UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-14760
RAIT INVESTMENT TRUST
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(Exact name of registrant as specified in its charter)
Maryland 23-2919819
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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
Securities registered pursuant to Section 12 (b) of the Act:
Common Shares of Beneficial Interest New York Stock Exchange
- ------------------------------------ -------------------------
(Title of each class) (Name of each exchange on
which registered)
Securities registered pursuant to Section 12 (g) of the Act: None
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.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ].
The aggregate market value of the common shares of the registrant held by
non-affiliates of the registrant, based upon the closing price of such shares on
June 28, 2002 of $23.73, was approximately $377.3 million.
As of March 26, 2003, 20,839,472 common shares of beneficial interest, par value
$0.01 per share, of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for registrant's 2003 Annual Meeting of
Shareholders are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS................................................................................ 1
PART I.................................................................................................... 1
ITEM 1. BUSINESS...................................................................................... 11
ITEM 2. PROPERTIES.................................................................................... 11
ITEM 3. LEGAL PROCEEDINGS............................................................................. 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................... 11
PART II................................................................................................... 12
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.................................. 12
ITEM 6. SELECTED FINANCIAL DATA....................................................................... 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.......... 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................... 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................... 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......... 45
PART III.................................................................................................. 46
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................ 46
ITEM 11. EXECUTIVE COMPENSATION....................................................................... 46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................... 46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION................................................ 46
ITEM 14. CONTROLS AND PROCEDURES...................................................................... 46
PART IV................................................................................................... 48
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K............................. 48
SIGNATURES............................................................................................ 49
CERTIFICATIONS........................................................................................ 50
EXHIBIT INDEX......................................................................................... 52
FORWARD LOOKING STATEMENTS
Statements we make in written or oral form to various persons,
including statements made in this report and in other filings with the U.S.
Securities and Exchange Commission that are not historical in nature, including
those using the words "anticipate," "estimate," should," "expect," "believe,"
"intend," and similar expressions, are forward-looking statements. These
forward-looking statements are subject to certain risks and uncertainties,
including, among other things:
- business conditions and the general economy, especially as
they affect interest rates;
- defaults by borrowers in paying debt service on our loans,
particularly our subordinated and discounted loans;
- illiquidity of our portfolio of investments in real estate;
- our possible inability to originate or acquire investments in
real estate on favorable terms;
- our possible inability to obtain capital resources and
maintain liquidity through offerings of our securities, lines
of credit or other means; and
- our possible inability to maintain our real estate investment
trust qualification or our exemption from registration under
the Investment Company Act.
Other risks, uncertainties and factors that could cause actual results
to differ materially from those projected are discussed below in Part I - Item 1
"Business - Investment Activity Risks" and elsewhere in this report. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
except as required by law. In light of these risks, uncertainties, and
assumptions, the forward-looking events discussed in or incorporated by
reference into this report might not occur.
PART I
ITEM 1. BUSINESS
GENERAL
RAIT Investment Trust is a real estate investment trust, or REIT,
formed under Maryland law. We conduct our operations through RAIT Partnership,
L.P., a limited partnership that owns substantially all of our assets. Our
wholly owned subsidiaries, RAIT General, Inc. and RAIT Limited, Inc., are the
sole general partner and sole limited partner, respectively, of RAIT
Partnership. We sometimes refer to RAIT Investment Trust and RAIT Partnership,
along with RAIT General and RAIT Limited, using the words "we," "our" and "us."
We make investments in real estate primarily by:
- making real estate loans;
- acquiring real estate loans; and
- acquiring interests in real estate.
We seek to generate income for distribution to our shareholders from a
combination of interest and fees on loans, rents and other income from our
interests in real estate and proceeds from the sale of our investments.
We were formed in August 1997. We commenced operations upon completion
of our initial public offering in January 1998. At December 31, 2002, we had
total assets of $438.9 million including 49 loans with a book value of $258.9
million (less senior debt of $30.4 million) and 11 interests in real estate
with a book value of $139.5 million (less senior debt of $84.2 million). At
December 31, 2001, we had total assets of $333.2 million including 36 loans with
a book value of $195.8 million (less senior debt of $36.8 million) and five
interests in real estate with a book value of $104.9 million (less senior debt
of $72.1 million).
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. Our internet address is
http://www.raitinvestmenttrust.com. We make our SEC filings available free of
charge on or through our internet website as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the SEC.
REAL ESTATE LOANS
One of the primary means by which we invest in real estate is by making
real estate loans to borrowers whose financing requirements cannot be met by
traditional institutional lenders and lenders that securitize loans. We attempt
to adapt the terms of our loans to meet the particular needs of a borrower. We
emphasize junior lien or other forms of subordinated, or "mezzanine," financing,
with principal amounts generally between $2.0 million and $30.0 million. We also
provide short-term bridge financing. We may provide financing in excess of our
targeted size range where the borrower has a committed source of take-out
financing, or we believe that it can arrange take-out financing, to reduce our
investment to an amount within our targeted size range. Our financing is usually
"non-recourse." Non-recourse financing means financing where the lender may look
only to the assets securing the payment of the loan, subject to certain standard
exceptions, including liabilities relating to environmental issues, fraud,
non-payment of real estate taxes and others. We may engage in recourse financing
by requiring personal guarantees from controlling persons of our borrowers in
certain circumstances where we feel it is necessary to protect the return on our
investment.
When we provide junior lien or other forms of subordinated financing,
our loans may not be secured by recorded or perfected liens in the real estate
relating to our financing. We often do this where a prior lender who holds a
first mortgage with respect to real estate relating to our financing prohibits
liens encumbering that real estate. Management believes that the following
matters may serve to mitigate our risks where we do not hold a recorded or
perfected lien in the real estate relating to our financing:
- Rents and other cash flow from the underlying
properties generally are deposited directly to a
bank account controlled by us;
- We generally hold a deed-in-lieu of foreclosure or
nominal cost purchase option that may enable us to
enforce our rights against the underlying property in
an expedited fashion;
- We may require the controlling persons of our
borrower to secure our loan with recorded or
perfected liens on other real estate owned by those
persons;
- We generally require the controlling persons of our
borrower to pledge their equity interests in the
borrower to us to secure our loan; and
- We may require the controlling persons of the
borrower to personally guarantee our loan.
However, none of these factors will assure that these loans are collected. See
"--Investment Activity Risks" below.
In addition to an agreed upon interest rate, we seek to enhance our
return on investment on our real estate loans by obtaining either origination
fees, exit fees, or appreciation interests, or a combination thereof, from our
borrowers. Appreciation interests require a borrower to pay us additional
amounts based upon a property's increase in value, increase in revenues or both.
While we emphasize providing mezzanine and bridge financing, we have no
limitations in our organizational documents on the types of financing we may
provide, however, and may provide first lien financing. Through our wholly-owned
subsidiary, RAIT Capital Corp. d/b/a Pinnacle Capital Group, we can provide, or
arrange for another lender to provide, a first-lien conduit loan to our
borrowers. Conduit loans are loans that meet certain criteria that enable them
to be included in pools of loans for the purpose of issuing securities backed by
those loans. We usually do this where the conduit loan assists us in offering a
complete financing package, including our mezzanine or bridge financing, to a
borrower.
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LOAN ACQUISITION
We also invest in real estate by acquiring existing real estate loans
held by banks, other institutional lenders or third-party investors. When we
acquire existing loans, we do so by either buying a senior participation in a
loan or by buying a discounted loan. We generally buy senior loan participations
at face value from banks or other institutional lenders when we see
opportunities to generate acceptable returns. We also buy loans at a discount
from both the outstanding balances of the loans and the appraised value of the
properties underlying the loans. Typically, discounted loans are in default
under the original loan terms or other requirements and are subject to
forbearance agreements. A forbearance agreement typically requires a borrower to
pay to the lender all revenue from a property after payment of the property's
operating expenses in return for the lender's agreement to withhold exercising
its rights under the loan documents. We will not acquire any loan, however,
unless material steps have been taken toward resolving problems with the loan,
or its underlying property. We seek to acquire loans for which completion of the
resolution process will enhance our total return through increased yields or
realization of some portion or all of the discount at which they were acquired.
ACQUISITION OF INTERESTS IN REAL ESTATE
Another of the primary means by which we invest in real estate is by
acquiring interests in real estate. We make these investments either through our
wholly-owned subsidiaries or by acquiring controlling or non-controlling
interests in entities that own real estate. We believe that acquiring interests
in real estate is advantageous for the following reasons:
- It gives us flexibility in addressing the financial
needs and tax situations of borrowers in situations
where debt financing may not be appropriate while
providing us with rights we believe are sufficient
to protect our return on our investment;
- It assists us in our tax planning. Many of our loans
have features that may result in timing differences
between the actual receipt of income and the
inclusion of that income in arriving at our REIT
taxable income. For example, when a loan provides for
interest at a rate in excess of the minimum monthly
required payment, there is a timing difference
between the cash collection of income and the accrual
of taxable income. The recognition of non-cash income
would increase the amount that we must distribute to
our shareholders to avoid corporate income tax in
such year, although we may not receive
contemporaneous corresponding cash payments.
Depreciation deductions associated with our interests
in real estate and other non-cash expenses, however,
should help offset such adverse tax effects; and
- It provides us with the opportunity to participate in
capital appreciation in addition to current income.
We generate a return on our investment in interests in real estate through our
share of rents and other sources of income from the operations of the real
estate.
SOURCES OF POTENTIAL REAL ESTATE INVESTMENTS
To generate loan originations, acquisitions of loans and investments in
interests in real estate, we rely primarily upon the relationships developed by
our senior management in the mortgage lending, real estate and real estate
finance industries with developers, commercial real estate brokers, mortgage
bankers, real estate investors and other direct borrowers or referral sources.
With respect to loan acquisition, we also rely on our senior management's
existing knowledge of and relationships with institutional lenders who may wish
to dispose of under-performing loans in their existing portfolios that meet our
financing criteria. These institutional lenders may also refer to us loan
opportunities presented to them that they do not wish to underwrite.
CERTAIN FINANCIAL GUIDELINES
We have established financial guidelines for use in evaluating
potential investments in real estate. We may depart from one or more of the
guidelines in underwriting any particular investment depending on the overall
characteristics of that investment. The general guidelines with regard to the
real estate underlying a potential investment in a real estate loan or interest
in real estate include the following:
- the ratio of current cash flow to debt service on senior lien
loans with respect to the property will be at least 1.25 to 1;
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- the ratio of current cash flow to debt service and other
payments due on both senior loans and our investment will be
at least 1.1 to 1;
- the aggregate of all outstanding senior debt may not exceed
80% of the appraised value of the property, and
- the aggregate of outstanding senior debt plus the amount of
our investment may not exceed 90% of the appraised value of
the property.
The "appraised value" of a property for purposes of the guidelines is
the estimate by an independent real estate appraiser of the fair market value of
the property, taking into account standard valuation methodologies.
In departing from a particular guideline for any investment, we
typically consider factors that would cause the underlying property to be in
compliance with the guidelines within a reasonable time following initial
funding of our investment. For example, we may depart from the cash flow
guidelines where the borrower can demonstrate that historical cash flow will not
be representative of cash flow during the term of our investment, and may depart
from loan-to-value guidelines where the borrower can demonstrate that the
application of the financing proceeds will result in an increase in property
value. In situations where we make a particular investment that does not meet
our cash flow guidelines, we typically require that the developers and their
controlling persons personally guarantee our investment, and that some or all of
these persons, individually or in the aggregate, have net worth sufficient to
repay our investment in the event of default. We may also require that the real
estate relating to our investment satisfy certain property income or occupancy
criteria. Notwithstanding the foregoing, these guidelines may be changed by our
Board of Trustees without notice to or approval by the shareholders.
LOCATION OF PROPERTIES RELATING TO INVESTMENTS
We generally invest in properties located in the Mid-Atlantic and
Southeast regions of the United States. Although we anticipate that we will
continue to focus on these regions for the foreseeable future, we have no
geographic limitations on where we may invest in our organizational documents
and, accordingly, may invest in other areas.
TYPES OF PROPERTIES RELATING TO INVESTMENTS
We focus our investing activities on multi-family residential, office
and other commercial properties with property values generally between $2.0
million and $30.0 million. We may, in appropriate circumstances as determined by
the Board of Trustees, invest in properties with values outside this range. We
do not normally invest in undeveloped property, or make investments in
situations involving construction except where the underlying property, and any
additional real estate collateral we may require as security, as it exists at
the time of investment, meets our loan-to-value and cash flow guidelines. We
have no limitations in our organizational documents on the amount or percentage
of our loans or investments in any category of property.
INVESTMENT PROCEDURES
Prior to making any investment, we engage in a set of review
procedures. We estimate the value of the underlying property based upon a recent
independent appraisal obtained by the borrower, an independent appraisal
obtained by us, or valuation information obtained by us and thereafter confirmed
by an independent appraisal. We make an on-site inspection of the property and,
where appropriate, we require further inspections by engineers, architects or
property management consultants. We may also retain environmental consultants to
review potential environmental issues. We obtain and review available rental,
expense, maintenance and other operational information regarding the property
and prepare cash flow and debt service analyses. For acquired loans, we also
evaluate the adequacy of the loan documentation as, for example, the existence
and adequacy of notes, mortgages, collateral assignments of rents and leases,
and title policies insuring lien positions, and other available information,
such as credit and collateral files, and evaluate the status and efficacy of
programs to resolve problems to which the
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loan or its underlying property may have been subject. We also analyze the
amount of revenue we derive from, and the amount of our assets composed of,
other investments with the proposed borrower and its affiliates in order to
manage the risk of our exposure to the failure to perform the terms of our
investment of any borrower and its affiliates. We do not have a specific
financial guideline with respect to the amount of investments we may make with
any particular borrower and its affiliates, but analyze this factor on a case by
case basis. In addition, we analyze the potential treatment of each investment
for purposes of reporting on our financial statements and compliance with REIT
and other legal requirements. With regard to investments in interests in real
estate, we also require satisfactory evidence, generally in the form of title
insurance, that we, or the entity owning the property in which we acquire an
interest, has or will acquire good and marketable title to the property, subject
only to such encumbrances as we find acceptable. We base the amount of our
investment upon the foregoing evaluations and analyses. We may modify these
procedures as appropriate in particular situations.
After making an investment, we follow specified procedures to monitor
its performance and compliance. We generally require that all revenues from the
underlying property be deposited into an operating account on which we are the
sole signatory. On a monthly basis, we pay the senior debt service, collect our
debt service or other payments due us and all required reserves, and then
transfer the balance of the funds to the borrower. In some situations, the
borrower pays property expenses from an account that is subject to our review
and approval before payment. The borrower must supply monthly operating
statements and annual financial statements and tax returns for the property
and/or the entity that owns the property. We may also require a borrower to
obtain our approval before any material contract or commercial lease with
respect to the property is executed and that the borrower prepare a budget for
the property which we must review and approve.
LOAN PORTFOLIO
The following table sets forth information regarding our loans as of
December 31, 2002:
BOOK VALUE OF NUMBER AVERAGE LOAN RANGE OF RANGE OF
TYPE OF LOAN LOANS OF LOANS TO VALUE (1) LOAN YIELDS (2) MATURITIES
------------ ----- -------- ------------ --------------- ----------
First mortgage and senior
loan participations $ 115,137,822 13 76% 8.0%-12.8% 1/8/03-6/28/13
Mezzanine loans 143,863,441 36 88% 11.7%-21.4% 3/11//03-5/1/21
(1) Calculated as the sum of the outstanding balance of our loan and senior loan
(if any) divided by the current appraised value of the underlying collateral.
(2) All of our loans are at fixed rates. Our calculation of loan yield includes
points charged and costs deferred.
INTERESTS IN REAL ESTATE
As of December 31, 2002, we owned the following interests in real
estate either through our wholly-owned subsidiaries or by ownership of a
controlling interest in an entity owning real estate and we accounted for such
interests on a consolidated basis:
- 51% limited and sole general partnership interest in a limited
partnership that owns a 500-unit multi-family apartment building in
Philadelphia, Pennsylvania with a cost of $19.8 million. We owned 100% of
the limited partnership until December 30, 2002, at which time we sold a
49% limited partnership interest (book value of $1.2 million) to a third
party for $4.1 million, thus recognizing a gain of $2.8 million. The
property is subject to non-recourse financing of $15.0 million ($14.6
million at December 31, 2002), which bears interest at 7.73% and is due on
December 1, 2009 and $2.3 million ($2.2 million at December 31, 2002),
which bears interest at an annual rate of 7.17% and is due March 1, 2012.
- 89% limited and sole general partnership interest in a limited
partnership that owns a building in Philadelphia, Pennsylvania with 456,000
square feet of office/retail space. We acquired our interest for $750,000.
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In March 2001, we also acquired two subordinated loans with respect to this
property for $20.2 million. The aggregate original principal amount of the two
loans was $23.2 million. Including these two loans, the property is subject to
non-recourse financing of $44.0 million ($42.0 million at December 31, 2002)
which bears interest at an annual rate of 6.85% and is due on August 1, 2008.
- 100% limited and sole general partnership interest in a limited
partnership that owns an office building in Rohrerstown, Pennsylvania with
12,630 square feet on 2.93 acres used as a diagnostic imaging center. We
acquired this interest for $1.7 million. After acquisition, we obtained
non-recourse financing of $1.1 million ($1.0 million at December 31, 2002),
which bears interest at 7.33% and is due on August 1, 2008.
- 50% limited and sole general partnership interest in a limited
partnership that owns 88 units in a multi-family condominium complex, 56,000
square feet of adjacent commercial space and a parking garage in Philadelphia,
Pennsylvania. We acquired our interest for $5.6 million. The property is subject
to non-recourse financing of $11.6 million ($11.4 million at December 31, 2002),
which bears interest at 8.37% and is due on March 11, 2028.
- 100% membership interest in a limited liability company that owns a
216-unit apartment complex and clubhouse in Watervliet, New York. We acquired
this property in January 2002 for $8.7 million, which included the assumption of
non-recourse financing in the original principal amount of $5.5 million ($5.3
million at December 31, 2002). The loan we assumed bears interest at an annual
rate of 7.27% and matures in January 2008.
- 84.6% membership interest in a limited liability company that owns an
office building with 44,517 square feet office building in Rockville, Maryland.
In October 2002, we acquired 100% of the limited liability company for $10.7
million and simultaneously obtained non-recourse financing of $7.6 million ($7.6
million at December 31, 2002). The loan bears interest at an annual rate of
5.73% and is due November 1, 2027. In December 2002 we sold a 15.4% interest in
the limited liability company to a partnership whose general partner is a son of
our chairman and chief executive officer. The buyer paid $513,000, which
approximated the book value of the interest being purchased. No gain or loss was
recognized on the sale.
As of December 31, 2002, we owned the following interests in real
estate through our unconsolidated equity investments in entities owning real
estate:
- 25% membership interest in a limited liability company that owns a
168-unit multi-family apartment complex in Baltimore, Maryland. We originally
acquired 100% of the limited liability company for $4.4 million. We subsequently
sold a 75% interest in the limited liability company to a third party. The
property is subject to non-recourse financing of $3.9 million ($3.8 million at
December 31, 2002), which bears interest at 7.88% and is due on November 1, 2009
and $1.4 million ($1.3 million at December 31, 2002), which bears interest at an
annual rate of 6.82% and is due October 2011.
- 19.9% membership interest in a limited liability company that is the
sole member of a limited liability company which owns a 354 unit apartment
complex in Stockton, California. We acquired our interest in May 2002 for $7.3
million. The property is subject to non-recourse financing of $10.3 million at
December 31, 2002, which bears interest at 6.985% due on March 1, 2008.
- 20% limited partnership interest in a limited partnership that is the
sole beneficiary of a trust that owns a 58-unit apartment building in
Philadelphia, Pennsylvania and a 20% limited partnership interest in a limited
partnership that owns an office building with 31,507 square feet in Alexandria,
Virginia. In September 2002, we acquired these interests, together with the
receipt of cash of $2.5 million, in repayment of two of our loans with a
combined net book value of $2.3 million. We recorded these interests at their
current fair value based upon discounted cash flows and recognized income from
loan satisfaction in the amount of $3.2 million. As of December 31, 2002, the
Pennsylvania and Virginia properties were subject to non-recourse financing of
$3.1 million and $3.5 million, respectively. Both loans bore interest at an
annual rate of the London interbank offered rates, or LIBOR, plus 275 basis
points and mature on March 31, 2003. Subsequent to December 31, 2002 both loans
were refinanced with long-term, fixed rate loans. The Pennsylvania property is
subject to non-recourse financing of $3.1 million bearing interest at 6.035% and
maturing on February 1, 2013. The Virginia property is subject to non-recourse
financing of $3.5 million bearing interest at 6.75% and maturing on March 1,
2013.
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- 5% membership interest in a limited liability company that is the sole
member of a limited liability company which owns a 265-unit apartment complex in
Germantown, Maryland. We acquired our interest in December 2002 for $6.1
million. The property is subject to non-recourse financing of $26.2 million at
December 31, 2002, which bears interest at 5.78% and is due on January 1, 2013.
INVESTMENT ACTIVITY RISKS
The value of our investments depends on conditions beyond our control.
Any failure to perform the terms of our investments will reduce our current
return on investment and may require us to become involved in expensive and
time-consuming proceedings, including bankruptcy, reorganization or foreclosure
proceedings. Our primary or, in some cases, sole source of recovery is typically
the real estate underlying our investments. Accordingly, the value of our
investments depends upon the value of the underlying real estate. The value of
the real estate underlying our investments also depends on conditions beyond our
control and is subject to varying degrees of risk. Our ability to generate
yields on our investments depends on the net income and capital appreciation of
the underlying real estate. Income from, and appreciation of, this underlying
real estate may be adversely affected by general and local economic conditions,
neighborhood values, competitive overbuilding, weather, casualty losses,
occupancy rates and other factors beyond our control. The value of this
underlying real estate may also be affected by factors such as the costs of
compliance with use, occupancy and similar regulations, potential or actual
liabilities under applicable environmental laws, changes in interest rates and
the availability of financing. Income from a property will be adversely affected
if a significant number of tenants are unable to pay rent or if available space
cannot be rented on favorable terms. Operating and other expenses of this
underlying real estate, particularly significant expenses such as mortgage
payments, insurance, real estate taxes and maintenance costs, generally do not
decrease when income decreases and, even if revenues increase, operating and
other expenses may increase faster than revenues.
Our loans typically provide payment structures other than equal
periodic payments that retire a loan over its specified term, including
structures that defer payment of some portion of accruing interest, or defer
repayment of principal, until loan maturity. Where a borrower must pay a loan
balance in a large lump sum payment, its ability to satisfy this obligation may
depend upon its ability to obtain suitable refinancing or otherwise to raise a
substantial cash amount, which we do not control and which may be subject to the
same considerations we describe in this "Investment Activity Risks" section. In
addition, mortgage lenders can lose their lien priority in many jurisdictions,
including those in which our existing loans are located, to persons who supply
labor and materials to a property. For these and other reasons, the total amount
that we may recover from one of our loans may be less than the total amount of
that loan or our cost of acquisition.
Longer term, subordinate and non-traditional loans may be illiquid and
their value may decrease. Our loans generally have maturities between two and
five years. Our mezzanine loans typically do not conform to traditional loan
underwriting criteria and are subordinate loans. As a result, our loans are
relatively illiquid investments. We may be unable to vary our portfolio promptly
in response to changing economic, financial and investment conditions. As a
result, the fair market value of our portfolio may decrease in the future.
Investment in subordinate loans may involve increased risk of loss. We
emphasize junior lien loans and other forms of subordinated financing. Because
of their subordinate position, junior lien loans carry a greater credit risk
than senior lien financing, including a substantially greater risk of
non-payment of interest or principal. Where, as part of a financing structure,
we take an equity or other unsecured position, our risk of loss may be
materially increased. A decline in the real estate market could adversely affect
the value of the property so that the aggregate outstanding balances of senior
liens may exceed the value of the underlying property. In the event of a default
on a senior loan, we may elect to make payments, if we have the right to do so,
in order to prevent foreclosure on the senior loans. In the event of
foreclosure, as a junior lienor we will be entitled to share in foreclosure
proceeds only after satisfaction of the amounts due to senior lienors, which may
result in our being unable to recover the full amount, or any, of our
investment. It is also possible that, in some cases, a "due on sale" clause
included in a senior mortgage, which accelerates the amount due under the senior
mortgage in case of the sale of the property, may apply to the sale of the
property if we foreclose, increasing our risk of loss.
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When we originate or acquire a junior loan, we may not have the right
to service senior loans. The servicers of the senior loans are responsible to
the holders of those loans, whose interests will likely not coincide with ours,
particularly in the event of a default. Accordingly, the senior loans may not be
serviced in a manner advantageous to us.
We currently have loans that are not collateralized by recorded or
perfected liens. Some of the loans not collateralized by liens are secured
instead by deeds-in-lieu of foreclosure, also known as "pocket deeds." A
deed-in-lieu of foreclosure is a deed executed in blank that the holder is
entitled to record immediately upon a default in the loan. Loans that are not
collateralized by recorded or perfected liens are subordinate not only to
existing liens encumbering the underlying property, but also to future judgment
or other liens that may arise as well as to the claims of general creditors of
the borrower. Moreover, filing a deed-in-lieu of foreclosure with respect to
these loans will usually constitute an event of default under any related senior
debt. Any such default would require us to acquire or pay off the senior debt in
order to protect our investment. Furthermore, in a bankruptcy, we will have
materially fewer rights than secured creditors and, if our loan is secured by
equity interests in the borrower, than the borrower's general creditors. Our
rights also will be subordinate to the lien-like rights of the bankruptcy
trustee. Moreover, enforcement of our loans against the underlying properties
will involve a longer, more complex, and likely, more expensive legal process
than enforcement of a mortgage loan.
Loans secured by equity interests in entities owning real estate may
involve increased risk of loss. We may originate or acquire loans secured by
these interests rather than by a direct security interest in the underlying
properties. These loans may be illiquid or otherwise have features that may make
it difficult for us to obtain a return of our investment in the event of a
default. Loans secured by these interests will be subordinate not only to
existing liens encumbering the underlying property but also to future judgment
or other liens that may arise and to the claims of general creditors of the
borrower.
Acquisitions of loans may involve increased risk of loss. When we
acquire existing loans, we generally do so at a discount from both the
outstanding balances of the loans and the appraised value of the properties
underlying the loans. Typically, discounted loans are in default under the
original loan terms or other requirements and are subject to forbearance
agreements. A forbearance agreement typically requires a borrower to pay to the
lender all revenue from a property after payment of the property's operating
expenses in return for the lender's agreement to withhold exercising its rights
under the loan documents. Acquiring loans at a discount involves a substantially
higher degree of risk of non-collection than loans that conform to institutional
underwriting criteria. We do not acquire a loan unless material steps have been
taken toward resolving problems with the loan, or its underlying property.
However, previously existing problems may recur or other problems may arise.
Financing with high loan-to-value ratios may involve increased risk of
loss. Most of our financings have loan-to-value ratios in excess of 80% and many
have loan-to-value ratios in excess of 90%. We expect to continue making loans
with high loan-to-value ratios. A loan-to-value ratio is the ratio of the amount
of our financing, plus the amount of any senior indebtedness, to the appraised
value of the property underlying the loan. By reducing the margin available to
cover fluctuations in property value, a high loan-to-value ratio increases the
risk that, upon default, the amount obtainable from the sale of the underlying
property may be insufficient to repay the financing.
Interest rate changes may adversely affect our investments. Changes in
interest rates affect the market value of our loan portfolio. In general, the
market value of a loan will change in inverse relation to an interest rate
change where a loan has a fixed interest rate or only limited interest rate
adjustments. Accordingly, in a period of rising interest rates, the market value
of such a loan will decrease. Moreover, in a period of declining interest rates,
real estate loans with rates that are fixed or variable only to a limited extent
may have less value than other income-producing securities due to possible
prepayments. Interest rate changes will also affect the return we obtain on new
loans. In particular, during a period of declining rates, our reinvestment of
loan repayments may be at lower rates than we obtained in prior investments or
on the repaid loans. Also, increases in interest on debt we incur may not be
reflected in increased rates of return on the investments funded through such
debt, which would adversely affect our return on those investments. Accordingly,
interest rate changes may materially affect the total return on our investment
portfolio, which in turn will affect the amount available for distribution to
shareholders.
We may not obtain appreciation interests at the rate we seek, or at
all; we may not benefit from appreciation interests we do obtain. In addition to
an agreed upon interest rate, we seek to obtain appreciation
8
interests from our borrowers. Appreciation interests require a borrower to pay
us additional amounts based upon a property's increase in value, increase in
revenues, or both. While we seek appreciation interests at rates of at least
25%, we may not be able to obtain these rates. Moreover, we may not be able to
negotiate appreciation interest provisions in any of our loans. In addition,
while we have sought to structure the interest rates on our existing loans to
maximize our current yield, we may in the future accept a lower interest rate to
obtain an appreciation interest. The value of any appreciation interest depends
on the performance and value of the property underlying the loan and, thus, is
subject to real estate investment risks. Accordingly, we may not realize any
benefits from our appreciation interests. We do not anticipate receiving
significant amounts from our appreciation interests in the early years of our
loans.
Appreciation interests may cause us to lose our lien priority. Because
appreciation interests allow us to participate in the increase in a property's
value or revenue, courts, including a court in a bankruptcy arrangement or
similar proceeding, may determine that we should be treated as a partner of, or
joint venturer with, the borrower. If a court makes that determination, we could
lose our lien priority in the property or lose any benefit of our lien.
The competition for making investments in real estate may limit our
ability to achieve our objectives. We may encounter significant competition from
banks, insurance companies, savings and loan associations, mortgage bankers,
pension funds, investment bankers and others, including public or private REITs.
This competition could reduce our yields and make it more difficult to obtain
appreciation interests. It may also increase the price, and thus reduce
potential yields, on discounted loans we acquire. Most of our competitors have
substantially greater assets than we do. As such, they have the ability to make
larger loans and to reduce the risk of loss from any one loan by having a more
diversified loan portfolio. An increase in the general availability of funds to
lenders, or a decrease in the amount of borrowing activity, may increase
competition for making loans and may reduce obtainable yields or increase the
credit risk inherent in the available loans.
Usury statutes may impose interest ceilings and substantial penalties
for violations. Interest we charge on our loans, which may include amounts
received from appreciation interests, may be subject to state usury laws. These
laws impose maximum interest rates that may be charged on loans and penalties
for violation, including repayment of excess interest and unenforceability of
debt. We seek to structure our loans so that we do not violate applicable usury
laws, but uncertainties in determining the legality of interest rates and other
borrowing charges under some statutes may result in inadvertent violations.
Our interests in real estate are illiquid and their value may decrease.
Therefore, we may have only a limited ability to vary our portfolio of interests
in real estate quickly in response to changes in economic or other conditions.
As a consequence, the fair market value of some or all of our interests in real
estate may decrease in the future. In addition, provisions in the Internal
Revenue Code and related regulations impose a 100% tax on gain realized by a
REIT like us from property held primarily for sale to customers in the ordinary
course of business. These provisions may materially adversely affect our ability
to sell our interests in real estate.
Uninsured and underinsured losses may affect the value of, or our
return from, our interests in real estate. Our properties, and the properties
underlying our loans, have comprehensive insurance in amounts we believe are
sufficient to permit the replacement of the properties in the event of a total
loss, subject to applicable deductibles. There are, however, certain types of
losses, such as earthquakes, floods, hurricanes and terrorism that may be
uninsurable or not economically insurable. Also, inflation, changes in building
codes and ordinances, environmental considerations and other factors might make
it impracticable to use insurance proceeds to replace a damaged or destroyed
property. If any of these or similar events occurs, it may reduce our return
from an affected property and the value of our investment.
We may have less control of our investment when we own less than 100%
of the equity interests in joint ventures, partnerships, limited liability
companies or other entities that own real estate, especially when we hold less
than a controlling equity interest. Our acquisition of these equity interests
may expose us to greater risk than situations where we own real estate through
our wholly-owned subsidiaries. For example, the other equity owners in the
entity holding the property might have economic or business interests or goals
which are inconsistent with our business interests or goals and may be in a
position to take action contrary to our instructions or to our policies and
objectives. Moreover, if we are a limited partner in a limited partnership and
have rights allowing us control over the partnership or its property, we may be
deemed to be a general partner and liable for the debts of the partnership
9
beyond the amount of our investment.
Real estate with environmental problems may create liability for us.
The existence of hazardous or toxic substances on a property will adversely
affect its value and our ability to sell or borrow against the property.
Contamination of real estate by hazardous substances or toxic wastes not only
may give rise to a lien on that property to assure payment of the cost of
remediation, but also can result in liability to us as owner, operator or lender
for that cost. Many environmental laws can impose liability whether we know of,
or are responsible for, the contamination. In addition, if we arrange for the
disposal of hazardous or toxic substances at another site, we may be liable for
the costs of cleaning up and removing those substances from the site, even if we
neither own nor operate the disposal site. Environmental laws may require us to
incur substantial expenses, and may materially limit our use of our properties
and may adversely affect our ability to make distributions to our shareholders.
In addition, future or amended laws, or more stringent interpretations or
enforcement policies with respect to existing environmental requirements, may
increase our exposure to environmental liability. We are not currently aware of
any environmental issues that could materially affect us.
Compliance with Americans with Disabilities Act may adversely affect
our financial condition. Under the Americans with Disabilities Act of 1990, all
public accommodations must meet federal requirements for access and use by
disabled persons. A determination that real estate relating to one of our
investments does not comply with the Americans with Disabilities Act could
result in liability for both governmental fines and damages to private parties.
This could reduce the revenues from that real estate that otherwise would be
available to our borrower to pay interest on our loans or reduce the income to
us from our interest in that real estate. As a result, if we or our borrowers
were required to make unanticipated major modifications to comply with the
Americans with Disabilities Act, the resulting expense could adversely affect
our ability to make distributions to our shareholders.
Lack of geographic diversification exposes our investments to a higher
risk of loss from regional economic factors. We generally invest in real estate
located in the Mid-Atlantic and Southeast regions of the United States. Although
we anticipate that we will continue to focus on these regions for the
foreseeable future, we are not, however, subject to any geographic limitations
in our organizational documents regarding where we may invest and, accordingly,
may make investments in other areas that do not readily fit our targeted
characteristics, as appropriate opportunities are identified. This lack of
geographic diversification may make our investment portfolio more sensitive to
economic developments of a primarily regional nature, which may result in
reduced rates of return or higher rates of default than might be incurred with a
more geographically diverse investment portfolio.
Leverage can reduce income available for distribution and cause losses.
Our organizational documents do not limit the amount of indebtedness we may
incur. Using leverage, whether with recourse to us generally or only with
respect to a particular property, to acquire investments creates an opportunity
for increased net income, but at the same time creates risks. For example,
leverage can reduce the net income available for distributions to shareholders
in periods of rising interest rates where interest rate increases are greater
than increases in the rates of return on our investments. We use leverage to
acquire investments only when we believe it will enhance our returns. However,
we cannot be sure that our use of leverage will prove to be beneficial.
Moreover, when our assets secure our debt, we can lose some or all of our assets
through foreclosure if we do not meet our debt service obligations.
Concentration of our investments increases our dependence on individual
investments. Although we generally invest between $2.0 million and $30.0 million
in a loan or interest in real estate, our organizational documents do not limit
the size of our investments. If we make larger investments, our portfolio will
be concentrated in a smaller number of assets, increasing the risk of loss to
shareholders if a default or other problem arises with respect to any one
investment. If we make investments that, in the aggregate, comprise a material
portion of our assets or generate a material portion of our revenue or net
income, to any single borrower or group of affiliated borrowers, the failure of
that borrower or group to perform their obligations under the terms of our
investment could increase the risk of loss to our shareholders.
EMPLOYEES
As of March 26, 2003, we had 22 employees and believe our relationships
with our employees to be good. Our employees are not represented by a collective
bargaining agreement.
10
ITEM 2. PROPERTIES
Our principal executive office is located in Philadelphia,
Pennsylvania. We sublease this office pursuant to two operating leases that
provide for annual rentals based upon the amount of square footage we occupy.
The sub-leases expire in August 2010 and both contain two five-year renewal
options. One sub-lease is with The Bancorp, Inc. We paid rent to Bancorp of
approximately $183,000, $137,000 and $39,000 for the years ended December 31,
2002, 2001, and 2000 respectively. The other sublease is with The Richardson
Group, Inc. We paid rent to Richardson of approximately $53,000 for the year
ended December 31, 2002. We and certain of our executive officers have other
relationships with Bancorp and Richardson. See Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operation" below. We also
sublease suburban office space at an annual rent of $10,000. This sublease
currently terminates in February 2004 but renews automatically each year for a
one year term unless prior notice of termination of the sublease is sent by
either party to the sublease to the other party to the sublease.
For a description of our interests in real estate, see Item 1
"Business- Interests in Real Estate" above.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
11
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common shares trade on the New York Stock Exchange under the symbol
"RAS."
The following table sets forth the high and low sale prices of our
common shares and distributions declared on our common shares on a quarterly
basis for our last two fiscal years and for the current fiscal year through
March 26, 2003.
Cash distributions
High Low declared per share
---- --- ------------------
Fiscal 2003
First quarter (through March 26, 2003) $22.58 $20.51 $ 0.62
Fiscal 2002
Fourth quarter $22.10 $17.19 $ 0.62
Third quarter 23.94 14.41 0.60
Second quarter 24.19 19.51 0.59
First quarter 20.35 16.20 0.58
Fiscal 2001
Fourth quarter $17.50 $15.55 $ 0.56
Third quarter 17.25 13.90 0.52
Second quarter 17.00 15.60 0.52
First quarter 15.69 12.35 0.52
As of March 21, 2003, there were 20,839,472 common shares outstanding
held by 324 persons of record and 15,592 beneficial owners.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2002.
(a) (b) (c)
Number of securities remaining
Number of securities to Weighted average available for future issuance
be issued upon exercise exercise price of under equity compensation plans
of outstanding options, outstanding options, (excluding securities reflected
Plan Category warrants, and rights warrants, and rights in column (a)
------------- -------------------- -------------------- -------------------------------
Equity compensation plans
approved by security holders 427,682 $ 14.52 730,757
Equity compensation plans not
approved by security
holders(1) 58,912 $ 21.21 0
(1) Relates to a supplemental executive retirement plan, or SERP, established
for our chief executive officer as required by her employment agreement. Our
board of trustees and the compensation committee of the board of trustees
approved this SERP and the issuance of these shares to the trust established to
fund the SERP. Shareholder approval of this compensation plan was not required.
See Note 7 "Benefit Plans" to our financial statements for a description of the
SERP.
12
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial and operating information should be
read in conjunction with Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements,
including the notes thereto, included elsewhere herein.
As of and for the year ended December 31,
-----------------------------------------
2002 2001 2000 1999 1998(1)
---- ---- ---- ---- ----
(dollars in thousands except per share data)
OPERATING DATA:
Total revenues (2) $ 73,694 $ 57,064 $ 38,549 $ 34,122 $ 17,177
Total costs and expenses 30,131 30,191 26,419 21,178 8,778
Net income 43,505 26,914 12,055 12,962 8,474
Net income per share-basic:
Net income 2.50 2.68 1.93 2.10 1.82
Net income per share-diluted:
Net income 2.48 2.65 1.92 2.09 1.81
BALANCE SHEET DATA:
Total assets 438,851 333,166 270,120 269,829 201,259
Indebtedness secured by real estate 114,592 108,935 148,434 161,164 114,204
Secured lines of credit 30,243 2,000 20,000 14,000 -
Shareholders' equity 277,595 211,025 86,675 86,238 85,518
Book value per share 14.76 14.12 13.74 13.91 13.87
Other data:
Dividends per share 2.39 2.12 2.04 2.04 1.77
(1) Operations commenced on January 14, 1998.
(2) We adopted SFAS No. 145, Rescission of FASB Statements 4, 44 and 64,
Amendment of FASB Statement 13, and Technical Correction. We
previously recorded an extraordinary gain on the extinguishment of debt of
$4.6 million which was reclassified into revenues as a result of the
adoption of SFAS No. 145.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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 and fees on loans, rents and other income from our
interests in real estate, and proceeds from the sale of portfolio investments.
Through December 31, 2002, we completed eight public offerings of our common
shares: two during 1998, three in 2001 and three in 2002. In February 2003 we
completed a ninth public offering of our common shares. We have used the
proceeds of these offerings, combined with amounts collected from the repayment,
sale and refinancing of our loans and interests in real estate and amounts drawn
from our lines of credit, to build our investment portfolio.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of our capital from our commencement through
December 31, 2002 were the eight public offerings of our common shares. After
offering costs and underwriting discounts and commissions, we obtained net
offering proceeds of $273.1 million. In February 2003, we completed our ninth
public offering of our common shares, which resulted in net offering proceeds to
us of approximately $39.7 million after offering costs and underwriting
discounts. In March 2003, we filed a shelf registration statement to allow us to
sell any combination of our common or preferred shares, warrants for our
preferred or common shares or one or more series of debt securities up to a
total amount of $300 million.
We also maintain liquidity through our lines of credit. Through
December 31, 2002, we had obtained a $5.0 million line of credit and two $20.0
million lines of credit. The $5.0 million line of credit bears interest at
30-day LIBOR plus 2.5%, with a floor of 5.5%. One $20.0 million line of credit
bears interest at the prime rate as published in the "Money Rates" section of
The Wall Street Journal. Its current term runs through April 2004 with annual
one-year extension options and an 11-month non-renewal notice requirement. The
second $20.0 million line of credit bears interest at either 30-day LIBOR plus
2.5% or The Wall Street Journal prime rate described above, at our election. The
minimum interest rate is 4.75%. Absent any renewal, this line will terminate in
October 2003 and any principal then outstanding must be repaid by October 2004.
All draws on our lines must be secured by a pledge of a loan(s) or interests in
real estate(s) held in our portfolio. At December 31, 2002, there was a total of
$30.2 million outstanding under our lines of credit.
Another source of capital resources for us is principal payments on,
refinancings of, and sales of loans in our portfolio as well as refinancings and
the proceeds of sales of our interests in real estate. These resources
aggregated $180.6 million and $97.9 million for the years ended December 31,
2002 and 2001, respectively. We use our capital resources principally for
originating and purchasing loans and acquiring property interests. For the year
ended December 31, 2002, we originated or purchased 34 loans in the amount of
$202.4 million, as compared to 25 loans in the amount of $145.4 million for the
year ended December 31, 2001. For the year ended December 31, 2002, we acquired
seven property interests for $39.3 (net of $5.4 million of long-term debt
assumed as part of a property acquisition). For the year ended December 31,
2001, we did not acquire any property interests.
We also receive funds from a combination of interest and fees on our
loans, rents and income from our interests in real estate. As required by the
Internal Revenue Code, we used any gains on sales of loans or interests in real
estate, interest and income from our interests in real estate, to the extent of
not less than 90% of our taxable income, to pay distributions to our
shareholders. For the years ended December 31, 2002 and 2001, we paid
distributions of $43.0 million and $21.7 million, respectively, of which $42.8
million and $21.6 million was in cash and $183,000 and $40,000 was in additional
common shares issued through our dividend reinvestment plan. We currently intend
to maintain our current level of distributions in fiscal 2003. We expect to
continue to use funds from these sources to meet these needs.
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 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.
14
At December 31, 2002, we had approximately $19.7 million in funds
available for investment. All of these funds were invested on an over-night
basis in mutual funds that we believe have a high degree of liquidity and
safety. We expect that, during 2003, 16 of our loans and investments in real
estate, totaling $88.3 million net of underlying senior indebtedness of $17.6
million at December 31, 2002, will be repaid or refinanced, providing additional
funds available for investment in the approximate amount of $108.0 million.
We believe that our existing sources of funds will be adequate for
purposes of meeting our liquidity and capital needs. We may also seek to develop
other sources of capital, including, without limitation, long-term borrowings,
offerings of our preferred shares and warrants and issuances of our debt
securities. Our ability to meet our long-term (i.e., beyond one year) liquidity
and capital resources requirements is subject to obtaining additional debt and
equity financing. Any decision by our lenders and investors to enter into such
transactions with us will depend upon a number of factors, such as our financial
performance, compliance with the terms of our existing credit arrangements,
industry or market trends, the general availability of and rates applicable to
financing transactions, such lenders' and investors' resources and policies
concerning the terms under which they make such capital commitments and the
relative attractiveness of alternative investment or lending opportunities. Our
financial performance and the value of our securities are subject to a number of
risks. See Item 1 "Business-Investment Activity Risks" above. In addition, as a
REIT, we must distribute at least 90% of our annual taxable income, which limits
the amount of cash we have available for other business purposes, including
amounts to fund our capital needs.
The following schedule summarizes our currently anticipated contractual
obligations and commercial commitments as of December 31, 2002:
Less than One to Four to After Five
One Year Three Years Five Years Years Total
----------- ----------- ----------- ----------- -------------
Operating leases $ 310,435 $ 619,500 $ 642,757 $ 862,648 $ 2,435,340
Secured lines of credit - 30,243,155 - - 30,243,155
Long-term debt 5,010,639 5,987,750 13,611,446 89,982,074 114,591,909
Deferred compensation 344,761 689,522 344,761 - 1,379,044
----------- ----------- ----------- ----------- -------------
Total $ 5,665,835 $37,539,927 $14,598,964 $90,844.722 $ 148,649,448
=========== =========== =========== =========== =============
RESULTS OF OPERATIONS
Our mortgage interest income was $33.8 million, $33.8 million, and
$18.3 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The $10.1 million increase in interest income from 2001 to 2002
was due to an additional $19.0 million of interest generated by the origination
of 47 loans totaling $279.3 million from the beginning of 2001 through the end
of 2002, partially offset by a $9.3 million reduction of interest due to the
repayment of 27 loans totaling $114.6 million during the same period. The $5.4
million increase in interest income from 2000 to 2001 was due to an additional
$10.0 million of interest generated by the origination of 28 loans totaling
$175.4 million from the beginning of 2000 through the end of 2001, partially
offset by a $5.1 million reduction of interest due to the repayment of 12 loans
totaling $93.1 million during the same period. Included in our mortgage interest
income is accretion of loan discount relating to loans we acquired at a discount
to the appraised value of the underlying properties of $39,000, $1.3 million and
$213,000 in 2002, 2001 and 2000, respectively.
We received rental income of $26.0 million for the year ended December
31, 2002, compared to $22.2 million and $18.3 million for the years ended
December 31, 2001 and 2000, respectively. The increase in rental income from
2001 to 2002 was due to our purchase of two properties in 2002. The increase in
rental income from 2000 to 2001 was due to the origination, in 2001, of two
loans whose returns are partially recognized
15
in the form of rental income.
We earned fee and other income of $5.0 million for the year ended
December 31, 2002 as compared to $5.6 million in 2001 and $1.4 million in 2000.
Included in the 2002 fee and other income were revenues of $937,000 from RAIT
Capital Corp., financial consulting fees of $3.9 million, exit fees of $100,000
and other fees of $51,000. Included in the 2001 fee and other income were
revenues of $1.6 million from RAIT Capital Corp, financial consulting fees of
$2.4 million, exit fees of $1.2 million and other fees of $226,000.
Included in the 2000 fee and other income were revenues of $286,000 from RAIT
Capital Corp., financial consulting fees of $75,000 and a termination fee of
$300,000 from Resource America, Inc. for consenting to the termination of one of
our appreciation interests and $500,000 earned for subordinating one of our
loans to additional senior debt. Resource America was our sponsor and held
approximately 6.8% of our outstanding common shares at December 31, 2002. Our
chairman and chief executive officer is:
- the spouse of the chairman, chief executive officer and president of
Resource America;
- the parent of a former director (through October 2002) of Resource
America; and
- the parent of the chief operating officer and a director of Resource
America, who is also our secretary and a member of our Board of
Trustees.
Our president and chief operating officer was, until October 2002, a director of
Resource America.
We received investment income of $1.9 million for the year ended
December 31, 2002, compared to $506,000 and $548,000 for the years ended
December 31, 2001 and 2000, respectively. The increased investment income in
2002 is due to the inclusion, in 2002, of income from two of our investments in
real estate, which are structured as preferred equity interests. As such, we
classified the income generated by these two investments as investment income
rather than as rental income.
In March 2002, we sold our entire interest in one loan with a book
value of $1.2 million to a partnership whose general partner is a son of our
chairman and chief executive officer. The buyer paid $2.2 million in cash and we
recognized a gain on the sale of approximately $948,000. In December 2001, we
sold our interests in three loans totaling $2.8 to a partnership whose general
partner is a son of our chairman and chief executive officer. The buyer paid
$3.3 million, which included the assumption of debt totaling $646,000. We
recognized a gain on sale of approximately $535,000. In 2001, we sold loan
participations totaling $1.5 million to The Bancorp, Inc., whose chief executive
officer is, and whose chairman is a son of, our chairman and chief executive
officer. The loan participations were sold at their current book value;
accordingly no gain was recorded on the sale.
In December 2002, we sold a 49% limited partnership interest in a
limited partnership that owns a property to an unrelated party. We retained a
51% limited and sole general partnership interest. The limited partnership
interest we sold had a book value of $1.2 million. The buyer paid $4.1 million
and we recognized a gain of $2.9 million. We did not generate any gain on sale
of interests in real estate in 2001 or 2000.
In September 2002, we generated $3.2 million in income from loan
satisfaction. This related to the repayment of two loans (total net book value
of $2.3 million) with cash of $2.5 million and equity interests in the entities
that own the real estate underlying the loans. We recorded the two interests in
real estate at their current fair value based upon discounted cash flows.
In December 2002, we sold a 15.4% membership interest in a wholly owned
limited liability company that owns a property, to a partnership whose general
partner is a son of our chairman and chief executive officer. We retained an
84.6% membership interest in this limited liability company. The buyer paid
$513,000, which approximated the book value of the interests in real estate. No
gain or loss was recognized on the sale.
In March 2001, we purchased from Resource America two subordinate loans
(in the original principal amounts of $18.3 million and $4.9 million) underlying
one of our interests in real estate. The purchase price for the loans was $20.2
million. The difference between the purchase price and the underlying face value
of the loans resulted in a gain of $4.6 million resulting from the consolidated
extinguishment of indebtedness underlying an investment in real estate.
During the year ended December 31, 2002, we incurred expenses of $30.1
million as compared to $30.2
16
million and $26.4 million in 2001 and 2000, respectively. The expenses consisted
of interest expense, operating expenses relating to our consolidated interests
in real estate, salaries and related benefits, general and administrative
expenses, and depreciation relating to our consolidated interests in real estate
and amortization. Interest expense was $9.3 million for the year ended December
31, 2002, as compared to $10.6 million and $12.8 million in 2001 and 2000,
respectively. Interest expense consists of interest payments made on senior
indebtedness on properties underlying our loans and interests in real estate,
and interest payments made on our lines of credit. The decrease in interest
expense from the year ended December 31, 2001 to the corresponding period in
2002 resulted from a decrease in the interest rate on our 1999 line from an
average of 6.9% in the year ended December 31, 2001 to an average of 4.7% in the
year ended December 31, 2002 as general market rates of interest decreased. The
decrease in interest expense from the year ended December 31, 2000 to the
corresponding period in 2001 resulted from the repayment of approximately $41.3
million of unsecured debt underlying our interests and on our secured line of
credit with funds made available by our equity offerings. In addition, the
interest rate on our credit line decreased from an average of 9.2% in 2000 to an
average of 6.9% in 2001.
Property operating expenses were $13.0 million for the year ended
December 31, 2002, compared to $12.2 million and $8.6 million for 2001 and 2000,
respectively. Depreciation and amortization was $3.7 million for the year ended
December 31, 2002, compared to $3.3 million and $2.9 million for 2001 and 2000,
respectively. The increases in property operating expenses, depreciation and
amortization were due to increases in the number of interests in real estate we
acquired for our portfolio in each of 2002 and 2001 as compared to the prior
year. Included in property operating expenses are management fees paid to
Brandywine Construction & Management, Inc., an affiliate of Resource America,
for providing real estate management services for the real estate underlying
five of our interests in real estate at December 31, 2002 and for the real
estate underlying two of our interests in real estate at December 31, 2001 and
2000. We paid management fees of $1.0 million, $978,000 and $471,000 to
Brandywine for the years ended December 31, 2002, 2001 and 2000, respectively.
We anticipate that we will continue to use Brandywine to provide real estate
management services.
Salaries and related benefits were $2.4 million for the year ended
December 31, 2002, as compared to $2.7 million and $1.5 million for 2001 and
2000, respectively. General and administrative expenses were $1.7 million for
the year ended December 31, 2002, as compared to $1.3 million and $637,000 for
2001 and 2000, respectively. The decrease in salaries and related benefits and
the increase in general and administrative expenses from the year ended December
31, 2001 to the corresponding period in 2002 as well as the increase of salaries
and related benefits and general and administrative expenses from December 31,
2000 to the corresponding period in 2001 were due to our acquisition of RAIT
Capital Corp. in August 2000, as well as increased personnel and occupancy
expenses which reflect the expansion of our staff to support the increased size
of our portfolio, due to the significant infusion of new capital primarily from
our public offerings, offset by deferred costs related to increased loan volume.
Included in general and administrative expense is rental expense
relating to our downtown Philadelphia office space. We sublease these offices
pursuant to two operating leases that provide for annual rentals based upon the
amount of square footage we occupy. The sub-leases expire in August 2010 and
both contain two five-year renewal options. One sub-lease is with Bancorp; rent
paid to Bancorp was approximately $183,000, $137,000 and $39,000 for the years
ended December 31, 2002, 2001, and 2000, respectively. The other sublease is
with The Richardson Group, Inc. whose chairman is our secretary and a member of
our board of trustees, and is also a son of our chairman and chief executive
officer. The senior vice president and chief operating officer of Richardson is
the spouse of our executive vice president and chief financial officer. Rent
paid to Richardson was approximately $53,000 for the year ended December 31,
2002. The increase in the amount of rent we paid from 2000 through 2002 was due
to the increase in the square footage we occupied over those periods.
Also included in general and administrative expenses is $60,000 that we
paid in the years ended December 31, 2002 and 2001 to Bancorp for technical
support services provided to us.
In our three most recent fiscal years, inflation and changing prices
have not had a material effect on our net income and revenue.
17
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
Our accounting and reporting policies conform with accounting
principles generally accepted in the United States of America. The preparation
of our financial statements requires that we make estimates and assumptions in
certain circumstances that affect amounts reported in our consolidated financial
statements. We have made our best estimates and judgments of certain amounts
included in the financial statements, given due consideration to materiality. We
do not believe that there is a great likelihood that materially different
amounts would be reported related to the accounting policies described below.
However, application of these accounting policies involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a result,
actual results could differ from those estimates.
BASIS OF FINANCIAL STATEMENT PRESENTATION - The consolidated financial
statements include our accounts and the accounts of our qualified REIT
subsidiaries, our wholly owned subsidiary, RAIT Capital Corp., our
majority-owned and controlled partnerships, OSEB Associates L.P., Stobba
Associates, L.P. and RAIT SLH, L.P., and our majority-owned and controlled
limited liability company, RAIT Executive Boulevard, LLC. We have eliminated all
significant intercompany balances and transactions. We consolidate any
corporation in which we own securities having over 50% of the voting power of
such corporation. We also consolidate any limited partnerships and limited
liability companies where we have both the general partnership or managing
membership interest, we hold a majority of the limited partnership or
non-managing membership interests and the other partners or members do not have
important rights that would preclude consolidation. Further, we account for all
our membership interests in unconsolidated limited liability companies under the
equity method of accounting.
REVENUE RECOGNITION - For loans that we originate or purchase at face
value we recognize interest income using the effective interest method applied
on a loan-by-loan basis. In some instances, the borrower pays additional
interest, or points, at the time the loan is closed. These points collected, as
well as any direct loan origination costs incurred, are deferred and recognized
over the life of the related loan as a yield adjustment Many of our loans
provide for accrual of interest at specified rates, which differ from current
payments terms. Interest is recognized on such loans at the accrual rate subject
to our determination that accrued interest and outstanding principal are
ultimately collectible, based on the underlying collateral and operations of the
borrower. If we cannot make this determination regarding collectibility, we
place the loans on non-accrual status and recognize interest income only upon
actual receipt. When we acquire loans at a discount from both the face value of
the loan and the appraised value of the property underlying the loan, the excess
of the loan's expected future cash flows over the amount received is accreted
into interest income over the remaining life of that particular loan. The excess
of the individual loan's scheduled contractual principal and interest payments
over its expected future cash flows is recognized as a nonaccretable difference
for that particular loan. Projected future cash flows are reviewed on a regular
basis and any decrease in the loan's actual or expected future cash flows is
recorded as a loss contingency for that particular loan. The present value of
any increase in the loan's actual or expected future cash flows is first applied
to any previously recorded loss contingency for that particular loan. Any
remaining increase is accounted for by reclassifying that amount from the
nonaccretable difference, thereby adjusting the amount of periodic accretion
over that particular loan's remaining life. Certain of our loan investments
provide for additional interest based on the borrower's operating cash flow or
appreciation of the underlying collateral. We consider such amounts to be
contingent interests and we recognize them as income only when we are certain of
their collection.
PROVISION FOR LOAN LOSSES - Our accounting policies require that an
allowance for estimated loan losses be maintained at a level that we consider
adequate to provide for loan losses, based upon an evaluation of known and
inherent risks in the portfolio. We would establish specific valuation
allowances for impaired loans in the amount by which the carrying value, before
allowance for estimated losses, exceeds the fair value of collateral on an
individual loan basis, with a corresponding charge to the provision for loan
losses. Charge-offs occur when we consider a loan, or a portion thereof, to be
uncollectible and of such little value that further pursuit of collection is not
warranted. We also provide a loan portfolio reserve based upon our periodic
evaluation and analysis of the portfolio, historical and industry loss
experience, economic conditions and trends, collateral values and quality, and
other relevant factors. We have a reserve for loan losses of $226,000 as of
December 31, 2002. This reserve is a general reserve and is not related to any
individual loan or to an anticipated loss. We do not currently have any specific
valuation allowances. In accordance with our policy, we determined that this
reserve was adequate as of December 31, 2002 and 2001. We will continue to
analyze the adequacy of this reserve on a quarterly basis.
18
FEDERAL INCOME TAXES - We qualify and we have elected to be taxed as a
real estate investment trust, or REIT, under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, commencing with our taxable year
ending December 31, 1999. If we qualify for taxation as a REIT, we generally
will not be subject to federal corporate income tax our taxable income that we
distribute to our shareholders. As a REIT, we are subject to a number of
organizational and operational requirements, including a requirement that we
currently distribute at least 90% of our annual taxable income.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board, or FASB,
issued Statement of Financial Accounting Standard, or SFAS, No. 145, Rescission
of FASB Statements 4, 44, and 64, Amendment of FASB Statement 13, and Technical
Corrections. Among other provisions, SFAS 145 rescinds FASB Statement 4,
Reporting Gains and Losses from Extinguishment of Debt. Accordingly, gains or
losses from extinguishment of debt should not be reported as extraordinary items
unless the extinguishment qualifies as an extraordinary item under the criteria
of Accounting Principles Board Opinion 30, Reporting the Results of Operations
- -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions (APB
30). Gains or losses from extinguishment of debt, which do not meet the criteria
of APB 30, should be reclassified to income from continuing operations in all
prior periods presented. Upon adoption, we anticipate that we will reclassify a
gain on early extinguishment of debt of $4.6 million, previously recorded as an
extraordinary item, to revenues.
SFAS No. 148 amends the disclosure and certain transition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation" to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. For entities that use the
intrinsic value method under APB No. 25, "Accounting for Stock Issued to
Employees", to account for employee stock compensation for any period presented,
their accounting policies note should include certain disclosures. The expanded
annual disclosure requirements and the transition provisions are effective for
fiscal years ending after December 15, 2002, which are included in our
consolidated financial statements. The new interim period disclosures are
required in financial statements for interim periods beginning after December
15, 2002.
In January 2003, the FASB issued FASB Interpretation 46, or FIN 46,
"Consolidation of Variable Interest Entities." FIN 46 clarifies the application
of Accounting Research Bulletin 51, "Consolidated Financial Statements", for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties or in which equity investors do not have the characteristics of a
controlling financial interest. We refer to these entities as variable interest
entities. Variable interest entities within the scope of FIN 46 will be required
to be consolidated by their primary beneficiary. The primary beneficiary of a
variable interest entity is determined to be the party that absorbs a majority
of the entity's expected losses, receives a majority of its expected returns, or
both. FIN 46 applies immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable interest entities in
which an enterprise holds a variable interest that it acquired before February
1, 2003. We are in the process of determining what impact, if any, the adoption
of the provisions of FIN 46 will have upon our financial condition or results of
operations.
19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table contains information about our cash held in money
market accounts, principal amounts outstanding on loans held in our portfolio,
principal amounts payable on long-term debt underlying our loans and interests
in real estate and the principal amount outstanding on our lines of credit as of
December 31, 2002. The presentation, for each category of information,
aggregates the assets and liabilities by their maturity dates for maturities
occurring in each of the years 2003 through 2007 and separately aggregates the
information for all maturities arising after 2007.
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
Interest earning assets:
Money market accounts $19,666,189 $ 19,666,189 $ 19,666,189
Average interest rate 2.1% 2.1%
First mortgages and senior
loan participations $71,307,822 - $ 9,030,000 $34,800,000 $115,137,822 $117,341,543
Average interest rate 9.2% - 8.6% - - 8.0% 8.8%
Mezzanine loans $17,177,140 $28,631,633 $10,151,667 $6,950,000 $10,400,000 $70,553,001 $143,863,440 $153,703,288
Average interest rate 14.4% 15.8% 14.5% 15.0% 16.0% 12.9% 14.1%
Interest bearing
liabilities:
Senior indebtedness
secured by real estate
underlying loans $ 3,884,218 $ 404,915 $ 3,078,152 $ 474,139 $10,266,263 $12,323,229 $ 30,430,916 $ 31,063,175
Average interest rate 4.5% 7.9% 4.7% 7.9% 8.6% 7.3% 6.5%
Long-term debt secured by
real estate owned $ 1,126,421 $ 1,207,547 $ 1,297,137 $1,392,076 $ 1,478,968 $77,658,844 $ 84,160,993 $ 88,757,407
Average interest rate 7.1% 7.1% 7.1% 7.1% 7.1% 7.2% 7.1%
Secured lines of credit $30,243,155 $ 30,243,155 $ 30,243,155
Average interest rate 4.75% 4.75%
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, equity prices and real estate values.
All of our interest-earning assets are at fixed rates. Our credit lines and
certain short-term borrowings underlying our loans ($6.1 million at December 31,
2002) are subject to floating interest rates. As a result, our primary market
risk exposure is the effect of changes in interest rates on the interest cost of
outstanding draws on our lines of credit and floating-rate borrowings. From time
to time we may enter into interest rate swap agreements for our floating rate
debt to manage our interest rate risk.
Changes in interest rates may also affect the value of our investments
and the rates at which we reinvest funds obtained from loan repayments. As
interest rates increase, although the interest rates we obtain from reinvested
funds will generally increase, the value of our existing loans at fixed rates
will generally tend to decrease. As interest rates decrease, the amounts
becoming available to us for investment due to repayment of our loans may be
invested at lower rates than we had been able to obtain in prior investments, or
than the rates on the repaid loans. These relationships between interest rate
and value may be diminished or not applicable to our cash flow loans. We may
enter into interest rate swap agreements for our floating rate debt to manage
our interest rate risk.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RAIT INVESTMENT TRUST AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 22
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2002 AND 2001 23
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE YEARS ENDED DECEMBER 31, 2002 24
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE YEARS
ENDED DECEMBER 31, 2002 25
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED DECEMBER 31,
2002 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27
SCHEDULE IV -- MORTGAGE LOANS ON REAL ESTATE 45
All other schedules are not applicable or are omitted since either (i) the
required information is not material or (ii) the information required is
included in the consolidated financial statements and notes thereto.
21
[Grant Thornton Letterhead]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Trustees
RAIT Investment Trust
We have audited the accompanying consolidated balance sheets of RAIT Investment
Trust and Subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of RAIT Investment
Trust and Subsidiaries as of December 31, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited Schedule IV Mortgage Loans on Real Estate of RAIT
Investment Trust and subsidiaries as of December 31, 2002. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
/S/ Grant Thornton LLP
Philadelphia, Pennsylvania
January 23, 2003 (except for Note 16, as to which the dates
are February 10, 2003 and March 4, 2003)
22
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
2002 2001
------------- -------------
ASSETS
Cash and cash equivalents $ 19,666,189 $ 18,064,909
Restricted cash 5,484,342 4,569,708
Tenant escrows 428,346 289,435
Accrued interest receivable 7,421,907 4,412,829
Investments in real estate loans, net 258,921,926 195,819,581
Investments in real estate, net 139,518,051 104,889,208
Furniture, fixtures and equipment, net 611,224 326,335
Prepaid expenses and other assets 5,911,495 3,907,157
Goodwill, net 887,143 887,143
------------- -------------
Total assets $ 438,850,623 $ 333,166,305
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 421,149 $ 1,437,054
Accrued interest payable 677,309 584,045
Tenant security deposits 657,921 812,317
Borrowers' escrows 10,150,938 5,812,737
Senior indebtedness secured by real estate
underlying the Company's loans 30,430,916 36,843,180
Long-term debt secured by real estate underlying equity interest 84,160,993 72,091,483
Secured lines of credit 30,243,155 2,000,000
------------- -------------
Total liabilities $ 156,742,381 $ 119,580,816
Minority interest 4,513,579 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 18,803,471 and 14,947,197 shares 188,035 149,472
Additional paid-in-capital 274,606,899 206,344,662
Retained earnings 5,079,319 4,530,830
Loans for stock options exercised (1,068,972) -
Deferred compensation (1,210,618) -
------------- -------------
Total shareholders' equity 277,594,663 211,024,964
------------- -------------
Total liabilities and shareholders' equity $ 438,850,623 $ 333,166,305
============= =============
The accompanying notes are an integral part of these consolidated financial
statements
23
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
2002 2001 2000
------------ ------------ ------------
REVENUES
Mortgage interest income $ 33,785,368 $ 23,663,358 $ 18,274,567
Rental income 26,010,905 22,151,409 18,305,725
Fee income and other 5,037,875 5,574,598 1,420,117
Investment income 1,879,474 506,173 548,322
Gain on early extinguishment of debt - 4,633,454 -
Gain on sale of loans 947,974 534,958 -
Gain on sale of interests in real estate 2,850,645 - -
Income from loan satisfaction 3,181,670 - -
------------ ------------ ------------
Total revenues 73,693,911 57,063,950 38,548,731
------------ ------------ ------------
COSTS AND EXPENSES
Interest 9,302,458 10,627,540 12,777,804
Property operating expenses 13,018,607 12,179,242 8,607,170
Salaries and related benefits 2,404,149 2,711,606 1,488,390
General and administrative 1,695,667 1,324,003 637,060
Depreciation and amortization 3,710,246 3,348,347 2,908,623
------------ ------------ ------------
Total costs and expenses 30,131,127 30,190,738 26,419,047
------------ ------------ ------------
Net income before minority interest $ 43,562,784 $ 26,873,212 $ 12,129,684
Minority interest (58,118) 40,968 (74,959)
------------ ------------ ------------
Net income $ 43,504,666 $ 26,914,180 $ 12,054,725
============ ============ ============
Net income before minority interest $ 2.50 $ 2.67 $ 1.94
Minority interest - 0.01 (0.01)
------------ ------------ ------------
Net income per common share-basic $ 2.50 $ 2.68 $ 1.93
============ ============ ============
Net income before minority interest $ 2.48 $ 2.65 $ 1.93
Minority interest - -- (0.01)
------------ ------------ ------------
Net income per common share-diluted $ 2.48 $ 2.65 $ 1.92
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements
24
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2002
LOANS FOR RETAINED
ADDITIONAL STOCK EARNINGS TOTAL
COMMON PAID-IN OPTIONS DEFERRED (ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL EXERCISED COMPENSATION DEFICIT) EQUITY
------------- ------------- ------------ ------------- ------------- -------------
Balance January 1, 2000 $ 61,991 $ 86,159,238 - - $ 17,069 $ 86,238,298
Net income - - - - 12,054,725 12,054,725
Dividends 464 471,597 - - (12,776,419) (12,304,358)
Stock options exercised 522 539,052 - - - 539,574
Common shares issued, net 125 146,750 - - - 146,875
------------- ------------- ------------ ------------- ------------- -------------
Balance, December 31, 2000 63,102 87,316,637 - - (704,625) 86,675,114
============= ============= ============ ============= ============= =============
Net income - - - - 26,914,180 26,914,180
Dividends 30 39,510 - - (21,678,725) (21,639,189)
Stock options exercised 250 212,250 - - - 212,500
Common shares issued, net 86,090 118,776,265 - - - 118,862,359
------------- ------------- ------------ ------------- ------------- -------------
Balance, December 31, 2001 $ 149,472 $ 206,344,662 - - $ 4,530,830 $ 211,024,964
============= ============= ============ ============= ============= =============
Net income - - - - 43,504,666 43,504,666
Dividends 90 183,221 - - (42,956,176) (42,772,865)
Stock options exercised 2,056 2,509,959 (1,068,972) - - 1,443,043
Warrants exercised 1,108 1,661,177 - - - 1,662,285
Deferred compensation 589 1,248,934 - (1,249,523) - -
Compensation expense - - - 38,905 - 38,905
Common shares issued, net 34,720 62,658,946 - - - 62,693,666
------------- ------------- ------------ ------------- ------------- -------------
Balance, December 31, 2002 $ 188,035 $ 274,606,899 $ (1,068,972) $ (1,210,618) $ 5,079,319 $ 277,594,663
============= ============= ============ ============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements
25
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
------------- ------------- -------------
Cash flows from operating activities
Net Income $ 43,504,666 $ 26,914,180 $ 12,054,725
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on consolidated extinguishment of debt - (4,633,454) -
Income from loan satisfaction (802,615) - -
Minority interest 58,118 (40,968) 74,959
Depreciation and amortization 3,710,246 3,348,347 2,908,623
Accretion of loan discounts (39,230) (1,272,989) (213,474)
Increase in tenant escrows (138,911) (67,064) (57,993)
Increase in accrued interest receivable (3,009,078) (1,401,333) (949,012)
Increase in prepaid expenses and other assets (2,201,386) (2,163,604) (819,732)
(Decrease) increase in accounts payable and accrued liabilities (711,952) 446,544 152,306
Increase (decrease) increase in accrued interest payable 93,264 (622,593) 630,147
Increase in deferred interest payable - - 91,506
(Decrease)/increase in tenant security deposits (154,396) 319,221 222,188
Increase in borrowers' escrows 3,423,567 1,104,618 146,661
------------- ------------- -------------
Net cash provided by operating activities 43,732,293 21,930,905 14,240,904
------------- ------------- -------------
Cash flows from investing activities
Purchase of furniture, fixtures and equipment (653,838) (6,511) (34,974)
Real estate loans purchased (4,128,200) - (1,850,000)
Real estate loans originated (199,758,181) (144,415,693) (38,041,556)
Proceeds from sale of loan 1,237,167 - -
Proceeds from disposition of interests in real estate 14,719,145 - -
Principal repayments from real estate loans 131,705,514 89,452,204 17,106,519
Investment in real estate and improvements (39,291,639) (182,084) (6,052,358)
Cash paid for asset acquisition - - (630,378)
------------- ------------- -------------
Net cash used in investing activities (96,170,032) (55,152,084) (29,502,747)
------------- ------------- -------------
Cash flows from financing activities
(Repayments)/advances on secured line of credit 28,243,155 (18,000,000) 6,000,000
Issuance of common shares, net 65,982,305 119,074,855 539,574
Payment of cash dividends (42,772,865) (21,639,185) (12,304,358)
Principal repayments on senior indebtedness (29,428,426) (23,747,228) (12,392,394)
Principal repayments on long-term debt (923,720) (786,907) (696,292)
Proceeds of senior indebtedness 25,350,000 6,950,000 30,200,000
Proceeds of long-term debt 7,588,570 2,275,000 -
Cash paid to acquire debt - (20,248,435) -
------------- ------------- -------------
Net cash provided by financing activities 54,039,019 43,878,100 11,346,530
------------- ------------- -------------
Net change in cash and cash equivalents 1,601,280 10,656,921 (3,915,313)
------------- ------------- -------------
Cash and cash equivalents, beginning of year $ 18,064,909 $ 7,407,988 $ 11,323,301
------------- ------------- -------------
Cash and cash equivalents, end of year $ 19,666,189 $ 18,064,909 $ 7,407,988
============= ============= =============
Noncash items:
Stock issued for asset acquisition $ - $ - $ 146,875
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements
26
NOTE 1 -- FORMATION AND BUSINESS ACTIVITY
RAIT Investment Trust (the "Company" or "RAIT"), together with its
wholly-owned subsidiaries, RAIT Partnership, L.P. (the "Operating Partnership"),
RAIT General, Inc. (the "General Partner"), the General Partner of the Operating
Partnership, and RAIT Limited, Inc. (the "Initial Limited Partner"), the Initial
Limited Partner of the Operating Partnership (together the "Company"), were each
formed in August 1997. RAIT, the General Partner and the Initial Limited Partner
were organized in Maryland, and the Operating Partnership was organized as a
Delaware limited partnership.
The Company's principal business activity is to make investments in
real estate primarily by making real estate loans, acquiring real estate loans
and acquiring interests in real estate. The Company acquires interests in real
estate through its wholly-owned subsidiaries or by acquiring controlling or
non-controlling equity interests in entities that own real estate. The Company
makes investments in situations that, generally, do not conform to the
underwriting standards of institutional lenders or sources that provide
financing through securitization. The Company emphasizes subordinated (or
"mezzanine") financing, with principal amounts generally between $2.0 million
and $30.0 million. The Company also provides short-term bridge financing in
excess of the targeted size range where the borrower has committed to obtain
take-out financing (or the Company believes that it can arrange such financing)
to reduce the Company's investment to an amount within the targeted size range.
The Operating Partnership undertakes the business of the Company, including the
origination and acquisition of financing and the acquisition of interests in
real estate.
The Company may encounter significant competition from banks, insurance
companies, savings and loan associations, mortgage bankers, pension funds,
investment bankers, and other public or private real estate investment trusts
for making investments in real estate.
The Company generally invests in real estate located in the
Mid-Atlantic and Southeast regions of the United States.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America. The consolidated financial statements include the accounts of the
Company, its qualified REIT subsidiaries, its wholly owned subsidiary, RAIT
Capital Corp., its majority-owned and controlled partnerships, OSEB Associates
L.P., Stobba Associates, L.P. and RAIT SLH, L.P., and its majority-owned and
controlled limited liability company, RAIT Executive Boulevard, LLC. All
significant intercompany balances and transactions have been eliminated.
The Company consolidates any corporation in which it owns securities
having over 50% of the voting power of such corporation. The Company also
consolidates any limited partnerships and limited liability companies where it
has both the general partnership or managing membership interest, holds a
majority of the limited partnership or non-managing membership interests and the
other partners or members do not have important rights that would preclude
consolidation. Further, the Company accounts for all its membership interests in
unconsolidated limited liability companies under the equity method of
accounting.
In preparing the consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities, and the reported
amounts of revenue and expenses. Actual results could differ from those
estimates.
27
INVESTMENTS IN REAL ESTATE LOANS
Investments in real estate loans consist of loans that are originated
at par or acquired at face value ("Par Loans") and certain mortgage loans, for
which the borrower is not current as to original contractual principal and
interest payments, that are acquired at a discount from both the face value of
the loan and the appraised value of the property underlying the loan
("Discounted Loans"). For each Discounted Loan, the excess of the loan's
expected future cash flows over the amount received is accreted into interest
income over the remaining life of that particular loan. The excess of the
individual loan's scheduled contractual principal and interest payments over its
expected future cash flows is recognized as a nonaccretable difference for that
particular loan. Projected future cash flows are reviewed on a regular basis and
any decrease in the loan's actual or expected future cash flows is recorded as a
loss contingency for that particular loan. The present value of any increase in
the loan's actual or expected future cash flows is first applied to any
previously recorded loss contingency for that particular loan. Any remaining
increase is accounted for by reclassifying that amount from the nonaccretable
difference, thereby adjusting the amount of periodic accretion over that
particular loan's remaining life.
Par Loans are originated or purchased at face value and are stated at
amortized cost, less any provision for loan losses, because the Company has the
ability and the intent to hold them for the foreseeable future or until maturity
or payoff. Interest income is recognized using the effective interest method
applied on a loan-by-loan basis. In some instances, the borrower pays additional
interest ("points") at the time the loan is closed. The points collected, as
well as any direct loan origination costs incurred, are deferred and recognized
over the life of the related loan as a yield adjustment. Many of the Company's
loans provide for accrual of interest at specified rates, which differ from
current payments terms. Interest is recognized on such loans at the accrual rate
subject to management's determination that accrued interest and outstanding
principal are ultimately collectible, based on the underlying collateral and
operations of the borrower. If management cannot make this determination
regarding collectibility, the loans are placed on non-accrual status and
interest income is recognized only upon actual receipt.
Certain of the Company's loan investments provide for additional
interest based on the borrower's operating cash flow or appreciation of the
underlying collateral. Such amounts are considered contingent interests and are
reflected as income only upon collection.
The Company's accounting policies require that an allowance for
estimated loan losses be maintained at a level that management, based upon an
evaluation of known and inherent risks in the portfolio, considers adequate to
provide for loan losses. Specific valuation allowances are established for
impaired loans in the amount by which the carrying value, before allowance for
estimated losses, exceeds the fair value of collateral on an individual loan
basis, with a corresponding charge to the provision for loan losses. Charge-offs
occur when management considers a loan, or a portion thereof, to be
uncollectible and of such little value that further pursuit of collection is not
warranted. Management also provides a loan portfolio reserve based upon its
periodic evaluation and analysis of the portfolio, historical and industry loss
experience, economic conditions and trends, collateral values and quality, and
other relevant factors.
INVESTMENTS IN REAL ESTATE
Investments in real estate are carried at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over an
estimated useful life of up to 39 years (non-residential) and 27.5 years
(residential). On January 1, 2002, the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No.
144 retains the existing requirements to recognize and measure the impairment of
long-lived assets to be held and used or to be disposed of by sale. However,
SFAS No. 144 makes changes to the scope and certain measurement requirements of
existing accounting guidance. SFAS No. 144 also changes the requirements
relating to reporting the effects of a disposal or discontinuation of a segment
of a business. The adoption of this statement did not have a material effect on
the Company's consolidated financial position or consolidated results of
operation.
The Company leases space to tenants under agreements with varying
terms. Leases are accounted for as operating leases with minimum rent recognized
on a straight-line basis over the term of the lease regardless of when payments
are due. Accrued rents are included in prepaid expenses and other assets.
28
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 the loans.
DEPRECIATION AND AMORTIZATION
Furniture, fixtures and equipment are carried at cost less accumulated
depreciation. Furniture and equipment are depreciated using the straight-line
method over an estimated useful life of five years. Leasehold improvements are
amortized using the straight-line method over the life of the related lease.
GOODWILL
In August 2000, the Company formed a wholly owned subsidiary, RAIT
Capital Corp., d/b/a Pinnacle Capital Group, which acquired the net assets of
Pinnacle Capital Group, a first mortgage conduit lender. The Company acquired
Pinnacle for consideration of $980,000, which included the issuance of 12,500 of
the Company's common shares and paid cash of approximately $800,000. The excess
of consideration paid over net assets acquired of $979,000 is reflected on the
Company's consolidated balance sheet as goodwill.
On January 1, 2002 the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Intangible Assets" ("SFAS No. 142").
SFAS No. 142 modifies the accounting for all purchased goodwill and intangible
assets and includes requirements to test goodwill and indefinite lived
intangibles assets for impairment rather than amortize them. At the time of
adoption of SFAS No. 142, the unamortized balance of goodwill was approximately
$887,000. The Company no longer amortizes goodwill, thereby eliminating annual
amortization expense of approximately $65,000. The Company has completed
transitional testing as of December 31, 2002. No impairment was recognized.
STOCK BASED COMPENSATION
The Company accounts for its stock option grants under the provisions
of FASB No. 123, "Accounting for Stock-Based Compensation," which contains a
fair value-based method for valuing stock-based compensation that entities may
use, and measures compensation cost at the grant date based on the fair value of
the award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, the standard permits entities to
continue accounting for employee stock options and similar instruments under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees."
At December 31, 2002, the Company had a stock-based employee
compensation plan, which is more fully described in Note 9. The Company accounts
for that plan under the recognition and measurement principles of APB No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Stock-based employee compensation costs are not reflected in net income, as all
options granted under the plan had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
---- ---- ----
Net income, as reported $43,505,000 $26,914,000 $12,055,000
Less: stocks based compensation determined under
fair value based method for all awards 220,000 776,000 855,000
----------- ----------- -----------
Pro forma net income $43,285,000 $26,138,000 $11,200,000
=========== =========== ===========
Net income per share-basic as reported $ 2.50 2.68 1.93
pro forma $ 2.49 2.60 1.79
Net income per share-diluted as reported $ 2.48 2.65 1.92
pro forma $ 2.47 2.58 1.79
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used for grants in 2002, 2001 and 2000, respectively:
dividend yield of 11.0%, 11.3% and 14.9%; expected volatility of 22%, 14%
and 30%; risk-free interest rate of 4.8%, 5.1% and 5.8%; and expected lives
of five years.
29
FEDERAL INCOME TAXES
The Company qualifies and has elected to be taxed as a real estate
investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended, commencing with its taxable year ending December 31,
1999. If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its taxable income that is
distributed to its shareholders. A REIT is subject to a number of organizational
and operational requirements, including a requirement that it currently
distribute at least 90% of its annual taxable income.
EARNINGS PER SHARE
The Company follows the provisions of SFAS No. 128, "Earnings per
Share." Basic earnings per share excludes dilution and is computed by dividing
income available to common shares by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock. EPS is computed
based on the weighted average number of shares of common stock outstanding.
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
non-interest earning deposits and interest earning deposits. Cash paid for
interest was $9.2 million, $11.3 million, and $11.8 million for the years ended
December 31, 2002, 2001 and 2000, respectively. Long-term debt assumed in
conjunction with the acquisition of an investment in real estate was $5.4
million, $0 and $11.8 million for the years ended December 31, 2002, 2001 and
2000, respectively.
During 2002, the Company generated $3.2 million in income from loan
satisfaction. This related to the repayment of two loans (total net book value
of $2.3 million) with cash of $2.5 million and preferred interests in the
entities, which own the real estate underlying the loans. The Company recorded
the two interests in real estate at their current fair value based upon
discounted cash flows.
VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued FASB Interpretation 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 clarifies the application
of Accounting Research Bulletin 51, "Consolidated Financial Statements," for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company is in the process
of determining what impact, if any, the adoption of the provisions of FIN 46
will have upon its financial condition or results of operations.
EXTINGUISHMENT OF GAIN
In April 2002, the FASB issued Statement 145, Rescission of FASB Statements 4,
44, and 64, Amendment of FASB Statement 13, and Technical Corrections (SFAS
145). Among other provisions, SFAS 145 rescinds FASB Statement 4, Reporting
Gains and Losses from Extinguishment of Debt. Accordingly, gains or losses from
extinguishment of debt should not be reported as extraordinary items unless the
extinguishment qualifies as an extraordinary item under the criteria of
Accounting Principles Board Opinion 30, Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions (APB 30). Gains or
losses from extinguishment of debt, which do not meet the criteria of APB 30,
should be reclassified to income from continuing operations in all prior periods
presented. Upon adoption, the Company anticipates that it will reclassify a gain
on early extinguishment of debt of $4.6 million, previously recorded as an
extraordinary item, to revenues.
30
NOTE 3 -- INVESTMENTS IN REAL ESTATE LOANS
The Company's portfolio of real estate loans consisted of the following
at the dates indicated below:
DECEMBER 31,
------------
2002 2001
---- ----
First mortgages and senior loan participations $ 115,137,822 $ 72,600,036
Mezzanine loans 143,863,441 124,835,458
Unearned (fees) costs 146,820 (1,389,756)
Less: Allowance for loan losses (226,157) (226,157)
------------- -------------
Investments in real estate loans 258,921,926 195,819,581
Less: Senior indebtedness secured by real estate
underlying the Company's loans (30,430,916) (36,843,180)
------------- -------------
Net investments in real estate loans $ 228,419,010 $ 158,976,401
============= =============
The following is a summary description of the assets contained in the
Company's portfolio of investments in real estate loans as of December 31, 2002:
AVERAGE
NUMBER LOAN TO RANGE OF
TYPE OF LOAN OF LOANS VALUE YIELD RANGE MATURITIES
First mortgages and senior loan participations 13 76% 8.0%-12.8% 1/08/03-6/28/13
Mezzanine loans 36 88% 11.7%-21.4%(1) 3/11/03-5/1/21
- ----------------------
(1) Includes points charged.
At December 31, 2002, approximately $106.8 million in principal amount
of the loans were secured by multi-family properties, $94.5 million in principal
amount of the loans were secured by office buildings and $57.7 million in
principal amount of the loans were secured by retail and other properties. At
December 31, 2001, approximately $89.9 million in principal amount of the loans
were secured by multi-family properties, $67.3 million in principal amount of
the loans were secured by office buildings and $40.6 million in principal amount
of the loans were secured by retail and other properties.
As of December 31, 2002 and 2001, $68.0 million and $40.1 million in
principal amount of loans, respectively, were pledged as collateral amounts
outstanding on Company's lines of credit and senior indebtedness.
As of December 31, 2002 and 2001, senior indebtedness secured by real
estate underlying the Company's loans consisted of the following:
2002 2001
---- ----
Loan payable, secured by real estate, monthly installments of $13,789,
including interest at 7.08%, remaining principal due December 1, 2008 $ - $ 1,846,393
Loan payable, secured by real estate, monthly installments of $17,051,
including interest at 6.83%, remaining principal due December 1, 2008 - 2,333,839
Loan payable, secured by real estate, monthly installments of $10,070,
including interest at 6.83%, remaining principal due December 1, 2008 - 1,492,801
Loan payable, secured by real estate, monthly installments of $28,090,
including interest at 6.82%, remaining principal due November 1, 2008 4,093,838 4,149,577
Loan payable, secured by real estate, monthly installments of $72,005,
including interest at 7.55%, remaining principal due December 1, 2008 9,493,819 9,564,089
Loan payable, secured by real estate, monthly installments of principal and
interest based on an amortization schedule of 25 years, including interest at a
specified London interbank offered rates ("LIBOR") plus 135 basis points (2.73% 10,693,259 10,835,791
31
at December 31, 2002), remaining principal due September 15, 2007; the interest
rate is subject to an interest rate swap agreement entered into by the borrower
which provides for a fixed rate of 8.68%
Loan payable, secured by Company's interest in mezzanine loan, monthly
principal payments of $34,483 plus interest at 10%, due November 2, 2005 - 1,620,690
Loan payable, secured by Company's interest in bridge loan with a principal
balance of $7,500,000 interest only at 8% due monthly, principal balance due
June 23, 2003 - 5,000,000
Senior loan participation, secured by Company's interest in short-term bridge
loan with a principal balance of $4,750,000, interest only at a
specified LIBOR plus 275 basis points (4.13% at December 31, 2002) due
monthly, principal balance due January 8, 2003 3,510,000 -
Senior loan participation, secured by Company's interest in short-term bridge
loan with a principal balance of $3,300,000 interest only at LIBOR
plus 275 basis points (4.19% at December 31, 2002) due monthly, principal
balance due March 29, 2005 2,640,000 -
----------- -----------
$30,430,916 $36,843,180
=========== ===========
As of December 31, 2002, the senior indebtedness secured by real estate
underlying the Company's loans maturing over the next five years, and the
aggregate indebtedness maturing thereafter is as follows:
2003 3,884,218
2004 404,915
2005 3,078,152
2006 474,139
2007 10,266,263
Thereafter 12,323,229
-----------
$30,430,916
===========
NOTE 4 -- INVESTMENTS IN REAL ESTATE
Investments in real estate are comprised of the following at the dates
indicated below:
DECEMBER 31,
------------
2002 2001
---- ----
Multi-family (1) $ 66,327,670 $ 41,571,480
Office (2) 84,394,747 71,079,197
Land 613,519 613,519
------------- -------------
Subtotal 151,335,936 113,264,196
Less: Accumulated depreciation (11,817,885) (8,374,988)
------------- -------------
Investment in real estate, net $ 139,518,051 $ 104,889,208
============= =============
(1) Includes $13.7 million invested in two limited liability companies that
each own apartment buildings and a $1.6 million investment in an entity,
which is the beneficiary of a trust, that owns an apartment building.
Also includes escrow balances totaling $1.2 million at December 31, 2002,
which are held for payment of real estate taxes, insurance premiums and
repair and replacement.
(2) Includes a $1.5 million investment in a limited partnership that owns an
office building. Also includes escrows totaling $2.0 million at December
31, 2002, which are held for payment of real estate taxes, insurance
premiums, repair and replacement, tenant improvements and leasing
commissions.
As of December 31, 2002 and 2001, long-term debt secured by the Company's real
estate underlying its equity interests in entities owning real estate consisted
of the following:
32
2002 2001
---- ----
Loan payable, secured by real estate, monthly installments of $8,008, including
interest at 7.33%, remaining principal due August 1, 2008 1,027,294 1,046,271
Loan payable, secured by real estate, monthly installments of $288,314,
including interest at 6.85%, remaining principal due August 1, 2008 41,977,745 42,502,302
Loan payable, secured by real estate, monthly installments of $107,255,
including interest at 7.73%, remaining principal due December 1, 2009(1) 14,570,873 14,725,067
Loan payable, secured by real estate, monthly installments of $15,396, including
interest at 7.17%, remaining principal due March 1, 2012(1) 2,234,784 2,258,378
Loan payable, secured by real estate, monthly payments of $87,960, including
interest at 8.367%, remaining principal due March 11, 2028(2) 11,418,529 11,559,465
Loan payable, secured by real estate, monthly installments of $37,697, including
interest at 7.27%, remaining principal due January 1, 2010 5,343,198 -
Loan payable, secured by real estate, monthly installments of $47,720, including
interest at 5.73%, remaining principal due 7,588,570 -
----------- -----------
$84,160,993 $72,091,483
=========== ===========
(1) These loans both relate to the same real estate underlying the Company's
equity interest in the entity owning the real estate.
(2) As an inducement to pay interest at 8.36% from April 11, 1998 onward, rather
than 7.89%, the Company received a buy-up premium of $418,482 (balance of
$262,589 million and $292,288 at December 31, 2002 and 2001, respectively) which
is amortized over the term of the underlying debt.
As of December 31, 2002, the amount of long-term debt secured by the
Company's real estate investments that matures over the next five years, and the
aggregate indebtedness maturing thereafter, is as follows:
2003 1,126,421
2004 1,207,547
2005 1,297,137
2006 1,392,076
2007 1,478,968
Thereafter 77,658,844
-----------
$84,160,993
===========
Expenditures for repairs and maintenance are charged to operations as
incurred. Significant renovations are capitalized. Fees and costs incurred in
the successful negotiation of leases are deferred and amortized on a
straight-line basis over the terms of the respective leases. Unamortized fees as
of December 31, 2002 and 2001 were $700,000 and $388,000, respectively. Rental
revenue is reported on a straight-line basis over the terms of the respective
leases. Depreciation expense relating to the Company's real estate investments
for the years ended December 31, 2002, 2001 and 2000 was $3.4 million and $3.1
million, $2.9 million, respectively.
33
The Company leases space in the buildings it owns to several tenants.
Approximate future minimum lease payments under noncancellable leasing
arrangements as of December 31, 2002 are as follows:
2003 $ 13,221,186
2004 13,117,249
2005 12,193,925
2006 11,083,574
2007 8,368,814
Thereafter 29,322,297
----------
$ 87,307,045
==========
NOTE 5 -- LINES OF CREDIT
The following is a description of the Company's secured lines of credit
at December 31, 2002:
In October 2002, the Company obtained a $20.0 million line of credit.
Each draw on this line must be secured by a pledge of a loan or loans in the
Company's portfolio. The line currently 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. The minimum interest rate is
4.75%. As of December 31, 2002 there was $10.2 million outstanding under this
line and the weighted average interest rate for the year ended December 31, 2002
was 4.75%. Absent any renewal, this Line will terminate in October 2003 and any
principal then outstanding must be paid by October 2004.
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.
This 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 September
2003. The Company utilized this line throughout 2002; however, as of December
31, 2002, there were no amounts outstanding. The weighted average interest rate
for the year ended December 31, 2002 was 5.5%.
A $20.0 million line of credit that bears interest at The Wall Street
Journal prime rate described above. Each draw on this line must be secured by a
pledge of a loan or loans in the Company's portfolio. The facility has a
two-year term with annual one-year extension options, and an 11-month
non-renewal notice requirement. At December 31, 2002 and 2001, there was $20.0
million and $2.0 million, respectively outstanding under this line and the
weighted average interest rates for the years ended December 31, 2002, 2001 and
2000 were 4.7%, 6.9%, and 9.3 %, respectively.
NOTE 6 -- SHAREHOLDERS' EQUITY
In November 2002, the Company issued 550,000 common shares in a public
offering at a offering price of $20.70 per share. After offering costs,
including underwriters' commissions, of approximately $561,500, the Company
received approximately $10.8 million of net proceeds.
In August 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.
In May 2002, the Company issued 1.0 million common shares in a public
offering at an offering price of $20.50 per share. After offering costs,
including underwriters' commissions, of approximately $1.0 million, the Company
received approximately $19.5 million of net proceeds. 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.
In April 2002 and May 2002, Friedman Billings Ramsey ("FBR") acquired
1,190 and 103,455 common
34
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.
In March 2002, the Company issued 1.2 million common shares in a public
offering at an offering price of $18.05 per share. After offering costs,
including underwriters' commissions, of approximately $1.1 million, the Company
received approximately $20.6 million of net proceeds. 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.
In January 2002 the Company issued 375,000 common shares pursuant to
the exercise of an over-allotment option granted by the Company relating to a
public offering of common shares by the Company that commenced in December 2001.
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 December 2001, the Company issued 2.5 million common shares in
a public offering. The net proceeds received by the Company in connection with
the public offering were approximately $37.0 million. Total offering costs
approximated $2.8 million including underwriting discounts. 125,000 of the
common shares sold in the public offering were purchased by Resource America,
and 136,179 common shares sold in the public offering were purchased by officers
and trustees of the Company, and related persons. The public offering price of
the common shares was $16.00 per share. The shares purchased by Resource
America, officers and trustees of the Company, and related persons were
purchased at $15.12 per share (a price equal to the public offering price less
the selling concession).
In August 2001, the Company issued an additional 338,983 common shares
associated with the over allotment of the second quarter offering, at $15.25 per
share. After underwriting discounts and commissions, the Company received total
net proceeds of $4.9 million.
In July 2001, the Company issued an additional 2.55 million common
shares in a public offering. The net proceeds received by the Company in
connection with the public offering were approximately $36.3 million. Total
offering costs approximated $2.7 million including underwriting discounts.
105,000 of the common shares sold in the public offering were purchased by
Resource America, and 64,899 common shares sold in the public offering were
purchased by officers and trustees of the Company, and related persons. The
public offering price of the common shares was $15.25 per share. The shares
purchased by Resource America, officers and trustees of the Company, and related
persons were purchased at $14.41 per share (a price equal to the public offering
price less the selling concession).
In May 2001, the Company issued an additional 420,000 shares associated
with the over allotment of its first quarter offering at $13.75 per share. After
underwriting discounts and commissions, the Company received total net proceeds
of $5.4 million.
In March 2001, the Company issued 2.8 million common shares in a public
offering at an offering price of $13.75 per share. After offering costs,
including underwriters' commissions, of approximately $3.6 million, the Company
received approximately $35.0 million of net proceeds.
NOTE 7 -- BENEFIT PLANS
401-(K) PROFIT SHARING PLAN
The Company has a 401(k) savings plan covering substantially all
employees. Under the plan, the Company matches 75% of employee contributions for
all participants. Contributions made by the Company were approximately $99,700,
$67,500 and $30,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
35
DEFERRED COMPENSATION
In January 2002 the Company established a supplemental executive
retirement plan, or SERP, providing for retirement benefits to Betsy Z. Cohen,
its Chairman and Chief Executive Officer, as required by her employment
agreement with the Company. The normal retirement benefit is equal to 60% of
Mrs. Cohen's average base plus incentive compensation for the three years
preceding the termination of employment, less social security benefits,
increasing by .05% for each month of employment after Mrs. Cohen reaches age 65.
Mrs. Cohen's rights in the SERP benefit vest 25% for each year of service after
October 31, 2002. The Company established a trust to serve as the funding
vehicle for the SERP benefit and deposited 58,912 of the Company's common shares
and $345,000 in this trust. The Company has recorded deferred compensation of
$1.25 million for the fair value of the common shares. For the year ended
December 31, 2002 the Company recognized $96,000 of compensation expense with
regard to this commitment.
NOTE 8 - EARNINGS PER SHARE
The Company's calculation of earnings per share in accordance with SFAS
No. 128 is as follows:
YEAR ENDED DECEMBER 31, 2002
----------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------
BASIC EARNINGS PER SHARE:
Net income available to common shareholders $43,504,666 17,433,260 $ 2.50
Effect of dilutive securities:
Options - 97,226 (.02)
Warrants - 7,850 -
----------- ---------- ---------
Net income available to common shareholders
plus assumed conversions $43,504,666 17,538,336 $ 2.48
=========== ========== =========
YEAR ENDED DECEMBER 31, 2001
----------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------
BASIC EARNINGS PER SHARE:
Net income available to common shareholders $26,914,180 10,039,788 $ 2.68
Effect of dilutive securities:
Options - 95,461 (.02)
Warrants - 7,682 (.01)
----------- ---------- ---------
Net income available to common shareholders
plus assumed conversions $26,914,180 10,142,931 $ 2.65
=========== ========== =========
YEAR ENDED DECEMBER 31, 2000
----------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------
BASIC EARNINGS PER SHARE:
Net income available to common shareholders $12,054,725 6,251,828 $ 1.93
Effect of dilutive securities:
Options - 14,094 (.01)
----------- --------- ---------
Net income available to common shareholders
plus assumed conversions $12,054,725 6,265,922 $ 1.92
=========== ========= =========
Options to purchase 396,500 shares at $15.00 per share and warrants to
purchase 141,667 shares at $15.00 per share were outstanding during 2000. They
were not included in the computation of diluted earnings per share because the
option exercise price was greater than the average market price.
36
NOTE 9 -- STOCK BASED COMPENSATION
The Company maintains a non-qualified and incentive share option plan
(the "Option Plan"). The maximum aggregate number of common shares that may be
issued pursuant to options granted under the Option Plan is 1,600,000. The
purpose of the Option Plan is to provide a means of performance-based incentive
compensation for the Company's key employees.
In February and April 2002, the Company granted to its employees,
executive officers and trustees options to purchase 61,100 common shares at the
fair market value on the date of grant. 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 these exercises are
subject to restrictions that lapse with respect to 25% of these common shares
annually on the anniversary date of the grants 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. Each of these promissory notes bears
interest at a rate of 6% per annum. The aggregate principal amount of all these
promissory notes was $1.1 million at December 31, 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.
The common shares 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 amount due under the note for which the maker is not personally
liable the return of all common shares purchased by maker with the proceeds of
the note.
The Company has granted to its officers, trustees and employees options
to acquire common shares. The vesting period is determined by the Compensation
Committee and the option term is generally ten years after the date of grant. At
December 31, 2002, there are 427,682 options outstanding.
A summary of the activity of the Option Plan is presented below.
2002 2001 2000
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding, January 1, 560,825 $ 13.16 586,825 $ 12.99 630,000 $ 13.19
Granted 87,100 18.12 10,000 13.65 85,000 11.65
Exercised (220,243) 12.41 (36,000) 10.39 (52,175) 10.34
Terminated - - - - (76,000) 15.00
-------- ------- -------
Outstanding, December 31 427,682 14.52 560,825 13.16 586,825 12.99
======== ======= =======
Options exercisable at
December 31, 378,932 508,244 281,663
======== ======= =======
Weighted average fair value of
options granted during the year $ 5.47 $ 3.45 $ 4.34
======== ======== ========
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ------------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER
RANGE OF OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT WEIGHTED AVERAGE
EXERCISE PRICES DECEMBER 31, 2002 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2002 EXERCISE PRICE
- ------------------ ----------------- ---------------- ----------------- ----------------- ----------------
$ 9.00-11.65 80,682 7.22 years $11.13 59,432 $10.94
$13.65-15.00 321,000 5.10 years $14.96 316,000 $14.98
$19.21-19.85 26,000 9.35 years $19.58 3,500 $19.67
------- ------
427,682 378,932
======= =======
37
NOTE 10 -- COMMITMENTS
LEASE OBLIGATIONS
The Company sub-leases both its downtown and suburban Philadelphia
office locations. The annual minimum rent pursuant to the subleases is estimated
to be as follows:
2003 $ 310,435
2004 306,579
2005 312,921
2006 319,264
2007 323,493
Thereafter 862,648
-----------
Total $ 2,435,340
===========
The Company sub-leases a portion of its downtown Philadelphia office
space under an operating lease with The Bancorp, Inc., ("Bancorp") whose Chief
Executive Officer is, and whose Chairman is a son of, the Chairman and Chief
Executive Officer of the Company, at an annual rental based upon the amount of
square footage the Company occupies. The sub-lease expires in August 2010 with
two five-year renewal options. Rent paid to Bancorp was approximately $183,000,
$137,000 and $39,000 for the years ended December 31, 2002, 2001, and 2000
respectively.
Commencing in 2002 the Company sub-leases the remainder of its downtown
Philadelphia office space under an operating lease with The Richardson Group,
Inc. ("Richardson") whose Chairman is a trustee and Secretary of the Company,
and a son of the Chairman and Chief Executive Officer of the Company. The Senior
Vice President and Chief Operating Officer of Richardson is the spouse of the
Executive Vice President and Chief Financial Officer of the Company. The annual
rental is based upon the amount of square footage the Company occupies. The
sub-lease expires in August 2010 with two five-year renewal options. Rent paid
to Richardson was approximately $53,000 for the year ended December 31, 2002.
The Company sub-leases suburban office space at an annual rental of
$10,000. This sublease currently terminates in February 2004 but renews
automatically each year for a one year term unless prior notice of termination
of the sublease is sent by either party to the sublease to the other party
thereto.
Total rental expense was $253,000, $147,000 and $82,000 for the years
ended December 31, 2002, 2001 and 2000.
EMPLOYMENT AGREEMENTS
The Company is party to employment agreements with certain executives
that provide for compensation and certain other benefits. The agreements also
provide for severance payments under certain circumstances.
NOTE 11 -- TRANSACTIONS WITH AFFILIATES
Resource America was the sponsor of the Company and held approximately
6.8% of the Company's outstanding common shares at December 31, 2002. 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 Resource America, (ii) the parent of Daniel Cohen, who was, until October
2002, a director of Resource America and (iii) the parent of Jonathan Z. Cohen,
the Chief Operating Officer and a director of Resource America. Jonathan Cohen
is also a Trustee and the Secretary of the Company. The President and Chief
Operating Officer of the Company, Scott F. Schaeffer, was, until October 2002, a
director of Resource America.
During 2002, the Company engaged in the following transactions with
Resource America:
In June 2002, the Company purchased from Resource America 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.
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
38
made to a separate borrower to finance the purchase of a separate property. All
three borrowers were limited partnerships in which Resource Properties, Inc., a
wholly owned subsidiary of Resource America, was the general partner. As of
December 31, 2002, these loans have been fully repaid.
During 2001 the Company engaged in the following transactions with
Resource America:
In June 2001, the Company provided $1.6 million of financing in
connection with the borrower's acquisition of a loan from Resource America with
respect to an 81-unit apartment complex in Middletown, Connecticut. The loan is
secured by a collateral assignment of all of the underlying documents evidencing
the loan acquired from Resource America, including assignment of the first
mortgage encumbering the property. The loan was repaid in July 2001.
In March 2001, the Company purchased from Resource America two
subordinate loans (in the original principal amounts of $18.3 million and $4.9
million) underlying one of the Company's interests in real estate. The purchase
price for the loans was $20.2 million. The difference between the purchase price
and the underlying face value of the loans resulted in a gain of $4.6 million
resulting from the extinguishment of indebtedness underlying an investment in
real estate.
Also in March 2001, the Company sold its entire interest in two loans
to Resource America for an aggregate purchase price of $21.6 million, which was
the book value of the interests.
During 2000 the Company engaged in the following transactions with
Resource America:
In May 2000, the Company purchased an interest held by Resource America
that is junior to one of the Company's existing loans for $1.8 million (face
value plus accrued interest).
In connection with the Company's January 1998 initial public offering,
the Company purchased certain investments from Resource America. In June 2000,
the Company received a payment of $300,000 for the termination of the Company's
appreciation interest in one of these investments.
The Company anticipates that it will purchase and sell additional loans
and lien interests in loans to and from Resource America, and participate with
it in other transactions.
TRANSACTIONS WITH OTHER AFFILIATES:
Brandywine Construction & Management, Inc. ("Brandywine"), an affiliate
of Resource America, provided real estate management services to ten properties
underlying the Company's loans and five interests in real estate owned by the
Company at December 31, 2002. Brandywine provided real estate management
services to ten properties underlying the Company's loans and two interests in
real estate owned by the Company at December 31, 2001. Management fees in the
amount of $1.0 million, $978,000 and $471,000 were paid to Brandywine for the
years ended December 31, 2002, 2001 and 2000, respectively, relating to the
properties owned by the Company.
Betsy Z. Cohen is the Chief Executive Officer and a director of
Bancorp. Daniel Cohen is the Chairman of the Board of Bancorp. The Company
maintains most of its checking and demand deposit accounts at Bancorp. As of
December 31, 2002 and 2001, the Company had $12.6 million and $12.2 million,
respectively, on deposit, of which approximately $12.5 million and $12.1
million, respectively, is over the FDIC insurance limit. During the course of
2001, the Company sold loan participations totaling $1.5 million to Bancorp. The
loan participations were sold at their current book value; accordingly no gain
was recorded on the sale. In January 2001, the Company began paying a fee of
$5,000 per month to Bancorp for technical support services provided to the
Company by Bancorp. The Company paid $60,000 for each of the years ended
December 31, 2002 and 2001. The Company subleases a portion of its downtown
Philadelphia office space from Bancorp.
39
The Company sub-leases apportion of its downtown Philadelphia office
space under an operating lease with Richardson. See Note 10.
In December 2002, the Company sold a 15.367% interest in a wholly owned
limited liability company that owns a property to a partnership whose general
partner is a son of the Chairman and Chief Executive Officer of the Company. The
buyer paid $513,000, which approximated the book value of the interests in real
estate. No gain or loss was recognized on the sale.
In March 2002, the Company sold its interest in one loan with a book
value of $1.2 million for a price of $2.2 million to a partnership whose general
partner is a son of the Chairman and Chief Executive Officer of the Company. The
Company recognized a gain on sale of approximately $948,000.
In December 2001, the Company sold its interests in three loans
totaling $2.8 to a partnership whose general partner is a son of the Chairman
and Chief Executive Officer of the Company. The buyer paid $3.3 million, which
included the assumption of debt totaling $646,000. The Company recognized a gain
on sale of approximately $535,000.
NOTE 12 -- CONCENTRATIONS OF CREDIT RISK
The Company believes that it does not concentrate its assets in any way
that exposes it to a material loss from any single occurrence or group of
occurrences. The Company has no loans or investments with cross default and or
cross collateral provisions with other loans or investments in its portfolio.
40
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an
entity's assets and liabilities considered to be financial instruments. For the
Company, the majority of its assets and liabilities are considered financial
instruments as defined in SFAS No. 107. However, many such instruments lack an
available trading market, as characterized by a willing buyer and seller
engaging in an exchange transaction. Also, it is the Company's general practice
and intent to hold its financial instruments to maturity and not to engage in
trading or sales activities, except for certain loans. Therefore, the Company
has used significant assumptions and present value calculations in estimating
fair value. Changes in the assumptions or methodologies used to estimate fair
values may materially affect the estimated amounts. Also, there may not be
reasonable comparability between institutions due to the wide range of permitted
assumptions and methodologies in the absence of active markets. This lack of
uniformity gives rise to a high degree of subjectivity in estimating financial
instrument fair values.
Estimated fair values have been determined by the Company using the
best available data and an estimation methodology suitable for each category of
financial instrument. The estimation methodologies used, the estimated fair
values, and recorded book values at December 31, 2002 and 2001 are outlined
below.
For cash and cash equivalents, the recorded book value of $19.7 million
and $18.1 million as of December 31, 2002 and 2001, respectively, approximated
fair value. The book value of restricted cash of $5.5 million and $ 4.6 million
approximated fair value at December 31, 2002 and 2001, respectively. The
recorded book value of the secured lines of credit totaling $30.2 million and
$2.0 million at December 31, 2002 and 2001, respectively, approximated the fair
value of the amounts outstanding.
The net loan portfolio, senior indebtedness secured by real estate
underlying the Company's loans, and long term debt secured by real estate owned
at December 31, 2002 and 2001 have been valued using a present value of expected
future cash flows. The discount rate used in these calculations is the estimated
current market rate adjusted for credit risk. The carrying value of accrued
interest approximates fair value.
The following tables describe the carrying amounts and fair value
estimates of the Company's investments in real estate loans and long-term debt
underlying the Company's loans and interests in real estate:
AT DECEMBER 31, 2002
--------------------
CARRYING ESTIMATED DISCOUNT
AMOUNT FAIR VALUE RATE
------ ---------- ----
First mortgages and senior loan participations $115,138,000 $117,342,000 7.5%
Mezzanine loans 143,863,000 153,703,000 11.5%
Senior indebtedness secured by real estate underlying the Company's loans 30,431,000 31,063,000 7.0%
Long-term debt secured by real estate underlying equity interest 84,161,000 88,757,000 6.0%
AT DECEMBER 31, 2001
--------------------
CARRYING ESTIMATED DISCOUNT
AMOUNT FAIR VALUE RATE
------ ---------- ----
First mortgages and senior loan participations $ 72,600,000 $ 73,617,000 9.0%
Mezzanine loans 124,835,000 131,057,000 11.8%
Senior indebtedness secured by real estate underlying the Company's loans 36,843,000 35,615,000 8.0%
Long-term debt secured by real estate underlying equity interest 72,091,000 69,466,000 7.7%
NOTE 14 -- SEGMENT REPORTING
The Company has identified that it has one operating segment;
accordingly it has determined that it has one reportable segment. As a group,
the executive officers of the Company act as the Chief Operating Decision Maker
41
("CODM"). The CODM reviews operating results to make decisions about all
investments and resources and to assess performance for the entire company. The
Company's portfolio consists of one reportable segment, investments in real
estate through the mechanism of lending and/or ownership. The CODM manages and
reviews the Company's operations as one unit. Resources are allocated without
regard to the underlying structure of any investment, but rather after
evaluating such economic characteristics as returns on investment, leverage
ratios, current portfolio mix, degrees of risk, income tax consequences and
opportunities for growth. The Company has no single customer that accounts for
10% or more of revenues.
42
NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the
Company which, in the opinion of management, reflects all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's results of operations
FOR THE THREE MONTHS ENDED
--------------------------
2002 DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- ------------ ------------
Mortgage interest income $ 9,099,691 $ 8,369,948 $ 8,037,385 $ 8,278,344
Rental income 6,705,848 6,175,076 6,466,737 6,663,244
Fee income and other 461,196 910,754 3,318,310 347,615
Investment income 637,792 681,589 463,541 96,552
Gain on sale of loans - - - 947,974
Gain on sale of interests in real estate 2,850,645 - - -
Income from loan satisfaction - 3,181,670 - -
Interest expense 2,514,734 2,570,182 2,070,940 2,146,602
Property operating expenses 3,592,573 3,291,188 3,255,602 2,879,244
Other operating expenses 1,886,420 2,152,674 1,963,312 1,807,657
------------ ------------ ------------ ------------
Net income before minority interest 11,761,445 11,304,993 10,996,119 9,500,226
Minority interest (76,717) 128,553 (38,971) (70,983)
------------ ------------ ------------ ------------
Net income $ 11,684,728 $ 11,433,546 $ 10,957,148 $ 9,429,243
============ ============ ============ ============
Basic earnings per share:
Net income $ 0.63 $ 0.63 $ 0.62 $ 0.61
Diluted earnings per share
Net income $ 0.63 $ 0.63 $ 0.62 $ 0.60
FOR THE THREE MONTHS ENDED
--------------------------
2001 DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
----------- ----------- ----------- -------------
Mortgage interest income $ 7,483,110 $ 5,877,477 $ 5,458,946 $ 4,843,825
Rental income 6,101,694 5,701,081 5,566,242 4,782,392
Fee income and other 828,956 2,588,282 1,479,660 677,700
Investment income 229,763 139,217 61,872 75,321
Gain on sale of loans 534,958 - - -
Gain on early extinguishment of debt - - - 4,633,454
Interest expense 2,141,820 2,592,566 2,743,079 3,150,075
Property operating expenses 3,290,596 3,439,836 3,125,134 2,323,676
Other operating expenses 2,117,040 1,650,642 1,780,763 1,835,511
----------- ----------- ----------- -------------
Net income before minority interest 7,629,025 6,623,013 4,917,744 7,703,430
Minority interest (9,294) 26,831 23,667 (236)
----------- ----------- ----------- -------------
Net income $ 7,619,731 $ 6,649,844 $ 4,941,411 $ 7,703,194
=========== =========== =========== =============
Basic earnings per share:
Net income $ 0.60 $ 0.57 $ 0.53 $ 1.20
Diluted earnings per share
43
Net income $ 0.60 $ 0.56 $ 0.53 $ 1.19
NOTE 16 -- SUBSEQUENT EVENTS
On February 10, 2003, the Company issued 1.75 million common shares in
a public offering at an offering price of $20.75 per share. After offering
costs, including the underwriter's discount and expenses, of approximately $1.7
million, the Company received approximately $34.6 million of net proceeds.
On March 4, 2003, the Company issued an additional 262,500 common
shares pursuant to the underwriter's exercise of its over-allotment option in
connection with this offering. The exercise price was $20.75 per share,
resulting in receipt by the Company of total net proceeds of approximately
$5.2 million in connection with this offering.
44
SCHEDULE IV
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2002
PERIODIC FACE AMOUNT BOOK VALUE
LOAN TYPE/PROPERTY TYPE MATURITY DATE PAYMENT TERMS PRIOR LIENS OF LOANS OF LOANS
----------------------- ------------- ------------- ------------ -------- --------
FIRST MORTGAGES AND SENIOR
LOAN PARTICIPATIONS
Residential 6/22/2003 interest only $ - $ 7,500,000 $ 7,500,000
Residential 6/28/2013 interest only 10,640,000 10,640,000
Residential 6/28/2013 interest only 12,080,000 12,080,000
Residential 6/28/2013 interest only 12,080,000 12,080,000
Residential 11/1/2003 interest only 14,700,000 14,700,000
Commercial 1/8/2003 interest only 3,510,000 4,750,000 4,750,000
Commercial 8/12/2003 interest only 6,440,000 6,440,000
Commercial 3/30/2003 interest only 35,000,000 35,000,000
All other residential 7/31/2003-3/29/2005 2,640,000 3,894,772 3,894,772
All other commercial 3/11/03-7/26/2005 - 8,053,050 8,053,050
------------ ------------
Total first mortgages and
senior loan participations $ 6,150,000 $115,137,822 $115,137,822
------------ ------------ ------------
Mezzanine loans
Residential 10/31/2008 interest only $ 4,093,838 $ 5,675,000 $ 5,675,000
Residential 9/8/2007 interest only 10,693,259 14,463,288 14,463,288
Residential 6/4/2011 interest only 13,338,766 6,168,037 6,168,037
Residential 12/30/2017 interest only 11,866,994 4,600,642 4,600,642
Commercial 11/30/2008 interest only 9,493,819 12,618,075 12,618,075
Commercial 7/10/2006 interest only 15,936,228 6,950,000 6,950,000
Commercial 8/30/2004 interest only 24,106,342 5,068,156 5,068,156
Commercial 9/18/2004 interest only 24,052,870 7,752,134 7,752,134
Commercial 9/24/2011 interest only 16,954,777 7,930,626 7,930,626
Commercial 7/29/2003 interest only 29,959,938 7,612,700 7,612,700
Commercial 7/10/2004 interest only 12,064,984 7,080,000 7,080,000
All other residential 4/4/2003-6/28/2013 121,023,759 22,548,225 22,548,225
All other commercial 3/11/2003-5/1/2021 184,372,918 35,396,558 35,396,558
------------ ------------ ------------
Total mezzanine loans $477,958,493 $143,863,441 $143,863,441
------------ ------------ ------------
Grand Total $484,108,493 $259,001,263 $259,001,263
============ ============ ============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
45
PART III
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be set forth in our
definitive proxy statement with respect to our 2003 annual meeting of
shareholders, to be filed on or before April 30, 2003 and is incorporated
herein by reference. We have set the date of our annual meeting of shareholders
for Tuesday, May 27, 2003 at 10:00 a.m.
Since the month and date of the 2003 annual meeting has been advanced
more than 30 days from the month and date of the 2002 annual meeting, the
following shareholder information is updated from our 2002 proxy materials:
- Shareholders who desire to submit proposals for inclusion in
our proxy statement for this meeting, subject to compliance
with the eligibility standards specified in the relevant SEC
rules, must submit such proposals to our Secretary a
reasonable time before we begin to print and mailing our
proxy.
- The proxy for this meeting may confer discretionary authority
to vote on any matter, including any shareholder proposal,
where we have not received notice of the matter a reasonable
time before the anticipated proxy mailing date.
- As provided in our by-laws, a shareholder who is entitled to
vote at this meeting may nominate a person for election as a
trustee if the shareholder has filed the nomination with our
Secretary on or before May 7, 2003.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in our
definitive proxy statement with respect to our 2003 annual meeting of
shareholders, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item other than the information
referenced in the following sentence will be set forth in our definitive proxy
statement with respect to our 2003 annual meeting of shareholders, and is
incorporated herein by reference. The information under the caption "Equity
Compensation Plan Information" set forth in Item 5 above is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be set forth in our
definitive proxy statement with respect to our 2003 annual meeting of
shareholders, and is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized, and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our chief executive officer and our chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure. We
necessarily applied our judgment in assessing the costs and benefits of such
controls and procedures which, by their nature, can provide only reasonable
assurance regarding our control objectives.
During the 90 days prior to the date this Annual Report was filed with
the SEC, we carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Our chief executive officer and chief financial officer
participated and provided input into this process. Based upon the foregoing,
these senior officers concluded that our disclosure controls and
46
procedures are effective in timely alerting them to material information
relating to us required to be included in the our Securities Exchange Act
reports.
There have been no significant changes in our internal controls or in
other factors which could significantly affect internal controls subsequent to
the date our chief executive officer and chief financial officer carried out
their evaluation.
47
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) Listed below are all financial statements, financial statement schedules,
and exhibits filed as part of this 10-K and herein included.
(1) Financial Statements
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Income for the three years ended December 31, 2002
Consolidated Statements of Changes in Shareholders' Equity for the three years
ended December 31, 2002
Consolidated Statements of Cash Flows for the three years ended December 31,
2002
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule IV - Mortgage Loans on Real Estate
All other schedules are not applicable or are omitted since either (i) the
required information is not material or (ii) the information required is
included in the consolidated financial statements and notes thereto.
(3) Exhibits
The Exhibits furnished as part of this annual report on Form 10-K are identified
in the Exhibit Index immediately following the signature pages and
certifications of this annual report. Such Exhibit Index is incorporated herein
by reference.
(b) Reports on Form 8-K
We filed three reports on Form 8-K during the quarter ending December 31, 2002:
- - A report on Form 8-K was dated October 24, 2002 and was filed on November
1, 2002. Pursuant to Item 5 "Other Events and Required FD Disclosure," we
reported that we issued a press release regarding our earnings for the third
quarter of fiscal 2002.
- - A report on Form 8-K was dated October 31, 2002 and was filed on November
7, 2002. Pursuant to Item 5 "Other Events and Required FD Disclosure," we
reported that we entered into a purchase agreement with an underwriter and filed
a prospectus supplement relating to a public offering of our common shares of
beneficial interest.
- - A report on Form 8-K was dated November 14, 2002 and was filed on November
14, 2002. Pursuant to Item 9 "Regulation FD Disclosure," we filed certifications
made by our Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
RAIT INVESTMENT TRUST
March 31, 2003 By: /s/ Betsy Z. Cohen
----------------------
Betsy Z. Cohen
Chairman, Chief Executive Officer and Trustee
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Betsy Z. Cohen
- --------------------------------
Betsy Z. Cohen Chairman, Chief Executive Officer and Trustee March 31, 2003
(Principal Executive Officer)
By: /s/ Scott F. Schaeffer
- --------------------------------
Scott F. Schaeffer President and Chief Operating Officer March 31, 2003
By: /s/ Ellen J. DiStefano
- --------------------------------
Ellen J. DiStefano Executive Vice President and Chief Financial Officer March 31, 2003
(Principal Financial Officer and
Principal Accounting Officer)
By: /s/ Jonathan Z. Cohen
- --------------------------------
Jonathan Z. Cohen Secretary and Trustee March 31, 2003
By: /s/ Edward S. Brown
- --------------------------------
Edward S. Brown Trustee March 31, 2003
By: /s/ Arthur Makadon
- --------------------------------
Arthur Makadon Trustee March 31, 2003
By: /s/ Joel R. Mesznik
- --------------------------------
Joel R. Mesznik Trustee March 31, 2003
By: /s/ Daniel Promislo
- --------------------------------
Daniel Promislo Trustee March 31, 2003
49
CERTIFICATIONS
I, Betsy Z. Cohen, certify that:
1. I have reviewed this annual report on Form 10-K of RAIT Investment Trust;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Betsy Z. Cohen
------------------------------
Name: Betsy Z. Cohen
Title: Chief Executive Officer
50
CERTIFICATIONS
I, Ellen J. DiStefano, certify that:
1. I have reviewed this annual report on Form 10-K of RAIT Investment Trust;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Ellen J. DiStefano
------------------------------
Name: Ellen J. DiStefano
Title: Chief Financial Officer
51
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------ ------------------------
3.1 Amended and Restated Declaration of Trust of RAIT Investment Trust (1)
3.1.1 Articles of Amendment of Amended and Restated Declaration of Trust of RAIT Investment Trust (2)
3.1.2 Articles of Amendment of Amended and Restated Declaration of Trust of RAIT Investment Trust (3)
3.1.3 Certificate of Correction to the Amended and Restated Declaration of Trust of RAIT Investment Trust (4)
3.2 By-laws of RAIT Investment Trust, as amended (1)
3.3 Articles of Incorporation of RAIT General, Inc. (1)
3.4 By-laws of RAIT General, Inc. (1)
3.5 Articles of Incorporation of RAIT Limited, Inc. (1)
3.6 By-laws of RAIT Limited, Inc. (1)
4 Form of Certificate for common shares of RAIT Investment Trust (3)
10.1 Form of Indemnification Agreement (1)
10.2 Form of Loan Purchase and Sale Agreement between RAIT Partnership, L.P., as buyer, and Resource America,
Inc., as seller (1)
10.3 Employment Agreement dated January 23, 2002 between Betsy Z. Cohen and RAIT Investment Trust (Corrected)
10.4 Employment Agreement dated January 23, 2002 between Scott F. Schaeffer and RAIT Investment Trust (5)
10.5 Revolving Credit Loan and Security Agreement between RAIT Investment Trust, RAIT Partnership, L.P., as
borrower, and Sovereign Bank, as lender, dated April 21, 1999 (3)
10.5.1 First Amendment dated October 29, 1999 to Revolving Credit Loan and Security Agreement between RAIT
Investment Trust, RAIT Partnership, L.P., as borrower, and Sovereign Bank, as lender (3)
10.6 Loan and Security Agreement dated October 1, 2002 by and between RAIT Partnership, L.P., as borrower, and
Commerce Bank, N.A., as lender.
10.7 First Amendment to Loan and Security Agreement dated October 17, 2002 by and between RAIT Partnership, L.P.
as borrower, and Commerce Bank, N.A., as lender.
10.8 Guarantee and Surety Agreement made as of October 1, 2002 by RAIT Investment Trust, as guarantor, for the
benefit of Commerce Bank, N.A.
10.9 Amended and Restated RAIT Investment Trust 1997 Stock Option Plan (as amended through July 16, 2002) (6)
21 List of Subsidiaries
23 Consent of Grant Thornton LLP
(1) Incorporated by reference to RAIT Investment Trust's Registration
Statement on Form S-11 (Registration No. 333-35077)
(2) Incorporated by reference to RAIT Investment Trust's Registration
Statement on Form S-11 (Registration No. 333-53067)
(3) Incorporated by reference to RAIT Investment Trust's Registration
Statement on Form S-2 (Registration No. 333-55518)
(4) Incorporated by reference to RAIT Investment Trust's Form 10-Q for
the Quarterly Period ended March 31, 2002 (File No. 1-14760).
(5) Incorporated by reference to RAIT Investment Trust's Annual Report
on Form 10-K/A for its fiscal year ended December 31, 2001 (File
No. 1-14760).
(6) Incorporated by reference to RAIT Investment Trust's Registration
Statement on Form S-8 (Registration No. 333-100766)
52