SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant To Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission file number 1-14760
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RAIT INVESTMENT TRUST
----------------------
(Exact name of registrant as specified in its charter)
MARYLAND 23-2919819
- ------------------------------ -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1818 MARKET STREET, 28TH FLOOR, PHILADELPHIA, PA 19103
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(Address of principal executive offices) (Zip Code)
(215) 861-7900
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(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.
[X] Yes [ ] No
- ------------------
As of August 8, 2002, 18,141,861 common shares of beneficial interest, par
value $0.01 per share, of the registrant were outstanding.
RAIT INVESTMENT TRUST
and Subsidiaries
Index to Quarterly Report
on Form 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets at June 30, 2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2002 and 2001 4
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements-June 30, 2002 (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAIT INVESTMENT TRUST
and Subsidiaries
Consolidated Balance Sheets
ASSETS June 30, 2002
(unaudited) December 31, 2001
------------- -----------------
Cash and cash equivalents $ 19,349,778 $18,064,909
Restricted cash 5,716,272 4,569,708
Tenant escrows 426,376 289,435
Accrued interest receivable 6,019,685 4,412,829
Investments in real estate loans, net 226,814,488 197,255,782
Investments in real estate, net 129,522,259 104,889,208
Furniture, fixtures and equipment, net 392,482 326,335
Prepaid expenses and other assets 6,527,134 3,907,157
Goodwill, net 887,143 887,143
------------ ------------
Total assets $395,655,617 $334,602,506
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 158,300 $ 1,437,054
Accrued interest payable 658,280 584,045
Tenant security deposits 658,528 812,317
Borrowers' escrows 7,099,389 5,812,737
Dividends payable 10,699,133 --
Deferred income 657,828 1,436,201
Senior indebtedness secured by real estate
underlying the Company's loans 30,668,644 36,843,180
Long-term debt secured by real estate owned 77,126,135 72,091,483
Secured line of credit -- 2,000,000
------------ ------------
Total liabilities 127,726,237 121,017,017
Minority interest 2,520,479 2,560,525
Shareholders' equity:
Preferred Shares, $.01 par value; 25,000,000
authorized shares -- --
Common Shares, $.01 par value; 200,000,000
authorized shares; issued and outstanding
18,134,123 shares and 14,947,197 shares
respectively 181,341 149,472
Additional paid-in-capital 261,809,246 206,344,662
Loans for stock options exercised (1,068,972) --
Retained earnings 4,487,286 4,530,830
------------ ------------
Total shareholders' equity 265,408,901 211,024,964
------------ ------------
Total liabilities and shareholders' equity $395,655,617 $334,602,506
============ ============
The accompanying notes are an integral part of these
consolidated financial statements
3
RAIT INVESTMENT TRUST
and Subsidiaries
Consolidated Statements of Income
(unaudited)
For the three months For the six months
ended June 30, ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
Mortgage interest income $8,037,385 $5,458,946 $16,315,729 $10,302,771
Rental income 6,466,737 5,566,242 13,129,981 10,348,634
Fee income and other 3,318,310 1,469,399 3,656,353 2,104,044
Investment income 463,541 72,133 569,665 190,509
Gain on sale of loan -- -- 947,974 --
---------- ---------- ---------- ----------
Total revenues 18,285,973 12,566,720 34,619,702 22,945,958
COSTS AND EXPENSES
Interest 2,070,940 2,743,079 4,217,542 5,893,154
Property operating expenses 3,255,602 3,125,134 6,134,846 5,448,810
Salaries and related benefits 692,023 560,421 1,332,113 1,232,293
General and administrative 361,006 409,274 674,052 732,663
Depreciation and amortization 910,283 811,068 1,764,803 1,651,318
--------- --------- ---------- ----------
Total costs and expenses 7,289,854 7,648,976 14,123,356 14,958,238
--------- --------- ---------- ----------
Net Income before minority interest
and extraordinary gain $10,996,119 $4,917,744 $20,496,346 $7,987,720
----------- ---------- ----------- ----------
Minority interest (38,971) 23,667 (109,954) 23,431
Extraordinary gain--consolidated
extinguishment of indebtedness
underlying investment in real
estate -- -- -- 4,633,454
----------- ---------- ----------- ----------
Net Income $10,957,148 $4,941,411 $20,386,392 $12,644,605
=========== ========== =========== ===========
Net income per common share
before minority interest and
extraordinary gain $ .62 $ .53 $ 1.23 $ 1.02
Extraordinary gain -- -- -- .59
------- ------- -------- -------
Net income per common share-basic $ .62 $ .53 $ 1.23 $ 1.61
======= ======= ======== =======
Weighted average common shares
outstanding-basic 17,645,936 9,253,722 16,607,088 7,836,522
========== ========= ========== =========
Net income per common share
before minority interest and
extraordinary gain $ .62 $ .53 $ 1.22 $ 1.01
Extraordinary gain -- -- -- .59
------- ------- -------- -------
Net income per common share-
diluted $ .62 $ .53 $ 1.22 $ 1.60
======= ======= ======== =======
Weighted average common shares
outstanding-diluted 17,813,109 9,345,657 16,739,252 7,908,400
========== ========= ========== =========
The accompanying notes are an integral part of these
consolidated financial statements
4
RAIT INVESTMENT TRUST
and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the six months ended June 30,
2002 2001
---- ----
Cash flows from operating activities
Net Income $20,386,392 $12,644,605
Adjustments to reconcile net income to net cash provided by
operating activities
Minority Interest 109,954 (23,431)
Depreciation and amortization 1,764,803 1,651,318
Gain on consolidated extinguishment of indebtedness underlying
investment in real estate -- (4,633,454)
Gain on sale of loan (947,974) --
Accretion of loan discount (776,309) (254,025)
Increase in security deposit escrows (136,941) (44,599)
Increase in accrued interest receivable (1,606,856) (52,657)
Increase in prepaid expenses and other assets (2,829,539) (2,233,497)
Decrease in accounts payable and accrued liabilities (1,278,754) (231,463)
Increase (decrease) in accrued interest payable 74,235 (536,997)
(Decrease) increase in tenant security deposits (153,789) 514,610
(Decrease) increase in deferred income (778,373) 171,433
Increase in borrowers' escrows 140,088 844,448
------ -------
Net cash provided by operating activities 13,966,937 7,816,291
---------- ---------
Cash flows from investing activities
Purchase of furniture, fixtures and equipment (90,381) (311,863)
Real estate loans purchased (1,805,150) --
Real estate loans originated (76,963,597) (55,903,225)
Principal repayments of loans 46,413,096 25,422,492
Purchase of real estate (21,299,134) (917,180)
Utilization of reserves held by mortgages to pay taxes 361,579 751,031
Proceeds from sale of loan 2,185,141 --
--------- ----
Net cash used in investing activities (51,198,446) (30,958,745)
----------- -----------
Cash flows from financing activities
Principal repayments on senior indebtedness (6,790,699) (1,207,890)
Principal repayments on long-term debt (339,833) (374,084)
Proceeds of senior indebtedness 2,950,000 4,800,000
Proceeds of long-term debt -- 2,275,000
Extinguishment of consolidated indebtedness
underlying investment in real estate -- (20,248,435)
Repayments to secured line of credit (2,000,000) --
Issuance of common shares, net 54,427,481 40,470,174
Payment of dividends (9,730,571) (3,281,326)
----------- -----------
Net cash provided by financing activities 38,516,378 22,433,439
---------- ----------
Net change in cash and cash equivalents 1,284,869 (709,015)
--------- ---------
Cash and cash equivalents, beginning of period $18,064,909 $7,407,988
----------- ----------
Cash and cash equivalents, end of period $19,349,778 $6,698,973
----------- ----------
The accompanying notes are an integral part of these
consolidated financial statements
5
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, these unaudited financial statements contain all
disclosures which are necessary to present fairly the Company's consolidated
financial position at June 30, 2002, the results of operations for the three and
six months ended June 30, 2002 and 2001 and the cash flows for the six months
ended June 30, 2002 and 2001. The financial statements include all adjustments
(consisting only of normal recurring adjustments) which in the opinion of
management are necessary in order to present fairly the financial position and
results of operation for the interim periods presented. Certain information and
footnote disclosures normally included in financial statements under accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K, as amended, for the year ended December 31, 2001.
NOTE 2 - CONSOLIDATED STATEMENT OF CASH FLOWS
Long-term debt assumed in conjunction with the Company's acquisition of
interests in real estate was $5.4 million for the six months ended June 30,
2002.
NOTE 3 - RESTRICTED CASH AND BORROWERS' ESCROWS
Restricted cash and borrowers' escrows represent borrowers' funds held by the
Company to fund certain expenditures or to be released at the Company's
discretion upon the occurrence of certain pre-specified events, and to serve as
additional collateral for borrowers' loans.
NOTE 4 - INVESTMENTS IN REAL ESTATE LOANS
The Company's portfolio of real estate loans consisted of the following at June
30, 2002:
Long-term first mortgages $ 594,772
Mezzanine (including wraparound) loans 117,797,643
Short-term bridge loans 108,604,032
Loan costs 44,198
Less: provision for loan losses (226,157)
--------------
Investments in real estate loans 226,814,488
Less: Senior indebtedness secured by real estate underlying the Company's loans (30,668,644)
-------
Net investments in real estate loans $ 196,145,844
==============
6
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
The following is a summary description of the Company's portfolio of real estate
loans at June 30, 2002:
Number of Average Loan Range of
Type of Loan Loans to Value Yield Range Maturities
- ------------ ---------- ------------ ----------- ----------
Long-term first
Mortgage 1 99% 12% 8/31/02
Mezzanine (including
wraparound) loans 25 88% 10-21% (1) 10/1/03-5/1/21
Short term bridge
Loans 17 81% 12-20% 9/18/02-5/16/05
- -----------------------
(1) Includes points charged
Approximately $104.9 million of the loans are secured by multi-family
residential properties and $122.1 million of the loans are secured by commercial
properties.
As of June 30, 2002, senior indebtedness secured by real estate underlying the
Company's wraparound loans consisted of the following:
Loan payable, secured by real estate, monthly installments of $13,789, including
interest at 7.08%, remaining principal due December 1, 2008 $ 1,829,582
Loan payable, secured by real estate, monthly installments of $10,070, including
interest at 6.83%, remaining principal due December 1, 2008 1,483,794
Loan payable, secured by real estate, monthly installments of $28,090, including
interest at 6.82%, remaining principal due November 1, 2008 4,122,168
Loan payable, secured by real estate, monthly installments of $72,005, including
interest at 7.55%, remaining principal due December 1, 2008 9,516,298
Loan payable, secured by real estate, monthly installments of principal and
interest based on an amortization schedule of 25 years, including interest at
LIBOR (London interbank offered rate) plus 135 basis points (3.19% at June 30,
2002), remaining principal due September 15, 2007; the interest rate is subject
to an interest rate swap agreement entered into by the borrower which sets the
interest rate at 8.68% 10,766,802
Senior loan participation, secured by Company's interest in short-term bridge
loan of $8,160,000, interest only at LIBOR plus 275 basis points (4.59% at June
30, 2002) payable monthly, principal due March 5, 2004 2,950,000
---------
$30,668,644
===========
7
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
As of June 30, 2002 the senior indebtedness secured by real estate underlying
the Company's wraparound loans maturing in the remainder of 2002, over the next
four years, and the aggregate indebtedness maturing thereafter is as follows:
2002 $ 202,428
2003 429,929
2004 3,414,708
2005 502,324
2006 543,013
Thereafter 25,576,242
----------
$30,668,644
===========
NOTE 5 - INVESTMENTS IN REAL ESTATE
Investments in real estate are comprised of the following at June 30, 2002:
Land $ 613,519
Commercial properties (1) 81,004,684
Residential properties (2) 57,958,033
----------
Subtotal 139,576,236
Less: accumulated depreciation (10,053,977)
-----------
Investment in real estate, net $ 129,522,259
===========
(1) Includes a $10.0 million investment in a limited liability company that owns
an office building. Also includes escrow balances totaling $1,109,816 at June
30, 2002, which represent escrows for real estate taxes, insurance premiums,
repair and replacement, tenant improvements and leasing commissions reserves.
(2) Includes $8.0 million invested in two limited liability companies that each
own apartment buildings. Also includes escrow balances totaling $970,253 at June
30, 2002, which represent escrows for real estate taxes, insurance premiums,
repair and replacement, tenant improvements and leasing commissions reserves.
8
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
As of June 30, 2002, long-term debt secured by the Company's real estate
investments consisted of the following:
Loan payable, secured by real estate, monthly installments of $8,008, including
interest at 7.33%, remaining principal due August 1, 2008 $ 1,036,853
Loan payable, secured by real estate, monthly installments of $288,314,
including interest at 6.85%, remaining principal due August 1, 2008 42,240,540
Loan payable, secured by real estate, monthly installments of $107,255,
including interest at 7.73%, remaining principal due December 1, 2009(1) 14,649,456
Loan payable, secured by real estate, monthly installments of $15,396, including
interest at 7.17%, remaining principal due March 1, 2012(1) 2,246,790
Loan payable, secured by real estate, monthly installments of $37,697, including
interest at 7.27%, remaining principal due January 1, 2010 5,374,487
Loan payable, secured by real estate, monthly payments of $87,960, including
interest at 8.367%, remaining principal due March 11, 2028(2) 11,578,009
----------
$ 77,126,135
============
(1) These loans related to a single investment in real estate.
(2) As an inducement to pay interest at 8.367% from April 11, 1998 onward,
rather than at 7.89%, the Company received a buy-up premium of $418,482 (balance
of $362,895 at June 30, 2002) which is amortized over the term of the underlying
debt.
As of June 30, 2002, the amount of long-term debt secured by the Company's
investments in real estate maturing in the remainder of 2002, over the next four
years, and the aggregate indebtedness maturing thereafter, is as follows:
2002 $ 452,305
2003 966,319
2004 1,038,373
2005 1,115,904
2006 1,199,316
Thereafter 72,353,918
----------
$ 77,126,135
============
9
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
NOTE 6 - LINE OF CREDIT
In March 2002, the Company obtained a $5 million line of credit secured by a
pledge of a $7.5 million first priority mortgage loan in its portfolio. The line
of credit bears interest at either 30-day LIBOR plus 2.5% or the prime rate as
published in the "Money Rates" section of The Wall Street Journal, at the
Company's election, with a floor of 5.5%. The line terminates in June 2003. As
of June 30, 2002, there were no amounts outstanding under this line of credit.
During the six months ending June 30, 2002, the Company repaid $2.0 million on
the $20 million line of credit and the Company borrowed and repaid $5.0 million
from the $5.0 million line of credit.
NOTE 7 - RELATED PARTY TRANSACTIONS
Resource America, Inc. ("RAI") was the sponsor of the Company and holds
approximately 8.0% of the Company's outstanding common shares based on the most
recent information available to the Company from RAI. The Chairman and Chief
Executive Officer of the Company, Betsy Z. Cohen, is (i) the spouse of Edward E.
Cohen, the Chairman, Chief Executive Officer and President of RAI, (ii) the
parent of D. Gideon Cohen, a director of RAI and (iii) the parent of Jonathan Z.
Cohen, the Chief Operating Officer of RAI. Jonathan Cohen is also a Trustee and
the Secretary of the Company. The President and Chief Operating Officer of the
Company, Scott F. Schaeffer, is a director of RAI.
Brandywine Construction & Management, Inc.("Brandywine"), an affiliate of RAI,
provided real estate management services to two properties owned by the Company
and 13 properties underlying the Company's loans at June 30, 2002. Management
fees in the amount of $225,000 and $510,000 were paid to Brandywine for the
three and six months ended June 30, 2002, respectively, relating to the
properties owned by the Company.
Betsy Z. Cohen is the Chief Executive Officer and a director of The
Bancorp.com., Inc. ("Bancorp"). D. Gideon Cohen is the Chairman of the Board of
Bancorp. The Company places a portion of its temporary excess cash and
restricted cash in short-term money market instruments with Bancorp's bank
subsidiary. As of June 30, 2002, the Company had $8.2 million on deposit, of
which approximately $8.1 million is over the Federal Deposit Insurance
Corporation insurance limit.
In February and April 2002, the Company granted to its employees, executive
officers and trustees options to purchase 61,100 common shares, in the
aggregate, under the Amended and Restated RAIT Investment Trust 1997 Stock
Option Plan. These options, which were exercised in March through May 2002, had
exercise prices of $16.92 and $19.85, respectively, per common share. The common
shares issued pursuant to all of these exercises are restricted as to their
transferability. These restrictions are lifted as to 25% of the common shares
annually for each of the next four years. At the time of exercise, the Company
provided loans to each person in the amount necessary to exercise such options.
The loans are evidenced by promissory notes. The principal amount of these
promissory notes bears interest at a rate of 6% per annum and was equal to $1.07
million, in the aggregate, at June 30, 2002. Interest on the outstanding
principal amount is payable quarterly and 25% of the original principal amount
of each promissory note is payable on each of the first four anniversaries of
the date of the promissory note. The notes must be fully paid on the fourth
anniversary of their issuance date. The common shares that were acquired
pursuant to the option exercise secure each note and the maker of such note is
personally liable for 25% of the outstanding balance due. Any payments of
principal are deemed to first reduce the amount of the maker's personal
liability and the Company agrees to accept as full satisfaction of amounts due
under the promissory note for which the maker is not personally liable the
return of all common shares purchased by maker with the proceeds of the
promissory note.
In March 2002, the Company provided, as part of a single transaction, three
mortgage loans aggregating $18.6 million to finance the acquisition of three
commercial properties in Philadelphia, Pennsylvania. Each loan was made to a
separate borrower to finance the purchase of a separate property. All three
borrowers are limited partnerships in which Resource Properties, Inc., a wholly
owned subsidiary of RAI, is the general partner. The outstanding aggregate
balance of the loans has been paid down to $4.6 million as of July 31, 2002.
10
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
In March 2002, the Company sold its interest in one loan with a book value of
$1.2 million to a partnership whose general partner is D. Gideon Cohen. The
partnership paid $2.2 million, which was received after March 31, 2002;
accordingly, the receivable is included in other assets. The Company recognized
a gain on sale of approximately $948,000.
In June 2002, the Company purchased from RAI a loan with an outstanding balance
(including accrued interest) of approximately $2.0 million for a purchase price
of approximately $1.8 million. The loan relates to an apartment complex in
Bensalem, Pennsylvania.
NOTE 8 - SHAREHOLDERS' EQUITY
In January 2002 the Company issued 375,000 common shares pursuant to the
exercise of an over-allotment option by the underwriter of the Company's
December 2001 offering. The exercise price was $16.00 per share, resulting in
receipt by the Company, after discounts and commissions, of total net proceeds
of $5.7 million.
In March 2002, the Company issued 1.2 million common shares in a public
offering. The Company received net proceeds from this offering of approximately
$20.6 million. Total offering costs approximated $1.1 million, including
underwriting discounts. The offering price of the common shares was $18.05 per
share. On March 18, 2002 the Company issued an additional 180,000 common shares
pursuant to the underwriter's exercise of its over-allotment option. The
exercise price was $18.05 per share, resulting in receipt by the Company total
net proceeds, after discounts and commissions, of $3.1 million.
On March 15, 2002 the Board of Trustees of the Company declared a cash dividend
of $0.58 per common share payable on April 16, 2002 to shareholders of record on
April 3, 2002.
In May 2002, the Company issued 1.0 million common shares in a public offering.
The Company received net proceeds from this offering of approximately $19.5
million. Total offering costs approximated $1.0 million, including underwriting
discounts. The offering price of the common shares was $20.50 per share. On May
8, 2002 the Company issued an additional 150,000 common shares pursuant to the
underwriter's exercise of its over-allotment option. The exercise price was
$20.50 per share, resulting in receipt by the Company total net proceeds, after
discounts and commissions, of $2.8 million.
On May 21, 2002 and April 11, 2002, Friedman Billings Ramsey ("FBR") acquired
1,190 and 103,455 common shares, respectively, pursuant to partial exercises of
its warrant (the "FBR Warrant") to purchase 141,667 of the Company's common
shares. The FBR Warrant was issued in connection with the Company's initial
public offering in January 1998 with an exercise price of $15.00 per common
share. The Company received proceeds of $17,850 and $1.5 million, respectively,
from these exercises.
On June 12, 2002 the Board of Trustees of the Company declared a cash dividend
of $0.59 per common share payable on July 15, 2002 to shareholders of record on
June 28, 2002.
NOTE 9 - SUBSEQUENT EVENTS
On August 1, 2002, FBR acquired 1,984 common shares pursuant to a partial
exercise of the FBR Warrant. The Company received proceeds of $29,760 from this
exercise.
11
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
NOTE 10- GOODWILL
Statement of Financial Accounting Standard ("SFAS") No. 141, Business
Combinations ("SFAS No. 141"), and SFAS No. 142, Goodwill and Intangible Assets
("SFAS No. 142") were issued in June 2001. These statements resulted in
significant modifications relative to the Company's accounting for goodwill and
other intangible assets. SFAS No. 142 modifies the accounting for all purchased
goodwill and intangible assets. SFAS No. 142 includes requirements to test
goodwill and indefinite lived intangible assets for impairment rather than
amortize them. The Company adopted the provisions of SFAS No. 142 as of January
1, 2002. Therefore, acquired goodwill is no longer amortized. Amortization of
goodwill for the three and six months ended June 30, 2001 was $16,000 and
$60,000, respectively, which did not have a material effect on earnings per
share. As of June 30, 2002, the Company has completed the transitional testing
of its intangible assets, including goodwill. The Company did not identify any
impairment of its outstanding goodwill.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 Annual Report on Form 10-K, as amended, for the year ended December
31, 2001 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.
OVERVIEW
We began investment operations in January 1998. Our principal business objective
is to generate income for distribution to our shareholders from a combination of
interest, rents and distributions in respect to rents where we own an equity
interest in a real property, and proceeds from the sale of portfolio
investments. Through June 30, 2002, we completed seven public offerings of our
common shares (two during 1998, three in 2001, one in the first quarter of 2002
and one in the second quarter of 2002). We have used these proceeds, combined
with repayment and refinancing of our loans and property interests and our lines
of credit, to build our investment portfolio.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of our capital from our commencement through June 30, 2002
were the seven public offerings of our common shares. After offering costs and
underwriting discounts and commissions, we obtained net offering proceeds of
$258.8 million. We also obtained capital resources from principal payments on,
refinancings of, and sales of loans in our portfolio as well as refinancings of
our property interests. These resources aggregated $36.4 million and $51.5
million for the three and six months ended June 30, 2002 and $2.5 million and
$32.5 million for the three and six months ended June 30, 2001.
We also have obtained a $5.0 million line of credit and a $20.0 million line of
credit. We obtained the $5 million line of credit during the quarter ended March
31, 2002. The $5.0 million line of credit bears interest at 30-day LIBOR plus
2.5%, with a floor of 5.5%. We will use our lines of credit to maintain
liquidity. During the six months ending June 30, 2002, we repaid $2.0 million on
our $20 million line of credit and we borrowed and repaid $5.0 million from the
$5.0 million line of credit. As of June 30, 2002, no amounts were outstanding
under either line of credit.
We also receive funds from interest payments on our loans and operating income
from our property interests. As required by the Internal Revenue Code, we use
these funds, to the extent of not less than 90% of our taxable income, to pay
distributions to our shareholders. For the quarters ended June 30, 2002 and
2001, we declared dividends of $10.7 million (paid July 15, 2002) and $5.0
million (paid July 13, 2001), respectively and for the six months ended June 30,
2002, and 2001, we declared dividends of $20.4 million and $8.2 million,
respectively.
We use our capital resources principally for originating and purchasing loans
and acquiring property interests. During the three months ended June 30, 2002,
we originated or purchased five loans in the amount of $28.6 million and during
the six months ended June 30, 2002, we originated or purchased fourteen loans in
the amount of $78.8 million. In the corresponding periods of our prior fiscal
year, we originated or purchased five loans in the amount of $37.9 million
during the three months ended June 30, 2001 and nine loans in the amount of
$55.9 million during the six months ended June 30, 2001. During the three months
ended June 30, 2002, we acquired two property interests for $17.8 million and,
during the six months ended June 30, 2002, we acquired three property interests
in the amount of $21.3 million and also assumed a $5.4 million mortgage loan
payable. We did not acquire any property interests during the three and six
months ended June 30, 2001. However, during the six months ended June 30, 2001
we also used our capital resources to fully repay the $20.0 million outstanding
on our $20.0 million line of credit and we extinguished debt in the amount of
$20.3 million.
Our receipt and investment of $54.4 million in net proceeds from our public
offerings in the six months ended June 30, 2002 have resulted in substantial
increases in our net investments in real estate loans and net investments in
real estate in the period from December 31, 2001 to June 30, 2002. Our receipt
of these net proceeds was also primarily responsible for the substantial
increase in our additional paid-in-capital in this period.
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Our total liabilities increased from $121.0 million at December 31, 2001 to
$127.7 million at June 30, 2002. This is due primarily to increases in the
amounts of borrowers' escrows, a dividend payable relating to the dividend we
paid in July 2002 and an increase in the amount of long-term debt secured by
real estate we own. This was partially offset by decreases in the amount of
accounts payable and accrued liabilities and the amount of senior indebtedness
secured by real estate underlying our loans.
In order to maintain our liquidity, we pursue the following strategies:
- - providing shorter-term financing to our borrowers (generally in the form of
bridge financing) to increase the turnover of our investments, and
- - pursuing borrower refinancing of portions of our loans through senior lenders,
while we retain junior interests.
We anticipate that we will continue to provide shorter-term financing and obtain
senior lien refinancing of our investments in loans and properties, in order to
maintain liquidity. However, we anticipate that from time to time, we may
provide longer-term financings as such opportunities arise.
We do not currently experience material difficulties in originating shorter-term
financings or obtaining senior loan refinancings on acceptable terms. However,
we could encounter difficulties in the future, depending upon the development of
conditions in the credit markets.
At June 30, 2002, after excluding funds needed to pay our dividend on July 15,
2002, we had $8.7 million available for investment. Since June 30, 2002, we have
used these funds along with approximately $28.5 million of funds received from
loan repayments and refinancings, as well as $20.0 million drawn from one of our
credit facilities, to fund the $45.4 million of loan originations. We expect to
receive loan repayments of approximately $34.8 million before the end of the
third quarter of 2002, which, together with our cash on hand of approximately
$8.5 at July 31, 2002 and $5.0 million still available on one of our credit
facilities, we expect will provide us with the necessary amounts to fund our
currently anticipated investments. We expect to continue to use cash provided by
operations to meet our short-term capital needs including general and
administrative expenses and dividend requirements. Factors that could impair our
ability to generate cash from operations in the future include the following:
- - A decline in the real estate market or economic conditions could occur in the
Mid-Atlantic region of the United States, where there is a large concentration
of properties that collateralize our loans.
- - Due to increasing vacancy in the national commercial property market, some of
our borrowers may experience a decline in market rents or in the overall revenue
of their properties which collateralize our loans. This may reduce the overall
cash flow available to service the total debt on these properties, including
payments due on our loans.
- - Our borrowers and we may not be able to refinance our existing indebtedness on
terms as favorable as the terms of our existing indebtedness, which would result
in higher interest expense.
- - Although we believe that the properties that collateralize our loans are
adequately insured, we are subject to the risk that the insurance may not cover
all of the costs to restore a property, which is damaged by a fire or other
catastrophic event.
We historically have financed our long-term capital needs through a combination
of the following:
- - principally, from proceeds of offerings of our common shares;
- - cash from operations;
- - borrowings from our secured lines of credit;
- - proceeds from repayments of loans;
- - refinancing of loans and property interests; and
- - sales of loans.
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We expect to continue to use these sources to meet our long-term capital needs.
We may also seek to develop other sources of capital, including, without
limitation, long-term borrowings, offerings of our preferred shares and
issuances of our debt securities. Factors that could negatively impact our
ability to finance our long-term capital needs in the future include the
following:
- - As a REIT, we must distribute 90% of our annual taxable income, which limits
the amount of cash we have available for other business purposes, including
amount to fund our long-term capital needs.
- - Much of our ability to raise capital through issuance of our common shares is
dependent upon the value of our common shares. As is the case with any publicly
traded securities, certain factors outside of our control could influence the
value of these shares.
RESULTS OF OPERATIONS
Our interest income from loans was $8.1 million and $5.5 million for the three
months ended June 30, 2002 and 2001, respectively. The $2.6 million increase in
interest income was due an additional $5.0 million of interest generated by the
origination of 29 loans totaling $153.1 million from the end of the second
quarter of 2001 through the end of the second quarter of 2002, partially offset
by a $2.4 million reduction of interest due to the repayment of 18 loans
totaling $74.5 million during the same period.
Our interest income from loans was $16.3 million and $10.3 million for the six
months ended June 30, 2002 and 2001, respectively. The $ 6.0 million increase
was due to an additional $9.3 million of interest generated by the origination
of 31 loans totaling $159.3 million from the end of the second quarter of 2001
through the end of the second quarter of 2002, partially offset by a $3.6
million reduction of interest due to the repayment of 19 loans totaling $90.6
million during the same period
We received $6.5 million and $13.1 million from rents from our property
interests for the three and six months ended June 30, 2002, respectively,
compared to $5.6 million and $10.3 million for the three and six months ended
June 30, 2001, respectively. The rental income increase from the three and six
months ended June 30, 2001 to the corresponding periods in 2002 was due to the
acquisition of a residential property in January 2002 and to our origination of
two master lease financing transactions in April 2001, the revenues from which
we record as rental income.
We earned fee and other income of $3.3 million and $3.7 million for the three
and six months ended June 30, 2002, respectively, as compared to $1.5 million
and $2.1 million for the three and six months ended June 30, 2001, respectively.
Included in fee and other income are financial consulting fees of $3.0 million,
in the aggregate, generated by three transactions in the six months ended June
30, 2002, as compared to financial consulting fees of $1.1 million and $1.4
million generated by two and three transactions, respectively, in the three and
six months ended June 30, 2001, respectively.
Investment income was $464,000 and $570,000 for the three and six months ended
June 30, 2002, respectively, compared to $72,000 and $191,000 for the same
periods in 2001. The increase in investment income from the three and six months
ended June 30, 2001 to the corresponding periods in 2002 is due to the
inclusion, in 2002, of income from two of our investments in real estate, which
are accounted for using the equity method. As such, we classified the income
generated by these two investments as investment income rather than as rental
income.
In the six months ended June 30, 2002, we sold our interest in one loan with a
book value of $1.2 million to a partnership whose general partner is the son of
our chairman and chief executive officer. The buyer paid $2.2 million and we
recognized a gain on the sale of approximately $948,000.
Three of our acquired loans remain subject to forbearance or similar agreements.
During the three and six months ended June 30, 2002 and 2001, all payments under
the agreements were timely made and all borrowers were otherwise in full
compliance with the terms of the agreements. The remaining 40 loans in our
portfolio are performing in accordance with their terms as we originally
underwrote them and were current as to payments as of June 30, 2002 and 2001.
During the three and six months ended June 30, 2002, we incurred expenses of
$7.3 million and $14.1 million, respectively, as compared to $7.6 million and
$15.0 million for the three and six months ended June 30, 2001, respectively.
The expenses consisted of interest expense, operating expenses relating to our
property interests, salaries and related benefits, general and administrative
expenses, and depreciation and amortization.
15
Interest expense was $2.1 million and $4.2 million for the three and six months
ended June 30, 2002, respectively, as compared to $2.7 million and $5.9 million
for the three and six months ended June 30, 2001, respectively. Interest expense
consists of interest payments made on senior indebtedness on properties
underlying our wraparound loans and property interests, and interest payments
made on our lines of credit. The decrease in interest expense from the three and
six months ended June 30, 2001 to the corresponding periods in 2002 resulted
from the net repayment of approximately $42.6 million of debt underlying our
interests and on our lines of credit with funds made available by our equity
offerings. In addition, the interest rate on our $20.0 million line of credit
decreased from an average of 8.64% in 2001 to an average of 4.75% in 2002 as
general market rates of interest decreased.
Property operating expenses were $3.3 million and $6.1 million for the three and
six months ended June 30, 2002, respectively, compared to $3.1 million and $5.4
million for the three and six months ended June 30, 2001, respectively.
Depreciation and amortization was $910,000 and $1.8 million for the three and
six months ended June 30, 2002, respectively, compared to $811,000 and $1.7
million for the three and six months ended June 30, 2001, respectively. The
increases in property operating expenses, depreciation and amortization were due
to the increased number of property interests in our portfolio.
Salaries and related benefits were $692,000 and $1.3 million for the three and
six months ended June 30, 2002, respectively, as compared to $560,000 and $1.2
million for the three and six months ended June 30, 2001, respectively. General
and administrative expenses were $361,000 and $674,000 for the three and six
months ended June 30, 2002, respectively, as compared to $409,000 and $733,000
for the three and six months ended June 30, 2001, respectively. The slight
decrease in general and administrative expenses from the three and six months
ended June 30, 2001 to the corresponding periods in 2002 was due to periodically
recurring expenses that were incurred in different periods in 2001 and 2002.
We have a reserve for loan losses of $226,000. This reserve is a general reserve
and is not related to any individual loan or to an anticipated loss. In
accordance with our policy, we determined that this reserve was adequate as of
June 30, 2002. We will continue to analyze the adequacy of this reserve on a
quarterly basis.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in our assessment of our sensitivity to market
risk since our presentation in the our Annual Report on Form 10-K, as amended,
for the year ended December 31, 2001.
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PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareholders held on July 16, 2002, pursuant to the
Notice of Annual Meeting of Shareholders and Proxy Statement dated June 21,
2002, the voting results were as follows:
(a) Each of the following nominees was elected to the Board of Trustees as
follows:
VOTES FOR VOTES WITHHELD VOTES ABSTAINED UNVOTED
Betsy Z. Cohen 14,502,418 1,377,284 0 0
S. Peter Albert 15,471,266 408,436 0 0
Edward S. Brown 15,471,266 408,436 0 0
Jonathan Z. Cohen 15,419,766 459,936 0 0
Joel R. Mesznik 15,471,266 408,436 0 0
Daniel Promislo 15,471,266 408,436 0 0
(b) An amendment to our Amended and Restated RAIT Investment Trust 1997 Stock
Option Plan to increase the maximum number of common shares which may be issued
under the Stock Option Plan by 800,000 common shares to a total of 1,600,000
common shares was approved as follows:
VOTES FOR VOTES WITHHELD VOTES ABSTAINED UNVOTED
14,786,373 986,195 107,131 4,000
(c) The ratification of the selection of Grant Thornton LLP as our independent
public accountants for the fiscal year ending January 31, 2002 was approved as
follows:
VOTES FOR VOTES WITHHELD VOTES ABSTAINED UNVOTED
15,672,350 160,986 46,366 1,000
ITEM 5. OTHER INFORMATION.
On July 16, 2002, our Board of Trustees voted to expand the number of Trustees
comprising the Board of Trustees from six to seven Trustees and elected Arthur
Makadon to serve as the seventh Trustee.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits furnished as part of this Quarterly Report on Form 10-Q are
identified in the Exhibit Index immediately following the signature page of this
Report. Such Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K
We filed two reports on Form 8-K during the quarter ending June 30, 2002.
The first report on Form 8-K was dated April 23, 2002 and was filed as of April
25, 2002. Pursuant to Item 5- Other Events, we disclosed that we had issued a
press release regarding our earnings for the first quarter of fiscal 2002.
The second report on Form 8-K was dated April 25, 2002 and was filed as of May
2, 2002. Pursuant to Item 5- Other Events, we disclosed that we had filed a
prospectus supplement and disclosed a related underwriting agreement that we had
entered into and related legal opinions.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
August 13, 2002 /s/ Ellen J. DiStefano
- ----------------------- -----------------------
DATE Ellen J. DiStefano
Chief Financial Officer
(On behalf of the registrant and
as its principal financial officer)
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Exhibit Index
Exhibit
Number Description
------- ----------
3.i.1(1) Amended and Restated Declaration of Trust.
3.i.2(2) Articles of Amendment of Amended and Restated
Declaration of Trust.
3.i.3(3) Articles of Amendment of Amended and Restated
Declaration of Trust.
3.i.4(4) Certificate of Correction to the Amended and
Restated Declaration of Trust
3.ii.1(1) Bylaws, as amended.
99.1 Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of
2002 (Chief Executive Officer)
99.2 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Chief Financial
Officer)
(1) Incorporated herein by reference to RAIT Investment Trust's Registration
Statement on Form S-11 (File No. 333-35077), as amended.
(2) Incorporated herein by reference RAIT Investment Trust's Registration
Statement on Form S-11 (File No. 333-53067), as amended.
(3) Incorporated herein by reference to RAIT Investment Trust's Regulation
Statement on Form S-2 (File No. 333-55518), as amended.
(4) Incorporated herein by reference to RAIT Investment Trust's Form 10-Q
for the Quarterly Period ended March 31, 2002 (File No. 1-14760).
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