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| RAS > SEC Filings for RAS > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-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, including advisory services to borrowers, 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 current and future market opportunities as 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, on our own account or by advising others on how to invest, in the distressed commercial real estate debt market;
• diversifying our sources of income by seeking to generate fee income through new business ventures that enable us to preserve capital, such as expanding our property management capabilities, expanding our broker-dealer into a fixed income sales and trading platform and expanding our loan serving capabilities;
• reducing our leverage;
• managing the size and cost structure of our business to match our operating environment; and
• developing new financing sources intended to maintain and increase our adjusted earnings and REIT taxable income.
During the six-month periods ended June 30, 2009 and 2008, we generated adjusted
earnings per diluted share of $0.46 and $1.05 respectively, total earnings
(loss) per diluted share of $(6.65) and $3.94 respectively, and gross cash flow
of $57.9 million and $91.7 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 losses for the
three-month and six-month periods ended June 30, 2009 were primarily caused by
the following:
• Losses on sales of assets. During the three-month period ended June 30, 2009, we sold all of our equity and a portion of our non-investment grade notes in the Taberna III, Taberna IV, Taberna VI and Taberna VII securitizations to a non-affiliated party. Upon completion of these sales, we deconsolidated these securitizations and removed the associated assets and liabilities from our consolidated balance sheet. The deconsolidation of these securitizations on June 25, 2009 resulted in a loss of $313.8 million.
• Allowance for losses. We increased our allowance for losses to $237.6 million as of June 30, 2009 from $172.0 million as of December 31, 2008. The provision for losses recorded during the six-month period ended June 30, 2009 was $185.6 million and resulted from increased delinquencies in our residential mortgage loans and additional non-performing loans in our commercial real estate portfolios.
• Asset impairments. We recorded asset impairments of $46.0 million during the three-month period ended June 30, 2009. These asset impairments were comprised of investments in securities, primarily our equity investments in our Taberna Europe I and Taberna Europe II CDOs, whose market values were reduced due to credit conditions or because of increased delinquencies of the underlying collateral.
We expect to continue to focus our efforts on our commercial real estate portfolio, comprised of our commercial mortgages, mezzanine loans, other loans and preferred equity interests and our investments in real estate interests. This is our primary investment portfolio generating $19.1 million, or 69.9%, and $27.8 million, or 60.7%, of our gross cash flow during the quarters ended June 30, 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 June 30, 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 we have expanded our commercial property management capabilities through Jupiter Communities, described below, to improve these efforts.
Our portfolio of TruPS generated $2.8 million, or 10.2%, and $9.2 million, or 20.1%, of our gross cash flow during the quarters ended June 30, 2009 and 2008, respectively. We expect our trust preferred securities, or TruPS, portfolio to continue to generate cash flow in the form of senior management and administrative fees. 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. See "Securitization Summary" below for a discussion of our securitizations collateralized by TruPs that have already, or may in the near future, have an event of default occur. We continue to seek remedies and other means of restructuring our TruPS so as to improve the overall recovery in future periods. As discussed above, in June 2009, we sold all of our retained interests in Taberna III, Taberna IV, Taberna VI and Taberna VII, or the TruPS securitizations. This transaction resulted in our deconsolidation of these securitizations, recognizing the loss described above and the removal of the associated assets and liabilities from our balance sheet. We expect to continue to receive our senior management fees from these securitizations and will continue to include their underlying assets in our assets under management in future reporting periods.
Our portfolio of residential mortgages generated $4.5 million, or 16.3%, and $5.0 million, or 10.8%, of our gross cash flow during the quarters ended June 30, 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. In July 2009, we sold all of our retained interests in six residential mortgage securitizations. These securitizations comprised our entire portfolio of residential mortgage loans. Subsequent to this sale, we deconsolidated and removed the associated assets and liabilities of the six residential mortgage securitizations from our consolidated balance sheet. We expect the deconsolidation of these securitizations in July 2009 to result in recognizing a loss of $62.0 million and the removal of the associated assets and liabilities from our consolidated balance sheet. We will not receive any further cash distributions from this portfolio and will remove these assets from our assets under management in future reporting periods.
We believe that the deconsolidation of the TruPS securitizations in the second quarter of 2009 and our deconsolidation of the residential mortgage securitizations in the third quarter of 2009 will be beneficial to the long-term interests of our shareholders, even though these deconsolidations result in the reduction of our assets and liabilities, and ultimately our total equity due to the aforementioned losses we incur upon deconsolidation. We believe that quarterly fluctuations in the fair value of these assets and the liabilities contributed to the significant volatility in our earnings and our reported net losses beginning in 2007. We expect the deconsolidation of the TruPS securitizations will significantly reduce future volatility in earnings. With respect to the residential mortgage securitizations, we will no longer need to incur additional loan loss reserves against the residential mortgage loans underlying the securitizations which have had increasing delinquencies and default rates. We expect that the deconsolidation of both the TruPS securitizations and the residential mortgage securitizations will improve transparency to our shareholders by removing a significant amount of our non-recourse liabilities, along with their associated assets, from our financial statements. We may, in the future, sell additional retained interests in our consolidated securitizations which may result in their deconsolidation. Any such sale may have material effects on our financial results in the period in which they occur.
We are in the process of diversifying our sources of income by seeking to generate fee income through new business ventures. First, we have expanded our 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 paid $1.3 million to acquire a 75% interest in the joint venture on May 1, 2009. On that date, the joint venture acquired the contracts and employees of the predecessor entity. We expect this enhanced management capability to generate additional fee income, partially offset by increased compensation and general and administrative expense related to Jupiter Communities. Second, we have expanded our broker-dealer, RAIT Securities, LLC, into a fixed income sales and trading platform and expect it to contribute to RAIT's operating results. Lastly, we have been added to Standard & Poor's select servicer list as a commercial mortgage primary servicer and may consider offering our loan serving capabilities to third parties. We continue to explore ways to generate acceptable returns from new investments while preserving our capital. Our returns from 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.
The deconsolidation transactions described above contributed to our strategy of deleveraging RAIT by removing the associated liabilities of the relevant securitizations from our balance sheet. In July 2009, we engaged in another transaction implementing this strategy by purchasing from a noteholder, $98.3 million aggregate principal amount of RAIT's 6.875% Convertible Senior Notes due 2027, or the convertible senior notes, for a purchase price of $53.0 million. The purchase price consisted of (a) a $43.0 million 12.5% Senior Secured Note due 2014 issued by RAIT, or the senior secured note, and (b) $10.0 million in cash. RAIT also paid to this noteholder approximately $2.0 million of accrued and unpaid interest on the convertible senior notes through July 31, 2009. RAIT has arranged for the cancellation of these convertible senior notes. We expect to continue to seek to acquire, redeem, restructure, refinance or otherwise enter into transactions to satisfy our debt where we believe that is in the long term interest of our shareholders which may include issuances of our debt and/or equity securities, sales or exchanges of our assets or other methods.
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 June 30,
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 $ 1,648,745 26.2 % 8.4 %
Investments in real estate interests 604,619 9.6 % N/A
Residential mortgages and mortgage-related
receivables 3,355,089 53.4 % 5.6 %
Investments in securities
TruPS and subordinated debentures 573,005 9.1 % 5.0 %
Unsecured REIT note receivables 74,645 1.2 % 6.9 %
CMBS receivables 25,888 0.4 % 2.8 %
Other securities 1,694 0.1 % 3.5 %
Total investments in securities 675,232 10.8 % 5.1 %
Total $ 6,283,685 100.0 % 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 June 30, 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 June 30, 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 $ 938,426 $ 930,519 7.5 % Aug. 2009 to Mar. 2016 62 56.8 %
Mezzanine loans 437,774 392,027 10.0 % Aug. 2009 to Aug. 2021 133 26.6 %
Other loans 126,391 116,233 5.2 % Apr. 2010 to Oct. 2016 9 7.7 %
Preferred equity interests 146,154 94,802 11.8 % Aug. 2009 to Sept. 2021 29 8.9 %
Total $ 1,648,745 $ 1,533,581 8.4 % 233 100.0 %
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(1) Reflects the carrying amount of the respective assets classes, as they appear in our consolidated financial statements as of June 30, 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
June 30, December 31,
2009 2008
Multi-family real estate properties $ 425,557 $ 225,054
Office real estate properties 138,918 131,285
Retail real estate property 33,751 -
Parcels of land 22,208 614
Subtotal 620,434 356,953
Plus: Escrows and reserves 458 4,091
Less: Accumulated depreciation and amortization (16,273 ) (10,557 )
Investments in real estate interests $ 604,619 $ 350,487
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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 June 30, 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. We sold our retained interests in this portfolio in July 2009. See "Overview".
Set forth below is certain information with respect to the residential mortgages and mortgage-related receivables owned as of June 30, 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 $ 84,620 5.6 % Aug. 2009 Aug. 2035 230 2.5 %
5/1 Adjustable rate 2,746,759 5.6 % Sept. 2010 Sept. 2035 5,725 81.9 %
7/1 Adjustable rate 471,545 5.7 % July 2012 July 2035 1,039 14.0 %
10/1 Adjustable rate 52,165 5.7 % June 2015 June 2035 60 1.6 %
Total $ 3,355,089 5.6 % 7,054 100.0 %
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(1) Reflects the carrying amount of the respective assets classes, as they appear in our consolidated financial statements as of June 30, 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 June 30, 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 six-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 June 30, 2009 (dollars in thousands):
Issuer Statistics
Weighted-
Average
Weighted- Weighted-Average Interest
Estimated % of Average Ratio of Debt to Total Coverage
Industry Sector Fair Value (1) Total Coupon (2) Capitalization (a) Ratio (a)
Commercial Mortgage $ 205,133 35.8 % 4.5 % 76.4 % 0.9x
Office 123,913 21.6 % 7.8 % 69.1 % 2.6x
Residential Mortgage 72,168 12.6 % 2.9 % 90.1 % 1.2x
Specialty Finance 53,442 9.3 % 4.7 % 100.0 % (1.0)x
Homebuilders 37,905 6.6 % 7.8 % 61.0 % 0.7x
Retail 36,554 6.4 % 5.1 % 81.8 % 2.0x
Hospitality 24,540 4.3 % 6.0 % 72.5 % 2.1x
Storage 19,350 3.4 % 8.0 % 63.5 % 3.5x
Total $ 573,005 100.0 % 5.0 % 77.5 % 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 June 30, 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 June 30, 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 June 30, 2009 (dollars in thousands):
Weighted-
Weighted- Average
Estimated Average Years to Amortized
Investment Description Fair Value Coupon (1) Maturity Cost
Unsecured REIT note receivables $ 74,645 6.9 % 6.9 $ 95,610
CMBS receivables 25,888 2.8 % 34.5 125,629
Other securities 1,694 3.5 % 40.6 57,084
Total $ 102,227 5.8 % 14.5 $ 278,323
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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 June 30, 2009.
Credit Summary
The table below summarizes the carrying value of our investments, non-accrual
status investments and our allowance for losses at June 30, 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 $ 2,253,364 27 $ 171,809 7.6 % $ 108,842 (2)
Residential mortgages and
. . .
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