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| AHR > SEC Filings for AHR > Form 10-Q on 11-Aug-2008 | All Recent SEC Filings |
11-Aug-2008
Quarterly Report
All currency figures expressed herein are expressed in thousands, except share and per share amounts.
Anthracite Capital, Inc., a Maryland corporation (collectively with its subsidiaries, the "Company"), is a specialty finance company that invests in commercial real estate assets on a global basis. The Company commenced operations on March 24, 1998 and is organized as a real estate investment trust ("REIT"). The Company seeks to generate income from the spread between the interest income, gains and net operating income on its commercial real estate assets and the interest expense from borrowings to finance its investments. The Company's primary activities are investing in high yielding commercial real estate debt and equity. The Company combines traditional real estate underwriting and capital markets expertise to maximize the opportunities arising from the continuing integration of these two disciplines. The Company focuses on acquiring pools of performing loans in the form of commercial mortgage-backed securities ("CMBS"), issuing secured debt backed by CMBS and providing strategic capital for the commercial real estate industry in the form of mezzanine loan financing and equity.
The Company's primary investment activities are conducted on a global basis in
four investment sectors:
1) Commercial Real Estate Securities
2) Commercial Real Estate Loans
3) Commercial Real Estate Equity
4) Residential Mortgage-Backed Securities ("RMBS")
The commercial real estate securities portfolio provides diversification and high yields that are adjusted for anticipated losses over a period of time (typically a ten-year weighted average life). Commercial real estate loans and equity provide attractive risk adjusted returns over shorter periods of time through strategic investments in specific property types or regions. Given the dramatically improved relative value in the RMBS sector, the Company may replenish the RMBS portfolio as its source of liquidity.
The Company's common stock, par value $0.001 per share ("Common Stock"), is traded on the New York Stock Exchange ("NYSE") under the symbol "AHR". The Company's primary long-term objective is to generate sufficient earnings to support a dividend at a level which provides an attractive return to stockholders. The Company establishes its dividend by analyzing the long-term sustainability of earnings given existing market conditions and the current composition of its portfolio. This includes an analysis of the Company's credit loss assumptions, general level of interest rates and projected hedging costs.
The Company is managed by BlackRock Financial Management, Inc. (the "Manager"), a subsidiary of BlackRock, Inc., a publicly traded (NYSE:BLK) asset management company with more than $1.428 trillion of assets under management at June 30, 2008. The Manager provides an operating platform that incorporates significant asset origination, risk management, and operational capabilities.
The Company's fixed income investment activity continues to be managed to maintain a positive, though controlled, exposure to both long- and short-term interest rates through its active hedging strategies. See "Item 3 - Quantitative and Qualitative Disclosures About Market Risk" for a discussion of interest rates and their effect on earnings and book value.
The following table illustrates the mix of the Company's asset types at June 30, 2008 and December 31, 2007:
Carrying Value at
June 30, 2008 December 31, 2007
Amount % Amount %
Commercial real estate securities(4) $ 1,903,167 44.6 % $ 2,274,151 49.3 %
Commercial real estate loans(1) 1,121,253 26.3 1,082,785 23.5
Commercial mortgage loan pools(2) 1,229,442 28.8 1,240,793 26.9
Commercial real estate equity(3) 9,350 0.2 9,350 0.2
Total commercial real estate assets 4,263,212 100 % 4,607,079 99.9
Residential mortgage-backed securities 973 0.0 10,183 0.1
Total $ 4,264,185 100 % $ 4,617,262 100.0 %
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(1) Includes equity investments in the Carbon Capital funds and AHR International JV.
(2) Represents a Controlling Class CMBS that is consolidated for accounting purposes. See Note 6 of the consolidated financial statements.
(3) Represents equity investment in Dynamic India Fund IV
(4) Includes equity investment in AHR JV
During the first six months of 2008 the Company purchased $53,515 of non-U.S. dollar denominated securities in order to continue to increase geographic diversification. Also during the first six months of 2008, the Company sold the majority of its remaining multifamily agency securities and CMBS IOs to increase its liquidity position. In addition, the dislocation in the capital markets during the first quarter of 2008 caused CMBS spreads to widen significantly. This development resulted in a significant decline in the market value of the Company's U.S. CMBS portfolio during the first quarter of 2008.
Summary of Commercial Real Estate Assets by Local Currency
A summary of the Company's commercial real estate assets with estimated fair
values in local currencies at June 30, 2008 is as follows:
Total
Total Commercial
Commercial Commercial Commercial Real
Commercial Real Real Commercial Real Estate
Real Estate Estate Estate Mortgage Estate Assets
Securities(2) Loans (1) Equity Loan Pools Assets (USD) % of Total
USD $ 1,507,230 $ 418,711 - $ 1,229,442 $ 3,155,383 $ 3,155,383 74.0 %
GBP £ 28,487 £ 44,679 - - £ 73,166 145,613 3.4 %
EURO € 136,522 € 370,606 - - € 507,128 799,006 18.7 %
Canadian Dollars C$ 86,907 C$ 6,276 - - C$ 93,183 91,847 2.2 %
Japanese Yen ¥ 4,079,450 - - - ¥ 4,079,450 38,484 0.9 %
Swiss Francs - CHF 23,966 - - CHF 23,966 23,529 0.6 %
Indian Rupees - - Rs 401,302 - Rs 401,302 9,350 0.2 %
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(1) Includes the Company's investments in the Carbon Capital Funds of $96,969 and AHR International JV of $30,902 at June 30, 2008.
(2) Includes the Company's investment in AHR JV of $1,089 at June 30, 2008.
A summary of the Company's commercial real estate assets with estimated fair values in local currencies at December 31, 2007 is as follows:
Total
Total Commercial
Commercial Commercial Commercial Commercial Real
Real Real Real Commercial Real Estate
Estate Estate Estate Mortgage Estate Assets
Securities Loans (1) Equity Loan Pools Assets (USD) % of Total
USD $ 1,881,328 $ 445,618 $ - $ 1,240,793 $ 3,567,739 $ 3,567,739 77.4 %
GBP £ 35,247 £ 45,944 - - £ 81,191 161,618 3.5 %
Euro € 131,645 € 354,458 - - € 486,103 710,707 15.4 %
Canadian Dollars C$ 89,805 C$ 6,249 - - C$ 96,054 97,324 2.1 %
Japanese Yen ¥ 4,378,759 - - - ¥ 4,378,759 39,196 0.9 %
Swiss Francs - CHF 23,939 - - CHF 23,939 21,145 0.5 %
Indian Rupees - - Rs 368,483 - Rs 368,483 9,350 0.2 %
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(1) Includes the Company's investments of $99,398 in the Carbon Capital Funds at December 31, 2007.
The Company has foreign currency rate exposure related to its non-U.S. dollar denominated assets. The Company's primary foreign currency exposures are the Euro, British pound and Canadian dollar. Changes in currency rates can adversely impact the estimated fair value and earnings of the Company's non-U.S. dollar investments. The Company mitigates this impact by utilizing local currency-denominated financing on its foreign investments and foreign currency forward commitments and swaps to hedge the net exposure.
Commercial Real Estate Assets Portfolio Activity
The following table details the par value, carrying value, adjusted purchase
price, and expected yield of the Company's commercial real estate securities
included in as well as outside of the Company's CDOs at June 30, 2008. The
dollar price ("Dollar Price") represents the estimated fair value or adjusted
purchase price of a security, respectively, relative to its par value.
Adjusted
Commercial real estate Purchase Dollar Expected
securities outside CDOs Par Carrying Value Dollar Price Price Price Yield
Investment grade CMBS $ 219,774 $ 159,830 $ 72.72 $ 190,190 $ 86.54 7.08 %
Investment grade REIT
debt 121 117 96.90 123 101.41 5.27
CMBS rated BB+ to B 565,361 235,745 41.70 432,343 76.47 8.85
CMBS rated B- or lower 514,031 110,761 21.34 161,542 31.40 8.39
CDO Investments 347,807 32,732 9.41 62,005 17.83 21.55
CMBS Interest Only
securities ("IOs") 110,688 4,427 4.00 2,192 1.98 24.90
Multifamily agency
securities 350 357 102.00 515 147.08 6.74
Total commercial real
estate assets outside
CDOs 1,758,132 543,969 30.88 849,910 48.28 9.34
Commercial real estate loans and equity outside CDOs
Commercial real estate
loans 645,885 631,391 596,407
Commercial mortgage loan
pools 1,189,528 1,229,442 103.36 1,229,442 103.36 4.15
Commercial real estate 9,350 9,350 9,350
Total commercial real
estate loans and equity
outside CDOs 1,844,763 1,870,183 103.36 1,835,199 103.36 4.15
Commercial real estate assets included in CDOs
Investment grade CMBS 808,780 708,420 87.59 759,536 93.91 7.28
Investment grade REIT
debt 210,624 205,729 97.68 211,767 100.54 5.78
CMBS rated BB+ to B 591,077 372,632 63.04 460.937 77.98 9.95
CMBS rated B- or lower 199,983 46,545 23.27 71,936 35.97 10.14
CDO Investments 4,000 2,840 71.00 3,535 88.38 7.84
Credit tenant lease 22,944 23,032 100.38 23,562 102.70 5.66
Commercial real estate
loans 499,504 489,861 98.07 437,105 87.51 8.60
Total commercial real
estate assets included in
CDOs 2,336,912 1,849,059 79.12 1,968,378 84.23 8.15 %
Total commercial real
estate assets $ 5,939,807 $ 4,263,211 $ 4,653,487
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The following table details the par, carrying value, adjusted purchase price and expected yield of the Company's commercial real estate assets included in as well as outside of the Company's CDOs at December 31, 2007:
Adjusted
Commercial real estate Purchase Dollar Expected
securities outside CDOs Par Carrying Value Dollar Price Price Price Yield
Investment grade CMBS $ 179,638 $ 149,856 $ 83.42 $ 158,216 $ 88.07 6.56 %
Investment grade REIT
debt 23,121 20,034 86.65 22,995 99.45 5.49
CMBS rated BB+ to B 546,299 316,210 57.88 417,204 76.37 8.71
CMBS rated B- or lower 513,189 144,797 28.21 166,381 32.42 10.73
CDO Investments 347,807 46,241 13.30 63,987 18.40 20.56
CMBS IOs 818,670 15,915 1.94 14,725 1.80 8.80
Multifamily agency
securities 35,955 37,123 103.25 36,815 102.39 5.37
Total commercial real
estate assets outside
CDOs 2,464,679 730,176 29.61 880,323 35.70 9.34
Commercial real estate loans and equity outside CDOs
Commercial real estate
loans 531,516 618,328 601,144
Commercial mortgage loan
pools 1,174,659 1,240,793 105.63 1,240,793 105.63 4.15
Commercial real estate 9,350 9,350 9,350
Total commercial real
estate loans and equity
outside CDOs 1,715,525 1,868,471 105.63 1,851,287 105.63 4.15
Commercial real estate assets included in CDOs
Investment grade CMBS 801,748 768,671 95.87 759,524 94.73 7.09
Investment grade REIT
debt 223,324 226,060 101.23 224,608 100.57 5.85
CMBS rated BB+ to B 627,550 466,564 74.35 486,162 77.47 10.01
CMBS rated B- or lower 193,155 54,342 28.13 68,693 35.56 14.98
CDO Investments 4,000 3,390 84.75 3,483 87.07 7.79
Credit tenant lease 23,235 24,949 107.38 23,867 102.72 5.66
Commercial real estate
loans 476,782 464,456 97.41 434,364 91.10 8.73
Total commercial real
estate assets included in
CDOs 2,349,794 2,008,432 85.47 2,000,701 85.14 8.28 %
Total commercial real
estate assets $ 6,529,998 $ 4,607,079 $ 4,732,311
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The Company's CDO offerings allow the Company to match fund its commercial real estate portfolio by issuing long-term debt to finance long-term assets. The CDO debt is non-recourse to the Company; therefore, the Company's losses are limited to its equity investment in the CDO. The CDO debt is also hedged to protect the Company from an increase in short-term interest rates. At June 30, 2008, 57% of the estimated fair value of the Company's subordinated CMBS was match funded in the Company's CDOs in this manner. The Company retained 100% of the equity of CDOs I, II, III, HY3 and Euro (each as defined below) and recorded the transactions on its consolidated financial statements as secured financing.
The table below summarizes the Company's CDO collateral and debt at June 30, 2008.
Collateral at June 30, 2008 Debt at June 30, 2008
Weighted
Adjusted Average
Adjusted Loss Adjusted Issue Cost of
Purchase Price Yield Price Funds * Net Spread
CDO I $ 454,341 8.23 % $ 384,179 6.75 % 1.48 %
CDO II 301,221 7.82 262,559 5.77 2.05 %
CDO III 374,462 7.05 375,638 5.14 1.91 %
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CDO HY3 415,232 9.79 372,725 5.29 4.50 % Euro CDO 423,122 8.24 415,157 5.07 3.17 %
Total ** $ 1,968,378 8.28 % $ 1,810,258 5.59 % 2.69 %
* Weighted Average Cost of Funds is the current cost of funds plus hedging expenses. ** The Company chose not to sell $12,500 of par of Euro CDO debt rated BB.
Real Estate Credit Profile of Below Investment Grade CMBS
The Company views its below investment grade CMBS investment activity as two portfolios: Controlling Class CMBS and other below investment grade CMBS. The Company considers the CMBS securities where it maintains the right to influence the foreclosure/workout process on the underlying loans its controlling class CMBS ("Controlling Class"). The distinction between the two is in the rights the Company obtains with its investment in Controlling Class CMBS. Controlling Class rights allow the Company to influence the workout and/or disposition of defaults that occur in the underlying loans. These securities absorb the first losses realized in the underlying loan pools. The coupon payment on the non-rated security also can be reduced for special servicer fees charged to the trust. The next highest rated security in the structure then generally will be downgraded to non-rated and become the first to absorb losses and expenses from that point on. At June 30, 2008, the Company owned 39 trusts where it is in the first loss position and is designated as the controlling class representative by owning the lowest rated or non-rated CMBS class. The total par of the loans underlying these securities was $58,356,845. At June 30, 2008, subordinated Controlling Class CMBS with a par of $1,556,235 were included on the Company's consolidated statement of financial condition and subordinated Controlling Class CMBS with a par of $750,623 were held as collateral by CDO HY1 and CDO HY2 (each as defined below).
The Company's other below investment grade CMBS have more limited rights associated with its ownership to influence the workout and/or disposition of underlying loan defaults. The total par of the Company's other below investment grade CMBS at June 30, 2008 was $313,079; the average credit protection, or subordination level, of this portfolio was 0.93%.
The Company's investment in its subordinated Controlling Class CMBS securities by credit rating category at June 30, 2008 was as follows:
Adjusted
Estimated Purchase Weighted Average
Par Fair Value Dollar Price Price Dollar Price Subordination Level
BB+ $ 250, 135 $ 127,960 $ 51.16 $ 210,257 $ 84.06 4.18 %
BB 191,578 88,612 46.25 156,143 81.50 3.16 %
BB- 182,916 94,521 51.67 133,211 72.83 5.03 %
B+ 106,635 40,594 38.07 70,207 65.84 2.12 %
B 133,772 49,770 37.20 81,965 61.27 1.85 %
B- 117,106 30,789 26.29 61,188 52.25 1.36 %
CCC+ 13,214 3,171 24.00 7,206 54.53 0.65 %
CCC 28,161 5,056 17.95 10,504 37.30 0.75 %
NR 532,718 93,027 17.46 133,503 25.06 n/a
Total $ 1,556,235 $ 533,500 $ 34.28 $ 864,184 $ 55.53
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The Company's investment in its subordinated Controlling Class CMBS securities by credit rating category at December 31, 2007 was as follows:
Adjusted
Estimated Purchase Weighted Average
Par Fair Value Dollar Price Price Dollar Price Subordination Level
BB+ $ 277,946 $ 189,351 $ 68.13 $ 228,054 $ 82.05 3.59 %
BB 191,808 117,702 61.36 154,916 80.77 2.55 %
BB- 192,875 121,665 63.08 137,092 71.08 4.33 %
B+ 103,352 55,664 53.86 67,214 65.03 2.15 %
B 140,275 71,947 51.29 83,949 59.85 1.76 %
B- 123,683 49,817 40.28 63,282 51.17 1.29 %
CCC 22,313 6,293 28.21 7,814 35.01 0.88 %
NR 533,920 118,473 22.19 139,714 26.17 n/a
Total $ 1,586,172 $ 730,912 $ 46.08 $ 882,035 $ 55.61
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During the six months ended June 30, 2008, the loan pools were paid down by $2,103,618. Pay down proceeds are distributed to the highest rated CMBS class first and reduce the percent of total underlying collateral represented by each rating category.
As the portfolio matures and expected losses occur, subordination levels of the lower rated classes of a CMBS investment will be reduced. This may cause the lower rated classes to be downgraded, which would negatively affect their estimated fair value and therefore the Company's net book value. Reduced estimated fair value would negatively affect the Company's ability to finance any such securities that are not financed through a CDO or similar matched funding vehicle. In some cases, securities held by the Company may be upgraded to reflect seasoning of the underlying collateral and thus would increase the estimated fair value of the securities. During the six months ended June 30, 2008, four securities in one of the Company's Controlling Class CMBS was upgraded by at least one rating agency and thirteen securities in one Controlling Class CMBS were downgraded. Additionally, at least one rating agency upgraded eleven of the Company's non-Controlling Class commercial real estate securities and downgraded eight.
As part of its underwriting process, the Company assumes a certain amount of loans will incur losses over time. In performing continuing credit reviews on the 39 Controlling Class trusts, the Company estimates that specific losses totaling $851,920 related to principal of the underlying loans will not be recoverable, of which $399,403 is expected to occur over the next five years. The total loss estimate of $851,920 represents 1.46% of the total underlying loan pools.
The Company considers delinquency information from the Lehman Brothers Conduit Guide to be the most relevant benchmark to measure credit performance and market conditions applicable to its Controlling Class CMBS holdings. The year of issuance, or vintage year, is important, as older loan pools will tend to have more delinquencies than newly underwritten loans. The Company owns Controlling Class CMBS issued in 1998, 1999, and 2001 through 2007. Comparable delinquency statistics referenced by vintage year as a percentage of par outstanding at June 30, 2008 are shown in the table below:
Vintage Underlying Year Collateral Delinquencies Outstanding Lehman Brothers Conduit Guide 1998 $ 1,640,063 2.58 % 0.81 % 1999 497,288 2.22 % 0.83 % 2001 805,373 0.91 % 0.83 % 2002 914,620 0.00 % 0.62 % 2003 1,751,059 1.48 % 0.87 % 2004 6,315,137 0.70 % 0.39 % 2005 11,819,255 0.63 % 0.41 % 2006 13,684,183 0.71 % 0.27 % . . . |
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