge the conclusion of Skadden, Arps, Slate, Meagher & Flom LLP, we could be subject to a penalty tax or we could fail to qualify as a REIT if a sufficient portion of our assets consists of TBAs.

We have invested in consumer loans. Our investments in consumer loans generally will not be qualifying real estate assets for purposes of the 75% asset test. However, to the extent the investments are purchased with new capital, such investments will be qualifying real estate assets for purposes of the 75% asset test for one year following the receipt of such new capital. Accordingly, our ability to make and retain ownership of these kinds of investments may be limited.

The status of investments in servicing advances for purposes of the REIT asset tests is uncertain, and therefore our ability to make such investments may be limited.

If we hold a “residual interest” in a REMIC from which we derive “excess inclusion income,” we will be required to either distribute the excess inclusion income or pay tax on it (or a combination of the two), even though we may not receive the income in cash. To the extent that distributed excess inclusion income is allocable

 

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to a particular stockholder, the income (1) would not be allowed to be offset by any net operating losses otherwise available to the stockholder, (2) would be subject to tax as unrelated business taxable income in the hands of most types of stockholders that are otherwise generally exempt from U.S. federal income tax, and (3) would result in the application of U.S. federal income tax withholding at the maximum rate (30%), without reduction pursuant to any otherwise applicable income tax treaty or other exemption, to the extent allocable to most types of non-U.S. holders. Moreover, any excess inclusion income that we receive that is allocable to specified categories of tax-exempt investors which are not subject to unrelated business income tax, such as government entities or charitable remainder trusts, may be subject to corporate-level income tax in our hands, whether or not it is distributed. See “—Taxable Mortgage Pools and Excess Inclusion Income.”

In addition, certain of our mezzanine loans may qualify for the safe harbor in Revenue Procedure 2003-65 pursuant to which certain loans secured by a first priority security interest in ownership interests in a partnership or limited liability company will be treated as qualifying assets for purposes of the 75% real estate asset test and the 10% vote or value test. See “—Income Tests.” We may make some mezzanine loans that do not qualify for that safe harbor and that do not qualify as “straight debt” securities or for one of the other exclusions from the definition of “securities” for purposes of the 10% value test. We intend to make such investments in such a manner as not to fail the asset tests described above, and we believe that our existing investments satisfy such requirements. We believe that our holdings of securities and other assets will comply with the foregoing REIT asset requirements, and we intend to monitor compliance on an ongoing basis.

We intend to enter into sale and repurchase agreements under which we would nominally sell certain of our Agency RMBS to a counterparty and simultaneously enter into an agreement to repurchase the sold assets in exchange for a purchase price that reflects a financing charge. We believe that we would be treated for REIT asset and income test purposes as the owner of the Agency RMBS that are the subject of any such agreement notwithstanding that such agreements may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the Agency RMBS during the term of the sale and repurchase agreement, in which case we could fail to qualify as a REIT.

Independent valuations have not been obtained to support our conclusions as to the value of all of our assets. Moreover, values of some assets, including instruments issued in securitization transactions, may not be susceptible to a precise determination, and values are subject to change in the future. Furthermore, the proper classification of an instrument as debt or equity for U.S. federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT asset requirements. Accordingly, there can be no assurance that the IRS will not contend that our interests in our subsidiaries or in the securities of other issuers will not cause a violation of the REIT asset tests.

The Code contains a number of relief provisions that make it easier for REITs to satisfy the asset requirements, or to maintain REIT qualification notwithstanding certain violations of the asset and other requirements. One such provision allows a REIT which fails one or more of the asset requirements to nevertheless maintain its REIT qualification if (1) the REIT provides the IRS with a description of each asset causing the failure, (2) the failure is due to reasonable cause and not willful neglect, (3) the REIT pays a tax equal to the greater of (a) $50,000 per failure, and (b) the product of the net income generated by the assets that caused the failure multiplied by the highest applicable corporate tax rate (currently 35%), and (4) the REIT either disposes of the assets causing the failure within 6 months after the last day of the quarter in which it identifies the failure, or otherwise satisfies the relevant asset tests within that time frame. A second relief provision applies to de minimis violations of the 10% and 5% asset tests. A REIT may maintain its qualification despite a violation of such requirements if (a) the value of the assets causing the violation does not exceed the lesser of 1% of the REIT’s total assets, and $10,000,000, and (b) the REIT either disposes of the assets causing the failure within 6 months after the last day of the quarter in which it identifies the failure, or the relevant tests are otherwise satisfied within that time frame.

If we fail to satisfy the asset tests at the end of a calendar quarter, such a failure would not cause us to lose our REIT qualification if we (1) satisfied the asset tests at the close of the preceding calendar quarter and (2) the

 

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discrepancy between the value of our assets and the asset requirements was not wholly or partly caused by an acquisition of non-qualifying assets, but instead arose from changes in the market value of our assets. If the condition described in (2) were not satisfied, we still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose or by making use of relief provisions described below. No assurance can be given that we would qualify for relief under those provisions.

Annual Distribution Requirements

In order to qualify as a REIT, we are required to distribute dividends, other than capital gain dividends, to our stockholders in an amount at least equal to:

 

  (a) the sum of

 

  (1) 90% of our “REIT taxable income,” computed without regard to our net capital gains and the deduction for dividends paid, and

 

  (2) 90% of our net income, if any, (after tax) from foreclosure property (as described below), minus

 

  (b) the sum of specified items of noncash income.

We generally must make these distributions in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for the year and if paid with or before the first regular dividend payment after such declaration. In addition, any dividend declared by us in October, November, or December of any year and payable to a stockholder of record on a specified date in any such month will be treated as both paid by us and received by the stockholder on December 31 of such year, so long as the dividend is actually paid by us before the end of January of the next calendar year. In order for distributions to be counted as satisfying the annual distribution requirement, and to give rise to a tax deduction for us, the distributions must not be “preferential dividends.” A dividend is not a preferential dividend if the distribution is (1) pro rata among all outstanding shares of stock within a particular class, and (2) in accordance with the preferences among different classes of stock as set forth in our organizational documents.

To the extent that we distribute at least 90%, but less than 100%, of our “REIT taxable income,” as adjusted, we will be subject to tax at ordinary corporate tax rates on the retained portion. We may elect to retain, rather than distribute, our net long-term capital gains and pay tax on such gains. In this case, we could elect for our stockholders to include their proportionate shares of such undistributed long-term capital gains in income, and to receive a corresponding credit for their share of the tax that we paid. Our stockholders would then increase their adjusted basis of their stock by the difference between (a) the amounts of capital gain dividends that we designated and that they include in their taxable income, and (b) the tax that we paid on their behalf with respect to that income.

To the extent that in the future we may have available net operating losses carried forward from prior tax years, such losses may reduce the amount of distributions that we must make in order to comply with the REIT distribution requirements. Such losses, however, will generally not affect the character of any distributions that are actually made as ordinary dividends or capital gains. See “—Taxation of Stockholders—Taxation of Taxable Domestic Holders—Distributions.”

If we should fail to distribute during each calendar year at least the sum of (a) 85% of our REIT ordinary income for such year, (b) 95% of our REIT capital gain net income for such year, and (c) any undistributed taxable income from prior periods, we would be subject to a non-deductible 4% excise tax on the excess of such required distribution over the sum of (x) the amounts actually distributed, plus (y) the amounts of income we retained and on which we have paid corporate income tax.

 

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It is possible that, from time to time, we may not have sufficient cash to meet the distribution requirements due to timing differences between (a) our actual receipt of cash, including receipt of distributions from our subsidiaries, and (b) our inclusion of items in income for U.S. federal income tax purposes. Other potential sources of non-cash taxable income include:

 

   

Excess MSRs,

 

   

loans or MBS held as assets that are issued at a discount and require the accrual of taxable economic interest in advance of receipt in cash,

 

   

loans on which the borrower is permitted to defer cash payments of interest, and distressed loans on which we may be required to accrue taxable interest income even though the borrower is unable to make current servicing payments in cash,

 

   

real estate securities that are financed through securitization structures, and

 

   

“residual interests” in REMICs or taxable mortgage pools.

Based on IRS guidance concerning the classification of Excess MSRs, we intend to treat our Excess MSRs as ownership interests in the interest payments made on the underlying pool of mortgage loans, akin to an “interest only” strip. Under this treatment, for purposes of determining the amount and timing of taxable income, each Excess MSR is treated as a bond that was issued with original issue discount on the date we acquired such Excess MSR. In general, we will be required to accrue original issue discount based on the constant yield to maturity of each Excess MSR, and to treat such original issue discount as taxable income in accordance with the applicable U.S. federal income tax rules. The constant yield of an Excess MSR will be determined, and we will be taxed based on, a prepayment assumption regarding future payments due on the mortgage loans underlying the Excess MSR. If the mortgage loans underlying an Excess MSR prepay at a rate different than that under the prepayment assumption, our recognition of original issue discount will be either increased or decreased depending on the circumstances. Thus, in a particular taxable year, we may be required to accrue an amount of income in respect of an Excess MSR that exceeds the amount of cash collected in respect of that Excess MSR. Furthermore, it is possible that, over the life of the investment in an Excess MSR, the total amount we pay for, and accrue with respect to, the Excess MSR may exceed the total amount we collect on such Excess MSR. No assurance can be given that we will be entitled to an ordinary loss or deduction for such excess, meaning that we may not be able to use any such loss or deduction to offset original issue discount recognized with respect to our Excess MSRs or other ordinary income recognized by us. As a result of this potential mismatch in character between the income and losses generated by our Excess MSRs, our REIT taxable income may be higher than it otherwise would have been in the absence of that mismatch, in which case we would be required to distribute larger amounts to our stockholders in order to maintain our status as a REIT.

Other debt instruments that we may acquire, including consumer loans, may be issued with, or treated as issued with, original issue discount. Those instruments would be subject to the same original issue discount accrual and income computations which are described above with regard to Excess MSRs.

We may acquire debt instruments in the secondary market for less than their face amount. The amount of such discount will generally be treated as “market discount” for U.S. federal income tax purposes. If we so elect, accrued market discount will be recognized as taxable income over our holding period in the instrument in advance of the receipt of cash. If we collect less on the debt instrument than our purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting loss deductions.

In addition, we may acquire debt investments that are subsequently modified by agreement with the borrower. If the amendments to the outstanding debt are “significant modifications” under the applicable Treasury regulations, the modified debt may be considered to have been reissued to us in a debt-for-debt exchange with the borrower. In that event, we may be required to recognize taxable gain to the extent the principal amount of the

 

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modified debt exceeds our adjusted tax basis in the unmodified debt, even if the value of the debt or the payment expectations have not changed. Following such a taxable modification, we would hold the modified loan with a cost basis equal to its principal amount for U.S. federal tax purposes. To the extent that such modifications are made with respect to a debt instrument held by a TRS that is treated as a dealer or trader and that makes an election to use mark-to-market accounting, such TRS would be required at the end of each taxable year, including the taxable year in which any such modification were made, to mark the modified debt instrument to its fair market value as if the debt instrument were sold. In that case, the TRS could recognize a loss at the end of the taxable year in which the modifications were made to the extent that the fair market value of such debt instrument at such time was less than the instrument’s tax basis.

Moreover, in the event that any debt instruments or MBS acquired by us are delinquent as to mandatory principal and interest payments, or in the event payments with respect to a particular debt instrument are not made when due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income. Similarly, we may be required to accrue interest income with respect to subordinate MBS at the stated rate regardless of whether corresponding cash payments are received.

Differences in timing between the recognition of taxable income and the actual receipt of cash could require us to (i) sell assets, (ii) borrow funds on a short-term or long-term basis, or (iii) pay dividends in the form of taxable in-kind distributions of property, to meet the 90% distribution requirement. Alternatively, we may declare a taxable distribution payable in cash or stock at the election of each stockholder, where the aggregate amount of cash to be distributed in such distribution may be subject to limitation. In such case, for U.S. federal income tax purposes, the amount of the distribution paid in stock will be equal to the amount of cash that could have been received instead of stock.

We may be able to rectify a failure to meet the distribution requirements for a year by paying “deficiency dividends” to stockholders in a later year, which may be included in our deduction for dividends paid for the earlier year. In this case, we may be able to avoid losing REIT status or being taxed on amounts distributed as deficiency dividends. We will be required to pay interest and a penalty based on the amount of any deduction taken for deficiency dividends.

Failure to Qualify

If we fail to satisfy one or more requirements for REIT qualification other than the gross income or asset tests, we could avoid disqualification if our failure is due to reasonable cause and not to willful neglect and we pay a penalty of $50,000 for each such failure. Relief provisions are available for failures of the income tests and asset tests, as described above in “—Income Tests” and—Asset Tests.”

If we fail to qualify for taxation as a REIT in any taxable year, and the relief provisions described above do not apply, we would be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. We cannot deduct distributions to stockholders in any year in which we are not a REIT, nor would we be required to make distributions in such a year. In this situation, to the extent of current and accumulated earnings and profits, distributions to domestic holders that are individuals, trusts and estates would generally be taxable at capital gains rates. In addition, subject to the limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Unless we are entitled to relief under specific statutory provisions, we would also be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year during which we lost qualification. It is not possible to state whether, in all circumstances, we would be entitled to this statutory relief. The rule against re-electing REIT status following a loss of such status would also apply to us if Newcastle fails to qualify as a REIT, and we are treated as a successor to Newcastle for U.S. federal income tax purposes. Although, as described under the heading “Certain Relationships and Transactions with Related Persons, Affiliates and Affiliated Entities,” Newcastle represented in the Separation and Distribution Agreement that it has no knowledge of any fact or circumstance that would cause us to fail to qualify as a REIT, and covenanted in the Separation and Distribution Agreement to use its

 

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reasonable best efforts to maintain its REIT status for each of Newcastle’s taxable years ending on or before December 31, 2014 (unless Newcastle obtains an opinion from a nationally recognized tax counsel or a private letter ruling from the IRS to the effect that Newcastle’s failure to maintain its REIT status will not cause us to fail to qualify as a REIT under the successor REIT rule referred to above), no assurance can be given that such representation and covenant would prevent us from failing to qualify as a REIT. Although, in the event of a breach, we may be able to seek damages from Newcastle, there can be no assurance that such damages, if any, would appropriately compensate us. In addition, if Newcastle were to fail to qualify as a REIT despite its reasonable best efforts, we would have no claim against Newcastle.

Prohibited Transactions

Net income that we derive from a prohibited transaction is subject to a 100% tax. The term “prohibited transaction” generally includes a sale or other disposition of property (other than foreclosure property, as discussed below) that is held primarily for sale to customers in the ordinary course of a trade or business. We intend to conduct our operations so that no asset that we own (or are treated as owning) will be treated as, or as having been, held for sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary course of our business. Whether property is held “primarily for sale to customers in the ordinary course of a trade or business” depends on the particular facts and circumstances. No assurance can be given that any property that we sell will not be treated as property held for sale to customers, or that we can comply with certain safe-harbor provisions of the Code that would prevent such treatment. The 100% tax does not apply to gains from the sale of property that is held through a TRS or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate rates.

Foreclosure Property

Foreclosure property is real property and any personal property incident to such real property (1) that we acquire as the result of having bid in the property at foreclosure, or having otherwise reduced the property to ownership or possession by agreement or process of law, after a default (or upon imminent default) on a lease of the property or a mortgage loan held by us and secured by the property, (2) for which we acquired the related loan or lease at a time when default was not imminent or anticipated, and (3) with respect to which we made a proper election to treat the property as foreclosure property. We generally will be subject to tax at the maximum corporate rate (currently 35%) on any net income from foreclosure property, including any gain from the disposition of the foreclosure property, other than income that would otherwise be qualifying income for purposes of the 75% gross income test. Any gain from the sale of property for which a foreclosure property election has been made will not be subject to the 100% tax on gains from prohibited transactions described above, even if the property would otherwise constitute inventory or dealer property.

Derivatives and Hedging Transactions

We and our subsidiaries may in the future enter into hedging transactions with respect to interest rate exposure on one or more assets or liabilities. Any such hedging transactions could take a variety of forms, including the use of derivative instruments such as interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, including short positions in TBA contracts, and options. To the extent that we or a pass-through subsidiary enter into a hedging transaction to reduce interest rate risk on indebtedness incurred to acquire or carry real estate assets or risks associated with certain currency fluctuations and the instrument is properly identified as a hedge along with the risk it hedges within prescribed time periods, any periodic income from the instrument, or gain from the disposition of such instrument, would not be treated as gross income for purposes of the REIT 75% and 95% gross income tests. To the extent that we hedge in certain other situations, the resultant income may be treated as income that does not qualify under the 75% or 95% gross income tests. We intend to structure any hedging transactions in a manner that does not jeopardize our status as a REIT. We may conduct some or all of our hedging activities through a TRS or other corporate entity, the income from which may be subject to U.S. federal income tax, rather than by participating in the arrangements directly or through pass-through subsidiaries.

 

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No assurance can be given, however, that our hedging activities will not give rise to income that does not qualify for purposes of the REIT gross income tests, or that our hedging activities will not adversely affect our ability to satisfy the REIT qualification requirements.

Taxable Mortgage Pools and Excess Inclusion Income

An entity, or a portion of an entity, may be classified as a taxable mortgage pool (“TMP”) under the Code if:

 

   

substantially all of its assets consist of debt obligations or interests in debt obligations,

 

   

more than 50% of those debt obligations are real estate mortgages or interests in real estate mortgages as of specified testing dates,

 

   

the entity has issued debt obligations (liabilities) that have two or more maturities, and

 

   

the payments required to be made by the entity on its debt obligations (liabilities) “bear a relationship” to the payments to be received by the entity on the debt obligations that it holds as assets.

Under regulations issued by the U.S. Treasury Department, if less than 80% of the assets of an entity (or a portion of an entity) consist of debt obligations, these debt obligations are considered not to comprise “substantially all” of its assets, and therefore the entity would not be treated as a TMP. We may enter into financing and securitization arrangements that are classified as TMPs, with the consequences as described below.

Where an entity, or a portion of an entity, is classified as a TMP, it is generally treated as a taxable corporation for U.S. federal income tax purposes. In the case of a REIT, or a portion of a REIT, or a disregarded subsidiary of a REIT, that is a TMP, however, special rules apply. The TMP is not treated as a corporation that is subject to corporate income tax, and the TMP classification does not directly affect the tax status of the REIT. Rather, the consequences of the TMP classification would, in general, except as described below, be limited to the stockholders of the REIT.

A portion of the REIT’s income from the TMP arrangement, which might be non-cash accrued income, could be treated as “excess inclusion income.” Under IRS guidance, the REIT’s excess inclusion income, including any excess inclusion income from a residual interest in a REMIC, must be allocated among its stockholders in proportion to dividends paid. The REIT is required to notify stockholders of the amount of “excess inclusion income” allocated to them. A stockholder’s share of excess inclusion income:

 

   

cannot be offset by any net operating losses otherwise available to the stockholder,

 

   

is subject to tax as unrelated business taxable income in the hands of most types of stockholders that are otherwise generally exempt from U.S. federal income tax, and

 

   

results in the application of U.S. federal income tax withholding at the maximum rate (30%), without reduction for any otherwise applicable income tax treaty or other exemption, to the extent allocable to most types of non-U.S. holders.

See “—Taxation of Stockholders.” Under IRS guidance, to the extent that excess inclusion income is allocated to a tax-exempt stockholder of a REIT that is not subject to unrelated business income tax (such as a government entity or charitable remainder trust), the REIT may be subject to tax on this income at the highest applicable corporate tax rate (currently 35%). In that case, the REIT could reduce distributions to such stockholders by the amount of such tax paid by the REIT attributable to such stockholder’s ownership. Treasury regulations provide that such a reduction in distributions does not give rise to a preferential dividend that could adversely affect the REIT’s compliance with its distribution requirements. See “—Annual Distribution Requirements.” The manner in which excess inclusion income is calculated, or would be allocated to stockholders, including allocations among shares of different classes of stock, is not clear under current law. As required by IRS guidance, we intend to make such determinations using a reasonable method. Tax-exempt investors, foreign investors and taxpayers with net operating losses should carefully consider the tax consequences described above, and are urged to consult their tax advisors.

 

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If a subsidiary partnership of ours that we do not wholly-own, directly or through one or more disregarded entities, were a TMP, the foregoing rules would not apply. Rather, the partnership that is a TMP would be treated as a corporation for U.S. federal income tax purposes, and potentially would be subject to corporate income tax or withholding tax. In addition, this characterization would alter our income and asset test calculations, and could adversely affect our compliance with those requirements. We intend to monitor the structure of any TMPs in which we have an interest to ensure that they will not adversely affect our status as a REIT.

Tax Aspects of Investments in Affiliated Partnerships

General

We may hold investments through entities that are classified as partnerships for U.S. federal income tax purposes. In general, partnerships are “pass-through” entities that are not subject to U.S. federal income tax. Rather, partners are allocated their proportionate shares of the items of income, gain, loss, deduction and credit of a partnership, and are potentially subject to tax on these items, without regard to whether the partners receive a distribution from the partnership. We will include in our income our proportionate share of these partnership items for purposes of the various REIT income tests and in computation of our REIT taxable income. Moreover, for purposes of the REIT asset tests, we will include in our calculations our proportionate share of any assets held by subsidiary partnerships. Our proportionate share of a partnership’s assets and income is based on our capital interest in the partnership (except that for purposes of the 10% value test, our proportionate share is based on our proportionate interest in the equity and certain debt securities issued by the partnership). See “Taxation of New Residential—Effect of Subsidiary Entities—Ownership of Partnership Interests.”

Entity Classification

Any investment in partnerships involves special tax considerations, including the possibility of a challenge by the IRS of the status of any subsidiary partnership as a partnership, as opposed to an association taxable as a corporation, for U.S. federal income tax purposes (for example, if the IRS were to assert that a subsidiary partnership is a TMP). See “Taxation of New Residential—Taxable Mortgage Pools and Excess Inclusion Income.” If any of these entities were treated as an association for U.S. federal income tax purposes, it would be taxable as a corporation and therefore could be subject to an entity-level tax on its income. In such a situation, the character of our assets and items of gross income would change and could preclude us from satisfying the REIT asset tests or the gross income tests as discussed in “—Taxation of New Residential—Asset Tests” and “—Income Tests,” and in turn could prevent us from qualifying as a REIT, unless we are eligible for relief from the violation pursuant to relief provisions described above. See “—Taxation of New Residential—Asset Tests,” “—Income Test” and “—Failure to Qualify,” above, for discussion of the effect of failure to satisfy the REIT tests for a taxable year, and of the relief provisions. In addition, any change in the status of any subsidiary partnership for tax purposes might be treated as a taxable event, in which case we could have taxable income that is subject to the REIT distribution requirements without receiving any cash.

Tax Allocations with Respect to Partnership Properties

Under the Code and the Treasury regulations, income, gain, loss and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership must be allocated for tax purposes so that the contributing partner is charged with, or benefits from, the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of the unrealized gain or unrealized loss is generally equal to the difference between the fair market value of the contributed property at the time of contribution, and the adjusted tax basis of such property at the time of contribution. Such allocations are solely for U.S. federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners.

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requirements. Where a partner contributes cash to a partnership at a time that the partnership holds appreciated (or depreciated) property, the Treasury regulations provide for a similar allocation of these items to the other (i.e., non-contributing) partners. These rules may apply to a contribution that we make to any subsidiary partnerships of the cash proceeds received in offerings of our stock. As a result, the partners of our subsidiary partnerships, including us, could be allocated greater or lesser amounts of depreciation and taxable income in respect of a partnership’s properties than would be the case if all of the partnership’s assets (including any contributed assets) had a tax basis equal to their fair market values at the time of any contributions to that partnership. This could cause us to recognize, over a period of time, taxable income in excess of cash flow from the partnership, which might adversely affect our ability to comply with the REIT distribution requirements discussed above.

Taxation of Stockholders

Taxation of Taxable Domestic Holders

Distributions . As a REIT, the distributions that we make to our taxable domestic holders out of current or accumulated earnings and profits that we do not designate as capital gain dividends will generally be taken into account by stockholders as ordinary income and will not be eligible for the dividends received deduction for corporations. With limited exceptions, our dividends are not eligible for taxation at the preferential income tax rates for qualified dividends received by domestic holders that are individuals, trusts and estates from taxable C corporations. Such stockholders, however, are taxed at the preferential rates on dividends designated by and received from REITs to the extent that the dividends are attributable to

 

   

income retained by the REIT in the prior taxable year on which the REIT was subject to corporate level income tax (less the amount of tax),

 

   

dividends received by the REIT from TRSs or other taxable C corporations, or

 

   

income in the prior taxable year from the sales of “built-in gain” property acquired by the REIT from C corporations in carryover basis transactions (less the amount of corporate tax on such income).

Distributions that we designate as capital gain dividends will generally be taxed to our stockholders as long-term capital gains, to the extent that such distributions do not exceed our actual net capital gain for the taxable year, without regard to the period for which the stockholder that receives such distribution has held its stock. We may elect to retain and pay taxes on some or all of our net long term capital gains, in which case provisions of the Code will treat our stockholders as having received, solely for tax purposes, our undistributed capital gains, and the stockholders will receive a corresponding credit for taxes that we paid on such undistributed capital gains. See “—Taxation of New Residential—Annual Distribution Requirements.” Corporate stockholders may be required to treat up to 20% of some capital gain dividends as ordinary income. Long-term capital gains are generally taxable at reduced maximum federal rates in the case of stockholders that are individuals, trusts and estates, and ordinary income rates in the case of stockholders that are corporations. Capital gains attributable to the sale of depreciable real property held for more than 12 months are subject to a 25% maximum federal income tax rate for taxpayers who are taxed as individuals, to the extent of previously claimed depreciation deductions.

Distributions in excess of our current and accumulated earnings and profits will generally represent a return of capital and will not be taxable to a stockholder to the extent that the amount of such distributions does not exceed the adjusted basis of the stockholder’s shares in respect of which the distributions were made. Rather, the distribution will reduce the adjusted basis of the stockholder’s shares. To the extent that such distributions exceed the adjusted basis of a stockholder’s shares, the stockholder generally must include such distributions in income as long-term capital gain, or short-term capital gain if the shares have been held for one year or less. In addition, any dividend that we declare in October, November or December of any year and that is payable to a stockholder of record on a specified date in any such month will be treated as both paid by us and received by the stockholder on December 31 of such year, provided that we actually pay the dividend before the end of January of the following calendar year.

 

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To the extent that we have available net operating losses and capital losses carried forward from prior tax years, such losses may reduce the amount of distributions that we must make in order to comply with the REIT distribution requirements. See “—Taxation of New Residential—Annual Distribution Requirements.” Such losses, however, are not passed through to stockholders and do not offset income of stockholders from other sources, nor would such losses affect the character of any distributions that we make, which are generally subject to tax in the hands of stockholders to the extent that we have current or accumulated earnings and profits.

If excess inclusion income from a taxable mortgage pool or REMIC residual interest is allocated to any stockholder, that income will be taxable in the hands of the stockholder and would not be offset by any net operating losses of the stockholder that would otherwise be available. See “—Taxation of New Residential—Taxable Mortgage Pools and Excess Inclusion Income.” As required by IRS guidance, we intend to notify our stockholders if a portion of a dividend paid by us is attributable to excess inclusion income.

Dispositions of New Residential Stock . In general, capital gains recognized by individuals, trusts and estates upon the sale or disposition of our stock will be subject to reduced maximum U.S. federal income tax rates if the stock is held for more than one year, and will be taxed at ordinary income rates if the stock is held for one year or less. Gains recognized by stockholders that are corporations are subject to U.S. federal income tax at ordinary income rates, whether or not such gains are classified as long-term capital gains. Capital losses recognized by a stockholder upon the disposition of our stock that was held for more than one year at the time of disposition will be considered long-term capital losses, and are generally available only to offset capital gain income of the stockholder but not ordinary income (except in the case of individuals, who may offset up to $3,000 of ordinary income each year). In addition, any loss upon a sale or exchange of shares of our stock by a stockholder who has held the shares for six months or less, after applying holding period rules, will be treated as a long-term capital loss to the extent of distributions that we make that are required to be treated by the stockholder as long-term capital gain.

If an investor recognizes a loss upon a subsequent disposition of our stock or other securities in an amount that exceeds a prescribed threshold, it is possible that the provisions of Treasury regulations involving “reportable transactions” could apply, with a resulting requirement to separately disclose the loss-generating transaction to the IRS. These regulations, though directed towards “tax shelters,” are written quite broadly, and apply to transactions that would not typically be considered tax shelters. The Code imposes significant penalties for failure to comply with these requirements. You should consult your tax advisors concerning any possible disclosure obligation with respect to the receipt or disposition of our stock or securities, or transactions that we might undertake directly or indirectly. Moreover, you should be aware that we and other participants in the transactions in which we are involved (including their advisors) might be subject to disclosure or other requirements pursuant to these regulations.

Taxation of Non-U.S. Holders

The following is a summary of certain U.S. federal income and estate tax consequences of the ownership and disposition of our stock applicable to non-U.S. holders. This discussion is based on current law, and is for general information only. It addresses only selected, and not all, aspects of U.S. federal income and estate taxation.

Ordinary Dividends . The portion of dividends received by non-U.S. holders that is (1) payable out of our earnings and profits, (2) which is not attributable to our capital gains and (3) which is not effectively connected with a U.S. trade or business of the non-U.S. holder, will be subject to U.S. withholding tax at the rate of 30%, unless reduced or eliminated by treaty. Reduced treaty rates and other exemptions are not available to the extent that income is attributable to excess inclusion income allocable to the non-U.S. holder. Accordingly, we will withhold at a rate of 30% on any portion of a dividend that is paid to a non-U.S. holder and attributable to that stockholder’s share of our excess inclusion income. See “—Taxation of New Residential—Taxable Mortgage Pools and Excess Inclusion Income.” As required by IRS guidance, we intend to notify our stockholders if a portion of a dividend paid by us is attributable to excess inclusion income.

 

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In general, non-U.S. holders will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of our stock. In cases where the dividend income from a non-U.S. holder’s investment in our stock is, or is treated as, effectively connected with the non-U.S. holder’s conduct of a U.S. trade or business, the non-U.S. holder generally will be subject to U.S. federal income tax at graduated rates, in the same manner as domestic holders are taxed with respect to such dividends. Such income must generally be reported on a U.S. income tax return filed by or on behalf of the non-U.S. holder. The income may also be subject to the 30% branch profits tax in the case of a non-U.S. holder that is a corporation.

Non-Dividend Distributions . Unless our stock constitutes a USRPI, distributions that we make which are not dividends out of our earnings and profits will not be subject to U.S. income tax. If we cannot determine at the time a distribution is made whether or not the distribution will exceed current and accumulated earnings and profits, the distribution will be subject to withholding at the rate applicable to dividends. The non-U.S. holder may seek a refund from the IRS of any amounts withheld if it is subsequently determined that the distribution was, in fact, in excess of our current and accumulated earnings and profits. If our stock constitutes a USRPI, as described below, distributions that we make in excess of the sum of (a) the stockholder’s proportionate share of our earnings and profits, plus (b) the stockholder’s basis in its stock, will be taxed under the FIRPTA at the rate of tax, including any applicable capital gains rates, that would apply to a domestic holder of the same type (e.g., an individual or a corporation, as the case may be), and the collection of the tax will be enforced by a refundable withholding tax at a rate of 10% of the amount by which the distribution exceeds the stockholder’s share of our earnings and profits. As described below, although it is not currently anticipated that our stock will constitute a USRPI, we cannot assure you that our stock will not become a USRPI.

Capital Gain Dividends . Under FIRPTA, a dividend that we make to a non-U.S. holder, to the extent attributable to gains from dispositions of USRPIs that we held directly or through pass-through subsidiaries (such gains, “USRPI capital gains”), will, except as described below, be considered effectively connected with a U.S. trade or business of the non-U.S. holder and will be subject to U.S. income tax at the rates applicable to U.S. individuals or corporations. We will be required to withhold tax equal to 35% of the maximum amount that could have been designated as a USRPI capital gain dividend. Distributions subject to FIRPTA may also be subject to a 30% branch profits tax in the hands of a non-U.S. holder that is a corporation. A distribution is not a USRPI capital gain dividend if we held an interest in the underlying asset solely as a creditor. Capital gain dividends received by a non-U.S. holder that are attributable to dispositions of our assets other than USRPIs are not subject to U.S. federal income tax, unless (1) the gain is effectively connected with the non-U.S. holder’s U.S. trade or business, in which case the non-U.S. holder would be subject to the same treatment as U.S. holders with respect to such gain, or (2) the non-U.S. holder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and has a “tax home” in the U.S., in which case the non-U.S. holder will incur a 30% tax on his capital gains.

A dividend that would otherwise have been treated as a USRPI capital gain dividend will not be so treated or be subject to FIRPTA, and generally will not be treated as income that is effectively connected with a U.S. trade or business, but instead will be treated in the same manner as ordinary income dividends (discussed above), provided that (1) the dividend is received with respect to a class of stock that is regularly traded on an established securities market located in the U.S., and (2) the recipient non-U.S. holder does not own more than 5% of that class of stock at any time during the year ending on the date on which the dividend is received. We anticipate that our common stock will be “regularly traded” on an established securities exchange.

Dispositions of New Residential Stock . Unless our stock constitutes a USRPI, a sale of our stock by a non-U.S. holder generally will not be subject to U.S. taxation under FIRPTA. Our stock will not be treated as a USRPI if less than 50% of our assets throughout a prescribed testing period consist of interests in real property located within the U.S., excluding, for this purpose, interests in real property solely in a capacity as a creditor. It is not currently anticipated that our stock will constitute a USRPI. However, we cannot assure you that our stock will not become a USRPI.

 

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Even if the foregoing 50% test is not met, our stock nonetheless will not constitute a USRPI if we are a “domestically-controlled qualified investment entity.” A domestically-controlled qualified investment entity includes a REIT, less than 50% of value of which is held directly or indirectly by non-U.S. holders at all times during a specified testing period. We believe that we will be a domestically-controlled qualified investment entity, and that a sale of our stock should not be subject to taxation under FIRPTA. No assurance can be given that we will remain a domestically-controlled qualified investment entity.

In the event that we are not a domestically-controlled qualified investment entity, but our stock is “regularly traded,” as defined by applicable Treasury regulations, on an established securities market, a non-U.S. holder’s sale of our stock nonetheless would not be subject to tax under FIRPTA as a sale of a USRPI, provided that the selling non-U.S. holder held 5% or less of our stock at all times during a specified testing period. We expect that our stock will be publicly traded.

In addition, if a non-U.S. holder owning more than 5% of our common stock disposes of such common stock during the 30-day period preceding the ex-dividend date of any dividend payment, and such non-U.S. holder acquires or enters into a contract or option to acquire our common stock within 61 days of the first day of such 30-day period described above, and any portion of such dividend payment would, but for the disposition, be treated as USRPI capital gain to such non-U.S. holder under FIRPTA, then such non-U.S holder will be treated as having USRPI capital gain in an amount that, but for the disposition, would have been treated as USRPI capital gain.

If gain on the sale of our stock were subject to taxation under FIRPTA, the non-U.S. holder would be required to file a U.S. federal income tax return and would be subject to the same treatment as a domestic holder with respect to such gain, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals, and the purchaser of the stock could be required to withhold 10% of the purchase price and remit such amount to the IRS.

Gain from the sale of our stock that would not otherwise be subject to FIRPTA will nonetheless be taxable in the U.S. to a non-U.S. holder in two cases: (1) if the non-U.S. holder’s investment in our stock is effectively connected with a U.S. trade or business conducted by such non-U.S. holder, the non-U.S. holder will be subject to the same treatment as a domestic holder with respect to such gain, or (2) if the non-U.S. holder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and has a “tax home” in the U.S., the nonresident alien individual will be subject to a 30% tax on the individual’s capital gain.

Other Withholding Rules . Legislation enacted in 2010 and existing guidance issued thereunder will require, after December 31, 2013, withholding at a rate of 30% on dividends in respect of, and, after December 31, 2016, gross proceeds from the sale of, our common stock held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an agreement with the Treasury to report, on an annual basis, information with respect to shares in, and accounts maintained by, the institution to the extent such shares or accounts are held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments. An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury regulations or other guidance, may modify these requirements. Accordingly, the entity through which our common stock is held will affect the determination of whether such withholding is required. Similarly, dividends in respect of, and gross proceeds from the sale of, our common stock held by an investor that is a non-financial non-U.S. entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies to us that such entity does not have any “substantial United States owners” or (ii) provides certain information regarding the entity’s “substantial United States owners,” which we will in turn provide to the Secretary of the Treasury. We will not pay any additional amounts to stockholders in respect of any amounts withheld. Non-U.S. stockholders are encouraged to consult their tax advisors regarding the possible implications of the legislation on their investment in our common stock.

 

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Estate Tax . If our stock is owned or treated as owned by an individual who is not a citizen or resident (as specially defined for U.S. federal estate tax purposes) of the U.S. at the time of such individual’s death, the stock will be includable in the individual’s gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise, and may therefore be subject to U.S. federal estate tax.

Taxation of Tax-Exempt Stockholders

Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, generally are exempt from U.S. federal income taxation. Such entities, however, may be subject to taxation on their UBTI. While some investments in real estate may generate UBTI, the IRS has ruled that dividend distributions from a REIT to a tax-exempt entity do not constitute UBTI. Based on that ruling, and provided that (1) a tax-exempt stockholder has not held our stock as “debt financed property” within the meaning of the Code (i.e., where the acquisition or holding of the property is financed through a borrowing by the tax-exempt stockholder), and (2) our stock is not otherwise used in an unrelated trade or business, distributions that we make and income from the sale of our stock generally should not give rise to UBTI to a tax-exempt stockholder.

To the extent that we are (or a part of us, or a disregarded subsidiary of ours is) a TMP, or if we hold residual interests in a REMIC, a portion of the dividends paid to a tax-exempt stockholder that is allocable to excess inclusion income may be treated as UBTI. If, however, excess inclusion income is allocable to some categories of tax-exempt stockholders that are not subject to UBTI, we might be subject to corporate level tax on such income, and, in that case, may reduce the amount of distributions to those stockholders whose ownership gave rise to the tax. See “—Taxation of New Residential—Taxable Mortgage Pools and Excess Inclusion Income.” As required by IRS guidance, we intend to notify our stockholders if a portion of a dividend paid by us is attributable to excess inclusion income.

Tax-exempt stockholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from U.S. federal income taxation under sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code are subject to different UBTI rules, which generally require such stockholders to characterize distributions that we make as UBTI.

In certain circumstances, a pension trust that owns more than 10% of our stock could be required to treat a percentage of the dividends as UBTI, if we are a “pension-held REIT.” We will not be a pension-held REIT unless (1) we are required to “look through” one or more of our pension stockholders in order to satisfy the REIT closely held test and (2) either (i) one pension trust owns more than 25% of the value of our stock, or (ii) a group of pension trusts, each individually holding more than 10% of the value of our stock, collectively owns more than 50% of our stock. Certain restrictions on ownership and transfer of our stock should generally prevent a tax-exempt entity from owning more than 10% of the value of our stock, and should generally prevent us from becoming a pension-held REIT.

Tax-exempt stockholders are urged to consult their tax advisors regarding the federal, state, local and foreign income and other tax consequences of owning our stock.

Other Tax Considerations

Legislative or Other Actions Affecting REITs

The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. Changes to the U.S. federal tax laws and interpretations thereof could adversely affect an investment in our stock.

 

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State, Local and Foreign Taxes

We and our subsidiaries and stockholders may be subject to state or local taxation in various jurisdictions, including those in which we or they transact business, own property or reside. Our state and local tax treatment and that of our stockholders may not conform to the U.S. federal income tax treatment discussed above. Prospective investors should consult their tax advisors regarding the application and effect of state and local income and other tax laws on an investment in our stock or other securities.

 

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WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement on Form 10 with the SEC, of which this information statement forms a part, with respect to the shares of our common stock being distributed as contemplated by this information statement. This information statement is a part of, and does not contain all of the information set forth in, the registration statement and the exhibits and schedules to the registration statement. For further information with respect to us and our common stock, please refer to the registration statement, including its exhibits and schedules. Statements made in this information statement relating to any contract or other document are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract or document. You may review a copy of the registration statement, including its exhibits and schedules, at the SEC’s public reference room, located at 100 F Street, N.E., Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330 as well as on the Internet website maintained by the SEC at www.sec.gov. Information contained on any website referenced in this information statement is not incorporated by reference in this information statement.

As a result of the distribution, we will become subject to the information and reporting requirements of the Exchange Act and, in accordance with the Exchange Act, we will file periodic reports, proxy statements and other information with the SEC, which will be available on the Internet website maintained by the SEC at www.sec.gov.

We intend to furnish holders of our common stock with annual reports containing consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles and audited and reported on, with an opinion expressed, by an independent registered public accounting firm.

You should rely only on the information contained in this information statement or to which we have referred you. We have not authorized any person to provide you with different information or to make any representation not contained in this information statement.

 

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INDEX TO FINANCIAL STATEMENTS OF NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (FORMERLY KNOWN AS NIC MSR LLC)

 

Unaudited Pro Forma Condensed Consolidated Financial Information

     F-2   

Report of Independent Registered Public Accounting Firm

     F-8   
Consolidated Balance Sheets as of December 31, 2012 and December 31, 2011      F-9   

Consolidated Statements of Income for the year ended December 31, 2012 and the period from December 8, 2011 (commencement of operations) through December 31, 2011

     F-10   

Consolidated Statements of Comprehensive Income for the year ended December 31, 2012 and the period from December 8, 2011 (commencement of operations) through December 31, 2011

     F-11   

Consolidated Statements of Changes in Newcastle’s Equity for the year ended December 31, 2012 and the period from December 8, 2011 (commencement of operations) through December 31, 2011

     F-12   

Consolidated Statements of Cash Flows for the year ended December 31, 2012 and the period from December 8, 2011 (commencement of operations) through December 31, 2011

     F-13   

Notes to Consolidated Financial Statements

     F-14   

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma condensed consolidated financial information presented below was derived from the application of pro forma adjustments to the consolidated financial statements of New Residential Investment Corp. and subsidiaries (formerly known as NIC MSR LLC) (“New Residential”). These unaudited pro forma condensed consolidated financial statements should be read in conjunction with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the historical financial statements of New Residential and related notes, which are included elsewhere in this information statement.

The unaudited pro forma condensed consolidated balance sheet and statement of operations reflect the historical information of New Residential with certain adjustments. The unaudited pro forma condensed consolidated balance sheet has been adjusted to give effect to all of the transactions described below as if each had occurred on December 31, 2012. The unaudited pro forma condensed consolidated statement of operations only includes adjustments to reflect: (i) interest income from the contributed Agency RMBS; (ii) interest expense from the financing of Agency RMBS; and (iii) interest expense from the financing, subsequent to December 31, 2012, of certain non-Agency RMBS, in each case as if the transactions giving rise to (i), (ii) and (iii) had occurred on January 1, 2012. Accordingly, the unaudited pro forma condensed consolidated statement of operations excludes adjustments for (i) earnings from investments in equity method investees, (ii) interest income from investments in non-Agency RMBS and (iii) interest income from investments in residential mortgage loans.

New Residential’s decision to include or exclude an adjustment in the unaudited pro forma condensed consolidated statement of operations was based on whether such adjustment would be factually supportable and historically based, as set forth in more detail below.

With respect to Agency RMBS, Newcastle Investment Corp. (“Newcastle”) held substantial investments in Agency RMBS during the entire period covered by the pro forma statement of operations. Although Newcastle did not own the exact securities contributed to New Residential for the entire period presented, management considers Agency RMBS to be fungible because, among other factors, they are guaranteed by the U.S. government and thus have consistent credit characteristics. As a result, New Residential determined that adjustments related to these securities are factually supportable.

In contrast to Agency RMBS, the yields of non-Agency RMBS and residential mortgage loans can have significant variances as a result of differences in the collateral and credit characteristics of each asset. Newcastle did not hold the specific non-Agency RMBS or residential mortgage loans contributed to New Residential during the entire period presented, and Newcastle does not have records relating to the performance of these assets prior to their acquisition. As a result, management believes that adjustments for the interest income from the non-Agency RMBS and residential mortgage loans would not be factually supportable.

The investments in equity method investees were made in newly formed entities with no historical operations. Neither New Residential nor Newcastle owned any of the underlying excluded investments prior to their acquisition by the investee entities. Furthermore, the underlying loans were not serviced by an affiliate of New Residential’s manager prior to their acquisition. As a result, Newcastle does not have records relating to the performance of these loans prior to the acquisition of the related investments. In addition, the composition of the loan pools and the loans underlying the Excess MSRs and consumer loan investee necessarily differ from the composition of the respective pools during the period covered by the pro forma statement of operations due to prepayment and default activity prior to acquisition. As a result, an adjustment related to these investees was not considered factually supportable. The following transactions are reflected in the pro forma financial information:

 

   

The agreement to invest approximately $340 million (based on the November 30, 2012 unpaid principal balance (“UPB”)) for a 50% interest in an equity method investee, subsequent to December 31, 2012, that is expected to acquire a 67% interest in Excess MSRs on a portfolio of residential

 

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mortgage loans with a UPB of approximately $215 billion as of November 30, 2012. The completion of this transaction is subject to regulatory and third party approvals. However, we believe that it is probable that we will be able to obtain pending approvals and subsequently complete this investment. Based on the UPB at December 31, 2012, the initial investment would be approximately $333 million.

 

   

The investment of approximately $27 million for a 50% interest in an equity method investee, subsequent to December 31, 2012, that acquired a 67% interest in Excess MSRs on a portfolio of residential mortgage loans with a UPB of approximately $13 billion as of November 30, 2012.

 

   

The investment of approximately $250 million for a 30% interest in an equity method investee, subsequent to December 31, 2012, that acquired a portfolio of consumer loans with a UPB of approximately $4.2 billion as of December 31, 2012.

 

   

The contributions of Agency RMBS by Newcastle to New Residential subsequent to December 31, 2012. Newcastle contributed Agency RMBS with a face amount of approximately $1.0 billion and a carrying amount of approximately $1.1 billion as of the dates of the contributions.

 

   

The financing of the Agency RMBS acquired subsequent to December 31, 2012. New Residential financed these Agency RMBS with approximately $1.0 billion of repurchase agreements.

 

   

The purchase of non-Agency RMBS, subsequent to December 31, 2012. The non-Agency RMBS had a face amount of approximately $394 million and an aggregate purchase price of approximately $243 million.

 

   

The financing of non-Agency RMBS with approximately $144 million of repurchase agreements subsequent to December 31, 2012.

 

   

The investment of approximately $35 million to acquire a 70% interest in mortgage loans with a UPB of approximately $83 million as of December 31, 2012.

 

   

The contribution of approximately $260 million of cash from Newcastle to New Residential subsequent to December 31, 2012.

 

   

The distribution of shares of New Residential common stock by Newcastle to its shareholders and the elimination of the historical parent company investment.

The unaudited pro forma condensed consolidated financial information is presented for illustrative and informational purposes only and is not intended to represent or be indicative of what our financial condition or results of operations would have been had the transactions described above occurred on the dates indicated. The unaudited pro forma condensed consolidated financial information also should not be considered representative of our future financial condition or results of operations. Upon completion of these transactions, our financial position and results of operations may be significantly different than what is presented in these unaudited pro forma condensed consolidated financial statements. In the opinion of management, all adjustments necessary to reflect the effects of the transaction described in the notes to the unaudited pro forma condensed consolidated financial statements have been included.

Further, the historical financial information presented herein has been adjusted to give pro forma effect to events that are factually supportable and are expected to have a continuing impact on our results. In addition, such adjustments are estimates and may not prove to be accurate. Information regarding these adjustments is subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. See “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.”

The pro forma adjustments are based upon available information and assumptions that we believe are reasonable. The unaudited pro forma condensed consolidated statement of operations and the unaudited pro forma condensed consolidated balance sheet do not purport to represent the results of operations that would have occurred had such transactions been consummated on the dates indicated or the financial position for any future date or period.

 

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

As of December 31, 2012

(dollars in thousands)

 

     Historical (a)    Closed
Transaction
Adjustments
  Pending
Transaction
Adjustments
  Pro Forma

Assets

                 

Cash and cash equivalents

     $ —          $ —         $ 260,000 (h)     $ 260,000  

Investments in excess mortgage servicing rights at fair value

       245,036          —           —           245,036  

Real estate securities, available-for-sale

       289,756          1,321,780 (b)       —           1,611,536  

Residential mortgage loans, held-for-investment

       —            35,000 (c)       —           35,000  

Investments in equity method investees, excess mortgage servicing rights, at fair value

       —            134,790 (d)       226,000 (i)       360,790  

Investments in equity method investees, consumer loans

       —            247,971 (e)       —           247,971  

Other assets

       84          —           —           84  
    

 

 

      

 

 

     

 

 

     

 

 

 
     $ 534,876        $ 1,739,541       $ 486,000       $ 2,760,417  
    

 

 

      

 

 

     

 

 

     

 

 

 

Liabilities and Equity

                 

Liabilities

                 

Repurchase Agreements

     $ 150,922        $ 1,168,055 (f)     $ —         $ 1,318,977  

Due to Newcastle

       5,136          —           —           5,136  

Accrued expenses

       348          —           —           348  

Purchase price payable on investments in excess mortgage servicing rights

       59          —           —           59  

Payable related to the investments in equity method investees, excess mortgage servicing rights

       —            —           226,000 (i)       226,000  

Accrued interest payable

       55          —           —           55  
    

 

 

      

 

 

     

 

 

     

 

 

 
       156,520          1,168,055         226,000         1,550,575  
    

 

 

      

 

 

     

 

 

     

 

 

 

Newcastle’s Equity

                 

Common stock, $0.01 par value, 2,000,000,000 authorized 253,025,645 issued and outstanding on a pro form basis

       —            —           2,530 (j)       2,530  

Additional paid in capital

       —            —           1,191,786 (g)       1,191,786  

Newcastle’s Equity

       362,830          571,486 (g)       (934,316 )(g)       —    

Accumulated other comprehensive income (loss)

       15,526          —           —           15,526  
    

 

 

      

 

 

     

 

 

     

 

 

 

Total Newcastle’s Equity

     $ 378,356        $ 571,486       $ 260,000       $ 1,209,842  
    

 

 

      

 

 

     

 

 

     

 

 

 
     $ 534,876        $ 1,739,541       $ 486,000       $ 2,760,417  
    

 

 

      

 

 

     

 

 

     

 

 

 

See Accompanying Notes.

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

 

(a) Represents the historical Condensed Consolidated Balance Sheet of New Residential at December 31, 2012 which is included elsewhere in this information statement.

 

(b) Represents adjustments to include the carrying value of Agency RMBS contributed to New Residential and non-Agency RMBS purchased subsequent to December 31, 2012.

 

(c) Represents the investment in mortgage loans purchased subsequent to December 31, 2012.

 

(d) Represents the investments in equity method investees at fair value, which have closed investments in Excess MSRs. New Residential accounts for its interests in entities over which it exercises significant influence, but with respect to which the requirements for consolidation are not met, as investments in equity method investees. Pursuant to ASC 825-10-25, New Residential has elected to measure its investments in equity method investees at fair value. The equity method investees have also elected to measure their investments in Excess MSRs at fair value pursuant to ASC 825-10-25.

 

(e) Represents the investment in an equity method investee, which invested in consumer loans.

 

(f) Represents adjustments to include the repurchase agreements entered into by New Residential subsequent to December 31, 2012 to finance the Agency RMBS and non-Agency RMBS.

 

(g) Represents Newcastle’s net investment in New Residential, including the additional contributions from Newcastle to New Residential representing the funding for the closed transactions less the par value of the shares of common stock set forth in (j) below. Newcastle’s investment was recorded as Newcastle’s equity in the historical financial statements.

 

(h) Represents the cash to be contributed to us by Newcastle subsequent to December 31, 2012.

 

(i) Represents the investments in equity method investees, which have pending investments in Excess MSRs and the payable related to making the investment.

 

(j) Represents 253,025,645 shares of common stock at a par value of $0.01 per share. The number of shares of common stock is based on Newcastle’s shares of common stock outstanding on April 23, 2013 and a distribution ratio of one share of New Residential common stock for each share of Newcastle common stock.

 

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NEW RESIDENTIAL INVESTMENT CORP AND SUBSIDIARIES (formerly known as NIC MSR LLC)

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

Year Ended December 31, 2012

(dollars in thousands, except per share data)

 

    Historical (a)    Closed
Transaction
Adjustments
  Pro Forma

Revenues

            

Interest income

    $ 33,759        $ 15,592 (b)     $ 49,351  

Interest expense

      704          7,673 (c)       8,377  
   

 

 

      

 

 

     

 

 

 

Net Interest Income

      33,055          7,919         40,974  
   

 

 

      

 

 

     

 

 

 

Change in fair value of investments in excess mortgage servicing rights

      9,023          —           9,023  

Other income (loss)

      8,400          —           8,400  
   

 

 

      

 

 

     

 

 

 
      17,423          —           17,423  
   

 

 

      

 

 

     

 

 

 

Expenses

            

Legal and other professional fees

      5,449          —           5,449  

Audit fees

      429          —           429  

Management fees allocated by Newcastle

      3,353          825 (d)       4,178  
   

 

 

      

 

 

     

 

 

 
      9,231          825         10,056  
   

 

 

      

 

 

     

 

 

 

Net Income

    $ 41,247        $ 7,094       $ 48,341  
   

 

 

      

 

 

     

 

 

 

Net income per share:

            

Basic

      N/A            $ 0.34 (e)

Diluted

      N/A            $ 0.33 (f)

Weighted average number of shares outstanding:

            

Basic

      N/A              144,146,370 (e)

Diluted

      N/A              145,766,413 (f)

See Accompanying Notes.

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

 

(a) Represents the historical Condensed Consolidated Statement of Income of New Residential for the year ended December 31, 2012 which is included elsewhere in this information statement.

 

(b) Represents adjustments to include the interest income related to the Agency RMBS contributed by Newcastle to New Residential subsequent to December 31, 2012. The interest income was computed based on the weighted average accounting yield of the securities of 1.45%. A 1/8% increase (decrease) in the benchmark interest rate would result in an increase (decrease) in interest income of approximately $1.3 million for the year ended December 31, 2012.

 

(c) Represents adjustments to include the interest expense related to repurchase agreements entered into by New Residential subsequent to December 31, 2012 to finance Agency RMBS and non-Agency RMBS. The interest expense was computed based on the actual terms of the repurchase agreements. A 1/8% increase (decrease) in the interest rate would result in an increase (decrease) in interest expense of approximately $1.5 million for the year ended December 31, 2012.

 

(d) Represents adjustments for the allocation of management fees related to the equity contribution by Newcastle to New Residential for the Agency RMBS, which are included in the unaudited pro forma condensed consolidated statement of operations.

 

(e) Pro forma basic earnings per share and weighted average number of basic shares outstanding reflect an estimated number of shares of common stock outstanding based upon Newcastle’s weighted average number of basic shares outstanding for the twelve months ended December 31, 2012 (based on a distribution ratio of one share of New Residential common stock for each share of Newcastle common stock). The pro forma weighted average basic shares outstanding have not been adjusted to reflect the shares issued in 2013 as if they had been issued on January 1, 2012 since pro forma adjustments for the investments acquired with the related proceeds have not been applied to the income statement as described above.

 

(f) Pro forma diluted earnings per share and weighted average number of diluted shares outstanding reflect shares of common stock that may be issued in connection with awards granted prior to the distribution under Newcastle equity plans based on the distribution ratio noted above in (e). While the actual dilutive impact will depend on various factors, we believe the estimate yields a reasonable approximation of the dilutive impact of the Newcastle equity plans and is based upon Newcastle’s weighted average number of diluted shares outstanding.

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors of Newcastle Investment Corp. as the sole stockholder of New Residential Investment Corp. (formerly known as NIC MSR LLC)

We have audited the accompanying consolidated balance sheets of New Residential Investment Corp. and Subsidiaries (formerly known as NIC MSR LLC) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in Newcastle’s equity, and cash flows for the year ended December 31, 2012 and the period from December 8, 2011 (commencement of operations) through December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of New Residential Investment Corp. and Subsidiaries (formerly known as NIC MSR LLC) at December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for the year ended December 31, 2012 and the period from December 8, 2011 (commencement of operations) through December 31, 2011, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

New York, New York

March 12, 2013

except for Note 11, as to which the date is

April 9, 2013

 

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

     December 31,
2012
     December 31,
2011
 

Assets

     

Investments in excess mortgage servicing rights at fair value

   $ 245,036       $ 43,971   

Real estate securities, available-for-sale

     289,756         —     

Other assets

     84         —     
  

 

 

    

 

 

 
   $ 534,876       $ 43,971   
  

 

 

    

 

 

 

Liabilities and Equity

     

Liabilities

     

Repurchase agreements

   $ 150,922       $ —     

Due to Newcastle

     5,136         158   

Accrued expenses

     348         755   

Purchase price payable on investments in excess mortgage servicing rights

     59         3,250   

Accrued interest payable

     55         —     
  

 

 

    

 

 

 
     156,520         4,163   
  

 

 

    

 

 

 

Commitments and contingencies

     

Newcastle’s Equity

     

Newcastle’s Equity

     362,830         39,808   

Accumulated other comprehensive income (loss)

     15,526         —     
  

 

 

    

 

 

 

Total Newcastle’s Equity

     378,356         39,808   
  

 

 

    

 

 

 
   $ 534,876       $ 43,971   
  

 

 

    

 

 

 

See notes to consolidated financial statements.

 

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands)

 

     Year Ended
December 31, 2012
     Period from
December 8, 2011
(Commencement
of operations)
through
December 31,
2011
 

Revenues

     

Interest income

   $ 33,759       $ 1,260   

Interest expense

     704         —     
  

 

 

    

 

 

 

Net Interest Income

     33,055         1,260   
  

 

 

    

 

 

 

Change in fair value of investments in excess mortgage servicing rights

     9,023         367   

Other income (loss)

     8,400         —     
  

 

 

    

 

 

 
     17,423         367   
  

 

 

    

 

 

 

Expenses

     

Legal and other professional fees

     5,449         809   

Audit fees

     429         65   

Management fees allocated by Newcastle

     3,353         39   
  

 

 

    

 

 

 
     9,231         913   
  

 

 

    

 

 

 

Net Income

   $ 41,247       $ 714   
  

 

 

    

 

 

 

See notes to consolidated financial statements.

 

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

 

     Year EndedDecember
31, 2012
     Period from
December 8, 2011
(Commencement
of Operations)
through
December 31,
2011
 

Net income

   $ 41,247       $ 714   

Other comprehensive income:

     

Net unrealized gain (loss) on securities

     15,526         —     
  

 

 

    

 

 

 

Other comprehensive income

     15,526         —     
  

 

 

    

 

 

 

Comprehensive income

   $ 56,773       $ 714   
  

 

 

    

 

 

 

See notes to consolidated financial statements.

 

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)

CONSOLIDATED STATEMENTS OF CHANGES IN NEWCASTLE’S EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2012 AND THE PERIOD FROM

DECEMBER 8, 2011 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31, 2011

(dollars in thousands)

 

     Newcastle’s
Equity
    Accumulated
Other
Comprehensive
Income (Loss)
     Total
Newcastle’s
Equity
 

Equity—December 8, 2011 (Commencement of operations)

   $ —        $ —         $ —     

Capital contributions

     40,492        —           40,492   

Capital distributions

     (1,398     —           (1,398

Net income

     714        —           714   
  

 

 

   

 

 

    

 

 

 

Equity—December 31, 2011

   $ 39,808      $ —         $ 39,808   

Capital contributions

     368,294        —           368,294   

Contributions in-kind

     164,142        —           164,142   

Capital distributions

     (250,661     —           (250,661

Net income

     41,247        —           41,247   

Other comprehensive income (loss)

     —          15,526         15,526   
  

 

 

   

 

 

    

 

 

 

Equity—December 31, 2012

   $ 362,830      $ 15,526       $ 378,356   
  

 

 

   

 

 

    

 

 

 

See notes to consolidated financial statements.

 

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

 

     Year Ended
December 31, 2012
    Period from
December 8, 2011
(Commencement of

Operations)
through
December 31, 2011
 

Cash Flows From Operating Activities

    

Net income

   $ 41,247      $ 714   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Change in fair value of investments in excess mortgage servicing rights

     (9,023     (367

Accretion of discount and other amortization

     (5,339     —     

Changes in:

    

Other assets

     (84     —     

Due to Newcastle

     4,978        158   

Accrued expenses

     (407     755   

Accrued interest payable

     55        —     

Other changes in:

    

Cash proceeds from investments, in excess of interest income

     43,113        138   

Net cash proceeds deemed as capital distributions to Newcastle

     (74,540     (1,398
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     —          —     
  

 

 

   

 

 

 

Cash Flows From Investing Activities

     —          —     

Cash Flows From Financing Activities

     —          —     
  

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     —          —     

Cash and Cash Equivalents, Beginning of Period

     —          —     
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ —        $ —     
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information

    

Cash paid during the period for interest expense

   $ 649      $ —     

Supplemental Schedule of Non-Cash Investing and Financing Activities

    

Cash proceeds from investments, in excess of interest income

   $ 43,113      $ 138   

Acquisition of investments in excess mortgage servicing rights

     221,832        40,492   

Acquisition of real estate securities

     121,262        —     

Deposit paid on investment in excess mortgage servicing rights

     25,200        —     

Return of deposit paid on investment in excess mortgage service rights

     25,200        —     

Purchase price payable on investments in excess mortgage servicing rights

     59        3,250   

Contributions in-kind of real estate securities by Newcastle

     164,142        —     

Borrowings under repurchase agreements

     153,510        —     

Repayments of repurchase agreements

     2,588        —     

Capital contributions by Newcastle

     368,294        40,492   

Capital distributions to Newcastle, net

     250,661        1,398   

See notes to consolidated financial statements.

 

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

(formerly known as NIC MSR LLC)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

1. ORGANIZATION

New Residential Investment Corp. (formerly known as NIC MSR LLC) (together with its subsidiaries, “New Residential”) is a Delaware corporation that was formed as a limited liability company in September 2011 for the purpose of making real estate related investments and commenced operations on December 8, 2011. On December 20, 2012, New Residential was converted to a corporation. Newcastle Investment Corp. (“Newcastle” or the “stockholder”) is the sole stockholder of New Residential. Newcastle is listed on the New York Stock Exchange under the symbol “NCT.” Newcastle generally does not have any liability for the obligations of New Residential, except as described in Note 6.

As of December 31, 2012, New Residential had acquired excess mortgage servicing rights (“Excess MSRs”) on five pools of residential mortgage loans from Nationstar Mortgage LLC (“Nationstar”). Nationstar is a leading residential mortgage servicer and is majority-owned by funds managed by Newcastle’s manager. Furthermore, New Residential acquired real estate securities during the third and fourth quarters of 2012.

New Residential intends to elect and qualify to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes for the tax year ending December 31, 2013. As such, New Residential 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.

New Residential intends to enter into a management agreement (the “Management Agreement”) with FIG LLC (the “Manager”), an affiliate of Fortress Investment Group LLC (“Fortress”), under which the Manager will advise New Residential on various aspects of its business and will manage its day-to-day operations, subject to the supervision of New Residential’s board of directors. For its services, the Manager is expected to be entitled to management fees and incentive compensation, both to be defined in, and in accordance with the terms of, the Management Agreement. For a further discussion of the Management Agreement, see Note 9. The Manager also manages Newcastle and investment funds that own a majority of Nationstar.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

Principles of Consolidation and Basis of Presentation The accompanying consolidated financial statements and related notes have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). These financial statements include the accounts of New Residential and its consolidated subsidiaries, which are comprised of entities in which it has an investment of 50% or more and has control over significant operating, financial and investing decisions of the entity. All intercompany balances and transactions have been eliminated upon consolidation. New Residential currently operates in three business segments: (i) investments in Excess MSRs, (ii) investments in real estate securities and (iii) corporate.

Variable interest entities (VIEs) are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, and only by its primary beneficiary, which is defined as the party who has the power to direct the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

 

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New Residential’s investments in non-Agency RMBS are variable interests. New Residential monitors these investments and analyzes the potential need to consolidate the related securitization entities pursuant to the VIE consolidation requirements.

New Residential has not consolidated the securitization entities that issued its non-Agency RMBS. This determination is based, in part, on New Residential’s assessment that it does not have the power to direct the activities that most significantly impact the economic performance of these entities, such as through ownership of a majority of the currently controlling class. In addition, New Residential is not obligated to provide, and has not provided, any financial support to these entities.

The consolidated financial statements have been prepared on a spin off basis from the consolidated financial statements and accounting records of Newcastle and reflect New Residential’s historical results of operations, financial position and cash flows, in accordance with U.S. GAAP. The consolidated financial statements may not be indicative of New Residential’s future performance and do not necessarily reflect what its consolidated results of operations, financial position and cash flows would have been had New Residential operated as an independent company during the periods presented.

The incremental cost of certain legal, accounting and other expenses related to New Residential’s operations are reflected in the accompanying consolidated financial statements. Certain expenses of Newcastle, currently comprised primarily of a portion of its management fee, have been allocated to New Residential to the extent they are directly associated with New Residential. The portion of the management fee allocated to New Residential represents the product of the management fee rate payable by Newcastle (1.5%) and New Residential’s gross equity, which management believes is a reasonable method for quantifying the expense of the services provided by the employees of the Manager to New Residential. New Residential and Newcastle do not intend to share any expenses following the separation.

Risks and Uncertainties In the normal course of business, New Residential encounters primarily two significant types of economic risk: credit and market. Credit risk is the risk of default on New Residential’s investments that results from a borrower’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of investments due to changes in prepayment speeds, interest rates, spreads or other market factors. Management believes that the carrying values of its investments are reasonable taking into consideration these risks along with estimated prepayments, refinancings, collateral values, payment histories, and other borrower information. Furthermore, as of December 31, 2012 and 2011, a significant portion of New Residential’s assets are its investments in Excess MSRs, which are dependent on Nationstar to perform its obligations as the servicer. If Nationstar is terminated as the servicer, New Residential’s right to receive its portion of the excess mortgage servicing amount is also terminated.

Additionally, New Residential is subject to significant tax risks. If New Residential were to fail to qualify as a REIT in any taxable year, it would be subject to U.S. federal corporate income tax (including any applicable alternative minimum tax), which could be material. Unless entitled to relief under certain statutory provisions, New Residential would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost.

Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

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REVENUE RECOGNITION

Investments in Excess Mortgage Servicing Rights Excess MSRs are aggregated into pools as applicable; each pool of Excess MSRs is accounted for in the aggregate. Interest income for Excess MSRs is accreted into interest income on an effective yield or “interest” method, based upon the expected excess mortgage servicing amount through the expected life of the underlying mortgages. Changes to expected cash flows result in a cumulative retrospective adjustment, which will be recorded in the period in which the change in expected cash flows occurs. Under the retrospective method, the interest income recognized for a reporting period would be measured as the difference between the amortized cost basis at the end of the period and the amortized cost basis at the beginning of the period, plus any cash received during the period. The amortized cost basis is calculated as the present value of estimated future cash flows using an effective yield, which is the yield that equates all past actual and current estimated future cash flows to the initial investment. In addition, New Residential’s policy is to recognize interest income only on its Excess MSRs in existing eligible underlying mortgages. The difference between the fair value of Excess MSRs and their amortized cost basis is recorded as “Change in fair value of investments in excess mortgage servicing rights.” Fair value is generally determined by discounting the expected future cash flows using discount rates that incorporate the market risks and liquidity premium specific to the Excess MSRs, and therefore may differ from their effective yields.

Real Estate Securities New Residential invests in real estate related asset backed securities. Discounts or premiums are accreted into interest income on an effective yield or “interest” method, based upon a comparison of actual and expected cash flows, through the expected maturity date of the security. Depending on the nature of the investment, changes to expected cash flows may result in a prospective change to yield or a retrospective change which would include a catch up adjustment. Deferred fees and costs, if any, are recognized as a reduction to the interest income over the terms of the securities using the interest method. Upon settlement of securities, the excess (or deficiency) of net proceeds over the net carrying value of such security is recognized as a gain (or loss) in the period of settlement.

Impairment of Securities New Residential continually evaluates securities for impairment. Securities are considered to be other-than-temporarily impaired, for financial reporting purposes, generally when it is probable that New Residential will be unable to collect all principal or interest when due according to the contractual terms of the original agreements, or for securities purchased at a discount for credit quality when New Residential determines that it is probable that it will be unable to collect as anticipated. The evaluation of a security’s estimated cash flows includes the following, as applicable: (i) review of the credit of the issuer, (ii) review of the credit rating of the security, (iii) review of the key terms of the security, (iv) review of the performance of the underlying loans, including debt service coverage and loan to value ratios, (v) analysis of the value of the collateral for the underlying loans, (vi) analysis of the effect of local, industry and broader economic factors, and (vii) analysis of historical and anticipated trends in defaults, loss severities and prepayments for similar securities. Furthermore, New Residential must record a write down if we have the intent to sell a given security in an unrealized loss position, or if it is more likely than not that we will be required to sell such a security. Upon determination of impairment, New Residential records a direct write down for securities based on the estimated fair value of the security or underlying collateral using a discounted cash flow analysis or based on an observable market value. It is New Residential’s policy to establish an allowance for uncollectible interest on performing securities that are past due more than 90 days or sooner when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. Upon such a determination, those securities are deemed to be non-performing and put on nonaccrual status. Actual losses may differ from New Residential’s estimates. New Residential may resume accrual of income on a security if, in management’s opinion, full collection is probable. Subsequent to a determination of impairment, and a related write down, income is accrued on an effective yield method from the new carrying value to the related expected cash flows, with cash received treated as a reduction of basis.

Other Income (Loss) On May 14, 2012, New Residential 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. The

 

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auction commenced on October 23, 2012, and Nationstar did not submit the highest bid on October 24, 2012. Therefore, New Residential did not complete this co-investment and was entitled to its portion of the breakup fee of approximately $8.4 million, which was recorded as other income for the year ended December 31, 2012.

Reclassification From Accumulated Other Comprehensive Income Into Net Income No amounts were reclassified out of accumulated other comprehensive income into net income for the year ended December 31, 2012.

EXPENSE RECOGNITION

Interest Expense New Residential finances certain investments using floating rate repurchase agreements. Interest is expensed as incurred.

General and Administrative Expenses General and administrative expenses, including legal fees, audit fees and other costs and are expensed as incurred.

Management Fees Allocated by Newcastle These represent the management fees allocated by and due to Newcastle based on the equity used in funding the acquisition of Excess MSRs and real estate securities. The management fees are equal to 1.5% of the gross equity, as defined in the Management Agreement between Newcastle and FIG LLC. For further information on the Management Agreement, see Note 9.

BALANCE SHEET MEASUREMENT

Cash and Cash Equivalents New Residential has no cash account as of December 31, 2011 or 2012. Cash transactions affecting account balances are collected or paid through a cash account held by Newcastle.

Due from/to Newcastle For purposes of classifying amounts, New Residential considers the Manager and principals of Fortress to be affiliates. Amounts due from and to Newcastle are recorded at their contractual or allocated amount, subject to an allowance for uncollectible amounts if collection is not deemed probable.

Investments in Excess Mortgage Servicing Rights Upon acquisition, New Residential has elected to record each of such investments at fair value. New Residential elected to record its Excess MSRs at fair value in order to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors on the Excess MSRs. Under this election, New Residential records a valuation adjustment on its Excess MSRs on a quarterly basis to recognize the changes in fair value in net income as described in Revenue Recognition – Investments in Excess Mortgage Servicing Rights above. As of December 31, 2012 and 2011, all Excess MSRs are classified as held-for-investment as New Residential has the intent and ability to hold the investments for the foreseeable future.

Investments in Real Estate Securities New Residential has classified its investments in securities as available-for-sale. Available-for-sale securities are carried at market value with the net unrealized gains or losses reported as a separate component of accumulated other comprehensive income, to the extent impairment losses are considered temporary. At disposition, the net realized gain or loss is determined on the basis of the cost of the specific investments and is included in earnings. Unrealized losses on securities are charged to earnings if they reflect a decline in value that is other-than-temporary, as described above.

Capital Contributions and Distributions Capital contributions represent the settlements of acquisition price in the acquisition of Excess MSRs and real estate securities and deposits related to Excess MSRs paid by Newcastle on behalf of New Residential. Capital distributions represent the cash receipts from investments, repayments of repurchase agreements and borrowings under repurchase agreements less cash payments for expenses, which would be equivalent to net increases in cash and cash equivalents in the respective periods had New Residential maintained a separate bank account.

Contributions in-kind Contributions in-kind represent the contribution of real estate securities by Newcastle to New Residential.

 

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RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the FASB issued new guidance regarding the measurement and disclosure of fair value, which became effective for New Residential on January 1, 2012. The adoption of this guidance did not have a material impact on New Residential’s financial position, liquidity or results of operations.

In June 2011, the FASB issued a new accounting standard that eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. New Residential has early adopted this standard in the period ended December 31, 2011 and has presented the Statement of Comprehensive Income separately from the Statement of Changes in Newcastle’s Equity.

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 the 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. New Residential 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, financial instruments, hedging and contingencies. Some of the proposed changes are significant and could have a material impact on New Residential’s reporting. New Residential has not yet fully evaluated the potential impact of these proposals, but will make such an evaluation as the standards are finalized.

3. SEGMENT REPORTING

New Residential conducts its business through the following segments: (i) investments in Excess MSRs, (ii) investments in real estate securities and (iii) corporate. The corporate segment consists primarily of general and administrative expenses and the allocation of management fees by the stockholder.

In the third quarter of 2012, New Residential changed the composition of its reportable segments to add a real estate securities segment and a corporate segment. Management acquired real estate securities during the third quarter and determined that it should disaggregate corporate expenses from the other segments presented. Segment information for previously reported periods in the accompanying financial statements has been restated to reflect this change to the composition of its segments.

 

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

 

     Excess
MSRs
     Real Estate
Securities
     Corporate     New
Residential
 

Year ended December 31, 2012

          

Interest income

   $ 27,496       $ 6,263       $ —        $ 33,759   

Interest expense

     —           704         —          704   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income (expense)

   $ 27,496       $ 5,559       $ —        $ 33,055   

Change in fair value of investments in excess mortgage servicing rights

     9,023         —           —          9,023   

Other income (loss)

     8,400         —           —          8,400   

Expenses

     5,449         —           3,782        9,231   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Income (Loss)

   $ 39,470       $ 5,559       $ (3,782   $ 41,247   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2012

          

Total Assets

   $ 245,068       $ 289,808       $ —        $ 534,876   
     Excess
MSRs
     Real Estate
Securities
     Corporate     New
Residential
 
Period from December 8, 2011 (Commencement of Operations) through December 31, 2011           

Interest income

   $ 1,260       $ —         $ —        $ 1,260   

Interest expense

     —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income (expense)

   $ 1,260       $ —         $ —        $ 1,260   

Change in fair value of investments in excess mortgage servicing rights

     367         —           —          367   

Expenses

     809         —           104        913   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Income (Loss)

   $ 818       $ —         $ (104   $ 714   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011

          

Total Assets

   $ 43,791       $ —         $ —        $ 43,791   

4. INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AT FAIR VALUE

Pool 1 . On December 13, 2011, Newcastle announced the completion of the first co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights acquired by Nationstar. New Residential invested approximately $44 million to acquire a 65% interest in the Excess MSRs on a portfolio of government-sponsored enterprise (“GSE”) residential mortgage loans with an outstanding principal balance of approximately $9.9 billion (“Pool 1”). Nationstar has co-invested on a pari-passu basis with New Residential in 35% of the Excess MSRs and will be the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, the servicing obligations and liabilities as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs will be shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.

Pool 2 . On June 5, 2012, Newcastle announced the completion of a co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights Nationstar acquired from Bank of America. New Residential invested approximately $44 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans with an outstanding principal balance of approximately $10.4 billion (“Pool 2”), comprised of loans in GSE pools. Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and will be the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities as the servicer. Under the terms of this

 

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investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs will be shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations. As of December 31, 2012, New Residential has a remaining purchase price payable of less than $0.1 million which is to be funded in 2013 pursuant to the payment terms of the agreement.

Pools 3, 4 and 5. On June 29, 2012, Newcastle announced the completion of a co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights Nationstar acquired from Aurora Bank FSB, a subsidiary of Lehman Brothers Bancorp Inc. New Residential invested approximately $176.5 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans with an outstanding principal balance of approximately $63.7 billion, comprised of approximately 75% non-conforming loans in private label securitizations and approximately 25% conforming loans in GSE pools. The portfolio is comprised of three pools: two GSE loan pools with outstanding principal balances of approximately $9.8 billion (“Pool 3”) and $6.3 billion (“Pool 4”), respectively, and a pool of non-conforming loans in private label securitizations with an outstanding principal balance of approximately $47.6 billion (“Pool 5”). Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and will be the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs will be shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.

The following is a summary of New Residential’s Excess MSRs at December 31, 2012 and 2011:

 

     December 31, 2011      Period From
Dec 8, 2011
(Commencement
of Operations)
Through Dec 31,
2011
 

Description

   Unpaid
Principal
Balance
     Amortized
Cost Basis(A)
     Carrying
Value(B)
     Wtd.
Avg.
Yield
    Wtd. Avg.
Maturity
(Years)(C)
     Changes in Fair
Value Recorded
in Income(D)
 

Pool 1

   $ 9,705,512       $ 37,469       $ 37,637         20.0     4.5       $ 168   

Pool 1-Recapture Agreement

     —           6,135         6,334         20.0     10.3         199   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 9,705,512       $ 43,604       $ 43,971         20.0     6.0       $ 367   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2012      Year Ended
December 31,
2012
 

Description

   Unpaid
Principal
Balance
     Amortized
Cost Basis(A)
     Carrying
Value(B)
     Wtd.
Avg.
Yield
    Wtd. Avg.
Maturity
(Years)(C)
     Changes in
Fair Value
Recorded in
Income(D)
 

Pool 1

   $ 8,403,211       $ 30,237       $ 35,974         18.0     4.8       $ 5,569   

Pool 1-Recapture Agreement

     —           4,430         4,936         18.0     10.8         307   

Pool 2

     9,397,120         32,890         33,935         17.3     5.0         1,045   

Pool 2-Recapture Agreement

     —           5,206         5,387         17.3     11.8         181   

Pool 3

     9,069,726         27,618         30,474         17.6     4.7         2,856   

Pool 3-Recapture Agreement

     —           5,036         4,960         17.6     11.3         (76

Pool 4

     5,788,133         11,130         12,149         17.9     4.6         1,019   

Pool 4-Recapture Agreement

     —           2,902         2,887         17.9     11.1         (15

Pool 5

     43,902,561         107,704         109,682         17.5     4.8         1,978   

Pool 5-Recapture Agreement

     —           8,493         4,652         17.5     11.7         (3,841
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 76,560,751       $ 235,646       $ 245,036         17.6     5.4       $ 9,023   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(A) The amortized cost basis of the Recapture Agreements is determined based on the relative fair values of the Recapture Agreements and related Excess MSRs at the time they were acquired.

 

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(B) Carrying Value represents the fair value of the pools or Recapture Agreements, as applicable.
(C) Weighted Average Maturity represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(D) The portion of the change in fair value of the Recapture Agreements relating to loans recaptured to date is reflected in the respective pool.

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the Excess MSRs at December 31, 2012 and 2011:

 

Percentage of Total Outstanding Unpaid Principal Amount(A)

 

December 31, 2012

   

December 31, 2011

 

State Concentration

   Percentage    

State Concentration

   Percentage  

California

     32.0   California      19.4

Florida

     10.1   Florida      11.1

Washington

     4.3   Texas      6.7

New York

     4.3   Arizona      4.8

Arizona

     3.9   Virginia      3.5

Texas

     3.6   Washington      3.2

Colorado

     3.5   New Jersey      3.1

Maryland

     3.4   Maryland      3.1

New Jersey

     3.1   Illinois      3.0

Virginia

     3.0   Nevada      2.7

Other U.S.

     28.8   Other U.S.      39.4
  

 

 

      

 

 

 
     100.0        100.0
  

 

 

      

 

 

 

 

(A) Based on the information provided by the loan servicer as of the most recent remittance for the respective dates.

Geographic concentrations of investments expose New Residential to the risk of economic downturns within the relevant states. Any such downturn in a state where New Residential holds significant investments could affect the underlying borrower’s ability to make the mortgage payment and therefore could have a meaningful, negative impact on the Excess MSRs.

5. INVESTMENTS IN REAL ESTATE SECURITIES

During 2012, Newcastle contributed approximately $258.0 million face amount of non-Agency residential mortgage backed securities (“RMBS”), which had a fair value of approximately $164.1 million on the contribution date, to New Residential. Furthermore, New Residential acquired an additional $193.8 million face amount of non-Agency RMBS for approximately $121.3 million during 2012.

The following is a summary of New Residential’s real estate securities at December 31, 2012, 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.

 

         

Gross Unrealized

                Weighted Average  

Asset Type

  Outstanding
Face Amount
    Amortized
Cost Basis
    Gains     Losses     Carrying
Value

(A)
    Number of
Securities
    Rating
(B)
    Coupon     Yield     Maturity
(Years)
(C)
    Principal
Subordination
(D)
 

ABS-Subprime(E)

  $ 433,510      $ 274,230      $ 15,856      $ (330   $ 289,756        29        CC        0.63     6.55     6.8        10.0

 

(A) Fair value, which is equal to carrying value for all securities. See Note 7 regarding the estimation of fair value.

 

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(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. 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 New Residential’s investments.
(E) The total outstanding face amount of fixed rate securities was $1.1 million, and of floating rate securities was $432.4 million.

During the year ended December 31, 2012, New Residential recorded no other-than-temporary impairment charge (“OTTI”) related to its real estate securities. The unrealized losses on New Residential’s securities were primarily the result of changes in market factors, rather than issue-specific credit impairment. New Residential 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. New Residential has no intent to sell and is not more likely than not to be required to sell these securities. The following table summarizes New Residential’s securities in an unrealized loss position as of December 31, 2012.

 

                Gross
Unrealized
                Weighted Average  

Securities in an

Unrealized Loss Position

  Outstanding
Face  Amount
    Amortized
Cost Basis
    Gains     Losses     Carrying
Value
    Number of
Securities
    Rating     Coupon     Yield     Maturity
(Years)
 

Less than Twelve Months

  $ 15,747      $ 9,945      $ —        $ (330   $ 9,615        4        CC        1.46     5.91     7.2   

Twelve of More Months

    —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 15,747      $ 9,945      $ —        $ (330   $ 9,615        4        CC        1.46     5.91     7.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The table below summarizes the geographic distribution of the collateral securing New Residential’s real estate securities at December 31, 2012:

 

     December 31, 2012  

Geographic Location

   Outstanding
Face
Amount
     Percentage  

Western U.S.

   $ 151,227         34.9

Southeastern U.S.

     100,636         23.2

Northeastern U.S.

     95,565         22.0

Midwestern U.S.

     43,230         10.0

Southwestern U.S.

     42,852         9.9
  

 

 

    

 

 

 
   $ 433,510         100.0
  

 

 

    

 

 

 

 

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New Residential evaluates the credit quality of its real estate securities, as of the acquisition date, for evidence of credit quality deterioration. As a result, we identified a population of real estate securities for which it was determined that it was probable that we would be unable to collect all contractually required payments. At December 31, 2012, these securities had a face amount of $342.0 million and a carrying value of $212.1 million. On their respective acquisition dates, the face amount of these real estate securities was $351.8 million, with total expected cash flows of $285.9 and a fair value of $205.3 million. The following is a summary of the changes in accretable yield for these securities during the year ended December 31, 2012.

 

     For the year ended
December 31, 2012
 

Balance at December 31, 2011

   $ —     

Additions

     80,636   

Accretion

     (3,195

Reclassifications from nonaccretable difference

     12,636   

Disposals

     —     
  

 

 

 

Balance at December 31, 2012

   $ 90,077   
  

 

 

 

6. DEBT OBLIGATIONS

The following table presents certain information regarding New Residential’s debt obligations at December 31, 2012:

 

    December 31, 2012  
                                                  Collateral  

Debt Obligation/Collateral

  Month
Issued
    Outstanding
Face
Amount
    Carrying
Value
    Final
Stated
Maturity
  Contractual
Weighted
Average

Funding Cost
    Weighted
Average
Funding

Cost
    Weighted
Average
Maturity
(Years)
    Face
Amount  of
Floating

Rate Debt
    Outstanding
Face
Amount
    Amortized
Cost Basis
    Carrying
Value
    Weighted
Average
Maturity
(Years)
    Floating
Rate
Face
Amount
 

Repurchase Agreements(A)

                         

Non-Agency RMBS (B) (C)

    Various      $ 150,922      $ 150,922      Jan
2013
    LIBOR+2.00%        2.21     0.1      $ 150,922      $ 344,177      $ 215,034      $ 228,493        6.9      $ 344,177   

 

(A) These repurchase agreements had approximately $55 thousand of associated accrued interest payable at December 31, 2012. $151 million face amount of these repurchase agreements were renewed subsequent to December 31, 2012.
(B) The counterparty of these repurchase agreements is Credit Suisse.
(C) Newcastle is the guarantor of these repurchase agreements, which are subject to customary margin call provisions.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

U.S. GAAP requires the categorization of the fair value of financial instruments 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.

New Residential follows this hierarchy for its financial instruments. The classifications are based on the lowest level of input that is significant to the fair value measurement.

 

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The carrying value and fair value of New Residential’s financial assets and liabilities at December 31, 2012 were as follows:

 

     Principal Balance or
Notional Amount
     Carrying
Value
     Fair Value  
           Level 2      Level 3      Total  

Assets:

              

Investments in Excess MSRs (A)

   $ 76,560,751       $ 245,036       $ —         $ 245,036       $ 245,036   

Real estate securities, available-for-sale

   $ 433,510       $ 289,756       $ —         $ 289,756       $ 289,756   

Liabilities:

              

Repurchase agreements

   $ 150,922       $ 150,922       $ 150,922       $ —         $ 150,922   

 

(A) The notional amount represents the total unpaid principal balance of the mortgage loans underlying the Excess MSRs. Generally, New Residential does not receive an excess mortgage servicing amount on nonperforming loans.

Investments in Excess MSRs Valuation

Fair value estimates of New Residential’s Excess MSRs were based on internal pricing models as of December 31, 2012 and 2011, respectively. The valuation technique is based on discounted cash flows. Significant inputs used in the valuations included expectations of prepayment rates, delinquency rates, recapture rates, the excess mortgage servicing amount of the underlying mortgage loans and discount rates that market participants would use in determining the fair values of mortgage servicing rights on similar pools of residential mortgage loans. New Residential’s management validates the inputs and outputs of the internal pricing models by comparing them to available independent third party market parameters and models for reasonableness. New Residential believes its valuation methods and the assumptions used are appropriate and consistent with other market participants.

In order to evaluate the reasonableness of its fair value determinations, management engages an independent valuation firm to separately measure the fair value of its Excess MSRs. The independent valuation firm determines an estimated fair value range based on its own models and issues a “fairness opinion” with this range. Management compares the range included in the opinion to the value generated by its internal models. For Excess MSRs acquired prior to the current quarter, the fairness opinion relates to the valuation at the current quarter end date. For Excess MSRs acquired during the current quarter, the fairness opinion relates to the valuation at the time of acquisition. To date, New Residential has not made any significant valuation adjustments as a result of these fairness opinions.

For Excess MSRs acquired during the current quarter, New Residential revalues the Excess MSRs at the quarter end date if a payment is received between the acquisition date and the end of the quarter. Otherwise, Excess MSRs acquired during the current quarter are carried at their amortized cost basis if there has been no change in assumptions since acquisition.

In addition, in valuing the Excess MSRs, management considered the likelihood of Nationstar being removed as the servicer, which likelihood is considered to be remote. Fair value measurements of the Excess MSRs 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. Significant increases (decreases) in the discount rates, prepayments or delinquency rates in isolation would result in a significantly lower (higher) fair value measurement, whereas significant increases (decreases) in the recapture rates or excess mortgage servicing amount in isolation would result in a significantly higher (lower) fair value measurement. Generally, a change in the delinquency rate assumption is accompanied by a directionally similar change in the assumption used for the prepayment speed.

 

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The following table summarizes certain information regarding the inputs used in valuing the Excess MSRs as of December 31, 2012 and 2011:

 

     Significant Input Ranges (December 31, 2011)  
     Prepayment
Speed (A)
    Delinquency
(B)
    Recapture
Rate (C)
    Excess
Mortgage
Servicing
Amount (D)
     Discount
Rate
 

Pool 1

     20.0     10.0     35.0     29 bps         20.0

Pool 1 - Recapture Agreement

     8.0     10.0     35.0     21 bps         20.0
     Significant Input Ranges (December 31, 2012)  
     Prepayment
Speed (A)
    Delinquency
(B)
    Recapture
Rate (C)
    Excess
Mortgage
Servicing
Amount (D)
     Discount
Rate
 

Pool 1

     17.1     10.0     35.0     29 bps         18.0

Pool 1 - Recapture Agreement

     8.0     10.0     35.0     21 bps         18.0

Pool 2

     16.7     11.0     35.0     23 bps         17.3

Pool 2 - Recapture Agreement

     8.0     10.0     35.0     21 bps         17.3

Pool 3

     16.9     12.1     35.0     23 bps         17.6

Pool 3 - Recapture Agreement

     8.0     10.0     35.0     21 bps         17.6

Pool 4

     18.6     15.9     35.0     17 bps         17.9

Pool 4 - Recapture Agreement

     8.0     10.0     35.0     21 bps         17.9

Pool 5

     15.0     N/A  (E)      20.0     13 bps         17.5

Pool 5 - Recapture Agreement

     8.0     N/A  (E)      20.0     21 bps         17.5

 

(A) Projected annualized weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.
(B) Projected percentage of mortgage loans in the pool that will miss their mortgage payments.
(C) Percentage of voluntarily prepaid loans that are expected to be refinanced by Nationstar.
(D) Weighted average total mortgage servicing amount in excess of the basic fee.
(E) The Excess MSR will be paid on the total UPB of the mortgage portfolio (including both performing and delinquent loans until REO).

All of the assumptions listed have some degree of market observability, based on New Residential’s knowledge of the market, relationships with market participants, and use of common market data sources. Prepayment speed and default rate projections are in the form of “curves” or “vectors” that vary over the expected life of the pool. New Residential uses assumptions that generate its best estimate of future cash flows for each investment in Excess MSRs.

When valuing Excess MSRs, New Residential uses the following criteria to determine the significant inputs:

 

   

Prepayment Speed: Prepayment speed projections are in the form of a “vector” that varies over the expected life of the pool. The prepayment vector specifies the percentage of the collateral balance that is expected to prepay voluntarily (i.e., pay off) and involuntarily (i.e., default) at each point in the future. The prepayment vector is based on assumptions that reflect factors such as the borrower’s FICO score, loan-to-value ratio, debt-to-income ratio, vintage on a loan level basis, as well as the projected effect on loans eligible for the Home Affordable Refinance Program 2.0 (“HARP 2.0”). Management considers collateral-specific prepayment experience when determining this vector. For the Recapture Agreements and recaptured loans, New Residential also considers industry research on the prepayment experience of similar loan pools (i.e., loan pools composed of refinanced loans). This data is obtained from remittance reports, market data services and other market sources.

 

   

Delinquency Rates: For existing mortgage pools, delinquency rates are based on the pool-specific experience of loans that missed their latest mortgage payments. For the Recapture Agreements and

 

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recaptured loans, delinquency rates are based on the experience of similar loan pools originated by Nationstar and delinquency experience over the past year. Management believes this time period provides a reasonable sample for projecting future delinquency rates while taking into account current market conditions. Additional consideration is given to loans that are expected to become 30 or more days delinquent.

 

   

Recapture Rates: Recapture rates are based on actual average recapture rates experienced by Nationstar on similar mortgage loan pools. Generally, New Residential looks to one year worth of actual recapture rates, which management believes provides a reasonable sample for projecting future recapture rates while taking into account current market conditions.

 

   

Excess Mortgage Servicing Amount: For existing mortgage pools, excess mortgage servicing amount projections are based on the actual total mortgage servicing amount in excess of a basic fee. For loans expected to be refinanced by Nationstar and subject to a Recapture Agreement, New Residential considers the excess mortgage servicing amount on loans originated by Nationstar over the past year and other general market considerations. Management believes this time period provides a reasonable sample for projecting future excess mortgage servicing amounts while taking into account current market conditions.

 

   

Discount Rate: The discount rates New Residential uses are derived from market data on pricing of mortgage servicing rights backed by similar collateral.

New Residential uses different prepayment and delinquency assumptions in valuing the Excess MSRs relating to the original loan pools, the Recapture Agreements and the Excess MSRs relating to recaptured loans. The prepayment speed and delinquency rate assumptions differ because of differences in the collateral characteristics, eligibility for the Home Affordable Refinance Program 2.0 (“HARP 2.0”) and expected borrower behavior for original loans and loans which have been refinanced. New Residential uses the same assumptions for recapture and discount rates when valuing Excess MSRs and Recapture Agreement. These assumptions are based on historical recapture experience and market pricing.

Excess MSRs measured at fair value on a recurring basis using Level 3 inputs changed during the period December 8, 2011 (Commencement of operations) through December 31, 2011 and the year ended December 31, 2012 as follows:

 

     Level 3  
     Pool 1 (A)     Pool 2 (A)     Pool 3 (A)     Pool 4 (A)     Pool 5 (A)     Total  

Balance at December 8, 2011 (Commencement of operations)

   $ —         $ —         $ —         $ —         $ —         $ —      

Transfers (B)

            

Transfers from Level 3

     —           —           —           —           —           —      

Transfers into Level 3

     —           —           —           —           —           —      

Total gains (losses) included in net income (C)

     367        —           —           —           —           367   

Interest income

     1,260        —           —           —           —           1,260   

Purchases, sales and repayments

            

Purchases

     43,742        —           —           —           —           43,742   

Proceeds from sales

     —           —           —           —           —           —      

Proceeds from repayments

     (1,398     —           —           —           —           (1,398
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

   $ 43,971      $ —         $ —         $ —         $ —         $ 43,971   

Transfers (B)

            

Transfers from Level 3

     —           —           —           —           —           —      

Transfers into Level 3

     —           —           —           —           —           —      

Total gains (losses) included in net income (C)

     5,877        1,226        2,780        1,004        (1,864     9,023   

Interest income

     7,955        3,450        3,409        1,381        11,293        27,488   

Purchases, sales and repayments

            

Purchases

     —           43,872        36,218        15,439        124,813        220,342   

Purchase adjustments

     (178     (1,522     —           —           —           (1,700

Proceeds from sales

     —           —           —           —           —           —      

Proceeds from repayments

     (16,715     (7,704     (6,973     (2,788     (19,908     (54,088
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

   $ 40,910      $ 39,322      $ 35,434      $ 15,036      $ 114,334      $ 245,036   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(A) Includes the recapture agreement for each respective pool.
(B) Transfers are assumed to occur at the beginning of the respective period.
(C) The gains (losses) recorded in earnings during the period are attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting dates. These gains (losses) represent the change in fair value of the Excess MSRs and are recorded in “Change in fair value of investments in excess mortgage servicing rights” in the consolidated statements of income.

Real Estate Securities Valuation

As of December 31, 2012 New Residential’s securities valuation methodology and results are further detailed as follows:

 

                   Fair Value  

Asset Type

   Outstanding
Face Amount
     Amortized
Cost Basis
     Multiple
Quotes (A)
     Single
Quote (B)
     Total  

ABS-Subprime

   $ 433,510       $ 274,230       $ 265,556       $ 24,200       $ 289,756   

 

(A) 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 the fair value and did not use an average of the quotes. Even if New Residential 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 New Residential receives. Management believes using an average of the quotes in these cases would not represent the fair value of the asset. Based on New Residential’s own fair value analysis using internal models, management selects one of the quotes which is believed to more accurately reflect fair value. New Residential 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.
(B) 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.

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 New Residential’s investments in real estate securities categorized within Level 3 of the fair value hierarchy, the significant unobservable inputs include the discount rates, assumptions related 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.

 

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Fair value estimates of New Residential’s securities were based on third party indications as of December 31, 2012 and classified as Level 3. Securities measured at fair value on a recurring basis using Level 3 inputs changed during the year ended December 31, 2012 as follows:

 

     Level 3  
     ABS-
Subprime
 

Balance at December 31, 2011

   $ —     

Transfers (A)

  

Transfers from Level 3

     —     

Transfers into Level 3

     —     

Total gains (losses)

  

Included in net income

     —     

Included in other comprehensive income (B)

     15,526   

Amortization included in interest income

     5,339   

Purchases, contributions in-kind, sales and repayments

  

Purchases

     121,262   

Contributions in-kind

     164,142   

Proceeds from sales

     —     

Proceeds from repayments

     (16,513
  

 

 

 

Balance at December 31, 2012

   $ 289,756   
  

 

 

 

 

(A) Transfers are assumed to occur at the beginning of the respective period.
(B) These gains (losses) were included in net unrealized gain (loss) on securities in the consolidated statements of comprehensive income.

Liabilities for Which Fair Value is Only Disclosed

The following table summarizes the level of the fair value hierarchy, valuation techniques and variables used for estimating 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

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

8. COMMITMENTS AND CONTINGENCIES

Litigation New Residential may, from time to time, be a defendant in legal actions from transactions conducted in the ordinary course of business. As of December 31, 2012 and 2011, New Residential is not subject to any material litigation, individually or in the aggregate, nor, to management’s knowledge, is any material litigation currently threatened against New Residential.

Capital Commitment to a Joint Venture As of December 31, 2012, New Residential had a capital commitment of $27.3 million related to a 50% investment in a joint venture in connection with the acquisition of Excess MSRs on a portfolio of Ginnie Mae residential mortgage loans, see Note 11.

 

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9. TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES

New Residential intends to enter into a Management Agreement with the Manager, an affiliate of Fortress. Pursuant to the Management Agreement, the Manager, under the supervision of New Residential’s board of directors, will formulate investment strategies, will arrange for the acquisition of assets and the associated financing, will monitor the performance of New Residential’s assets and will provide certain advisory, administrative and managerial services in connection with the operations of New Residential. For performing these services, the Manager is expected to receive from New Residential a management fee and incentive compensation, as defined in the Management Agreement. In addition to the management fee and incentive compensation, New Residential is also expected to be responsible for reimbursing the Manager for certain expenses paid by the Manager on behalf of New Residential.

Prior to entering into a Management Agreement with FIG LLC, management fees are allocated by and due to Newcastle based on the equity used in funding the acquisition of Excess MSRs and real estate securities. The management fees are equal to 1.5% of the gross equity, as defined in the Management Agreement between Newcastle and FIG LLC.

Due to Newcastle is comprised of the following amounts due to Newcastle as of December 31, 2012 and 2011:

 

     December 31,
2012
     December 31,
2011
 

Management fees payable to Newcastle

   $ 3,392       $ 39   

Reimbursable expenses payable to Newcastle

     1,744         119   
  

 

 

    

 

 

 
   $ 5,136       $ 158   
  

 

 

    

 

 

 

See Notes 1, 4 and 11 for a discussion of transactions with Nationstar. As of December 31, 2012, New Residential held on its balance sheet a total face amount of $433.5 million of non-Agency RMBS serviced by Nationstar. The total UPB of the loans underlying these Nationstar serviced non-Agency RMBS was approximately $5.7 billion as of December 31, 2012.

10. INCOME TAXES

New Residential intends to qualify as a REIT for the tax year ending December 31, 2013. A REIT will generally not be subject to U.S. federal corporate income tax on that portion of its 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 December 20, 2012, New Residential Investment LLC was converted to New Residential Investment Corp. New Residential remains a wholly owned subsidiary of Newcastle and, as a qualified REIT subsidiary, continues to be a disregarded entity for the year ended December 31, 2012. As a result, no provision or liability for U.S. federal or state income taxes has been included in the accompanying consolidated financial statements for the periods ended December 31, 2012 or 2011.

11. RECENT ACTIVITIES

These financial statements include a discussion of material events that have occurred subsequent to December 31, 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.

Subsequent to December 31, 2012, New Residential acquired approximately $391.7 million face amount of non-Agency RMBS for approximately $242.8 million. These non-Agency RMBS are serviced by Nationstar.

On January 4, 2013, New Residential, through a joint venture, co-invested in Excess MSRs on a portfolio of Ginnie Mae residential mortgage loans with a UPB of approximately $13 billion as of November 30, 2012.

 

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Nationstar acquired the related servicing rights from Bank of America in November 2012. New Residential invested approximately $27.3 million for a 50% interest in a joint venture which will acquire an approximately 67% interest in the Excess MSRs on this portfolio. The remaining interests in the joint venture will be owned by a Fortress-managed fund and the remaining interest of approximately 33% in the Excess MSRs will be owned by Nationstar. As the servicer, Nationstar will perform all servicing and advancing functions, and it will retain the ancillary income, servicing obligations and liabilities associated with this portfolio. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs will be shared on a pro rata basis by the joint venture and Nationstar, subject to certain limitations.

On January 6, 2013 New Residential, through a joint venture, agreed to co-invest in Excess MSRs on a portfolio of four pools of residential mortgage loans with a UPB of approximately $215 billion as of November 30, 2012. Approximately 53% of the loans in this portfolio are in private label securitizations, and the remainder are owned, insured or guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation or the Government National Mortgage Association (“Ginnie Mae”). Nationstar has agreed to acquire the related servicing rights from Bank of America. New Residential committed to invest approximately $340 million (based on the November 30, 2012 UPB) for a 50% interest in a joint venture which will acquire an approximately 67% interest in the Excess MSRs on this portfolio. The remaining interests in the joint venture will be owned by a Fortress-managed fund and the remaining interest of approximately 33% in the Excess MSRs will be owned by Nationstar. As the servicer, Nationstar will perform all servicing and advancing functions, and it will retain the ancillary income, servicing obligations and liabilities associated with this portfolio. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs will be shared on a pro rata basis by the joint venture and Nationstar, subject to certain limitations. On January 31, 2013, New Residential completed the first closing of this co-investment. The first closing related to Excess MSRs on loans with an aggregate UPB of approximately $58 billion as of December 31, 2012, that are owned, insured, or guaranteed by Fannie Mae or Freddie Mac. There can be no assurance that New Residential will complete this investment as anticipated or at all.

On January 28, 2013, New Residential extended all of its existing repurchase agreements to April 29, 2013. The repurchase agreements had an outstanding principal balance of approximately $158.0 million on April 3, 2013.

On February 27, 2013, New Residential, through a subsidiary, entered into an agreement to co-invest in residential mortgage loans with a UPB of approximately $83 million as of December 31, 2012. New Residential has invested approximately $35 million to acquire a 70% interest in the mortgage loans. Nationstar has co-invested pari passu with New Residential in 30% of the mortgage loans and will be the servicer of the loans performing all servicing and advancing functions and retaining the ancillary income, servicing obligations and liabilities as the servicer.

On March 5, 2013, New Residential agreed to co-invest in a portfolio of consumer loans with a UPB of approximately $4.2 billion as of December 31, 2012. The portfolio includes over 400,000 personal unsecured loans and personal homeowner loans originated through subsidiaries of HSBC Finance Corporation. On April 1, 2013, New Residential completed this co-investment through newly formed limited liability companies (collectively, “the consumer loan companies”). The consumer loan companies acquired the portfolio from HSBC Finance Corporation and its affiliates. New Residential 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 our Manager, acquired 47%, and an affiliate of Blackstone Tactical Opportunities Advisors L.L.C. acquired 23%. Springleaf will act 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 consumer loan companies were formed on March 19, 2013, for the purpose of making this investment and commenced operations upon the completion of the investment. After a servicing transition period, Springleaf will be the servicer of the loans and will provide all servicing and advancing functions for the portfolio.

 

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From March 25, 2013 to April 2, 2013, Newcastle contributed to New Residential approximately $1.0 billion face amount of Agency RMBS. New Residential financed these Agency RMBS with approximately $1.0 billion of repurchase agreements. The counterparties of these repurchase agreements are Goldman Sachs & Co., Barclays Capital Inc., Citigroup Global Markets, Inc., Nomura Securities International, Inc. and Morgan Stanley & Co. LLC.

 

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