UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007
or

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission File Number: 001-31458

Newcastle Investment Corp.
(Exact name of registrant as specified in its charter)


Maryland 81-0559116
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

1345 Avenue of the Americas, New York, NY 10105
(Address of principal executive offices) (Zip Code)

  (212) 798-6100  
  (Registrant’s telephone number, including area code)  
      
  (Former name, former address and former fiscal year, if changed since last report)  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes    [X]     No    [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    [X]     Accelerated filer    [ ]     Non-accelerated filer    [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes    [ ]     No    [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.

Common stock, $0.01 par value per share: 52,779,179 shares outstanding as of August 3, 2007.




NEWCASTLE INVESTMENT CORP.
FORM 10-Q

INDEX





Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)


  June 30,
2007
December 31,
2006
  (Unaudited)  
Assets    
Real estate securities, available for sale $ 5,338,347 $ 5,581,228
Real estate related loans, net 2,060,789 1,568,916
Residential mortgage loans, net 698,453 809,097
Subprime mortgage loans, held for sale 1,095,821
Subprime mortgage loans subject to call option – Note 5 289,742 288,202
Investments in unconsolidated subsidiaries 22,634 22,868
Operating real estate, net 31,553 29,626
Cash and cash equivalents 103,863 5,371
Restricted cash 241,248 184,169
Derivative assets 76,789 62,884
Receivables and other assets 64,329 52,031
  $ 10,023,568 $ 8,604,392
Liabilities and Stockholders’ Equity    
Liabilities    
CBO bonds payable $ 3,924,672 $ 4,313,824
Other bonds payable 621,562 675,844
Notes payable 93,793 128,866
Repurchase agreements 2,450,517 760,346
Repurchase agreements subject to ABCP facility 1,281,156 1,143,749
Financing of subprime mortgage loans subject to call option – Note 5 289,742 288,202
Credit facility 93,800
Junior subordinated notes payable (security for trust preferred) 100,100 100,100
Derivative liabilities 8,000 17,715
Dividends payable 40,786 33,095
Due to affiliates 7,741 13,465
Accrued expenses and other liabilities 72,113 33,406
  8,890,182 7,602,412
Stockholders’ Equity    
Preferred stock, $0.01 par value, 100,000,000 shares authorized, 2,500,000 shares of 9.75% Series B Cumulative Redeemable Preferred Stock, 1,600,000 shares of 8.05% Series C Cumulative Redeemable Preferred Stock and 2,000,000 shares of 8.375% Series D Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, issued and outstanding (Series D issued in 2007) 152,500 102,500
Common stock, $0.01 par value, 500,000,000 shares authorized, 52,779,179 and 45,713,817 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively 528 457
Additional paid-in capital 1,033,316 833,887
Dividends in excess of earnings (14,699 )  (10,848 ) 
Accumulated other comprehensive income (loss) (38,259 )  75,984
  1,133,386 1,001,980
  $ 10,023,568 $ 8,604,392

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Table of Contents

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(dollars in thousands, except share data)


  Three Months Ended
June 30,
Six Months Ended
June 30,
  2007 2006 2007 2006
Revenues        
Interest income $ 191,869 $ 124,209 $ 354,090 $ 238,116
Rental and escalation income 1,322 774 2,575 2,782
Gain on sale of investments, net 6,977 5,493 9,189 7,421
Other income (loss), net 5,753 (1,449 )  6,496 4,256
  205,921 129,027 372,350 252,575
Expenses        
Interest expense 133,917 87,909 250,674 164,874
Loss on extinguishment of debt – Note 6 7,280 7,280
Property operating expense 1,044 949 2,080 1,767
Loan and security servicing expense 3,698 1,402 5,681 3,408
Provision for credit losses 3,089 1,179 5,125 3,186
Provision for losses, loans held for sale – Note 5 5,754 5,754 4,127
General and administrative expense 1,478 1,161 2,815 2,791
Management fee to affiliate 4,545 3,474 8,451 6,945
Incentive compensation to affiliate 2,521 2,834 6,209 5,686
Depreciation and amortization 342 278 671 477
  163,668 99,186 294,740 193,261
Other Gains (Losses)        
Other-than-temporary impairment – Note 3 5,953 5,953
Income before equity in earnings of unconsolidated subsidiaries 36,300 29,841 71,657 59,314
Equity in earnings of unconsolidated subsidiaries 819 1,215 1,666 2,410
Income from continuing operations 37,119 31,056 73,323 61,724
Income (loss) from discontinued operations (6 )  (26 )  (19 )  225
Net Income 37,113 31,030 73,304 61,949
Preferred dividends (3,375 )  (2,329 )  (5,890 )  (4,657 ) 
Income Available For Common Stockholders $ 33,738 $ 28,701 $ 67,414 $ 57,292
Net Income Per Share of Common Stock        
Basic $ 0.64 $ 0.65 $ 1.35 $ 1.30
Diluted $ 0.64 $ 0.65 $ 1.34 $ 1.30
Income from continuing operations per share of common stock, after preferred dividends        
Basic $ 0.64 $ 0.65 $ 1.35 $ 1.29
Diluted $ 0.64 $ 0.65 $ 1.34 $ 1.29
Income (loss) from discontinued operations per share of common stock        
Basic $ (0.00 )  $ (0.00 )  $ (0.00 )  $ 0.01
Diluted $ (0.00 )  $ (0.00 )  $ (0.00 )  $ 0.01
Weighted Average Number of Shares of Common Stock Outstanding        
Basic 52,273,988 43,990,635 49,936,428 43,967,854
Diluted 52,467,019 44,071,310 50,158,085 44,067,645
Dividends Declared per Share of Common Stock $ 0.720 $ 0.650 $ 1.410 $ 1.275

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Table of Contents

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(dollars in thousands)


  Preferred Stock Common Stock Additional
Paid-in
Capital
Dividends in
Excess of
Earnings
Accum. Other
Comp. Income
(Loss)
Total
Stockholders’
Equity
  Shares Amount Shares Amount
Stockholders’ equity – December 31, 2006 4,100,000 $ 102,500 45,713,817 $ 457 $ 833,887 $ (10,848 )  $ 75,984 $ 1,001,980
Dividends declared (77,155 )  (77,155 ) 
Issuance of common stock 6,980,000 70 199,687 199,757
Exercise of common stock options 83,198 1 1,442 1,443
Issuance of common stock to directors 2,164 60 60
Issuance of preferred stock 2,000,000 50,000 (1,760 )  48,240
Comprehensive income:                
Net income 73,304 73,304
Net unrealized (loss) on securities (151,730 )  (151,730 ) 
Reclassification of net realized (gain) loss on securities into earnings (14,278 )  (14,278 ) 
Foreign currency translation 1,728 1,728
Net unrealized gain on derivatives designated as cash flow hedges 49,440 49,440
Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings 597 597
Total comprehensive income (loss)               (40,939 ) 
Stockholders’ equity – June 30, 2007 6,100,000 $ 152,500 52,779,179 $ 528 $ 1,033,316 $ (14,699 )  $ (38,259 )  $ 1,133,386
Stockholders’ equity – December 31, 2005 4,100,000 $ 102,500 43,913,409 $ 439 $ 782,735 $ (13,235 )  $ 45,564 $ 918,003
Dividends declared (60,736 )  (60,736 ) 
Exercise of common stock options 84,000 1 1,439 1,440
Issuance of common stock to directors 2,408 60 60
Comprehensive income:                
Net income 61,949 61,949
Net unrealized (loss) on securities (73,164 )  (73,164 ) 
Reclassification of net realized (gain) on securities into earnings (1,694 )  (1,694 ) 
Foreign currency translation 795 795
Net unrealized gain on derivatives designated as cash flow hedges 96,649 96,649
Reclassification of net realized (gain) on derivatives designated as cash flow hedges into earnings (2,954 )  (2,954 ) 
Total comprehensive income               81,581
Stockholders’ equity – June 30, 2006 4,100,000 $ 102,500 43,999,817 $ 440 $ 784,234 $ (12,022 )  $ 65,196 $ 940,348

    

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Table of Contents

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
(dollars in thousands)


  Six Months Ended June 30,  
  2007 2006  
Cash Flows From Operating Activities      
Net income $ 73,304 $ 61,949  
Adjustments to reconcile net income to net cash provided by (used in) operating activities (inclusive of amounts related to discontinued operations):      
Depreciation and amortization 671 477  
Accretion of discount and other amortization (13,649 )  (11,969 )   
Equity in earnings of unconsolidated subsidiaries (1,666 )  (2,410 )   
Distributions of earnings from unconsolidated subsidiaries 1,666 2,410  
Deferred rent 151 (1,057 )   
Gain on sale of investments (9,113 )  (7,784 )   
Unrealized gain on non-hedge derivatives and hedge ineffectiveness (6,338 )  (4,167 )   
Loss on extinguishment of debt 6,260  
Provision for credit losses 5,125 3,186  
Provision for losses, loans held for sale 5,754 4,127  
Other-than-temporary impairment 5,953  
Purchase of loans held for sale – Notes 4 and 5 (1,089,202 )  (1,511,086 )   
Sale of loans held for sale – Note 5 1,507,588  
Non-cash directors’ compensation 60 60  
Change in:      
Restricted cash 71,067 10,958  
Receivables and other assets (10,458 )  2,633  
Due to affiliates (5,724 )  (1,939 )   
Accrued expenses and other liabilities 899 3,687  
Net cash provided by (used in) operating activities (965,240 )  56,663  
Cash Flows From Investing Activities      
Purchase of real estate securities (289,027 )  (807,396 )   
Proceeds from sale of real estate securities 116,555 273,062  
Purchase of and advances on loans (862,978 )  (407,862 )   
Repayments of loan and security principal 632,005 291,759  
Margin received on derivative instruments 55,152  
Return of margin on derivative instruments (39,960 )  30,350  
Margin deposits on total rate of return swaps (treated as derivative instruments) (56,249 )  (30,060 )   
Return of margin deposits on total rate of return swaps (treated as derivative instruments) 59,941 23,593  
Proceeds from termination of derivative instruments 24,191 17,955  
Proceeds from sale of derivative instrument into Securitization Trust – Note 5 5,623  
Purchase and improvement of operating real estate (865 )  (806 )   
Contributions to unconsolidated subsidiaries (201 )  (100 )   
Distributions of capital from unconsolidated subsidiaries 435 1,214  
Net cash used in investing activities (361,001 )  (602,668 )   

Continued on Page 5

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Table of Contents

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
(dollars in thousands)


  Six Months Ended June 30,  
  2007 2006  
Cash Flows From Financing Activities      
Repayments of CBO bonds payable (984,776 )  (10,672 )   
Issuance of other bonds payable 587,628 240,719  
Repayments of other bonds payable (55,123 )  (259,101 )   
Repayments of notes payable (35,073 )  (74,802 )   
Borrowings under repurchase agreements 3,399,557 2,305,541  
Repayments of repurchase agreements (1,709,386 )  (1,732,662 )   
Issuance of repurchase agreement subject to ABCP facility 247,409  
Repayments of repurchase agreement subject to ABCP facility (110,002 )   
Draws under credit facility 382,800 274,900  
Repayments of credit facility (476,600 )  (244,400 )   
Issuance of junior subordinated notes payable 100,100  
Issuance of common stock 199,791  
Costs related to issuance of common stock  
Exercise of common stock options 1,443 1,440  
Issuance of preferred stock 50,000    
Costs related to issuance of preferred stock (1,760 )   
Dividends paid (69,464 )  (59,636 )   
Payment of deferred financing costs (1,711 )  (6,653 )   
Net cash provided by financing activities 1,424,733 534,774  
Net Increase (Decrease) in Cash and Cash Equivalents 98,492 (11,231 )   
Cash and Cash Equivalents, Beginning of Period 5,371 21,275  
Cash and Cash Equivalents, End of Period $ 103,863 $ 10,044  
Supplemental Disclosure of Cash Flow Information      
Cash paid during the period for interest expense $ 231,226 $ 156,634  
Cash paid during the period for income taxes $ $ 244  
Supplemental Schedule of Non-Cash Investing and Financing Activities      
Common stock dividends declared but not paid $ 38,001 $ 28,600  
Preferred stock dividends declared but not paid $ 2,785 $ 1,552  
Foreclosure of loans $ $ 12,200  
Acquisition and financing of loans subject to call option $ $ 286,315  

5




NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
    
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2007
(dollars in tables in thousands, except share data)

1.  GENERAL

Newcastle Investment Corp. (and its subsidiaries, ‘‘Newcastle’’) is a Maryland corporation that was formed in 2002. Newcastle conducts its business through three primary segments: (i) real estate securities and real estate related loans, (ii) residential mortgage loans, and (iii) operating real estate.

Newcastle is organized and conducts its operations to qualify as a real estate investment trust (‘‘REIT’’) for U.S. federal income tax purposes. As such, Newcastle will generally not be subject to U.S. federal corporate income tax on that portion of its net income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by prescribed dates and complies with various other requirements.

Newcastle is party to a management agreement (the ‘‘Management Agreement’’) with FIG LLC (the ‘‘Manager’’), an affiliate of Fortress Investment Group LLC, under which the Manager advises Newcastle on various aspects of its business and manages its day-to-day operations, subject to the supervision of Newcastle’s board of directors. For its services, the Manager receives an annual management fee and incentive compensation, both as defined in the Management Agreement.

Approximately 5.1 million shares of Newcastle’s common stock were held by the Manager, through its affiliates, and its principals at June 30, 2007. In addition, the Manager, through its affiliates, held options to purchase approximately 1.5 million shares of Newcastle’s common stock at June 30, 2007.

The accompanying consolidated financial statements and related notes of Newcastle have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of Newcastle’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with Newcastle’s consolidated financial statements for the year ended December 31, 2006 and notes thereto included in Newcastle’s annual report on Form 10-K filed with the Securities and Exchange Commission. Capitalized terms used herein, and not otherwise defined, are defined in Newcastle’s consolidated financial statements for the year ended December 31, 2006.

6




NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
    
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2007
(dollars in tables in thousands, except share data)

2.  INFORMATION REGARDING BUSINESS SEGMENTS

Newcastle conducts its business through three primary segments: real estate securities and real estate related loans, residential mortgage loans, and operating real estate.

Summary financial data on Newcastle’s segments is given below, together with a reconciliation to the same data for Newcastle as a whole:


  Real Estate
Securities and
Real Estate
Related Loans
Residential
Mortgage
Loans
Operating
Real
Estate
Unallocated Total
June 30, 2007 and the Six Months then Ended          
Gross revenues $ 282,606 $ 86,877 $ 2,566 $ 301 $ 372,350
Operating expenses (1,399 )  (15,182 )  (2,167 )  (17,367 )  (36,115 ) 
Operating income (loss) 281,207 71,695 399 (17,066 )  336,235
Interest expense (191,375 )  (53,200 )  (25 )  (6,074 )  (250,674 ) 
Loss on extinguishment of debt (7,280 )  (7,280 ) 
Other-than-temporary impairment (5,953 )  (5,953 ) 
Depreciation and amortization (527 )  (144 )  (671 ) 
Equity in earnings of unconsolidated subsidiaries 482 1,180 4 1,666
Income (loss) from continuing operations 77,081 18,495 1,027 (23,280 )  73,323
Income (loss) from discontinued operations (19 )  (19 ) 
Net income (loss) 77,081 18,495 1,008 (23,280 )  73,304
Preferred dividends