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
 
$