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| RAS > SEC Filings for RAS > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
Forward-Looking Statements
In addition to historical information, this discussion and analysis contains forward-looking statements. These statements can be identified by the use of forward-looking terminology including "may," "believe," "will," "expect," "anticipate," "estimate," "continue" or similar words. These forward-looking statements are subject to risks and uncertainties, as more particularly set forth in our filings with the Securities and Exchange Commission, including those described in the "Forward Looking Statements" and "Risk Factors" sections of our Annual Report on Form 10-K for the year ended December 31, 2008, that could cause actual results to differ materially from those projected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report, except as may be required by applicable law.
Overview
RAIT Financial Trust invests in and manages a portfolio of real estate related assets and provides a comprehensive set of debt financing options to the real estate industry. Our income is generated primarily from:
• interest income from our investments, net of any financing costs, or net interest margin,
• fee income from originating and managing assets and
• rental income from our investments in real estate assets.
We continue to face challenging and volatile market conditions resulting from global recessionary economic conditions, including significant disruptions in the credit markets, abrupt and significant devaluations of assets directly or indirectly linked to the real estate finance markets, and the attendant removal of liquidity, both long and short term, from the capital markets. We cannot predict with any certainty the potential impact on our financial performance of contemplated or future government interventions in financial markets. We seek to position RAIT to be able to take advantage of opportunities once market conditions improve and to maximize shareholder value over time. To do this, we will continue to focus on:
• managing our investment portfolios to reposition non-performing assets and maximize cash flows while seeking to maximize the ultimate recovery value of our assets over time;
• taking advantage of our commercial real estate platform to invest in the distressed commercial real estate debt market;
• reducing our leverage through additional purchases of our debt;
• managing the size and cost structure of our business to match today's operating environment; and
• developing new financing sources intended to maintain and increase our adjusted earnings and REIT taxable income.
In the current economic environment, we are seeking to effectively manage and service our investment portfolios with a goal of continuing to generate cash flow from our securitizations and our investments. We expect to continue to focus our efforts on our commercial real estate portfolio, while we expect our other portfolios to continue to generate cash flow. Given the current environment, we continue to review investment opportunities within our own capital structure, such as collateral exchanges with our securitizations, and seek to improve the credit profile of, and maximize the distributions from, our securitizations. While a substantial portion of our subordinated collateral management fees from our securitizations continued to be redirected in the first quarter of 2009 due to the performance of the underlying collateral, we continued to earn senior management fees. Our return from originating new investments may increasingly be in the form of fees under the terms of new financing arrangements we develop, such as co-investment and joint venturing strategies. In addition, we expect to enhance our ability to earn property management and servicing fees in the future.
During the three-month periods ended March 31, 2009 and 2008, we generated
adjusted earnings per diluted share of $0.27 and $0.52, respectively, total
earnings (loss) per diluted share of $(2.22) and $2.12, respectively, and gross
cash flow of $30.5 million and $45.9 million, respectively. A reconciliation of
RAIT's reported generally accepted accounting principles, or GAAP, net income
(loss) allocable to common shares to adjusted earnings is set forth below. See
"Performance Measures-Adjusted Earnings." RAIT's GAAP net loss for the
three-month period ended March 31, 2009 was primarily caused by the following:
• Allowance for losses. We increased our allowance for losses to $226.1 million as of March 31, 2009 from $172.0 million as of December 31, 2008. The provision for losses recorded during the three-month period ended March 31, 2009 was $119.5 million and resulted from increased delinquencies in our residential mortgage loans and additional non-performing loans in our commercial real estate portfolios.
• Changes in fair value of financial instruments. During 2009, the change in fair value of our financial instruments continued to deteriorate due to the continuing turmoil in the credit markets. The change in fair value of our financial instruments was a net decrease of $99.8 million during the three-month period ended March 31, 2009, before allocations of $13.5 million to
our noncontrolling interests. This change was comprised of a decrease in the fair value of our financial assets totaling $190.7 million, a decrease in the fair value of our financial liabilities totaling $82.6 million and a decrease in the fair value of our interest rate derivatives totaling $8.3 million. Due to the volatility of the financial markets, we are unable to predict with any level of certainty the future changes in the fair value of our financial instruments.
Our commercial real estate loans are our primary investment portfolio generating $20.3 million, or 66.6%, and $25.1 million, or 54.8%, of our gross cash flow during the quarters ended March 31, 2009 and 2008, respectively. Current economic conditions have subjected borrowers under our commercial real estate loans to financial stress, which has increased the number of loans on non-accrual and caused us to increase our allowance for losses. Where it is likely to enhance our returns, we consider restructuring loans or foreclosing on the underlying property. During the quarter ended March 31, 2009, we took title to eleven properties that served as collateral on our commercial real estate loans. In April 2009, we took title to seven properties that served as collateral on our commercial real estate loans. We expect we will continue to engage in workout activity with respect to our commercial real estate loans that may result in the conversion of the property collateralizing those loans. The effect of these workouts generally would decrease the amount of our commercial real estate loans and increase the amount of investments in real estate interests we hold. Under GAAP, we may take a non-cash charge to earnings at the time of any foreclosure to the extent the amount of our loan, reduced by any allowance for losses and certain other expenses, exceeds the fair value of the property at the time of the conversion. We plan to improve the performance of properties we convert through workout activity and so have expanded our commercial property management capabilities. Effective May 1, 2009, we formed a joint venture, referred to as Jupiter Communities, with the owners of an established property management firm specializing in managing multi-family properties. We have a 75% interest in the joint venture and paid a $1.3 million capital contribution to the joint venture on May 1, 2009. On May 1, 2009, the joint venture acquired the contracts and employees of the predecessor entity. We expect this enhanced management capability to generate fee income, partially offset by increased general and administrative expense related to Jupiter Communities.
Our portfolio of residential mortgages generated $4.5 million, or 14.8%, and $5.1 million, or 11.1%, of our gross cash flow during the quarters ended March 31, 2009 and 2008, respectively. We have seen the delinquency rates in our residential mortgage portfolio increase, which resulted in increases in our loan loss reserves and the number and amount of loans on non-accrual status.
Our portfolio of trust preferred securities, or TruPS, generated $3.8 million, or 12.3%, and $11.9 million, or 25.8%, of our gross cash flow during the quarters ended March 31, 2009 and 2008, respectively. We continue to experience credit deterioration of TruPS issuers. This credit deterioration adversely affects the cash flow we receive from our securitizations and the fair value of their collateral. We continue to seek remedies and other means of restructuring our TruPS so as to improve the overall recovery in future periods.
Investors should read the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, or the Annual Report, for a detailed discussion of the following items:
• capital markets, liquidity and credit risk,
• interest rate environment,
• prepayment rates on commercial mortgages, mezzanine loans and residential mortgages in our portfolio, and
• other market developments.
Our Investment Portfolio
The table below summarizes our consolidated investment portfolio as of March 31,
2009 (dollars in thousands):
Percentage Weighted-
Carrying of Total Average
Amount (1) Portfolio Coupon (2)
Commercial mortgages, mezzanine loans, other
loans and preferred equity interests $ 1,853,721 24.2 % 8.2 %
Investments in real estate interests 501,459 6.6 % N/A
Residential mortgages and mortgage-related
receivables 3,490,698 45.5 % 5.6 %
Investments in securities
TruPS and subordinated debentures 1,527,370 20.0 % 5.9 %
Unsecured REIT note receivables 248,178 3.2 % 6.0 %
CMBS receivables 29,357 0.4 % 5.7 %
Other securities 4,539 0.1 % 5.8 %
Total investments in securities 1,809,444 23.7 % 5.9 %
Total $ 7,655,322 100.0 % 6.4 %
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(1) Reflects the carrying amount of the respective assets classes, as they appear in our consolidated financial statements as of March 31, 2009.
(2) Weighted-average coupon is calculated on the unpaid principal amount of the underlying instruments which does not necessarily correspond to the carrying amount.
Our consolidated investment portfolio is currently comprised of the following asset classes:
Commercial mortgages, mezzanine loans, other loans and preferred equity interests.
The tables below describe certain characteristics of our commercial mortgages, mezzanine loans, other loans and preferred equity interests as of March 31, 2009 (dollars in thousands):
% of
Weighted- Total
Carrying Estimated Average Number Loan
Amount (1) Fair Value Coupon (2) Range of Maturities of Loans Portfolio
Commercial mortgages $ 1,070,698 $ 1,036,858 7.4 % May 2009 to Mar. 2016 82 57.8 %
Mezzanine loans 436,908 411,163 10.0 % May 2009 to Aug. 2021 133 23.6 %
Other loans 174,606 173,355 5.1 % Apr. 2010 to Oct. 2016 12 9.4 %
Preferred equity interests 171,509 100,297 11.6 % May 2009 to Sept. 2021 36 9.2 %
Total $ 1,853,721 $ 1,721,673 8.2 % 263 100.0 %
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(1) Reflects the carrying amount of the respective assets classes, as they appear in our consolidated financial statements as of March 31, 2009.
(2) Weighted-average coupon is calculated on the unpaid principal amount of the underlying instruments which does not necessarily correspond to the carrying amount.
Investment in real estate interests.
The table below summarizes the amounts included in our consolidated financial statements for investments in real estate interests (dollars in thousands):
As of As of
March 31, December 31,
2009 2008
Multi-family real estate properties $ 314,465 $ 243,198
Office real estate properties 139,862 131,285
Retail real estate property 33,685 -
Parcels of land 22,208 614
Subtotal 510,220 375,097
Plus: Escrows and reserves 4,724 4,404
Less: Accumulated depreciation and amortization (13,485 ) (11,762 )
Investments in real estate interests $ 501,459 $ 367,739
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The charts below describe the property types and the geographic breakdown of our commercial mortgages, mezzanine loans, other loans, preferred equity interests and investments in real estate interests as of March 31, 2009:
[[Image Removed: LOGO]] [[Image Removed: LOGO]]
(a) Based on amortized cost.
Residential mortgages and mortgage-related receivables.
We invested in our portfolio of residential mortgages primarily to help RAIT comply with REIT asset and income requirements while generating acceptable returns and we expect ongoing reductions in this portfolio in the future primarily as a result of prepayments in the ordinary course of business.
Set forth below is certain information with respect to the residential mortgages and mortgage-related receivables owned as of March 31, 2009 (dollars in thousands):
Average
Weighted- Next Average Number Percentage
Carrying Average Adjustment Contractual of of
Amount (1) Coupon (2) Date Maturity Loans Portfolio
3/1 Adjustable rate $ 87,082 5.6 % May 2009 Aug. 2035 235 2.5 %
5/1 Adjustable rate 2,866,067 5.6 % Sept. 2010 Sept. 2035 5,973 82.1 %
7/1 Adjustable rate 484,662 5.7 % July 2012 July 2035 1,072 13.9 %
10/1 Adjustable rate 52,887 5.7 % June 2015 June 2035 62 1.5 %
Total $ 3,490,698 5.6 % 7,342 100.0 %
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(1) Reflects the carrying amount of the respective assets classes, as they appear in our consolidated financial statements as of March 31, 2009.
(2) Weighted-average coupon is calculated on the unpaid principal amount of the underlying instruments which does not necessarily correspond to the carrying amount.
The following charts below describe the housing type and geographic breakdown of the residential mortgages and mortgage-related receivables we own as of March 31, 2009:
[[Image Removed: LOGO]] [[Image Removed: LOGO]]
(a) Based on Carrying Amount.
TruPS and subordinated debentures. We have provided REITs and real estate operating companies the ability to raise subordinated debt capital through TruPS and subordinated debentures. TruPS are long-term instruments, with maturities ranging from 10 to 30 years, which are priced based on short-term variable rates, such as the three-month London Inter-Bank Offered Rate, or LIBOR. TruPS are unsecured and contain minimal financial and operating covenants.
The table below describes our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of March 31, 2009 (dollars in thousands):
Issuer Statistics
Weighted- Weighted-Average Weighted-Average
Estimated % of Average Ratio of Debt to Total Interest Coverage
Industry Sector Fair Value (1) Total Coupon (2) Capitalization (a) Ratio (a)
Commercial Mortgage $ 519,221 34.0 % 5.3 % 70.5 % 1.0x
Office 348,243 22.8 % 6.4 % 70.0 % 2.3x
Specialty Finance 210,366 13.8 % 5.2 % 106.5 % 0.4x
Homebuilders 145,112 9.5 % 8.5 % 77.8 % 0.1x
Retail 88,604 5.8 % 3.7 % 88.9 % 1.8x
Residential Mortgage 84,808 5.5 % 4.7 % 94.9 % 1.2x
Hospitality 72,751 4.8 % 7.2 % 83.1 % 2.4x
Storage 58,265 3.8 % 7.2 % 62.9 % 3.1x
Total $ 1,527,370 100.0 % 5.9 % 78.8 % 1.3x
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(1) Reflects the estimated fair value of the respective assets classes, as they appear in our consolidated financial statements as of March 31, 2009.
(2) Weighted-average coupon is calculated on the unpaid principal amount of the underlying instruments which does not necessarily correspond to the carrying amount.
The chart below describes the equity capitalization of our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of March 31, 2009 (dollars in thousands):
[[Image Removed: LOGO]]
(a) Based on the most recent information available to management as provided by our TruPS issuers or through public filings.
Mortgage-backed securities, including RMBS, CMBS, unsecured REIT notes and other real estate-related debt securities. We have invested, and expect to continue to invest, in RMBS, CMBS, unsecured REIT notes and other real estate-related debt securities.
The table and the chart below describe certain characteristics of our mortgage-backed securities and other real estate-related debt securities as of March 31, 2009 (dollars in thousands):
Weighted-
Weighted- Average
Estimated Average Years to Amortized
Investment Description Fair Value Coupon (1) Maturity Cost
Unsecured REIT note receivables $ 248,178 6.0 % 7.6 $ 377,616
CMBS receivables 29,357 5.7 % 34.5 224,434
Taberna Europe CDO I & II investments 2,927 11.0 % 29.1 35,375
Other securities 1,612 4.1 % 38.1 66,392
Total $ 282,074 6.0 % 20.1 $ 703,817
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(1) Weighted-average coupon is calculated on the unpaid principal amount of the underlying instruments which does not necessarily correspond to the carrying amount.
[[Image Removed: LOGO]]
(a) S&P Ratings as of March 31, 2009.
Credit Summary
The table below summarizes the carrying value of our investments, non-accrual
status investments and our allowance for losses at March 31, 2009 (dollars in
thousands):
Carrying
Number Amount of
of Non-Accrual Non-Accrual Percentage
Carrying Status Status of Asset Allowance for
Amount (1) Investments Investments Class(es) Losses
Commercial mortgages, mezzanine
loans, other loans, preferred
equity interests and investments
in real estate interests $ 2,355,180 35 $ 177,233 7.5 % $ 126,229 (2)
Residential mortgages and
mortgage-related receivables 3,490,698 784 305,218 (3) 8.7 % 99,823 (3)
Investments in securities and
security-related receivables (4) 1,809,444 14 8,367 0.5 % N/A (5)
Total $ 7,655,322 833 $ 490,818 6.4 % $ 226,052
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(1) Reflects the carrying amount of the respective assets classes, as they appear in our consolidated financial statements as of March 31, 2009
(2) Pertains to 29 loans with a $163.6 million aggregate unpaid principal balance.
(3) Includes loans delinquent over 60 days, in foreclosure, bankrupt or real estate owned as of March 31, 2009.
(4) Investments in securities and security-related receivables are recorded at fair value in our consolidated balance sheet in accordance with GAAP. The unpaid principal value of these investments as of March 31, 2009 is $4.0 billion. The unpaid principal balance of the non-accrual investments in this category is $477.3 million, or 11.9% of the total unpaid principal balance.
(5) An allowance for loan losses is not applicable for investments in securities and security-related receivables, including our investments in European, U.S. TruPS or other securities, as these items are carried at fair value in our consolidated financial statements. The estimated fair value adjustment for our U.S. TruPS portfolio is recorded as a component of GAAP net income. The estimated fair value adjustments for our investments in European securitizations and other securities are recorded as a component of accumulated other comprehensive income within shareholders' equity. A charge to GAAP net income is recorded only if an other-than-temporary impairment is identified within our European portfolio or other investments. While we believe the estimated fair values of these asset classes are affected by any related credit quality issues, under GAAP, no separate allowance for loan losses is established.
Securitization Summary
A summary of the CDO investments as of the most recent payment information is as
follows (dollars in millions):
Our Retained Interests (Par Amount)
Total Defaulted
Managed CDOs Collateral Debt Equity Total Collateral OC Test OC Test
(Unconsolidated) (Par Amount) Retained Retained Investment (Par Amount) Trigger % Current %
Taberna I $ 656.7 $ 3.4 $ 0.3 $ 3.7 $ 95.0 104.5 % 99.2 %
Taberna II 963.9 13.0 7.5 20.5 295.0 102.5 % 76.0 %
Taberna V 700.6 13.0 19.7 32.7 225.0 101.4 % 76.4 %
Taberna Europe I 793.0 18.5 14.9 33.4 106.0 101.5 % 90.9 %
Taberna Europe II 1,034.0 2.6 16.5 19.1 159.0 108.3 % 95.2 %
Managed CDOs 4,148.2 50.5 58.9 109.4 880.0
TruPS CDOs
(Consolidated)
Taberna III 743.9 40.0 30.3 70.3 221.1 101.0 % 79.4 %
Taberna IV 651.4 31.1 26.0 57.1 170.0 101.6 % 79.9 %
Taberna VI 677.0 9.0 30.0 39.0 186.3 102.2 % 82.8 %
Taberna VII 635.8 38.5 30.8 69.3 146.8 101.7 % 85.3 %
Taberna VIII 716.1 73.0 60.0 133.0 62.5 103.5 % 97.9 %
Taberna IX 742.1 134.0 52.5 186.5 138.8 105.4 % 89.9 %
TruPS CDOs 4,166.3 325.6 229.6 555.2 925.5
CRE CDOs
(Consolidated)
RAIT I 1,015.6 38.0 165.0 203.0 85.5 116.2 % 117.4 %
RAIT II 822.3 120.5 110.2 230.7 4.3 111.7 % 118.2 %
CRE CDOs 1,837.9 158.5 275.2 433.7 89.8
Total $ 10,152.4 $ 534.6 $ 563.7 $ 1,098.3 $ 1,895.3
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The equity securities that we own in the CDOs shown in the table are subordinate in right of payment and in liquidation to the collateralized debt securities . . .
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