SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
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
(Exact name of registrant as specified in its charter)
MARYLAND 23-2919819
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o RAIT PARTNERSHIP, L.P.
1818 MARKET STREET, 28TH FLOOR, PHILADELPHIA, PA 19103
(Address of principal executive offices) (Zip Code)
(215) 861-7900
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ X ] No [ ]
As of August 14, 2003, 20,852,683 common shares of beneficial interest, par
value $0.01 per share, of the registrant were outstanding.
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets at June 30, 2003 (unaudited) and December 31, 2002 3
Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2003
and 2002 5
Notes to Consolidated Financial Statements - June 30, 2003 (unaudited) 6
Report of Independent Certified Public Accountants 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
ITEM 4. CONTROLS AND PROCEDURES 18
PART II. OTHER INFORMATION 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
EXHIBIT INDEX 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003
(UNAUDITED) DECEMBER 31, 2002
-------------- -----------------
ASSETS
Cash and cash equivalents $ 19,859,606 $ 19,666,189
Restricted cash 12,971,701 5,484,342
Tenant escrows 170,108 428,346
Accrued interest receivable 10,126,946 7,421,907
Investments in real estate loans, net 311,232,416 258,921,926
Investments in real estate, net 119,132,135 139,518,051
Furniture, fixtures and equipment, net 653,307 611,224
Prepaid expenses and other assets 8,179,688 5,911,495
Goodwill, net 887,143 887,143
------------- -------------
Total assets $ 483,213,050 $ 438,850,623
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 646,254 $ 421,149
Accrued interest payable 457,653 677,309
Tenant security deposits 408,516 657,921
Borrowers' escrows 10,705,424 10,150,938
Dividends payable 12,925,735 --
Senior indebtedness secured by real estate underlying the
Company's loans 32,932,992 30,430,916
Long-term debt secured by real estate underlying
equity interests 66,891,301 84,160,993
Secured lines of credit 42,080,000 30,243,155
------------- -------------
Total liabilities $ 167,047,875 $ 156,742,381
Minority interest 3,206,791 4,513,579
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 20,846,810 and
18,803,471 shares, respectively 208,468 188,035
Additional paid-in-capital 314,655,260 274,606,899
(Accumulated deficit)/retained earnings (18,173) 5,079,319
Loans for stock options exercised (793,269) (1,068,972)
Deferred compensation (1,093,902) (1,210,618)
------------- -------------
Total shareholders' equity 312,958,384 277,594,663
------------- -------------
Total liabilities and shareholders' equity $ 483,213,050 $ 438,850,623
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
3
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- --------------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUES
Mortgage interest income $ 8,479,137 $ 7,795,953 $ 17,019,794 $ 15,887,797
Rental income 5,426,080 6,466,737 12,272,415 13,129,981
Fee income and other 943,428 3,318,310 1,475,608 3,656,353
Investment income 448,684 463,541 2,805,555 569,665
Gain on sale of loan -- -- -- 947,974
Gain on sale of property interest -- -- 2,372,220 --
------------ ------------ ------------ ------------
Total revenues 15,297,329 18,044,541 35,945,592 34,191,770
COSTS AND EXPENSES
Interest 1,692,437 2,070,940 3,910,433 4,217,542
Property operating expenses 2,787,652 3,255,602 6,588,996 6,134,846
Salaries and related benefits 918,142 450,591 1,622,328 904,181
General and administrative 778,200 361,006 1,327,944 674,052
Depreciation and amortization 826,810 910,283 1,804,189 1,764,803
------------ ------------ ------------ ------------
Total costs and expenses 7,003,241 7,048,422 15,253,890 13,695,424
------------ ------------ ------------ ------------
Net income before minority interest $ 8,294,088 $ 10,996,119 $ 20,691,702 $ 20,496,346
Minority interest 32,994 (38,971) 56,706 (109,954)
------------ ------------ ------------ ------------
Net income $ 8,327,082 $ 10,957,148 $ 20,748,408 $ 20,386,392
============ ============ ============ ============
Net income per common share-basic $ 0.40 $ 0.62 $ 1.02 $ 1.23
============ ============ ============ ============
Net income per common share-diluted $ 0.40 $ 0.62 $ 1.01 $ 1.22
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
4
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
2003 2002
---- ----
Cash flows from operating activities
Net Income $ 20,748,408 $ 20,386,392
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority Interest (56,706) 109,954
Depreciation and amortization 1,804,189 1,764,803
Accretion of loan discount (433,992) (291,708)
Deferred compensation 116,716 --
Decrease (increase) in tenant escrows 258,238 (136,941)
Increase in accrued interest receivable (2,705,039) (1,606,856)
Increase in prepaid expenses and other assets (891,306) (2,829,539)
Increase (decrease) in accounts payable and accrued liabilities 224,900 (1,278,754)
(Decrease) increase in accrued interest payable (219,656) 74,235
Decrease in tenant security deposits (249,405) (153,789)
(Decrease) Increase in borrowers' escrows (6,932,872) 140,088
------------ ------------
Net cash provided by operating activities 11,663,475 16,177,885
------------ ------------
Cash flows from investing activities
Purchase of furniture, fixtures and equipment (89,583) (90,381)
Real estate loans purchased (34,768,223) (1,805,150)
Real estate loans originated (80,839,074) (77,741,970)
Principal repayments of loans 63,718,815 45,928,495
Proceeds from disposition of real estate interests 10,136,822 --
Investments in real estate and improvements (10,990,998) (20,937,555)
Proceeds from sale of loan -- 1,237,167
------------ ------------
Net cash used in investing activities (52,832,241) (53,409,394)
------------ ------------
Cash flows from financing activities
Principal repayments on senior indebtedness (13,597,924) (6,790,699)
Principal repayments on long-term debt (464,035) (339,833)
Principal repayments on notes underlying deferred compensation 241,863 --
Proceeds of senior indebtedness 16,100,000 2,950,000
Advances (repayments) on secured lines of credit 11,836,845 (2,000,000)
Issuance of common shares, net 40,102,634 54,427,481
Payment of dividends (12,857,200) (9,730,571)
------------ ------------
Net cash provided by financing activities 41,362,183 38,516,378
------------ ------------
Net change in cash and cash equivalents 193,417 1,284,869
------------ ------------
Cash and cash equivalents, beginning of period $ 19,666,189 $ 18,064,909
============ ============
Cash and cash equivalents, end of period $ 19,859,606 $ 19,349,778
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
5
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, these unaudited financial statements contain
all disclosures which are necessary to present fairly RAIT Investment Trust's
(the "Company") consolidated financial position at June 30, 2003, its results of
operations for the three and six months ended June 30, 2003 and 2002 and its
cash flows for the six months ended June 30, 2003 and 2002. The financial
statements include all adjustments (consisting only of normal recurring
adjustments) which in the opinion of management are necessary in order to
present fairly the financial position and results of operations for the interim
periods presented. Certain information and footnote disclosures normally
included in financial statements under accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002. Certain reclassifications have been made to the consolidated
financial statements as of and for the three and six months ended June 30, 2002
to conform to the presentation for the three and six months ended June 30, 2003.
STOCK BASED COMPENSATION
The Company accounts for its stock-based employee compensation 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 THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income as reported $8,327,000 $10,957,000 $20,748,000 $20,386,000
Less: stock based compensation determined
under fair value based method for all awards (29,000) (125,000) (57,000) (251,000)
Pro forma net income $8,298,000 $10,832,000 $20,691,000 $20,135,000
Net income per share-basic, as reported $0.40 $0.62 $1.02 $1.23
Net income per share-basic, pro forma $0.40 $0.61 $1.01 $1.21
Net income per share-diluted, as reported $0.40 $0.62 $1.01 $1.22
Net income per share-diluted, pro forma $0.39 $0.61 $1.01 $1.20
The Company granted options to purchase 0 and 24,850 common shares during
the three and six months ended June 30, 2003, respectively. The Company granted
options to purchase 38,000 and 87,100 common shares during the three and six
months ended June 30, 2002, respectively. 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 2003 and
2002, respectively: dividend yield of 10.7% and 11.0%; expected volatility of
22.0% and 22.0%; risk-free interest rate of 4.0% and 4.8% and expected lives of
five years and five years.
VARIABLE INTEREST ENTITIES
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. The Company refers 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.
6
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
Some of the financing structures that the Company offers to its borrowers
involve the creation of entities that could be deemed variable interest entities
and, therefore, could be subject to FIN 46. These entities would include certain
majority-owned subsidiaries reported in the Company's consolidated financial
statements. The Company is continuing to assess the impact of FIN 46 on all
variable interest entities with which it is involved and whether or not such
entities would be required to be consolidated on the Company's balance sheet. At
this time, the Company does not believe that the implementation of FIN 46 will
have a material impact with respect to its current portfolio of real estate
investments on its consolidated balance sheet, earnings or capital resources.
The Company anticipates that, even if it were required to consolidate any of the
entities that could be deemed variable interest entities, the maximum charge to
earnings per share would be $0.02 per share, calculated on an annual basis based
on the weighted average number of diluted shares outstanding for the three
months ended June 30, 2003. The complexity of the new consolidation rules and
their evolving clarification make forecasting their effect difficult.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted Statement of Financial Accounting Standard 149 (SFAS
No. 149), "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends SFAS No. 133 to require a lender to account for loan commitments related
to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. As of
August 14, 2003, the Company has not entered into loan commitments which it
intends to sell in the future.
ACCOUNTING FOR FINANCIAL INSTRUMENTS
The FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity," on May 15,
2003. SFAS No. 150 changes the classification in the statement of financial
position of certain common financial instruments from either equity or mezzanine
presentation to liabilities and requires an issuer of those financial statements
to recognize changes in fair value or redemption amount, as applicable, in
earnings. SFAS No. 150 is effective for public companies for financial
instruments entered into or modified after May 31, 2003 and is effective at the
beginning of the first interim period beginning after June 15, 2003. Management
is currently determining if it has entered into any financial instruments that
would qualify under SFAS No. 150, and what, if any, impact the adoption of SFAS
No. 150 will have on the Company's financial position or results of operations.
NOTE 2 - CONSOLIDATED STATEMENT OF CASH FLOWS
Investments in real estate received in conjunction with the Company's
disposition of certain investments in real estate totaled $1.9 million for the
six months ended June 30, 2003.
NOTE 3 - RESTRICTED CASH AND BORROWERS' ESCROWS
Restricted cash and borrowers' escrows represent borrowers' funds held
by the Company to fund certain expenditures or to be released at the Company's
discretion upon the occurrence of certain pre-specified events and to serve as
additional collateral for borrowers' loans. Also included in restricted cash is
$1.0 million collateralizing a letter of credit; see note 8 below.
NOTE 4 - INVESTMENTS IN REAL ESTATE LOANS
The Company's portfolio of real estate loans consisted of the following at
June 30, 2003:
First mortgages and senior loan participations $ 163,936,666
Mezzanine loans 146,195,017
Unearned (fees) costs 1,326,890
Less: Allowance for loan losses (226,157)
-----------------
Investments in real estate loans 311,232,416
Less: Senior indebtedness secured by real estate
underlying the Company's loans (32,932,992)
----------------
Net investments in real estate loans $ 278,299,424
================
7
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
The following is a summary description of the Company's portfolio of real
estate loans as of June 30, 2003:
AVERAGE
NUMBER LOAN
TYPE OF LOAN OF LOANS TO VALUE YIELD RANGE RANGE OF MATURITIES
------------ -------- -------- ----------- -------------------
First mortgages and senior loan
participations 17 72.0% 6.3%-14.6% 9/11/03-6/28/13
Mezzanine loans 34 80.0% 8.0%-27.2%(1) 9/11/03-5/1/21
(1) Includes points charged.
As of June 30, 2003, approximately $94.8 million in principal amount of
the Company's loans were secured by multi-family properties, $129.3 million in
principal amount of the Company's loans were secured by office buildings and
$86.0 million in principal amount of the Company's loans were secured by retail
and other properties.
As of June 30, 2003, senior indebtedness secured by real estate underlying
the Company's loans consisted of the following:
Loan payable, secured by real estate, monthly installments of $72,005,
including interest at 7.55%, remaining principal due December 1, 2008 $ 9,416,526
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 rate ("LIBOR") plus 135
basis points (2.47% at June 30, 2003), 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% 10,616,466
Senior loan participation, secured by Company's interest in a first
mortgage loan with a principal balance of $6,440,000, payable interest only at
5.25% due monthly, principal balance due February 12, 2004 2,900,000
Senior loan participation, secured by Company's interest in a first
mortgage loan with a principal balance of $6,000,000, payable interest only at
LIBOR plus 275 basis points (3.87% at June 30, 2003) due monthly,
principal balance due June 26, 2004 5,000,000
Senior loan participation, secured by Company's interest in a first
mortgage loan with a principal balance of $10,250,000, payable interest only at
LIBOR plus 275 basis points (3.87% at June 30, 2003) due monthly,
principal balance due June 30, 2004 5,000,000
------------
$ 32,932,992
============
As of June 30, 2003, the senior indebtedness secured by real estate
underlying the Company's loans maturing in the remainder of 2003, over the next
four years, and the aggregate indebtedness maturing thereafter is as follows:
2003 $ 160,443
2004 13,241,024
2005 369,764
2006 400,939
2007 10,187,912
Thereafter 8,572,910
--------------
$ 32,932,992
==============
8
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
NOTE 5 - INVESTMENTS IN REAL ESTATE
Investments in real estate are comprised of the following at June 30,
2003:
Multi-family (1) 39,354,596
Office (2) 90,433,352
Land 613,519
------------
Subtotal 130,401,467
Less: Accumulated depreciation (11,269,332)
------------
Investment in real estate, net $119,132,135
============
(1) Includes $7.2 million invested in two limited liability companies that
each own apartment buildings, $1.3 million invested in a limited
partnership that owns an apartment building and a $1.8 million investment
in an entity which is the beneficiary of a trust that owns an apartment
building. Also includes escrow balances totaling $376,000 at June 30, 2003
which are held for payment of real estate taxes, insurance premiums and
repair and replacement costs.
(2) Includes $1.5 million invested in a limited partnership that owns an
office building and $6.6 million invested in a limited liability company
that owns an office building. Also includes escrows totaling $1.1 million
at June 30, 2003 which are held for payment of real estate taxes,
insurance premiums, repair and replacement costs, tenant improvements and
leasing commissions.
As of June 30, 2003, long-term debt secured by real estate underlying the
Company's equity interests in entities owning real estate consisted of the
following:
Loan payable, secured by real estate, monthly installments of $8,008,
including interest at 7.33%, remaining principal due August 1, 2008. $ 1,017,161
Loan payable, secured by real estate, monthly installments of $288,314,
including interest at 6.85%, remaining principal due August 1, 2008. 41,697,553
Loan payable, secured by real estate, monthly payments of
$87,960, including interest at 8.36%, remaining principal
due March 11, 2028; 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
$256,704 at June 30, 2003) which is amortized over the
term of the underlying debt. 11,344,565
Loan payable, secured by real estate, monthly installments of $37,697,
including interest at 7.27%, remaining principal due January 1, 2010. 5,310,754
Loan payable, secured by real estate, monthly installments of $47,720,
including interest at 5.73%, remaining principal due November 1, 2012. 7,521,268
------------
$ 66,891,301
============
As of June 30, 2003, the amount of long-term debt secured by the Company's
real estate investments that matures over the remainder of 2003, over the next
four years and the aggregate indebtedness maturing thereafter, is as follows:
2003 $ 470,693
2004 1,000,441
2005 1,073,605
2006 1,150,815
2007 1,233,617
Thereafter 61,962,130
-----------
$66,891,301
===========
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 June 30, 2003 were $649,000. 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 three and six months ended June
30, 2003 was $760,000 and $1.7 million, respectively.
9
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
NOTE 6 - LINES OF CREDIT
As of June 30, 2003 there was $42.1 million outstanding on the Company's
secured lines of credit. The following is a description of the available credit
facilities:
$10.0 million line of credit that bears interest at either three month
LIBOR plus 3.0% or the prime rate as published in the "Money Rates" section of
The Wall Street Journal, at the Company's election. As of June 30, 2003, there
was $5.0 million outstanding under this line. Each draw on this line must be
secured by a pledge of a loan or loans in the Company's portfolio. Absent any
renewal, this line will terminate in July 2004 and any principal then
outstanding must be paid by July 2009.
$20.0 million line of credit which bears interest at either 30-day LIBOR
plus 2.5% or The Wall Street Journal prime rate, as described above, at the
Company's election. The minimum interest rate is 4.75%. As of June 30, 2003,
there was $12.1 million outstanding under this line. Each draw on this line must
be secured by a pledge of a loan or loans in the Company's portfolio. Absent any
renewal, this line will terminate in October 2003 and any principal then
outstanding must be paid by October 2004.
$5.0 million line of credit which bears interest at either 30-day LIBOR
plus 2.5% or The Wall Street Journal prime rate, as described above, at the
Company's election, with a minimum interest rate of 5.5%. As of June 30, 2003,
there was $5.0 million outstanding under this line. The line is secured by a
pledge of a $7.5 million first priority mortgage loan in the Company's portfolio
and terminates on September 20, 2003.
$20.0 million line of credit which bears interest at The Wall Street
Journal prime rate, as described above. Each draw on this line must be secured
by a pledge of a loan or loans in the Company's portfolio. As of June 30, 2003,
there was $20.0 million outstanding under this line. The facility terminates in
May 2004 with annual one-year extension options, and an 11-month non-renewal
notice requirement.
NOTE 7 - RELATED PARTY TRANSACTIONS
In the ordinary course of its business operations, the Company has ongoing
relationships with several related entities. Certain of these transactions with
these related entities in the six months ended June 30, 2003 are described
below.
Resource America, Inc. ("Resource America"), which was the sponsor of the
Company, owned 4.5% of the Company's outstanding common shares of beneficial
interest as of August 14, 2003. Resource America has had the right to nominate
one person for election to the Board of Trustees until such time as its
ownership of outstanding common shares is less than 5%. In June 2003, Resource
America's holdings fell below 5%. Jonathan Z. Cohen, the Chief Operating Officer
and a Director of Resource America, has served as Resource America's
representative on the Company's Board of Trustees and is also the Secretary of
the Company. Mr. Cohen's service as a Trustee continues. 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 G. Cohen, who was, until October 2002, a director of
Resource America and (iii) the parent of Jonathan Z. Cohen. The President and
Chief Operating Officer of the Company, Scott F. Schaeffer, was, until October
2002, a director of Resource America.
Brandywine Construction & Management, Inc. ("Brandywine"), an affiliate of
Resource America, provided real estate management services to fifteen
properties underlying the Company's investments in real estate at June 30, 2003.
Management fees in the amount of $266,000 and $545,000 were paid to Brandywine
for the three and six months ended June 30, 2003, respectively. The Company
believes that the management fees charged by Brandywine are comparable to those
that could be obtained from unaffiliated third parties. The Company continues to
use Brandywine to provide real estate management services to properties
underlying the Company's investments.
Betsy Z. Cohen is the Chief Executive Officer and a director of The
Bancorp, Inc. ("Bancorp"), the holding company for The Bancorp Bank. Daniel G.
Cohen is the Chairman of the Board of Bancorp. The Company maintains most of its
checking and demand deposit accounts at Bancorp. As of June 30, 2003, the
Company had $1.8 million on deposit, of which approximately $1.7 million is over
the FDIC insurance limit. The Company pays a fee of $5,000 per month to Bancorp
for information system technical support services. The Company paid fees
aggregating $15,000 and $30,000 for these services for the three and six months
ended June 30, 2003, respectively.
10
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
The Company sub-leases a portion of its downtown Philadelphia office space
under an operating lease from Bancorp. The sub-lease expires in August 2010 with
two five-year renewal options. Rent paid to Bancorp was approximately $61,000
and $122,000 for the three and six months ended June 30, 2003, respectively. The
Company sub-leases the remainder of its downtown Philadelphia office space under
an operating lease from The Richardson Group, Inc. ("Richardson"), a sales
consulting company, whose Chairman is Jonathan Z. Cohen. The Senior Vice
President and Chief Operating Officer of Richardson is the spouse of Ellen J.
DiStefano, the Executive Vice President and Chief Financial Officer of the
Company. The sub-lease expires in August 2010 with two five-year renewal
options. Rent paid to Richardson was approximately $13,000 and $27,000 for the
three and six months ended June 30, 2003, respectively. With respect to both
sub-leases, the Company pays rent based upon the square footage it occupies at
the amount paid per square foot by each of Bancorp and Richardson under their
respective leases with an unaffiliated lessor.
Daniel G. Cohen is the principal owner of the corporate parent of Cohen
Brothers & Company ("Cohen Brothers"), a registered broker-dealer. In March
2003, Jonathan Z. Cohen sold his 50% equity interest in this corporate parent to
Daniel G. Cohen. Cohen Brothers acted as a dealer in a public offering the
Company made of its common shares in February 2003 wherein Cohen Brothers was
allocated 150,000 common shares at the public offering price less the concession
of $0.48 per share established in that offering for all dealers included in the
selling group.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
At June 30, 2003, the Company has outstanding two letters of credit
totaling $3.0 million as follows:
On February 20, 2003, a $1.0 million letter of credit was posted in
connection with the Company's sale of a property interest to support the
Company's guaranteed rate of return to the buyer of up to a maximum of $800,000
over a three-year period and capital improvements of $200,000. The letter of
credit is collateralized by a cash deposit of $1.0 million that is held by the
institution that extended the letter of credit and is included in the
restricted cash in the Company's consolidated financial statements at June 30,
2003.
On March 31, 2003, on behalf of a borrower, the Company extended a $2.0
million letter of credit as a guarantee of a portion of the senior indebtedness
underlying one of the Company's loans. This letter of credit expires in March
2005, but automatically extends for an additional year unless the Company gives
prior notice that it elects not to extend the expiration date. The principals of
the borrower have guaranteed repayment of any amounts the Company pays under
this letter of credit.
NOTE 9 - SHAREHOLDERS' EQUITY
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 net proceeds of approximately $5.2 million.
On March 21, 2003 the Board of Trustees of the Company declared a cash
dividend of $0.62 per common share payable on April 16, 2003 to shareholders of
record on April 3, 2003.
On June 19, 2003, the Board of Trustees of the Company declared a cash
dividend of $0.62 per common share payable on July 15, 2003 to shareholders of
record on July 3, 2003.
11
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
NOTE 10 - EARNINGS PER SHARE
The Company's calculation of earnings per share for the three and six
months ended June 30, 2003 and 2002 in accordance with SFAS No. 128 is as
follows:
THREE MONTHS ENDED JUNE 30, 2003 SIX MONTHS ENDED JUNE 30, 2003
-------------------------------- ------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
Basic earnings per share
Net income available to common
shareholders $ 8,327,082 20,845,820 $0.40 $20,748,408 20,410,801 $1.02
Effect of dilutive securities
Options -- 167,150 -- -- 152,495 (.01)
----------- ----------- ----- ----------- ----------- -----
Net income available to common
shareholders plus assumed
conversions $ 8,327,082 21,012,970 $0.40 $20,748,408 20,563,296 $1.01
=========== =========== ===== =========== =========== =====
THREE MONTHS ENDED JUNE 30, 2002 SIX MONTHS ENDED JUNE 30, 2002
-------------------------------- ------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- --------
Basic earnings per share
Net income available to common
shareholders $10,957,148 17,645,936 $0.62 $20,386,392 16,607,088 $1.23
Effect of dilutive securities
Options -- 155,897 -- -- 123,694 (.01)
Warrants -- 11,276 -- -- 8,470 --
----------- ----------- ----- ----------- ----------- -----
Net income available to common shareholders
plus assumed conversions $10,957,148 17,813,109 $0.62 $20,386,392 16,739,252 $1.22
=========== =========== ===== =========== =========== =====
Options to purchase 15,000 common shares at $19.85 per share were
outstanding as of June 30, 2002. These options were not included in the
computation of diluted earnings per share because the option exercise price was
greater than the average market price.
12
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Trustees and Shareholders
RAIT Investment Trust
We have reviewed the accompanying consolidated balance sheet of RAIT
Investment Trust and Subsidiaries as of June 30, 2003 and the related
consolidated statements of income and cash flows for the three-month and
six-month periods ended June 30, 2003 and 2002. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion. Based on our review, we are not aware of any material modifications
that should be made to the accompanying financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheet as of December 31, 2002, and the related consolidated statements of
income, shareholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated January 23, 2003 (except for note 16
as to which the dates are February 10, 2003 and March 4, 2003). We expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 2002 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
August 14, 2003
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this discussion and analysis
contains forward-looking statements. These statements can be identified by the
use of forward-looking terminology including "may," "believe," "will," "expect,"
"anticipate," "estimate," "continue" or similar words. These forward-looking
statements are subject to risks and uncertainties, as more particularly set
forth in our filings with the Securities and Exchange Commission, including
those described in the "Risk Factors" section of our Registration Statement No.
333-103618 and our Annual Report on Form 10-K for the year ended December 31,
2002, that could cause actual results to differ materially from those projected
in the forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. We undertake no obligation to publicly
revise or update these forward-looking statements to reflect events or
circumstances that arise after the date of this report.
OVERVIEW
We began investment operations in January 1998. Our principal business
objective is to generate income for distribution to our shareholders from a
combination of interest and fees on loans, rents and other income from our
interests in real estate, and proceeds from the sale of portfolio investments.
Through June 30, 2003, we had completed nine public offerings of our common
shares: two during 1998, three in 2001, three in 2002 and one in February 2003.
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 liquidity and capital resources from our
commencement through June 30, 2003 were the nine public offerings of our common
shares. After offering costs and underwriting discounts and commissions, we
obtained net offering proceeds of $313.2 million. 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 our liquidity and capital resources through our lines of
credit. As of June 30, 2003, we had obtained a $5.0 million line of credit, a
$10.0 million line of credit and two $20.0 million lines of credit. The $5.0
million line of credit bears interest either at 30-day LIBOR plus 2.5% or at the
prime rate as published in the "Money Rates" section of the Wall Street Journal,
at our election. The minimum interest rate is 5.5% and the line terminates in
September 2003. As of June 30, 2003, there was $5.0 million outstanding under
this line. The $10.0 million line of credit, which we obtained in June 2003,
bears interest either at three month LIBOR plus 3.0% or at the Wall Street
Journal prime rate as described above, at our election. Absent any renewal,
this line will terminate in July 2004 and any principal then outstanding must
be repaid by July 2009. As of June 30, 2003, there was $5.0 million outstanding
under this line. The first $20.0 million line of credit bears interest at the
Wall Street Journal prime rate as described above. Its current term runs
through May 2004 with annual one-year extension options and an 11-month
non-renewal notice requirement. As of June 30, 2003, there was $20.0 million
outstanding under this line. 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. As of June 30, 2003, there was
$12.1 million outstanding under this line. All draws on our lines of credit
must be secured by a pledge of a loan(s) or interest(s) in real estate held in
our portfolio.
We are currently negotiating a three-year extension for the $5.0 million
line of credit described above and a one-year extension of the second $20.0
million line of credit described above. Based on the current status of these
negotiations, we believe we will be able to extend the terms of these lines of
credit. There can be no assurance, however, that we will be successful in
obtaining extensions of either or both of these lines of credit. In the event we
are unable to obtain extensions of either or both of these lines, we believe we
could replace these lines of credit with other lines of credit and our other
sources of liquidity so that our liquidity would not decrease materially.
Our other sources of liquidity and capital resources include principal
payments on, refinancings of, and sales of senior participations in loans in our
portfolio as well as refinancings and the proceeds of sales of our interests in
real estate. These resources aggregated $71.8 million and $90.0 million for the
three and six months ended June 30, 2003, respectively, and $36.1 million and
$50.1 million for the three and six months ended June 30, 2002, respectively.
We use our capital resources principally for originating and purchasing
loans and acquiring interests in real estate. For the three and six months ended
June 30, 2003, we originated or purchased eight loans in the aggregate amount of
$74.8 million and 13 loans in the aggregate amount of $115.6 million,
respectively, as compared to eight loans in the aggregate amount of $29.4
million and 15 loans in the aggregate amount of $79.5 million, for the three and
six months ended June 30, 2002, respectively. For the three and six months ended
June 30, 2003, we acquired two interests in real estate totaling $10.5 million
and three interests in real estate totaling
14
$11.0 million, respectively, as compared to the three and six months ended June
30, 2002 when we acquired two and three interests in real estate for $17.4
million and $20.9 million (net of $5.4 million of long-term debt assumed),
respectively.
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 this income, to the extent of not less than 90%
of our taxable income, to pay distributions to our shareholders. For the three
and six months ended June 30, 2003, we declared dividends of $12.9 million and
$25.8 million, respectively, and for the three and six months ended June 30,
2002, we declared dividends of $10.7 million and $20.4 million, respectively. 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 to increase the
turnover of our investments,
- pursuing borrower refinancing of our loans through senior lenders,
while we retain junior interests, and
- selling senior participations in our loans.
We anticipate that we will continue to pursue these strategies 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 pursuing these strategies. However, we could
encounter difficulties in the future, depending upon the development of
conditions in the credit markets and the other risks and uncertainties described
in our filings with the Securities and Exchange Commission, including those
described in the "Risk Factors" section of our Registration Statement No.
333-103618 and our Annual Report on Form 10-K for the year ended December 31,
2002.
At June 30, 2003, we had approximately $17.8 million in cash on hand
available for investment and payment of dividends. In July 2003, we received
approximately $2.0 million of loan repayments and proceeds of dispositions of
real estate interests, as well as $3.3 million of proceeds from the refinancing
of loans in our portfolio. These proceeds of $5.3 million combined with $12.9
million available from our lines of credit, and cash on hand of $17.8 million at
June 30, 2003, provided for payment of our $12.9 million dividend on July 15,
2003 and additional funds available for investment of $23.1 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
sources of capital other than those discussed above, including, without
limitation, long-term borrowings, offerings of preferred shares or warrants,
further common share offerings and issuances of our debt securities. Our ability
to meet our liquidity and capital resources requirements beyond one year is
subject to obtaining additional debt and equity financing. Any decision by our
lenders to extend debt financing to us or by investors to purchase our equity
securities 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 relative attractiveness of our securities to
investors are subject to a number of risks described in our filings with the
Securities and Exchange Commission, including those described in the "Risk
Factors" section of our Registration Statement No. 333-103618 and our Annual
Report on Form 10-K for the year ended December 31, 2002. In addition, as a
REIT, we must distribute at least 90% of our annual taxable income, which limits
the amount of cash we can accumulate 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 June 30, 2003:
LESS ONE TO FOUR TO AFTER
THAN THREE FIVE FIVE
ONE YEAR YEARS YEARS YEARS TOTAL
-------- ----- ----- ----- -----
Operating leases $ 305,107 $ 625,843 $ 969,422 $ 377,409 $ 2,277,781
Long-term debt 631,136 15,684,834 12,973,282 70,535,041 99,824,293
Deferred compensation 344,761 689,522 172,681 -- 1,206,664
----------- ----------- ----------- ----------- ------------
Total $ 1,281,004 $17,000,199 $14,115,085 $70,912,450 $103,308,738
=========== =========== =========== =========== ============
15
OFF-BALANCE SHEET ARRANGEMENTS
On February 20, 2003, a $1.0 million letter of credit was posted in
connection with our sale of a property interest to support our guaranteed rate
of return to the buyer of up to a maximum of $800,000 over a three-year period
and capital improvements of $200,000. The letter of credit is collateralized by
a cash deposit of $1.0 million that is held by the institution that extended
the letter of credit and is included in restricted cash in our consolidated
financial statements at June 30, 2003. We anticipate that the $200,000 for
capital improvements will be drawn down under this letter of credit in the next
year. We do not currently anticipate that any amounts relating to the
guaranteed rate of return will be drawn down.
On March 31, 2003, on behalf of a borrower, we extended a $2.0 million
letter of credit as a guarantee of a portion of the senior indebtedness
underlying one of our loans. This letter of credit expires in March 2005, but
automatically extends for an additional year unless we give prior notice that we
elect not to extend the expiration date. The principals of the borrower have
guaranteed repayment of any amounts we pay under this letter of credit. Based on
these guarantees and our credit analysis of the borrower and the underlying real
estate, we believe that it is unlikely that we will be required to make any
payments under this letter of credit.
VARIABLE INTEREST ENTITIES
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.
Some of the financing structures that we offer to our borrowers involve
the creation of entities that could be deemed variable interest entities and,
therefore, could be subject to FIN 46. These entities would include certain
majority-owned subsidiaries reported in our consolidated financial statements.
We are continuing to assess the impact of FIN 46 on all variable interest
entities with which we are involved and whether or not such entities would be
required to be consolidated on our balance sheet. At this time, we do not
believe that the implementation of FIN 46 with respect to our current portfolio
of real estate investments will have a material impact on our consolidated
balance sheet, earnings or capital resources. We anticipate that, even if we
were required to consolidate any of the entities that could be deemed variable
interest entities, the maximum charge to earnings per share would be $0.02 per
share, calculated on an annual basis based on the weighted average number of
diluted shares outstanding for the three months ended June 30, 2003. The
complexity of the new consolidation rules and their evolving clarification make
forecasting their effect difficult.
RESULTS OF OPERATIONS
Interest Income. Our mortgage interest income was $8.5 million for the
three months ended June 30, 2003 compared to $7.8 million for the three months
ended June 30, 2002. The $683,000 increase was due to an additional $4.9 million
of interest generated by 29 loans totaling $205.3 million that were purchased or
originated between April 1, 2002 and June 30, 2003, partially offset by a $4.2
million reduction of interest due to the repayment of 24 loans during the same
period totaling $144.9 million. Our mortgage interest income was $17.0 million
for the six months ended June 30, 2003 compared to $15.9 million for the six
months ended June 30, 2002. The $1.1 million increase was due to an additional
$8.2 million of interest generated by 35 loans totaling $245.1 million that were
purchased or originated between January 1, 2002 and June 30, 2003, partially
offset by a $7.1 million reduction of interest due to the repayment of 24 loans
during the same period totaling $143.0 million.
Rental Income. We received rental income of $5.4 million for the three
months ended June 30, 2003 compared to $6.5 million for the three months ended
June 30, 2002. We received rental income of $12.3 million for the six months
ended June 30, 2003 compared to $13.1 million for the six months ended June 30,
2002. The decreases from both the three and six months June 30, 2002 to the
corresponding periods in 2003 were primarily due to the sale of one property
interest in the fourth quarter of 2002.
Fee Income and Other. We earned fee and other income of $943,000 for the
three months ended June 30, 2003 as compared to $3.3 million for the three
months ended June 30, 2002. We earned fee and other income of $1.5 million for
the six months ended June 30, 2003 as compared to $3.7 million for the six
months ended June 30, 2002. The decreases from both the three and six months
ended June 30, 2002 to the corresponding periods in 2003 were primarily due to
financial consulting fees of $2.9 million earned in 2002 relating to a group of
loans that were closed at the end of the second quarter of 2002.
16
Investment Income. Investment income represents income other than rents
from our interests in real estate. We received investment income of $449,000 for
the three months ended June 30, 2003 compared to $464,000 for the three months
ended June 30, 2002. We received investment income of $2.8 million for the six
months ended June 30, 2003 compared to $570,000 for the six months ended June
30, 2002. The $2.2 million increase in the six month period was primarily due to
$1.7 million realized (cash collected) from participation interests we held in
three of our investments and $600,000 of investment income generated by two
investments totaling $1.3 million that were made subsequent to the end of the
first quarter of 2002.
Gain On Sale of Property Interest. In March 2003, we sold a 40% limited
partnership interest and sole general partnership interest in a limited
partnership that owns a property to an unrelated party. We retained an 11%
limited partnership interest. The partnership interests we sold had a negative
book value of $1.4 million. The buyer paid $900,000 and we recognized a gain of
$2.4 million.
Interest Expense. Interest expense consists of interest payments made on
senior indebtedness on properties underlying our loans and property interests,
and interest payments made on our lines of credit. Interest expense was $1.7
million for the three months ended June 30, 2003 as compared to $2.1 million for
the three months ended June 30, 2002. Interest expense was $3.9 million for the
six months ended June 30, 2003 as compared to $4.2 million for the quarter ended
June 30, 2002. The decreases in interest expense from both the three and six
months ended June 30, 2002 to the corresponding periods in 2003 resulted from a
decrease in amounts outstanding from time to time pursuant to our lines of
credit combined with a decrease in general market interest rates throughout 2002
and the first six months of 2003.
Property Operating Expenses. Property operating expenses were $2.8 million
for the three months ended June 30, 2003, compared to $3.3 million for the three
months ended June 30, 2002. The $468,000 decrease in property operating expenses
was primarily due to the sale of a property interest in the fourth
quarter of 2002. Property operating expenses were $6.6 million for the six
months ended June 30, 2003, compared to $6.1 million for the six months ended
June 30, 2002. The $454,000 increase in property operating expenses was due to
$235,000 in additional operating expenses from a property interest acquired in
the fourth quarter of 2002, a $300,000 non-recurring adjustment relating to 2001
which reduced expenses in the first quarter of 2002 and $300,000 of increased
expenses resulting from the unusually severe winter of 2002-2003, partially
offset by the sale of a property interest in the fourth quarter of 2002.
Included in property operating expenses are management fees of $119,000
and $288,000 paid to Brandywine Construction & Management, Inc., an affiliate of
Resource America, Inc., for providing real estate management services to five
properties underlying our investments in real estate during the three and six
months ended June 30, 2003, respectively. We paid management fees of $115,000
and $303,000 to Brandywine for providing real estate management services to four
properties underlying our investments in real estate during the three and six
months ended June 30, 2002, respectively. Brandywine also provides real estate
management services to ten properties underlying our investments in real estate
loans during the three and six months ended June 30, 2003 where Brandywine's
management fees are paid by the borrower on the relevant loan. Brandywine
provided real estate management services to eleven properties underlying our
investments in real estate loans during the three and six months ended June 30,
2002 where Brandywine's management fees were paid by the borrower on the
relevant loan. We anticipate that we will continue to use Brandywine to provide
real estate management services. See Note 7 to our financial statements, Item 1
of this quarterly report on Form 10-Q.
Salaries and Related Benefits; General and Administrative Expense.
Salaries and related benefits were $918,000 for the three months ended June 30,
2003, as compared to $451,000 for the three months ended June 30, 2002. General
and administrative expenses were $778,000 for the three months ended June 30,
2003, as compared to $361,000 for the three months ended June 30, 2002. Salaries
and related benefits were $1.6 million for the six months ended June 30, 2003,
as compared to $904,000 for the six months ended June 30, 2002. General and
administrative expenses were $1.3 million for the six months ended June 30,
2003, as compared to $674,000 for the six months ended June 30, 2002. The
increases in salaries and related benefits and general and administrative
expenses were due to (i) 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, (ii) increased compliance costs relating to new regulatory
requirements and (iii) increased costs for directors' and officers' liability
insurance. The major portion of these increases took place in the second and
third quarters of fiscal 2002.
17
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. The sub-leases expire in August 2010 and both contain two
five-year renewal options. One sub-lease is with Bancorp, Inc. Rent paid to
Bancorp was $61,000 and $122,000 for the three and six months ended June 30,
2003, respectively, and $38,000 and $73,000 for the three and six months ended
June 30, 2002, 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 $13,000 and $27,000 for the three and six months ended June 30, 2003,
respectively, and $13,000 and $13,000 for the three and six months ended June
30, 2002, respectively. The increase in the amount of rent we paid was due to
the increase in the square footage we occupied over those periods. With respect
to both sub-leases, we pay rent based upon the square footage we occupy at the
amount paid per square foot by each of Bancorp and Richardson under their
respective leases with an unaffiliated lessor. See Note 7 to our financial
statements, Item 1 of this quarterly report on Form 10-Q.
Also included in general and administrative expenses is $15,000 and
$30,000 that we paid in the three and six months ended June 30, 2003 to Bancorp
for technical support services provided to us. We paid Bancorp $15,000 and
$30,000 in the three and six months ended June 30, 2002, respectively, for
technical support services. See Note 7 to our financial statements, Item 1 of
this quarterly report on Form 10-Q.
Depreciation and Amortization. Depreciation and amortization was $827,000
for the three months ended June 30, 2003 compared to $910,000 for the three
months ended June 30, 2002. The $87,000 decrease was due to sale of a property
interest in the fourth quarter of 2002, partially offset by the acquisition of a
property interest in the fourth quarter of 2002. Depreciation and amortization
was $1.8 million for the six months ended June 30, 2003 compared to $1.8 million
for the six months ended June 30, 2002.
Reserve for Loan Losses. We have a reserve for loan losses of $226,000.
This reserve is a general reserve and is not related to any individual loan or
to an anticipated loss. In accordance with our policy, we determined that this
reserve was adequate as of June 30, 2003 based upon our credit analysis of each
of the loans in our portfolio. If that analysis were to change, we may be
required to increase our reserve, and such an increase, depending upon the
particular circumstances, could be substantial. Any increase in reserves will
constitute a charge against income. We will continue to analyze the adequacy of
this reserve on a quarterly basis. During the six months ended June 30, 2003,
the loans in our portfolio performed in accordance with their terms and were
current as to payments.
CRITICAL ACCOUNTING POLICIES
Refer to our Annual Report on Form 10-K for the year ended December 31,
2002 for a discussion of our critical accounting policies. During the six months
ended June 30, 2003, there were no material changes to these policies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in our assessment of our sensitivity to
market risk since our presentation in our Annual Report on Form 10-K for the
year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Securities Exchange Act of 1934
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 management, including our Chief Executive Officer and
our Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, our management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
We have carried out an evaluation under the supervision of our chief
executive officer and chief financial officer and with the participation of our
disclosure committee appointed by such officers of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. As a result of that evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures are
effective. There have been no significant changes in our internal controls over
financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting during our most
recent fiscal quarter.
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PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareholders held on May 27, 2003, pursuant to
the Notice of Annual Meeting of Shareholders and Proxy Statement dated April 28,
2003, the voting results were as follows:
(a) Each of the following nominees was elected to the Board of Trustees as
follows:
VOTES VOTES
VOTES FOR WITHHELD ABSTAINED UNVOTED
--------- -------- --------- -------
Betsy Z. Cohen 19,533,375 115,883 0 0
Edward S. Brown 19,533,675 115,583 0 0
Jonathan Z. Cohen 19,533,599 115,659 0 0
Arthur Makadon 17,396,096 2,253,162 0 0
Joel R. Mesznik 19,533,675 115,583 0 0
Daniel Promislo 19,533,675 115,583 0 0
(b) The ratification of the selection of Grant Thornton LLP as our independent
public accountants for the fiscal year ending December 31, 2003 was approved as
follows:
VOTES VOTES
VOTES FOR WITHHELD ABSTAINED UNVOTED
--------- -------- --------- -------
19,495,102 103,580 50,575 1
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits furnished as part of this Quarterly Report on Form 10-Q are
identified in the Exhibit Index immediately following the signature page of this
Report. Such Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K
We filed two reports on Form 8-K during the three months ended June 30,
2003.
A report on Form 8-K dated April 24, 2003 was filed as of April 24, 2003.
Pursuant to Item 5 - Other Events and Required FD Disclosure, we disclosed that
we had issued a press release regarding our earnings for the first quarter of
fiscal 2003.
A report on Form 8-K dated March 31, 2003 was filed as of April 1, 2003.
Pursuant to Item 9 - Regulation FD Disclosure, we disclosed certifications by
our chief executive officer and chief financial officer made pursuant to 18
U.S.C. Section 1350 which accompanied our Annual Report on Form 10-K for the
fiscal year ended December 31, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RAIT INVESTMENT TRUST
(Registrant)
August 14, 2003 /s/ Ellen J. DiStefano
- --------------- --------------------------------
DATE Ellen J. DiStefano
Chief Financial Officer
(On behalf of the registrant and
as its principal financial officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------
3.i.1(1) Amended and Restated Declaration of Trust.
3.i.2(2) Articles of Amendment of Amended and Restated Declaration of Trust.
3.i.3(3) Articles of Amendment of Amended and Restated Declaration of Trust.
3.i.4(4) Certificate of Correction to the Amended and Restated Declaration of
Trust
3.ii.1(1) Bylaws, as amended.
15.1 Awareness Letter from Independent Accountants.
31.1 Rule 13a-14(a) Certification by the Chief Executive Office of RAIT
Investment Trust.
31.2 Rule 13a-14(a) Certification by the Chief Financial Officer of RAIT
Investment Trust.
32.1 Section 1350 Certification by the Chief Executive Officer of RAIT
Investment Trust.
32.2 Section 1350 Certification by the Chief Financial Officer of RAIT
Investment Trust.
(1) Incorporated herein by reference to RAIT Investment Trust's Registration
Statement on Form S-11 (File No. 333-35077), as amended.
(2) Incorporated herein by reference RAIT Investment Trust's Registration
Statement on Form S-11 (File No. 333-53067), as amended.
(3) Incorporated herein by reference to RAIT Investment Trust's Registration
Statement on Form S-2 (File No. 333-55518), as amended.
(4) Incorporated herein by reference to RAIT Investment Trust's Form 10-Q for
the Quarterly Period ended March 31, 2002 (File No. 1-14760).
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