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, 2005

or

o   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.)


1251 Avenue of the Americas, New York, NY
10020
(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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities
Exchange Act). Yes x   No o

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: 43,789,819 shares outstanding as of August 8, 2005.

NEWCASTLE INVESTMENT CORP.
FORM 10-Q

INDEX
 
   
PAGE
PART I. FINANCIAL INFORMATION
  
     
Item 1.
Financial Statements
  
     
 
Consolidated Balance Sheets as of June 30, 2005 (unaudited) and December 31, 2004
1
     
 
Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2005 and 2004
2
     
 
Consolidated Statements of Stockholders' Equity (unaudited) for the six months ended June 30, 2005 and 2004
3
     
 
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2005 and 2004
4
     
 
Notes to Consolidated Financial Statements (unaudited)
6
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
14
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
28
     
Item 4.
Controls and Procedures
33
     
PART II. OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
34
 
    
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
34
     
Item 3.
Defaults upon Senior Securities
34
     
Item 4.
Submission of Matters to a Vote of Security Holders
34
     
Item 5.
Other Information
34
     
Item 6.
Exhibits
34
     
SIGNATURES
35

 
CAUTIONARY STATEMENTS

The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our company. We urge you to carefully review and consider the various disclosures made by us in this report and in our other filings with the Securities and Exchange Commission (“SEC”), including our annual report on Form 10-K for the year ended December 31, 2004, that discuss our business in greater detail.

This report contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments, the stability of our earnings, and our financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should," "potential," "intend," "expect," "endeavor," "seek," "anticipate," "estimate," "overestimate," "underestimate," "believe," "could," "project," "predict," "continue" or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, 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 real estate securities portfolios in general or particular real estate related assets, or in a manner that maintains our historic net spreads; changes in interest rates and/or credit spreads, as well as the success of our hedging strategy in relation to such changes; the quality and size of the investment pipeline and the rate at which we can invest our cash, including cash obtained in connection with CBO financings; impairments in the value of the collateral underlying our real estate securities, real estate related loans and residential mortgage loans; the relation of any impairments in the value of our real estate securities portfolio, loans or operating real estate to our judgments as to whether changes in the market value of our securities are temporary or not and whether circumstances bearing on the value of our loans or operating real estate warrant changes in carrying values; changes in the markets; legislative/regulatory changes; completion of pending investments; the availability and cost of capital for future investments; competition within the finance and real estate industries; and other risks detailed from time to time in our SEC reports. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management's views as of the date of this report. The factors noted above could cause our actual results to differ significantly from those contained in any forward-looking statement. For a discussion of our critical accounting policies see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Application of Critical Accounting Policies."

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
   
 June 30, 2005
       
   
 (Unaudited)
  
 December 31, 2004
  
Assets
           
 Real estate securities, available for sale
  
$
3,973,566
  
$
3,369,496
  
 Real estate securities portfolio deposit
    
10,126
    
25,411
  
 Real estate related loans, net
    
566,913
    
591,890
  
 Investments in unconsolidated subsidiaries
    
33,691
    
41,230
  
 Operating real estate, net
    
16,110
    
57,193
  
 Real estate held for sale
    
-
    
12,376
  
 Residential mortgage loans, net
    
799,772
    
654,784
  
 Cash and cash equivalents
    
68,965
    
37,911
  
 Restricted cash
    
186,085
    
77,974
  
 Derivative assets
    
22,597
    
27,122
  
 Receivables and other assets
    
32,217
    
37,333
  
   
$
5,710,042
  
$
4,932,720
  
Liabilities and Stockholders' Equity
              
               
Liabilities
              
 CBO bonds payable
  
$
3,093,682
  
$
2,656,510
  
 Other bonds payable
    
383,553
    
222,266
  
 Notes payable
    
474,513
    
652,000
  
 Repurchase agreements
    
677,303
    
490,620
  
 Derivative liabilities
    
48,380
    
39,661
  
 Dividends payable
    
28,384
    
25,928
  
 Due to affiliates
    
3,963
    
8,963
  
 Accrued expenses and other liabilities
    
89,015
    
40,057
  
     
4,798,793
    
4,136,005
  
Stockholders' Equity
              
 Preferred stock, $0.01 par value, 100,000,000 shares authorized, 2,500,000
              
shares of Series B Cumulative Redeemable Preferred Stock, liquidation
              
preference $25.00 per share, issued and outstanding
    
62,500
    
62,500
  
 Common stock, $0.01 par value, 500,000,000 shares authorized, 43,789,819 and
              
39,859,481 shares issued and outstanding at June 30, 2005 and
              
December 31, 2004, respectively
    
438
    
399
  
 Additional paid-in capital
    
782,103
    
676,015
  
 Dividends in excess of earnings
    
(13,573
)
  
(13,969
)
 Accumulated other comprehensive income
    
79,781
    
71,770
  
     
911,249
    
796,715
  
   
$
5,710,042
  
$
4,932,720
  
 
1
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,
  
   
2005
  
 2004
  
 2005
  
 2004
  
Revenues
                     
 Interest income
  
$
86,715
  
$
56,144
  
$
166,426
  
$
105,170
  
 Rental and escalation income
    
1,715
    
1,022
    
2,979
    
2,169
  
 Gain on settlement of investments
    
3,635
    
4,446
    
6,323
    
9,582
  
     
92,065
    
61,612
    
175,728
    
116,921
  
Expenses
                          
Interest expense
    
55,791
    
32,615
    
104,557
    
60,706
  
Property operating expense
    
540
    
531
    
1,233
    
1,171
  
Loan and security servicing expense
    
1,580
    
861
    
3,163
    
1,643
  
Provision for credit losses
    
1,187
    
-
    
1,899
    
-
  
General and administrative expense
    
1,326
    
1,163
    
2,217
    
2,303
  
Management fee to affiliate
    
3,316
    
2,563
    
6,579
    
4,960
  
Incentive compensation to affiliate
    
883
    
1,236
    
2,855
    
3,610
  
Depreciation and amortization
    
135
    
95
    
271
    
208
  
     
64,758
    
39,064
    
122,774
    
74,601
  
Income before equity in earnings of unconsolidated subsidiaries
    
27,307
    
22,548
    
52,954
    
42,320
  
Equity in earnings of unconsolidated subsidiaries
    
1,438
    
2,218
    
3,524
    
3,441
  
Income taxes on related taxable subsidiaries
    
(45
)
  
-
    
(278
)
  
-
  
Income from continuing operations
    
28,700
    
24,766
    
56,200
    
45,761
  
Income (loss) from discontinued operations
    
781
    
(1,591
)
  
1,965
    
(735
)
Net Income
    
29,481
    
23,175
    
58,165
    
45,026
  
Preferred dividends
    
(1,524
)
  
(1,524
)
  
(3,047
)
  
(3,047
)
Income Available For Common Stockholders
  
$
27,957
  
$
21,651
  
$
55,118
  
$
41,979
  
Net Income Per Share of Common Stock
                          
Basic
  
$
0.64
  
$
0.60
  
$
1.27
  
$
1.19
  
Diluted
  
$
0.63
  
$
0.59
  
$
1.26
  
$
1.17
  
Income from continuing operations per share of common stock, after
                          
preferred dividends
                          
Basic
  
$
0.62
  
$
0.64
  
$
1.22
  
$
1.21
  
Diluted
  
$
0.61
  
$
0.63
  
$
1.21
  
$
1.19
  
Income (loss) from discontinued operations per share of common
stock
                          
Basic
  
$
0.02
  
$
(0.04
)
$
0.05
  
$
(0.02
)
Diluted
  
$
0.02
  
$
(0.04
)
$
0.05
  
$
(0.02
)
Weighted Average Number of Shares of
                          
Common Stock Outstanding
                          
Basic
    
43,768,381
    
36,160,778
    
43,496,597
    
35,281,696
  
Diluted
    
44,127,381
    
36,670,603
    
43,879,606
    
35,828,575
  
Dividends Declared per Share of Common Stock
  
$
0.625
  
$
0.600
  
$
1.250
  
$
1.200
  
 
2

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(dollars in thousands)
 
                                         
Accum.
        
                             
 Additional
    
Dividends
    
Other
    
Total Stock-
  
     
Preferred Stock
    
Common Stock
    
Paid-in
    
in Excess of
    
Comp.
    
holders'
  
     
Shares
    
Amount
    
Shares
    
Amount
    
Capital
    
Earnings
    
Income
    
Equity
  
Stockholders' equity - December 31, 2004
    
2,500,000
  
$
62,500
    
39,859,481
  
$
399
  
$
676,015
  
$
(13,969
)
$
71,770
  
$
796,715
  
Dividends declared
    
-
    
-
    
-
    
-
    
-
    
(57,769
)
  
-
    
(57,769
)
Issuance of common stock
    
-
    
-
    
3,300,000
    
33
    
96,537
    
-
    
-
    
96,570
  
Exercise of common stock options
    
-
    
-
    
628,330
    
6
    
9,491
    
-
    
-
    
9,497
  
Issuance of common stock to directors
    
-
    
-
    
2,008
    
-
    
60
    
-
    
-
    
60
  
Comprehensive income:
                                                  
Net income
    
-
    
-
    
-
    
-
    
-
    
58,165
    
-
    
58,165
  
Unrealized gain on securities
    
-
    
-
    
-
    
-
    
-
    
-
    
25,302
    
25,302
  
Reclassification of realized (gain) on securities into earnings
    
-
    
-
    
-
    
-
    
-
    
-
    
(1,936
)
  
(1,936
)
Foreign currency translation
    
-
    
-
    
-
    
-
    
-
    
-
    
(2,154
)
  
(2,154
)
Reclassification of realized foreign currency translation into earnings
    
-
    
-
    
-
    
-
    
-
    
-
    
(626
)
  
(626
)
Unrealized (loss) on derivatives designated as cash flow hedges
    
-
    
-
    
-
    
-
    
-
    
-
    
(13,849
)
  
(13,849
)
Reclassification of realized (gain) on derivatives designated as cash flow hedges into earnings
    
-
    
-
    
-
    
-
    
-
    
-
    
1,274
    
1,274
  
Total comprehensive income
                                                                   
66,176
  
Stockholders' equity - June 30, 2005
    
2,500,000
  
$
62,500
    
43,789,819
  
$
438
  
$
782,103
  
$
(13,573
)
$
79,781
  
$
911,249
  
Stockholders' equity - December 31, 2003
    
2,500,000
  
$
62,500
    
31,374,833
  
$
314
  
$
451,806
  
$
(14,670
)
$
39,413
  
$
539,363
  
Dividends declared
    
-
    
-
    
-
    
-
    
-
    
(46,814
)
  
-
    
(46,814
)
Issuance of common stock
    
-
    
-
    
6,750,000
    
67
    
172,818
    
-
    
-
    
172,885
  
Exercise of common stock options
    
-
    
-
    
107,500
    
1
    
1,428
    
-
    
-
    
1,429
  
Issuance of common stock to directors
    
-
    
-
    
2,148
    
-
    
60
    
-
    
-
    
60
  
Comprehensive income:
                                                  
Net income
    
-
    
-
    
-
    
-
    
-
    
45,026
    
-
    
45,026
  
Unrealized (loss) on securities
    
-
    
-
    
-
    
-
    
-
    
-
    
(39,915
)
  
(39,915
)
Reclassification of realized (gains) on securities into earnings
    
-
    
-
    
-
    
-
    
-
    
-
    
(8,967
)
  
(8,967
)
Foreign currency translation
    
-
    
-
    
-
    
-
    
-
    
-
    
(414
)
  
(414
)
Reclassification of realized foreign currency translation into earnings
    
-
    
-
    
-
    
-
    
-
    
-
    
(395
)
  
(395
)
Unrealized gain on derivatives designated as cash flow hedges
    
-
    
-
    
-
    
-
    
-
    
-
    
39,000
    
39,000
  
Total comprehensive income
                                                            
34,335
  
Stockholders' equity - June 30, 2004
    
2,500,000
  
$
62,500
    
38,234,481
  
$
382
  
$
626,112
  
$
(16,458
)
$
28,722
  
$
701,258
  

3

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
(dollars in thousands)
 
   
Six Months Ended June 30,
  
   
2005
2004
  
Cash Flows From Operating Activities
          
Net income
  
$
58,165
  
$
45,026
  
Adjustments to reconcile net income to net cash provided by operating activities
              
(inclusive of amounts related to discontinued operations):
              
Depreciation and amortization
    
445
    
1,124
  
Accretion of discount and other amortization
    
956
    
(972
)
Equity in earnings of unconsolidated subsidiaries
    
(3,524
)
  
(3,441
)
Deferred rent
    
(1,063
)
  
(922
)
Gain on settlement of investments
    
(5,073
)
  
(8,006
)
Unrealized gain on non-hedge derivatives
    
(2,780
)
  
(1,281
)
Non-cash directors' compensation
    
60
    
60
  
Change in:
    
 
        
Restricted cash
    
(6,709
)
  
(1,626
)
Receivables and other assets
    
3,986
  
440
  
Due to affiliates
    
(5,000
)
  
2,105
  
Accrued expenses and other liabilities
    
48,756
    
(6,171
)
Net cash provided by operating activities
    
88,219
    
26,336
  
Cash Flows From Investing Activities
              
Purchase of real estate securities
    
(687,864
)
  
(576,757
)
Proceeds from sale of real estate securities
    
56,521
    
96,860
  
Deposit on real estate securities (treated as a derivative)
    
(17,692
)
  
(33,657
)
Purchase of and advances on loans
    
(406,209
)
  
(40,913
)
Proceeds from settlement of loans
    
401
     –  
Repayments of loan and security principal
    
304,401
    
(314,858
)
Margin deposit on credit derivative instruments
    
(26,322
)
  
148,230
  
Proceeds from sale of derivative instruments
    
763
 
  
123,595
  
Payments on settlement of derivative instruments
    
(1,112
)
  
–
  
Purchase and improvement of operating real estate
    
(192
)
  
(203
)
Proceeds from sale of operating real estate
    
52,329
 
  
27,460
  
Contributions to unconsolidated subsidiaries
    
–
 
  
(26,788
)
Distributions from unconsolidated subsidiaries
    
11,063
    
8,511
  
Payment of deferred transaction costs
    
(39
)
  
(278
)
Net cash used in investing activities
    
(713,952
)
  
(588,798
)
 
Continued on Page 5
              
 
4
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
(dollars in thousands)
 
 
Six Months Ended June 30,
  
   
2005
2004
Cash Flows From Financing Activities
          
Issuance of CBO bonds payable
    
442,034
    
409,612
  
Repayments of CBO bonds payable
    
(6,589
)
  
(11,320
)
Issuance of other bonds payable
    
246,547
    
40,000
  
Repayments of other bonds payable
    
(84,072
)
  
(29,723
)
Borrowings under notes payable
    
-
    
281,819
  
Repayments of notes payable
    
(177,487
)
  
(191,500
)
Borrowings under repurchase agreements
    
316,777
    
-
  
Repayments of repurchase agreements
    
(130,094
)
  
-
  
Issuance of common stock
    
97,680
    
175,628
  
Costs related to issuance of common stock
    
(1,110
)
  
(2,743
)
Exercise of common stock options
    
9,497
    
1,429
  
Dividends paid
    
(55,313
)
  
(39,561
)
Payment of deferred financing costs
    
(1,083
)
  
(147
)
Net cash provided by financing activities
    
656,787
    
633,494
  
               
Net Decrease in Cash and Cash Equivalents
    
31,054
    
71,032
  
               
Cash and Cash Equivalents, Beginning of Period
    
37,911
    
60,403
  
               
Cash and Cash Equivalents, End of Period
  
$
68,965
  
$
131,435
  
               
Supplemental Disclosure of Cash Flow Information
              
               
Cash paid during the period for interest expense
  
$
99,903
  
$
61,122
  
Cash paid during the period for income taxes
  
$
434
  
$
 -  
               
Supplemental Schedule of Non-Cash Investing and Financing Activities
              
               
Common stock dividends declared but not paid
  
$
27,369
  
$
22,940
  
Preferred stock dividends declared but not paid
  
$
1,016
  
$
1,016
  
Deposits used in acquisition of real estate securities (treated as derivatives)
  
$
44,504
  
$
35,457
  
 
5
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2005
(dollars in tables in thousands, except per 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) operating real estate, and (iii) residential mortgage loans.

The following table presents information on shares of Newcastle’s common stock issued subsequent to its formation:
 
           
Net Proceeds
Year
  
 Shares Issued
  
Range of Issue Prices (1)
  
(millions)
Formation
  
16,488,517
  
N/A
  
N/A
2002
  
7,000,000
  
$13.00
 
$80.0
2003
  
7,886,316
  
$20.35-$22.85
 
$163.4
2004
  
8,484,648
  
$26.30-$31.40
 
$224.3
1st Half 2005
  
3,930,338
  
$29.60
 
$106.1
June 30, 2005
  
43,789,819
        
 
(1) Exludes shares issued pursuant to the exercise of options and shares issued to Newcastle's independent directors.
 
Approximately 2.8 million shares of Newcastle’s common stock were held by an affiliate of the Manager (and its principals, as defined below) at June 30, 2005. In addition, an affiliate of the Manager held options to purchase approximately 1.3 million shares of Newcastle’s common stock at June 30, 2005.

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 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.

Newcastle is party to a management agreement (the "Management Agreement") with Fortress Investment Group LLC (the "Manager"), an affiliate, 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.

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 accounting principles generally accepted in the United States 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 December 31, 2004 consolidated financial statements 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 December 31, 2004 consolidated financial statements.

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

6

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2005
(dollars in tables in thousands, except per share data)
 
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
       
 Residential
            
   
and Real Estate
  
 Operating Real
  
Mortgage
            
   
Related Loans
  
Estate
  
 Loans
  
Unallocated
  
Total
  
June 30, 2005 and the Six Months then Ended
                          
Gross revenues
  
$
147,061
  
$
3,003
  
$
25,338
  
$
326
  
$
175,728
  
Operating expenses
    
(776
)
  
(1,260
)
  
(4,328
)
  
(11,582
)
  
(17,946
)
Operating income (loss)
    
146,285
    
1,743
    
21,010
    
(11,256
)
  
157,782
  
Interest expense
    
(89,248
)
  
(251
)
  
(15,058
)
  
-
    
(104,557
)
Depreciation and amortization
    
-
    
(231
)
  
-
    
(40
)
  
(271
)
Equity in earnings of unconsolidated subsidiaries (A)
    
1,843
    
1,403
    
-
    
-
    
3,246
  
Income (loss) from continuing operations
    
58,880
    
2,664
    
5,952
    
(11,296
)
  
56,200
  
Income (loss) from discontinued operations
    
-
    
1,965
    
-
    
-
    
1,965
  
Net Income (Loss)
  
$
58,880
  
$
4,629
  
$
5,952
  
$
(11,296
)
$
58,165
  
Revenue derived from non-U.S. sources:
                                
Canada
  
$
-
  
$
8,352
  
$
-
  
$
-
  
$
8,352
  
Belgium
  
$
-
  
$
62
  
$
-
  
$
-
  
$
62
  
Total assets
  
$
4,803,803
  
$
35,749
  
$
802,945
  
$
67,545
  
$
5,710,042
  
Long-lived assets outside the U.S.:
                                
Canada
  
$
-
  
$
16,110
  
$
-
  
$
-
  
$
16,110
  
December 31, 2004
                                
Total assets
  
$
4,136,203
  
$
108,322
  
$
658,643
  
$
29,552
  
$
4,932,720
  
Long-lived assets outside the U.S.:
                                
Canada
  
$
-
  
$
57,193
  
$
-
  
$
-
  
$
57,193
  
Belgium
  
$
-
  
$
12,376
  
$
-
  
$
-
  
$
12,376
  
Three Months Ended June 30, 2005
                                
Gross revenues
  
$
77,515
  
$
1,727
  
$
12,644
  
$
179
  
$
92,065
  
Operating expenses
    
(453
)
  
(559
)
  
(2,325
)
  
(5,495
)
  
(8,832
)
Operating income (loss)
    
77,062
    
1,168
    
10,319
    
(5,316
)
  
83,233
  
Interest expense
    
(47,918
)
  
(93
)
  
(7,780
)
  
-
    
(55,791
)
Depreciation and amortization
    
-
    
(115
)
  
-
    
(20
)
  
(135
)
Equity in earnings of unconsolidated subsidiaries (A)
    
997
    
396
    
-
    
-
    
1,393
  
Income (loss) from continuing operations
    
30,141
    
1,356
    
2,539
    
(5,336
)
  
28,700
  
Income (loss) from discontinued operations
    
-
    
781
    
-
    
-
    
781
  
Net Income (Loss)
  
$
30,141
  
$
2,137
  
$
2,539
  
$
(5,336
)
$
29,481
  
Revenue derived from non-U.S. sources:
                                
Canada
  
$
-
  
$
4,281
  
$
-
  
$
-
  
$
4,281
  
Belgium
  
$
-
  
$
(470
)
$
-
  
$
-
  
$
(470
)
 
(A) Net of income taxes on related taxable subsidiaries.
 
Continued on Page 8
 
7
 
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2005
(dollars in tables in thousands, except per share data)
 
 
   
Real Estate Securities
and Real Estate
Related Loans
  
Operating Real
Estate
  
Residential
Mortgage
Loans
  
Unallocated
  
Total
  
Six Months Ended June 30, 2004
                          
Gross revenues
  
$
106,096
  
$
2,181
  
$
8,443
  
$
201
  
$
116,921
  
Operating expenses
    
(587
)
  
(1,236
)
  
(1,091
)
  
(10,773
)
  
(13,687
)
Operating income (loss)
    
105,509
    
945
    
7,352
    
(10,572
)
  
103,234
  
Interest expense
    
(56,071
)
  
(260
)
  
(4,375
)
  
-
    
(60,706
)
Depreciation and amortization
    
-
    
(208
)
  
-
    
-
    
(208
)
Equity in earnings of unconsolidated subsidiaries (A)
    
1,978
    
1,463
    
-
    
-
    
3,441
  
Income (loss) from continuing operations
    
51,416
    
1,940
    
2,977
    
(10,572
)
  
45,761
  
Income from discontinued operations
    
-
    
(735
)
  
-
    
-
    
(735
)
Net Income (Loss)
  
$
51,416
  
$
1,205
  
$
2,977
  
$
(10,572
)
$
45,026
  
Revenue derived from non-US sources:
                                
Canada
  
$
-
  
$
7,443
  
$
-
  
$
-
  
$
7,443
  
Belgium
  
$
-
  
$
2,305
  
$
-
  
$
-
  
$
2,305
  
Three Months Ended June 30, 2004
                                
Gross revenues
  
$
56,255
  
$
1,025
  
$
4,241
  
$
91
  
$
61,612
  
Operating expenses
    
(325
)
  
(558
)
  
(555
)
  
(4,916
)
  
(6,354
)
Operating income (loss)
    
55,930
    
467
    
3,686
    
(4,825
)
  
55,258
  
Interest expense
    
(30,252
)
  
(121
)
  
(2,242
)
  
-
    
(32,615
)
Depreciation and amortization
    
-
    
(95
)
  
-
    
-
    
(95
)
Equity in earnings of unconsolidated subsidiaries (A)
    
909
    
1,309
    
-
    
-
    
2,218
  
Income (loss) from continuing operations
    
26,587
    
1,560
    
1,444
    
(4,825
)
  
24,766
  
Income from discontinued operations
    
-
    
(1,591
)
  
-
    
-
    
(1,591
)
Net Income (Loss)
  
$
26,587
  
$
(31
)
$
1,444
  
$
(4,825
)
$
23,175
  
Revenue derived from non-US sources:
                                
Canada
  
$
-
  
$
2,739
  
$
-
  
$
-
  
$
2,739
  
Belgium
  
$
-
  
$
331
  
$
-
  
$
-
  
$
331
  

(A) Net of income taxes on related taxable subsidiaries.

8
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2005
(dollars in tables in thousands, except per share data)
The following table summarizes the activity affecting the equity held by Newcastle in unconsolidated subsidiaries:
 
   
Operating Real Estate
  
 Real Estate Loan
  
   
Subsidiary
  
 Subsidiary
  
Balance at December 31, 2004
  
$
17,778
  
$
23,452
  
Contributions to unconsolidated subsidiaries
    
-
    
-
  
Distributions from unconsolidated
              
subsidiaries
    
(6,611
)
  
(4,452
)
Equity in earnings of unconsolidated
              
subsidiaries
    
1,681
    
1,843
  
Balance at June 30, 2005
  
$
12,848
  
$
20,843
  

Summarized financial information related to Newcastle’s unconsolidated subsidiaries was as follows (in thousands):
 
     
Operating
Real Estate
Subsidiary (A) (B)
    
Real Estate Loan Subsidiary (A) (C)
  
     
June 30,
2005
    
December 31,
2004
    
June 30,
2005
    
December 31,
2004
  
Assets
  
$
79,178
  
$
89,222
  
$
41,923
  
$
47,170
  
Liabilities
    
(53,000
)
  
(53,000
)
  
-
    
-
  
Minority interest
    
(482
)
  
(666
)
  
(237
)
  
(266
)
                           
Equity
  
$
25,696
  
$
35,556
  
$
41,686
  
$
46,904
  
                           
Equity held by Newcastle
  
$
12,848
  
$
17,778
  
$
20,843
  
$
23,452
  
  
     
Six Months Ended June 30,
    
Six Months Ended June 30,
  
     
2005
  
2004
    
2005
    
2004
  
Revenues
  
$
6,563
  
$
4,237
  
$
3,729
  
$
4,063
  
Expenses
    
(3,138
)
  
(1,257
)
  
(22
)
  
(85
)
Minority interest
    
(63
)
  
(54
)
  
(21
)
  
(23
)
Net income (loss)
  
$
3,362
  
$
2,926
  
$
3,686
  
$
3,955
  
                           
Newcastle's equity in net income (loss)
  
$
1,681
  
$
1,463
  
$
1,843
  
$
1,978
  


(A) 
  The unconsolidated subsidiaries’ summary financial information is presented on a fair value basis, consistent with their internal basis of accounting.
   
(B)    Included in the operating real estate segment. 
   
(C)    Included in the real estate securities and real estate related loans segment.

9
 
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2005
(dollars in tables in thousands, except per share data)

3. REAL ESTATE SECURITIES

The following is a summary of Newcastle’s real estate securities at June 30, 2005, all of which are classified as available for sale and are therefore marked to market through other comprehensive income.
 
           
Gross Unrealized
          
Weighted Average
  
Asset Type 
  
Current Face
Amount
  
Amortized Cost
Basis
  
Gains
  
Losses
Carrying Value
  
Number of
Securities
  
S&P
Equivalent
Rating
  
Coupon
  
Yield
  
Maturity
(Years)
  
CMBS-Conduit
  
$
1,225,893
  
$
1,187,276
  
$
62,490
  
$
(4,147)
 
$
1,245,619
    
184
    
BBB-
    
6.12%
 
  
6.72%
 
  
7.61
  
CMBS-Large Loan
    
569,122
    
566,209
    
10,270
    
(291)
 
  
576,188
    
68
    
BBB
    
5.86%
 
  
6.07%
 
  
2.01
  
CMBS- B-Note
    
191,586
    
187,775
    
9,234
    
(158)
 
  
196,851
    
34
    
BB+
    
6.52%
 
  
6.85%
 
  
6.27
  
Unsecured REIT Debt
    
802,979
    
816,791
    
36,381
    
(2,242)
 
  
850,930
    
92
    
BBB-
    
6.37%
 
  
6.05%
 
  
7.31
  
ABS-Manufactured Housing
    
180,665
    
163,729
    
5,851
    
(721)
 
  
168,859
    
9
    
B
    
7.11%
 
  
8.63%
 
  
6.55
  
ABS-Home Equity
    
405,842
    
403,907
    
5,539
    
(301)
 
  
409,145
    
63
    
A-
    
5.07%
 
  
5.17%
 
  
3.59
  
ABS-Franchise
    
69,376
    
67,545
    
1,797
    
(473)
 
  
68,869
    
16
    
BBB+
    
7.28%
 
  
8.21%
 
  
5.34
  
Agency RMBS
    
454,962
    
457,908
    
960
    
(1,763)
 
  
457,105
    
11
    
AAA
    
4.66%
 
  
4.46%
 
  
5.42
  
Total/Average (A)
  
$
3,900,425
  
$
3,851,140
  
$
132,522
  
$
(10,096)
 
$
3,973,566
    
477
    
BBB
    
5.94%
 
  
6.16%
 
  
5.90
  
 
(A)  The total current face amount of fixed rate securities was $2,985.9 million, and of floating rate securities was $914.5 million.
              
 
Unrealized losses that are considered other than temporary are recognized currently in income. There were no such losses incurred during the six months ended June 30, 2005. The unrealized losses on Newcastle’s securities are primarily the result of market factors, rather than credit impairment, and Newcastle believes their carrying values are fully recoverable over their expected holding period. None of the securities were delinquent as of June 30, 2005.
 
Securities in an Unrealized Loss Position
                                        
 
Less Than Twelve Months
  
$
865,468
  
$
873,618
  
$
-
  
$
(4,797)
 
$
868,821
    
88
    
A+
    
5.34%
 
  
5.12%
 
  
5.27
  
Twelve or More Months
    
240,307
    
243,511
    
-
    
(5,299)
 
  
238,212
    
35
    
BBB-
    
5.71%
 
  
5.48%
 
  
7.41
  
Total
  
$
1,105,775
  
$
1,117,129
  
$
-
  
$
(10,096)
 
$
1,107,033
    
123
    
A
    
5.42%
 
  
5.19%
 
  
5.73
  
 
The unrealized losses on a majority of the securities in the “Twelve or More Months” category were caused by changes in market interest rates as well as market credit spreads. None of the securities in this category are in default or delinquent and Newcastle has performed credit analyses in relation to such securities which support its belief that the carrying values of such securities are fully recoverable over their expected holding period. Although management expects to hold these securities until their recovery, there is no assurance that such securities will not be sold or at what price they may be sold.

4. REAL ESTATE RELATED LOANS AND RESIDENTIAL MORTGAGE LOANS

The following is a summary of real estate related loans and residential mortgage loans at June 30, 2005. The loans contain various terms, including fixed and floating rates, self-amortizing and interest only. They are generally subject to prepayment.

                   
Weighted
      
                   
Average
      
   
Current
  
Carrying
  
Loan
  
Wtd. Avg.
  
Maturity
 
Delinquent Carrying
  
Loan Type
  
Face Amount
  
Value
  
Count
  
Yield
  
(Years) (C)
  
Amount
  
B-Notes
  
$
137,356
  
$
137,658
    
26
    
6.93
%
  
2.31
  
$
-
  
Mezzanine Loans (A)
    
104,342
    
104,310
    
5
    
7.77
%
  
2.03
    
-
  
Bank Loans
    
135,482
    
135,819
    
3
    
6.91
%
  
2.03
    
-
  
Real Estate Loans
    
14,726
    
14,339
    
1
    
20.02
%
  
2.50
    
-
  
ICH CMO Loans (B)
    
176,462
    
174,787
    
106
    
7.89
%
  
1.81
    
26,826
  
Total Real Estate
                                      
Related Loans
  
$
568,368
  
$
566,913
    
141
    
7.71
%
  
2.04
  
$
26,826
  
Residential Loans
  
$
498,625
  
$
506,580
    
1,323
    
4.33
%
  
3.65
  
$
11,110
  
Manufactured Housing
                                      
Loans
    
310,526
    
293,192
    
8,021
    
7.85
%
  
4.71
    
4,347
  
Total Residential
                                      
Mortgage Loans
  
$
809,151
  
$
799,772
    
9,344
    
5.62
%
  
4.06
  
$
15,457
  
 
10

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2005
(dollars in tables in thousands, except per share data)

(A)
One of these loans has a contractual exit fee which Newcastle will begin to accrue if and when management believes it is probable that such exit fee will be received.
   
(B)
In October 2003, pursuant to FIN No. 46, Newcastle consolidated an entity which holds a portfolio of commercial mortgage loans which has been securitized. This investment, which is referred to as the ICH CMO, was previously treated as a non-consolidated residual interest in such securitization. Newcastle exercises no control over the management or resolution of these assets. The primary effect of the consolidation is the requirement that Newcastle reflect the gross loan assets and gross bonds payable of this entity in its financial statements.
   
(C)
The weighted average maturity for the residential mortgage loan portfolio was calculated based on a constant prepayment rate (CPR) of approximately 20%.

Newcastle has entered into credit derivative instruments with a major investment bank, whereby Newcastle receives the sum of all interest, fees and any positive change in value amounts (the total return cash flows) from a reference asset with a specified notional amount, and pays interest on such notional plus any negative change in value amounts from such asset. These agreements are recorded in Derivative Assets and treated as non-hedge derivatives for accounting purposes and are therefore marked to market through income. Under the agreements, Newcastle is required to post an initial margin deposit to an interest bearing account and additional margin may be payable in the event of a decline in value of the reference asset. Any margin on deposit, less any negative change in value amounts, will be returned to Newcastle upon termination of the contract. The following table presents information on these instruments as of June 30, 2005.
 

   
Reference
  
Notional
  
 Margin
  
Receive
  
Pay
  
Fair
  
Month Executed
  
Asset
  
Amount
  
 Amount
  
Interest Rate
  
Interest Rate
  
Value
  
November 2004
   Term loan to a retail mall REIT  
$
106,493
  
$
18,149
    
LIBOR + 2.00%
 
  
LIBOR + 0.500%
 
$
936
  
February 2005
   Term loan to a diversified real
estate and finance company		  
$
97,997
  
$