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| RAS > SEC Filings for RAS > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-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,
• rental income from our investments in real estate assets, and
• fee income from originating and managing assets, including advisory services to borrowers.
We continue to face challenging market conditions resulting from global economic conditions, including significant disruptions in the credit markets, significant devaluations of assets directly or indirectly linked to the real estate finance markets, and the lack of liquidity, both long and short term, in the capital markets. We continue to see limited lending activity in the commercial real estate sector and, broadly speaking, our borrowers, whether commercial real estate sponsors or public REITs, continue to experience limited opportunities to increase income, borrow funds or sell assets at profitable levels. In addition, we cannot predict with any certainty the potential impact on our financial performance of current or future government interventions in financial markets.
This year continues to be a transitional year for RAIT as we execute changes to our business model in response to changing market realities. We are continuing to build a vertically integrated commercial real estate platform with the capability to originate, invest, manage, service, trade and advise on commercial real estate related assets, including loans, securities and properties. The platform is expected to enable RAIT to provide asset and collateral management services, not only to our current investment portfolios but also to new opportunities that exist in the market today. 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:
• reducing our leverage;
• fully utilizing RAIT's vertically integrated commercial real estate platform, including investing, on our own account or by advising others on how to invest, in the distressed commercial real estate debt market, and 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 activities into advisory services and fixed income sales and trading and expanding our loan servicing capabilities;
• 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;
• 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 REIT taxable income.
During the nine-month periods ended September 30, 2009 and 2008, we recorded net income (loss) allocable to common shares of $(456.8) million and $62.6 million, respectively, and generated gross cash flow of $79.3 million and $135.9 million, respectively. RAIT's net losses for the three-month and nine-month periods ended September 30, 2009 were primarily caused by the following:
• Gains(losses) on sales of assets. During the nine-month period ended September 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 and all of our interests in our six residential mortgage securitizations. Upon completion of these sales, we deconsolidated these securitizations and removed the
associated assets and liabilities from our consolidated balance sheet. The deconsolidation of the Taberna securitizations on June 25, 2009 resulted in a loss of $313.8 million and the deconsolidation of the residential mortgage securitizations on July 16, 2009 resulted in a loss of $61.8 million.
• Provision for losses. The provision for losses recorded during the three and nine-month period ended September 30, 2009 was $18.5 and $204.1 million, respectively, and resulted from increased delinquencies and impaired loans in our residential mortgages and commercial real estate portfolios.
• Asset impairments. We recorded asset impairments of $46.0 million and $38.4 million during the nine-month periods ended September 30, 2009 and 2008, respectively. No asset impairment expense was recorded during the three-month period ended September 30, 2009. For the three-month period ended September 30, 2008, we recorded asset impairments totaling $18.1 million. These asset impairments were comprised of investments in securities, primarily our equity investments in our Taberna Europe I and Taberna Europe II CDOs, whose carrying values were reduced due to credit conditions or because of increased delinquencies of the underlying collateral.
Our balance sheet at September 30, 2009 reflected substantial changes from our balance sheet at December 31, 2008 due to the sales of our interests in the Taberna securitizations and residential mortgage securitizations described above. Assets of $4.5 billion and liabilities of $4.0 billion were removed from our balance sheet upon the deconsolidation of these securitizations, representing a reduction of 54.9% of our assets and 57.4% of our liabilities since December 31, 2008. Our shareholders' equity was reduced $351.2 million or 32.5% from December 31, 2008 to September 30, 2009 in connection with these transactions.
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 resulted in the reduction of our assets and liabilities, and ultimately our total equity due to the aforementioned losses we incurred upon deconsolidation. We believe that quarterly fluctuations in the fair value of the TruPS assets and the related 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 incur additional loan losses against the residential mortgage loans. Our retained interests in six residential mortgage securitizations, which comprised our entire portfolio of residential mortgage loans generated $1.4 million, or 6.7%, and $4.8 million, or 10.8%, of our gross cash flow during the quarters ended September 30, 2009 and 2008, respectively. We may, in the future, sell additional retained interests in our consolidated securitizations which may result in their deconsolidation.
The disposition transactions described above contributed to our strategy of deleveraging 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 our 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, or the senior secured note, and (b) $10.0 million in cash. We also paid to this noteholder approximately $2.0 million of accrued and unpaid interest on the convertible senior notes through July 31, 2009. 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. On November 4, 2009, we filed a registration statement on Form S-4 and a Schedule TO with the Securities and Exchange Commission, or the SEC, in anticipation of our intention to undertake an offer to exchange common shares and cash for a portion of our outstanding convertible senior notes. See "Liquidity and Capital Resources-Exchange Offer" below.
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 $16.3 million, or 76.0%, and $23.1 million, or 52.2%, of our gross cash flow during the three-month periods ended September 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 record provisions for loan losses. Where it is likely to enhance our returns, we consider restructuring loans or foreclosing on the underlying property. During the quarter ended September 30, 2009, we took title to four 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. 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 goal is to build a portfolio that outperforms the market while we monitor the market for opportunities to sell or refinance properties.
Our portfolio of trust preferred securities, or TruPS, generated $2.7 million, or 12.6%, and $11.9 million, or 27.0%, of our gross cash flow during the quarters ended September 30, 2009 and 2008, respectively. We expect our 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. This transaction resulted in the 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 ancillary fees from the Taberna securitizations for our restructuring efforts may decrease as events of default in most of these securitizations will limit these efforts in the future.
We are in the process of diversifying our sources of income by seeking to generate fee income by leveraging our existing capabilities and by creating 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 which acquired the contracts and employees of the predecessor entity. We expect this enhanced management capability to generate additional fee income, offset to varying degrees 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 of commercial real estate securities and provider of commercial real estate advisory services 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 offer 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.
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:
• Credit, capital markets and liquidity risk.
• Interest rate environment.
• Prepayment rates.
• Commercial real estate lack of liquidity and reduced performance.
Our Investment Portfolio
The table below summarizes our consolidated investment portfolio as of
September 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 $ 1,577,371 54.2 % 8.0 %
Investments in real estate interests 645,484 22.2 % N/A
Investments in securities
TruPS and subordinated debentures 541,701 18.7 % 4.7 %
Unsecured REIT note receivables 82,311 2.8 % 6.9 %
CMBS receivables 59,034 2.0 % 2.3 %
Other securities 1,790 0.1 % 3.0 %
Total investments in securities 684,836 23.6 % 4.7 %
Total $ 2,907,691 100.0 % 7.0 %
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(1) Reflects the carrying amount of the respective assets classes, as they appear in our consolidated financial statements as of September 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 September 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 $ 926,722 $ 911,939 7.2 % Nov. 2009 to Mar. 2016 61 58.8 %
Mezzanine loans 425,086 382,567 9.9 % Nov. 2009 to Aug. 2021 130 26.9 %
Other loans 125,116 114,892 5.2 % Apr. 2010 to Oct. 2016 9 7.9 %
Preferred equity interests 100,447 86,591 11.0 % Nov. 2009 to Sept. 2021 26 6.4 %
Total $ 1,577,371 $ 1,495,989 8.0 % 226 100.0 %
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(1) Reflects the carrying amount of the respective assets classes, as they appear in our consolidated financial statements as of September 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
September 30, December 31,
2009 2008
Multi-family real estate properties $ 467,612 $ 225,054
Office real estate properties 139,345 131,285
Retail real estate property 36,402 -
Parcels of land 22,208 614
Subtotal 665,567 356,953
Plus: Escrows and reserves 535 4,091
Less: Accumulated depreciation and amortization (20,618 ) (10,557 )
Investments in real estate interests $ 645,484 $ 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 and preferred equity interests as of September 30, 2009:
[[Image Removed: LOGO]] [[Image Removed: LOGO]]
(a) Based on amortized cost.
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 nine-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 September 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 $ 158,277 29.2 % 3.8 % 79.1 % 1.1x
Office 131,435 24.3 % 7.8 % 69.7 % 2.5x
Residential Mortgage 72,351 13.4 % 2.6 % 83.9 % 1.4x
Specialty Finance 53,758 9.9 % 4.6 % 90.9 % (1.0)x
Homebuilders 44,039 8.1 % 7.8 % 63.8 % (0.2)x
Retail 37,149 6.8 % 5.0 % 82.0 % 1.9x
Hospitality 24,888 4.6 % 5.8 % 73.4 % 0.9x
Storage 19,804 3.7 % 8.0 % 62.4 % 3.6x
Total $ 541,701 100.0 % 4.7 % 76.7 % 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 September 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 September 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 September 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 $ 82,311 6.9 % 6.7 $ 100,215
CMBS receivables 59,034 2.3 % 34.5 158,368
Other securities 1,790 3.0 % 38.3 57,071
Total $ 143,135 3.9 % 28.3 $ 315,654
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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 September 30, 2009.
Securitization Summary
A summary of our 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 $ 622.7 $ 3.4 $ 0.3 $ 3.7 $ 31.0 104.5 % 101.8 %
Taberna II 947.6 13.0 7.5 20.5 245.0 102.5 % 78.3 %
Taberna III 768.7 17.0 - 17.0 196.1 101.0 % 83.4 %
Taberna IV 673.7 6.8 - 6.8 145.6 101.6 % 84.2 %
Taberna V 677.2 13.0 19.7 32.7 175.0 101.4 % 79.2 %
Taberna VI 665.4 5.5 - 5.5 135.6 102.2 % 83.5 %
Taberna VII 608.1 17.5 - 17.5 110.0 101.7 % 84.2 %
Taberna Europe I 796.6 19.7 15.8 35.5 58.6 101.5 % 94.6 %
Taberna Europe II 1,066.2 2.8 17.6 20.4 101.0 108.3 % 95.6 %
Managed CDOs 6,826.2 98.7 60.9 159.6 1,197.9
TruPS CDOs
(Consolidated)
Taberna VIII 715.1 73.0 60.0 133.0 69.5 103.5 % 97.9 %
Taberna IX 728.6 134.0 52.5 186.5 88.4 105.4 % 94.1 %
TruPS CDOs 1,443.7 207.0 112.5 319.5 157.9
CRE CDOs
(Consolidated)
RAIT I 1,015.6 56.0 165.0 215.5 68.0 116.2 % 119.0 %
RAIT II 822.3 120.5 110.2 230.7 4.3 111.7 % 118.1 %
CRE CDOs 1,837.9 176.5 275.2 446.2 72.3
Total $ 10,107.8 $ 482.2 $ 448.6 $ 925.3 $ 1,428.1
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