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 September 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 November 7, 2007.





NEWCASTLE INVESTMENT CORP.
FORM 10-Q

INDEX


    PAGE
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements  
  Consolidated Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006 1
  Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2007 and 2006 2
  Consolidated Statements of Stockholders’ Equity (unaudited) for the nine months ended September 30, 2007 and 2006 3
  Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2007 and 2006 4
  Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 44
Item 4. Controls and Procedures 50
PART II. OTHER INFORMATION  
Item 1. Legal Proceedings 51
Item 1A. Risk Factors 51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 52
Item 3. Defaults upon Senior Securities 52
Item 4. Submission of Matters to a Vote of Security Holders 52
Item 5. Other Information 52
Item 6. Exhibits 53
  SIGNATURES 54




PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

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


  September 30,
2007
December 31,
2006
  (Unaudited)  
Assets    
Real estate securities, available for sale $ 5,186,147 $ 5,581,228
Real estate related loans, net 1,960,762 1,568,916
Residential mortgage loans, net 662,624 809,097
Subprime mortgage loans subject to call option – Note 5 392,992 288,202
Investments in unconsolidated subsidiaries 34,097 22,868
Operating real estate, net  33,348 29,626
Cash and cash equivalents 40,772 5,371
Restricted cash 107,415 184,169
Derivative assets 21,907 62,884
Receivables and other assets 65,409 52,031
  $ 8,505,473 $ 8,604,392
Liabilities and Stockholders’ Equity    
Liabilities    
CBO bonds payable $ 4,728,805 $ 4,313,824
Other bonds payable 588,971 675,844
Notes payable 85,233 128,866
Repurchase agreements 1,583,842 760,346
Repurchase agreements subject to ABCP facility 98,655 1,143,749
Financing of subprime mortgage loans subject to call option – Note 5 392,992 288,202
Credit facility 93,800
Junior subordinated notes payable (security for trust preferred) 100,100 100,100
Derivative liabilities 46,164 17,715
Dividends payable 40,251 33,095
Due to affiliates 7,741 13,465
Accrued expenses and other liabilities  12,098 33,406
  7,684,852 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 September 30, 2007 and December 31, 2006, respectively 528 457
Additional paid-in capital  1,033,322 833,887
Dividends in excess of earnings (91,973 )  (10,848 ) 
Accumulated other comprehensive income (loss) (273,756 )  75,984
  820,621 1,001,980
  $ 8,505,473 $ 8,604,392

1





NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

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


  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2007 2006 2007 2006
Revenues        
Interest income $ 169,770 $ 140,330 $ 523,860 $ 378,446
Rental and escalation income 1,323 834 3,898 3,616
Gain on sale of investments, net 4,825 2,642 14,014 10,722
Other income (loss), net (7,053 )  288 (557 )  4,545
  168,865 144,094 541,215 397,329
Expenses        
Interest expense 117,434 100,239 368,108 265,113
Loss on extinguishment of debt – Note 6 7,752 15,032 658
Property operating expense 1,019 1,041 3,099 2,808
Loan and security servicing expense 2,091 1,553 7,772 4,961
Provision for credit losses 2,820 2,682 7,945 5,868
Provision for losses, loans held for sale – Note 5 5,754 4,127
General and administrative expense 1,335 1,187 4,150 3,979
Management fee to affiliate 4,597 3,475 13,048 10,420
Incentive compensation to affiliate 3,094 6,209 8,780
Depreciation and amortization 359 290 1,030 767
  137,407 113,561 432,147 307,481
Other Gains (Losses)        
Other-than-temporary impairment – Note 3 (67,860 )  (73,813 ) 
Income (loss) before equity in earnings of unconsolidated subsidiaries (36,402 )  30,533 35,255 89,848
Equity in earnings of unconsolidated subsidiaries 488 1,506 2,154 3,916
Income (loss) from continuing operations (35,914 )  32,039 37,409 93,764
Income (loss) from discontinued operations 17 (12 )  (2 )  212
Net Income (Loss) (35,897 )  32,027 37,407 93,976
Preferred dividends (3,375 )  (2,328 )  (9,265 )  (6,985 ) 
Income (Loss) Applicable to Common Stockholders $ (39,272 )  $ 29,699 $ 28,142 $ 86,991
Income (Loss) Per Share of Common Stock        
Basic $ (0.74 )  $ 0.68 $ 0.55 $ 1.98
Diluted $ (0.74 )  $ 0.67 $ 0.55 $ 1.97
Income (loss) from continuing operations per share of common stock, after preferred dividends        
Basic $ (0.74 )  $ 0.68 $ 0.55 $ 1.97
Diluted $ (0.74 )  $ 0.67 $ 0.55 $ 1.97
Income from discontinued operations per share of common stock        
Basic $ 0.00 $ 0.00 $ 0.00 $ 0.01
Diluted $ 0.00 $ 0.00 $ 0.00 $ 0.00
Weighted Average Number of Shares of Common Stock Outstanding        
Basic 52,779,179 43,999,817 50,894,424 43,978,625
Diluted 52,779,179 44,136,956 51,045,418 44,091,003
Dividends Declared per Share of Common Stock $ 0.720 $ 0.650 $ 2.130 $ 1.925

2





NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 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 (118,532 )  (118,532 ) 
Issuance of common stock 6,980,000 70 199,703 199,773
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 (1,770 )  48,230
Comprehensive income:                
Net income 37,407 37,407
Net unrealized (loss) on securities (292,713 )  (292,713 ) 
Reclassification of net realized (gain) loss on securities into earnings (20,831 )  (20,831 ) 
Foreign currency translation 3,205 3,205
Net unrealized (loss) on derivatives designated as cash flow hedges (39,466 )  (39,466 ) 
Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings 65 65
Total comprehensive income (loss)               (312,333 ) 
Stockholders’ equity – September 30, 2007 6,100,000 $ 152,500 52,779,179 $ 528 $ 1,033,322 $ (91,973 )  $ (273,756 )  $ 820,621
Stockholders’ equity – December 31, 2005 4,100,000 $ 102,500 43,913,409 $ 439 $ 782,735 $ (13,235 )  $ 45,564 $ 918,003
Dividends declared (91,664 )  (91,664 ) 
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 93,976 93,976
Net unrealized gain on securities 31,775 31,775
Reclassification of net realized (gain) on securities into earnings (637 )  (637 ) 
Foreign currency translation 763 763
Net unrealized gain on derivatives designated as cash flow hedges 6,801 6,801
Reclassification of net realized (gain) on derivatives designated as cash flow hedges into earnings (3,351 )  (3,351 ) 
Total comprehensive income               129,327
Stockholders’ equity – September 30, 2006 4,100,000 $ 102,500 43,999,817 $ 440 $ 784,234 $ (10,923 )  $ 80,915 $ 957,166

3





NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

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


  Nine Months Ended September 30,
  2007 2006
Cash Flows From Operating Activities    
Net income $ 37,407 $ 93,976
Adjustments to reconcile net income to net cash provided by (used in) operating activities (inclusive of amounts related to discontinued operations):    
Depreciation and amortization 1,028 767
Accretion of discount and other amortization (18,751 )  (14,976 ) 
Equity in earnings of unconsolidated subsidiaries (2,154 )  (3,916 ) 
Distributions of earnings from unconsolidated subsidiaries 2,154 3,916
Deferred rent 234 (1,274 ) 
Gain on sale of investments (14,155 )  (10,430 ) 
Unrealized gain on non-hedge derivatives and hedge ineffectiveness 829 (4,421 ) 
Loss on extinguishment of debt 10,278
Provision for credit losses 7,945 5,868
Provision for losses, loans held for sale 5,754 4,127
Other-than-temporary impairment 73,813
Purchase of loans held for sale – Notes 4 and 5 (1,089,202 )  (1,511,086 ) 
Sale of loans held for sale – Note 5 969,747 1,411,530
Non-cash directors’ compensation  60 60
Change in:    
Restricted cash from operating activities (8,268 )  34,398
Receivables and other assets (13,138 )  (524 ) 
Due to affiliates (5,724 )  1,155
Accrued expenses and other liabilities (5,030 )  8,757
Net cash provided by (used in) operating activities (47,173 )  17,927
Cash Flows From Investing Activities    
Purchase of real estate securities  (416,408 )  (1,020,618 ) 
Proceeds from sale of real estate securities  237,892 306,618
Purchase of and advances on loans  (896,500 )  (1,267,511 ) 
Repayments of loan and security principal 925,431 417,277
Margin received on derivative instruments 73,978 (33,387 ) 
Return of margin on derivative instruments (90,097 )  30,349
Margin deposits on total rate of return swaps (treated as derivative instruments) (60,085 )  (46,158 ) 
Return of margin deposits on total rate of return swaps (treated as derivative instruments) 67,632 89,255
Proceeds from termination of derivative instruments 26,801 17,982
Proceeds from sale of derivative instrument into Securitization Trust 2006 – Note 5 5,623
Purchase and improvement of operating real estate (1,537 )  (1,314 ) 
Contributions to unconsolidated subsidiaries (12,191 )  (100 ) 
Distributions of capital from unconsolidated subsidiaries  962 1,504
Change in restricted cash from investing activities (2,516 ) 
Net cash used in investing activities (146,638 )  (1,500,480 ) 

Continued on Page 5

4





NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

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


  Nine Months Ended September 30,
  2007 2006
Cash Flows From Financing Activities    
Issuance of CBO bonds payable 1,835,071
Repayments of CBO bonds payable (1,430,506 )  (27,716 ) 
Issuance of other bonds payable 631,988
Repayments of other bonds payable (88,067 )  (276,082 ) 
Repayments of notes payable (43,633 )  (106,484 ) 
Borrowings under repurchase agreements 4,785,636 3,300,477
Repayments of repurchase agreements (3,962,140 )  (2,150,900 ) 
Issuance of repurchase agreement subject to ABCP facility 247,409
Repayments of repurchase agreement subject to ABCP facility (1,292,503 ) 
Draws under credit facility 382,800 393,900
Repayments of credit facility (476,600 )  (288,900 ) 
Issuance of junior subordinated notes payable 100,100
Issuance of common stock 200,165
Costs related to issuance of common stock (358 ) 
Exercise of common stock options 1,443 1,440
Issuance of preferred stock 50,000
Costs related to issuance of preferred stock (1,770 ) 
Dividends paid (111,376 )  (90,564 ) 
Payment of deferred financing costs (2,244 )  (9,664 ) 
Change in restricted cash from financing activities 135,885
Net cash provided by financing activities 229,212 1,477,595
Net Increase (Decrease) in Cash and Cash Equivalents 35,401 (4,958 ) 
Cash and Cash Equivalents, Beginning of Period 5,371 21,275
Cash and Cash Equivalents, End of Period $ 40,772 $ 16,317
Supplemental Disclosure of Cash Flow Information    
Cash paid during the period for interest expense $ 345,777 $ 248,594
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 $ 2,250 $ 1,552
Foreclosure of loans $ $ 12,200
Acquisition and financing of loans subject to call option $ 102,457 $ 286,315

5





NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES
    
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 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 September 30, 2007. In addition, the Manager, through its affiliates, held options to purchase approximately 1.5 million shares of Newcastle’s common stock at September 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)
SEPTEMBER 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
September 30, 2007 and the Nine Months then Ended          
Gross revenues $ 416,458 $ 119,607 $ 3,867 $ 1,283 $ 541,215
Operating expenses (2,115 )  (19,390 )  (3,224 )  (23,248 )  (47,977 ) 
Operating income (loss) 414,343 100,217 643 (21,965 )  493,238
Interest expense (285,462 )  (74,453 )  (44 )  (8,149 )  (368,108 ) 
Loss on extinguishment of debt (15,032 )  (15,032 ) 
Other-than-temporary impairment (73,813 )  (73,813 ) 
Depreciation and amortization (812 )  (218 )  (1,030 ) 
Equity in earnings of unconsolidated subsidiaries 432 1,717 5 2,154
Income (loss) from continuing operations 40,468 25,764 1,504 (30,327 )  37,409
Income (loss) from discontinued operations (2 )  (2 ) 
Net income (loss) 40,468 25,764 1,502 (30,327 )  37,407
Preferred dividends (9,265 )  (9,265 ) 
Income (loss) applicable to common stockholders $ 40,468 $ 25,764 $ 1,502 $ (39,592 )  $ 28,142
Revenue derived from non-U.S. sources:          
Canada  $ $ $ 2,229 $ $ 2,229
Total assets $ 7,265,735 $ 1,142,322 $ 52,152 $ 45,264 $ 8,505,473
Long-lived assets outside the U.S.:          
Canada  $ $ $ 20,403 $ $ 20,403
December 31, 2006          
Total assets $ 7,366,684 $ 1,179,547 $ 48,518