- --------------------------------------------------------------------------------
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
<Table>
(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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER 1-14760
---------------------
RAIT INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
<Table>
MARYLAND 23-2919819
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
C/O RAIT PARTNERSHIP, L.P. 19103
1818 MARKET STREET, 28TH FLOOR (Zip Code)
PHILADELPHIA, PA
(Address of principal executive offices)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(215) 861-7900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<Table>
<Caption>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Shares of Beneficial Interest New York Stock Exchange
</Table>
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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). 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 30, 2003 of $26.50, was approximately $530.1 million.
As of March 1, 2004, 23,210,256 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 2004 Annual Meeting of
Shareholders are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
<Table>
FORWARD LOOKING STATEMENTS.................................. 1
PART I...................................................... 1
ITEM 1. BUSINESS......................................... 1
ITEM 2. PROPERTIES....................................... 12
ITEM 3. LEGAL PROCEEDINGS................................ 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................ 12
PART II..................................................... 13
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.................................... 13
ITEM 6. SELECTED FINANCIAL DATA.......................... 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION..................... 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................ 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...... 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 49
ITEM 9A. CONTROLS AND PROCEDURES......................... 49
PART III.................................................... 49
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE
REGISTRANT............................................. 49
ITEM 11. EXECUTIVE COMPENSATION.......................... 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT......................................... 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................................... 50
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.......... 50
PART IV..................................................... 50
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND
REPORTS ON FORM 8-K.................................... 50
SIGNATURES................................................ 52
EXHIBIT INDEX............................................. 53
</Table>
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, or the SEC, 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.
These risks and uncertainties and 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 were formed in August 1997. We commenced operations upon
completion of our initial public offering in January 1998. 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 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.
1
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 offer
junior lien or other forms of subordinated, or "mezzanine," financing, senior
short-term bridge financing and first-lien conduit loans. We seek to structure
the financing package we offer to a borrower using one or more of these types of
loans to meet their particular needs. We believe that our ability to offer
structured financing that works with other financing sources and our ability to
respond quickly to our borrower's needs makes us an attractive alternative to
equity financing. As a result, we believe we are able to take advantage of
opportunities that will generate higher returns than traditional real estate
loans.
We emphasize mezzanine and bridge financing which makes up most of our loan
portfolio. Our bridge loans are generally short-term, first mortgages that we
anticipate will be refinanced by our borrower with traditional institutional
lenders and lenders that securitize loans in order to repay us. In general, our
mezzanine loans generate a higher rate of return to us than our bridge loans due
to the additional risk we assume resulting from their subordinated status. The
principal amounts of our mezzanine and bridge loans generally range between $2.0
million and $40.0 million. 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 and
non-payment of real estate taxes. We may engage in recourse financing by
requiring personal guarantees from controlling persons of our borrowers where we
feel it is necessary to further protect the return on our investment.
We often provide mezzanine or other forms of subordinated financing where
the senior lien on a property prohibits the imposition of additional liens. We
typically include one or more of the following provisions in these loans which
we believe serve to mitigate our risks in these circumstances:
- Direct deposit of rents and other cash flow from the underlying
properties to a bank account controlled by us;
- Delivery to us of 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;
- Recorded or perfected liens on other real estate owned by the controlling
persons of our borrower;
- Pledge to us of the equity interest in the borrower by its controlling
persons; and
- Personal guarantees from the borrower's controlling persons.
Although we seek to incorporate some or all of these provisions in our
subordinated financings, we may not be able to negotiate the inclusion of any or
all of them. Moreover, none of these factors will assure that these loans are
collected. See "Investment Activity Risks" below.
We often provide bridge financing where our borrower is unable to obtain
financing from traditional institutional lenders and lenders that securitize
loans within our borrower's time constraints or because our borrower or the
related real estate does not fall within the lending guidelines of these
lenders. Our bridge loans are structured as senior loans that may have a stated
term of several years but that we anticipate will be refinanced by our borrower
with these lenders within a shorter term. There can be no assurance that our
bridge loans will be refinanced and so we analyze these loans assuming we may
hold them to maturity.
While we emphasize providing mezzanine and bridge financing, we have no
limitations in our organizational documents on the types of financing we may
provide. 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. We usually do this where the conduit
loan assists us in offering the borrower a complete financing package, including
our mezzanine or bridge financing. Where we have made a
2
bridge loan to a borrower, we may be able to assist our borrower to refinance
our bridge loan for which we will earn related fee income through Pinnacle.
In addition to an agreed upon interest rate, we seek to enhance our return
on investment on our real estate loans by obtaining origination fees, exit fees,
cash flow and appreciation interests, or a combination of these fees and
interests, from our borrowers. Cash flow and appreciation interests require a
borrower to pay us additional amounts based upon a property's generation of
positive cash flow or increase in value. We may also provide additional services
to a borrower for which we may obtain consulting fees.
We may also seek to enhance our return by "leveraging" our loan in
appropriate circumstances by selling a senior participation in the loan to
another lender or by assigning our loan under one of our lines of credit to
collateralize an advance under the line of credit. In either case, we do this
only where interest payable under the participation or the line of credit is
less than the interest we receive from our loan so that we benefit from the
portion of the interest we retain and the opportunity to seek to re-invest the
proceeds of the participation or advance at a higher return.
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 generally buy them 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 way we invest in real estate is by acquiring equity interests. We
make these investments either through our wholly owned subsidiaries or by
acquiring controlling or non-controlling interests in entities that own real
estate. These non-controlling interests usually take the form of preferred
equity investments. These preferred equity interests generally give us a
preferred position as to distributions and upon liquidation over common equity
interests, provide for distributions to us and a mandatory redemption date. They
may have conversion or exchange features and may have voting rights in certain
circumstances. Although we seek to incorporate some or all of these provisions
in our preferred equity financings, we may not be able to negotiate the
inclusion of any or all of them. Moreover, none of these factors will assure the
return on our investment. See "Investment Activity Risks" below. We believe that
acquiring interests in real estate is advantageous for the following reasons:
- It provides 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, help offset such adverse tax
effects; and
- It provides us with the opportunity to participate in capital
appreciation in addition to current income.
3
We generate a return on our interests in real estate through our share of
rents and other sources of income from the operations of the real estate. We may
also seek to enhance our return on our investment in interests in real estate by
"leveraging" our investment in appropriate circumstances by borrowing against
the real estate underlying our investment.
SOURCES OF POTENTIAL REAL ESTATE INVESTMENTS
To generate loan originations, loan acquisitions 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. In 2003, we
initiated several programs intended to increase our sources for originating
investments in real estate. In our "seamless mezzanine program", we initiated
intercreditor arrangements with several first-lien conduit lenders establishing
the terms on which we would provide mezzanine loans in conjunction with first
lien loans made by these lenders. Our "acceleRAIT program" uses proprietary
methods to seek to identify borrowers who may be seeking to refinance their
loans. We also started a "correspondent program" seeking to establish
arrangements with potential referral sources. There can be no assurance,
however, that these programs will result in increased originations of real
estate investments. We do not have a specific financial guideline with respect
to the percentage of our portfolio generated from any particular source, but
monitor this factor regularly.
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 will
be at least 1.25 to 1;
- 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 is not 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 without
notice to or approval by the shareholders.
4
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 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. We also evaluate the overall real estate
market relative to the investment. 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 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
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 of which we are the
sole signatories. On a monthly basis, we pay the senior debt service, collect
our debt service or other payments due us, and all reserves required by the
terms of any senior debt or our investment, 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.
LOCATION OF PROPERTIES RELATING TO INVESTMENTS
We generally invest in properties located in mature markets in the East,
Mid-Atlantic, Southeast and Mid-West 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 within our organizational documents on
where we may invest and, accordingly, we may invest in other areas.
TYPES OF PROPERTIES RELATING TO INVESTMENTS
We focus our investing activities on multi-family residential, office,
retail and other commercial properties with property values generally between
$2.2 million and $45.0 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 within our organizational documents on the
amount or percentage of our loans or investments we may make in any category of
property.
5
LOAN PORTFOLIO
The following table sets forth information regarding our loans as of
December 31, 2003:
<Table>
<Caption>
BOOK VALUE NUMBER AVERAGE LOAN RANGE OF RANGE OF
TYPE OF LOAN OF LOANS OF LOANS TO VALUE(1) LOAN YIELDS(2) MATURITIES
- ------------ ------------ -------- ------------ -------------- -----------------
First mortgages...... $201,492,314 19 74% 6.2% - 12.5% 1/30/04 - 9/30/18
Mezzanine loans...... 142,717,826 31 86% 10.0% - 29.6% 1/29/04 - 4/30/21
</Table>
- ---------------
(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, 2003, 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 the real estate. We accounted for these interests
on a consolidated basis:
- 89% 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. 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. In addition to these two loans, the
property is subject to non-recourse financing of $44.0 million ($41.4
million at December 31, 2003), 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, 2003), which bears interest at 7.33% and is due on August 1, 2008.
- 49% limited and 1% 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 in the original amount of $11.6 million
($11.2 million at December 31, 2003), 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, 2003). 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 a
44,517 square foot 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 ($7.5
million at December 31, 2003). The loan bears interest at an annual rate
of 5.73% and is due November 1, 2012. 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.
- 100% membership interest in a limited liability company that owns a
110,421 square foot shopping center in Norcross, Georgia. In 1998, we
made loans in the aggregate amount of $2.8 million to the former owner of
the property. In July 2003, we negotiated our acquisition of this
property from this
6
former owner. At that time we assumed the existing senior, non-recourse mortgage
financing on the property ($9.3 million outstanding at December 31, 2003), which
bears interest at an annual rate of 7.55% and is due on December 1, 2008. This
property currently generates a level of net operating income that is
sufficient to service the senior loan and to provide us with a current
return on our real estate investment that is comparable to our original
loan terms.
As of December 31, 2003, we owned the following interests in real estate
through our unconsolidated equity investments in entities owning real estate:
- 11% limited partnership interest in a limited partnership that owns a
500-unit multi-family apartment building in Philadelphia, Pennsylvania.
We owned 100% of the limited partnership (cost of $19.8 million) 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. On March 31, 2003, we sold a 40%
limited partnership interest and sole general partnership interest
(negative book value of $1.4 million) to the same third party for
$914,000, thus recognizing a gain of $2.4 million. The property is
subject to non-recourse financing of $19.7 million at December 31, 2003,
which is comprised of:
- $14.4 million, which bears interest at an annual rate of 7.73% and is
due on December 1, 2009
- $2.2 million, which bears interest at an annual rate of 7.17% and is due
on March 1, 2012
- $1.8 million, which bears interest at an annual rate of 5.8% and is due
on December 1, 2009 and
- $1.3 million, which we provided to the purchaser of our 89% interests
which bears interest at an annual rate of 4.74% and is due on June 1,
2010. This loan is included in "Investments in real estate loans, net"
on our balance sheet.
- 20% beneficial interest in a trust that owns a 58-unit apartment building
in Philadelphia, Pennsylvania and a 20% partnership interest in a general
partnership that owns an office building with 31,507 square feet in
Alexandria, Virginia. In September 2002, we acquired these interests,
together with a cash payment 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, 2003, the Pennsylvania property is subject to
non-recourse financing of $3.0 million bearing interest at 6.04% 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.
- 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. In October 2003, we received a partial repayment
of our investment in the amount of $1.4 million. The property is subject
to non-recourse financing of $25.9 million at December 31, 2003, which
bears interest at 5.78% and is due on January 1, 2013.
- Class B limited partnership interest in a limited partnership that owns a
240,000 square foot office building in Boston, Massachusetts. We acquired
our interest in June 2003 for $6.6 million. The property is subject to
non-recourse financing of $37.7 million at December 31, 2003 which bears
interest at 4.89% and is due on June 11, 2010.
- 0.1% membership interest in a limited liability company that owns a
44,411 square foot shopping center in Cincinnati, Ohio. We acquired our
interest in September 2003 for $850,000. The property is subject to
non-recourse financing of $4.5 million at December 31, 2003, which bears
interest at 7.58% and is due on January 1, 2009.
- Class B limited partnership interest in a limited partnership that owns a
363-unit multifamily apartment complex in Pasadena (Houston), Texas. We
acquired our interest in September 2003 for $1.9 million. The property is
subject to non-recourse financing of $8.0 million at December 31, 2003,
which bears interest at the 30-day London interbank offered rates, or
LIBOR, plus 3.0% (5.0% at
7
December 31, 2003) with a LIBOR floor of 2.0% and a total rate cap of
6.0%, and is due in October 2005.
- Class B membership interest in a limited liability company that owns a
280,830 square feet of a total 777,537 square foot enclosed mall in
Springfield, Massachusetts. We acquired our interest in December 2003 for
$4.2 million. The property is subject to non-recourse financing of $24.5
million at December 31, 2003, which bears interest at 3.37% and is due in
December 2006.
INVESTMENT ACTIVITY RISKS
The value of our investments depends on conditions beyond our control. Our
investments are primarily loans secured directly or indirectly by real estate,
interests in entities whose principal or sole assets are real estate or direct
ownership of real estate. As a result, the value of our investments depends
principally upon the value of the real estate underlying our investments, which
is affected by numerous factors beyond our control including 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.
Any investments may also be affected by a borrower's failure to perform the
terms of a loan or borrower's bankruptcy or insolvency which may require us to
become involved in expensive and time-consuming bankruptcy, reorganization or
foreclosure proceedings. Where the structure of our loan defers payment of some
portion of accruing interest or defers repayment of principal until loan
maturity, the borrower's 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 lien priority in many jurisdictions,
including those in which real estate securing or underlying our loans is
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 an 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, are subordinated and typically do not conform to traditional loan
underwriting criteria. 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.
8
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
interests in entities owning real estate 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. 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. 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. 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 rates 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
9
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 and
we may not benefit from appreciation interests we do obtain. In addition to an
agreed upon interest rate, we seek to obtain appreciation 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 set
maximum interest rates that may be charged on loans and impose 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. Real estate investments are relatively illiquid. 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 gains realized by a
REIT, like us, from property held as a dealer primarily for sale to customers in
the ordinary course of business. These provisions may materially and 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 impractical 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.
10
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 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, 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
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 East, Mid-Atlantic, Southeast and Mid-West regions of the United
States. Although we anticipate that we will continue to focus on these regions
for the foreseeable future, we are not subject to any geographic limitations
within our organizational documents regarding where we may invest and,
accordingly, we may make investments in other areas, as appropriate
opportunities are identified. This lack of geographic diversification may make
our investment portfolio more sensitive to economic developments within a
regional area, 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.
11
Concentration of our investments increases our dependence on individual
investments. Although we generally invest between $2.0 million and $40.0
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 material investments in any single borrower or
group of affiliated borrowers, the failure of that borrower or group to perform
their obligations to us could increase the risk of loss to our shareholders.
Quarterly results may fluctuate and may not be indicative of future
quarterly performance. Our quarterly operating results could fluctuate;
therefore, you should not rely on past quarterly results to be indicative of our
performance in future quarters. Factors that could cause quarterly operating
results to fluctuate include, among others, variations in our investment
origination volume, variations in the timing of prepayments, variations in the
amount of time between our receipt of the proceeds of a securities offering and
our investment of those proceeds in loans or interests in real estate, the
degree to which we encounter competition in our markets and general economic
conditions.
EMPLOYEES
As of March 1, 2004, we had 24 employees and believe our relationships with
our employees to be good. Our employees are not represented by a collective
bargaining agreement.
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 $244,000,
$183,000 and $137,000 for the years ended December 31, 2003, 2002 and 2001,
respectively. The other sublease, which commenced in 2002, is with The
Richardson Group, Inc. We paid rent to Richardson of approximately $42,500 and
$53,000 for the years ended December 31, 2003 and 2002, respectively. 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 Operations" below. We also sublease suburban office space at an annual rent
of $10,000. This sublease currently terminates in February 2005 but renews
automatically each year for a one-year term unless either party sends prior
notice of termination of 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.
12
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." We have adopted a Code of Business Conduct and Ethics (the "Code") for
our trustees, officers and employees intended to satisfy New York Stock Exchange
listing standards and the definition of a "code of ethics" set forth in Item 406
of Regulation S-K. We also have adopted Trust Governance Guidelines and charters
for the audit, compensation, investment and nominating committees of the board
of trustees intended to satisfy New York Stock Exchange listing standards. The
Code, these guidelines and these charters are available on our website at
http://www.raitinvestmenttrust.com and are available in print to any shareholder
who requests it. Please make any such request in writing to RAIT Investment
Trust, c/o RAIT Partnership, L.P., 1818 Market Street, 28th Floor, Philadelphia,
PA 19103, Attention: Investor Relations. Any information relating to amendments
to the Code or waivers of a provision of the Code required to be disclosed
pursuant to Item 10 of Form 8-K will be disclosed through our website.
We have filed the certifications required by Section 302 of the
Sarbanes-Oxley Act of 2002 for our chief executive officer and chief financial
officer as exhibits to this report.
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.
<Table>
<Caption>
CASH DISTRIBUTIONS
HIGH LOW DECLARED PER SHARE
------ ------ ------------------
FISCAL 2003
Fourth quarter..................................... $26.59 $22.75 0.60
Third quarter...................................... 26.50 21.25 0.62
Second quarter..................................... 26.70 21.65 0.62
First quarter...................................... 22.70 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
</Table>
As of March 1, 2004, there were 23,210,256 common shares outstanding held
by 542 persons of record and 20,226 beneficial owners.
13
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 Operation," and our financial statements, including the
notes thereto, included elsewhere herein.
<Table>
<Caption>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
OPERATING DATA:
Total revenues(1)............... $ 78,563 $ 73,694 $ 57,064 $ 38,549 $ 34,122
Total costs and expenses........ 31,433 30,131 30,191 26,419 21,178
Net income...................... 47,164 43,505 26,914 12,055 12,962
Net income per share -- basic:
Net income...................... 2.24 2.50 2.68 1.93 2.10
Net income per share -- diluted:
Net income...................... 2.23 2.48 2.65 1.92 2.09
BALANCE SHEET DATA:
Total assets.................... 534,555 438,851 333,166 270,120 269,829
Indebtedness secured by real
estate........................ 131,082 114,592 108,935 148,434 161,164
Secured lines of credit......... 23,904 30,243 2,000 20,000 14,000
Shareholders' equity............ 363,401 277,595 211,025 86,675 86,238
Book value per share............ 15.66 14.76 14.12 13.74 13.91
Other data:
Dividends per share............. 2.46 2.39 2.12 2.04 2.04
</Table>
- ---------------
(1) We adopted SFAS No. 145, "Rescission of FASB Statements 4, 44 and 64,
Amendment of FASB Statement 13, and Technical Correction." In 2001, we
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
We began investment operations in January 1998. We are a real estate
investment trust, or REIT, formed under Maryland law. We make investments in
real estate primarily by making real estate loans, acquiring real estate loans
and acquiring interests in real estate. Our principal business objective is to
generate income for distribution to our shareholders from investments in real
estate generating 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.
During the past three fiscal years, we have achieved significant growth in
our revenues, net income and total assets. Our revenues have grown 38% to $78.6
million in fiscal 2003 as compared to $57.1 million for fiscal 2001, while our
net income has increased 75% to $47.2 million in fiscal 2003 as compared to
$26.9 million in fiscal 2001. Total assets have similarly grown 60% in the three
year period, to $534.6 million at December 31, 2003 as compared to $333.2
million at December 31, 2001.
We attribute this growth to three principal factors:
- our ability to generate attractive real estate investment opportunities
in a national environment of low interest rates;
14
- our ability to obtain additional capital through offerings of our common
shares, a total of $273.5 million in eight offerings during fiscal 2001
through 2003; and
- our ability to contain administrative costs and expenses within or below
the growth parameters of our assets and revenues.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of our liquidity and capital resources from our
commencement through December 31, 2003 were our public offerings of common
shares. After offering costs and underwriting discounts and commissions, these
offerings have allowed us to obtain net offering proceeds of $357.2 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
$300.0 million, of which $247.7 million remains available.
We also maintain liquidity through the lines of credit we have established
with four different lending institutions, as described below:
At December 31, 2003, we had $19.9 million of availability under our $30.0
million line of credit. This line of credit bears interest at either 30-day
London interbank offered rate, or LIBOR, plus 2.5% or the prime rate as
published in the "Money Rates" section of The Wall Street Journal, at our
election. The minimum interest rate is 4.0%. The current interest rate is 4.0%.
Absent any renewal, the line of credit will terminate in October 2005 and any
principal then outstanding must be repaid by October 2006.
At December 31, 2003, we had $9.6 million of availability under our $20.0
million line of credit. This line of credit bears interest at the prime rate as
described above. The current interest rate is 4.00%. This line of credit has a
current term running through April 2004 with annual one-year extension options
at the lender's option and an 11-month non-renewal notice requirement.
Approximately $442,000 of availability under this line of credit is reserved in
the event we are required to make any payments under a letter of credit
described in Note 10 to our financial statements, Item 8 of this annual report
on Form 10-K.
At December 31, 2003, we had $6.1 million of availability under our $10.0
million line of credit. This line of credit bears interest either at three month
LIBOR plus 3.0% or at the prime rate as described above, at our election. The
current interest rate is 4.14%. Absent any renewal, this line will terminate in
July 2004 and any principal then outstanding must be repaid by July 2009.
On February 23, 2004, we entered into a $25.0 million line of credit. This
line of credit bears interest at either, at our election, (a) one, two or three
month LIBOR, plus 2.25% or (b) a daily base rate equal to the higher of (i) the
bank's announced prime rate plus 1% or (ii) the federal funds rate, as published
by the Federal Reserve Bank of New York, plus 2%. Absent any renewal, this line
of credit will terminate in February 2006 and any principal then outstanding
must be repaid at that time. On March 1, 2004, we had $6.0 million of
availability under this line of credit and the interest rate was 3.35%.
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 and other
dispositions of our interests in real estate. These resources aggregated $200.1
million and $184.1 million for the years ended December 31, 2003 and 2002,
respectively.
We use our capital resources principally for originating and purchasing
loans and acquiring interests in real estate. For the year ended December 31,
2003, we originated or purchased 23 loans in the amount of $227.7 million, as
compared to 34 loans in the amount of $203.7 million for the year ended December
31, 2002. For the year ended December 31, 2003, we acquired five property
interests for $16.1 million (and one property interest in satisfaction of our
loan in the amount of $12.6 million). For the year ended December 31, 2002, we
acquired seven property interests for $39.5 million (net of $5.4 million of
long-term debt assumed as part of a property acquisition).
We also receive funds from a combination of interest and fees on our loans,
rents and income from our interests in real estate and consulting fees. As
required by the Internal Revenue Code, we use this income, to
15
the extent of not less than 90% of our taxable income, to pay distributions to
our shareholders. For the years ended December 31, 2003 and 2002, we paid
distributions of $52.7 million and $43.0 million, respectively, of which $52.4
million and $42.8 million, respectively, was in cash and $296,000 and $183,000,
respectively, was in additional common shares issued through our dividend
reinvestment plan. We expect to continue to use funds from these sources to meet
these needs.
In order to maintain our liquidity, we pursue borrower refinancing of, or
sell senior participations in, our senior lien bridge loans, while we retain
junior interests. We do not currently experience material difficulties in these
strategies to refinance our senior lien loans on acceptable terms. However, we
could encounter difficulties in the future, depending upon the development of
conditions in the credit markets.
At December 31, 2003, we had approximately $22.8 million of cash on hand
(including a deposit in the amount of $8.0 million held by a third-party) which,
when combined with $37.4 million of loan repayments we received and net
borrowings of $4.0 million in January and February 2004, provided for $60.9
million of new loan originations as of March 1, 2004. We anticipate that we will
use the $51.6 million of funds available to be drawn on our lines of credit
(including $25.0 million from our new line of credit described above) primarily
to originate additional investments for the first six months of 2004.
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, issuances of our debt securities
and securitization and sale of pools of our loans. 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, 2003:
<Table>
<Caption>
LESS THAN ONE TO THREE FOUR TO FIVE AFTER FIVE
ONE YEAR YEARS YEARS YEARS TOTAL
----------- ------------ ------------ ----------- ------------
Operating leases..... $ 316,778 $ 633,885 $ 646,986 $ 539,156 $ 2,136,805
Secured lines of
credit............. -- 20,053,760 3,850,000 -- 23,903,760
Indebtedness secured
by real estate(1).. 19,241,465 29,935,123 12,964,610 68,940,805 131,082,003
Deferred
compensation....... 243,170 530,470 -- -- 773,640
----------- ----------- ----------- ----------- ------------
Total.............. $19,801,413 $51,153,238 $17,461,596 $69,479,961 $157,896,208
=========== =========== =========== =========== ============
</Table>
- ---------------
(1) Indebtedness secured by real estate consists of our non-recourse senior
indebtedness relating to loans and long-term debt secured by real estate
underlying our investments in real estate.
RESULTS OF OPERATIONS
Interest Income. Our interest income was $40.1 million, $33.8 million and
$23.7 million for the years ended December 31, 2003, 2002 and 2001,
respectively. The $6.3 million increase in interest income from 2002 to 2003 was
due to an additional $21.2 million of interest accruing on 46 loans totaling
$325.1 million originated in the period from the beginning of 2002 through the
end of 2003, partially offset by a $15.1 million
16
reduction of interest due to the repayment of 35 loans totaling $213.6 million
during the same period. The $10.1 million increase in interest income from 2001
to 2002 was due to an additional $19.0 million of interest accruing on 47 loans
totaling $279.3 million originated in the period 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. Certain of our loans have expected future cash flows in excess of
the scheduled, contractual interest and principal payments reflected in the loan
documents. We recognize this excess, or "accretable yield" over the remaining
life of the loan, such that the return yielded by the loan remains at a constant
level for its remaining life. Included in our mortgage interest income is
accretable yield of $5.4 million, $39,000, and $1.3 million for the years ended
December 31, 2003, 2002, and 2001, respectively. The significant increase in the
accretable yield from the years ending December 31, 2001 and 2002 to the year
ending December 31, 2003 is due to the purchase, in June 2003, of a loan with a
face value in excess of $40.0 million secured by a property with an appraised
value also in excess of $40.0 million for a cost of approximately $26.8 million.
The loan matures in September 2004, thus the large accretable yield must be
recognized over the 15-month period between loan purchase and loan maturity.
Rental Income. At December 31, 2003 we had eight consolidated investments
in real estate (eight and six at December 31, 2002 and 2001, respectively) that
generated rental income that is included in our financial statements. Our rental
income was $24.4 million for the year ended December 31, 2003, compared to $26.0
million and $22.2 million for the years ended December 31, 2002 and 2001,
respectively. The increase in rental income from 2001 to 2002 resulted from the
acquisition of two of these investments in 2002. The decrease in rental income
from 2002 to 2003 resulted from the sale of a real estate investment early in
2003, partially offset by rents generated from an acquisition in mid-2003 and a
full year of rents from the 2002 acquisitions.
Fee Income and Other. We earned fee and other income of $4.9 million for
the year ended December 31, 2003, as compared to $5.0 million for 2002 and $5.6
million in 2001. Included in fee and other income for 2003 were revenues of $2.5
million from RAIT Capital Corp., consulting fees of $2.0 million, forfeited
borrower application deposits of $105,000 and other miscellaneous fees totaling
$224,000. Also included in 2003 fee and other income was a facilitation fee of
$100,000 paid to us by Resource America, Inc. for facilitating an acquisition,
by an unrelated third party financial institution, of a $10.0 million
participation in a loan owned by Resource America. We had previously owned the
participation from March 1999 until June 2002 and, in order for another party to
acquire it, we had to reacquire it and then sell it to them. The transaction was
completed in January 2004, at which time we earned an additional $23,000
representing interest for the eight days that we had funded the participation.
For a description of our relationship with Resource America, see "Item
8 -- Financial Statements and Supplementary Data -- Note 11 Transactions with
Affiliates." 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 miscellaneous fees totaling $141,000. 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
miscellaneous fees totaling $226,000. Fee and other income is usually negotiated
on a transaction by transaction basis and is non-recurring. As a result, the
sources and amounts for any particular period are not generally indicative of
future sources and amounts.
Investment Income. Our investment income was $6.8 million for the year
ended December 31, 2003, compared to $1.9 million and $506,000 for the years
ended December 31, 2002 and 2001, respectively. Investment income is derived
from three primary sources:
- return on unconsolidated investments in real estate,
- appreciation interests in the cash flow, assets or both, underlying our
loans, and
- interest earned on cash held in bank accounts.
At December 31, 2003, we had five (three and one at December 31, 2002 and
2001, respectively) unconsolidated investments in real estate that generated
$1.6 million of investment income for the year ended December 31, 2003 ($1.4
million and $154,000 of investment income for the years ended December 31, 2002
17
and 2001, respectively.) For the year ended December 31, 2003, we recognized
investment income of $4.8 million relating to our appreciation interests in six
of our investments. We did not recognize any income relating to our appreciation
interests in the years ended December 31, 2002 and 2001. Cash held in bank
accounts generated investment income of $421,000, $401,000 and $352,000 for the
years ended December 31, 2003, 2002 and 2001, respectively.
Gain on Early Extinguishment of Debt. 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. We did not recognize any gain on early
extinguishment of debt in 2002 or 2003.
Gain on Sale of Loans. 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 million 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 Bancorp, whose chief
executive officer is, and whose vice-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. We did not recognize any
gain on sale of loans in 2003.
Gain on Sale of Interests in Real Estate. In March 2003, we sold a 40%
limited 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 limited partnership interest we sold had a book value of negative
$1.4 million. The buyer paid $914,000 and we recognized a gain of $2.4 million.
In December 2002, we sold a 49% limited partnership interest in the same limited
partnership to the same unrelated party. At that time, 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.
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. No gain or loss
was recognized on the sale.
Income from Loan Satisfaction. 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.
Interest Expense. Interest expense was $8.7 million for the year ended
December 31, 2003, as compared to $9.3 million and $10.6 million in 2002 and
2001, 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 $600,000 decrease
in interest expense from the year ended December 31, 2002 to the corresponding
period in 2003 was comprised of a $1.2 million decrease resulting from a lower
average interest rate charged on the mortgages underlying our investments (the
average outstanding balances did not change significantly from 2002 to 2003),
partially offset by a $600,000 increase in interest expense on our lines of
credit due to establishing new lines, increasing the limits on existing lines
and having amounts drawn for longer periods of time. 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 credit 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.
18
Property Operating Expenses; Depreciation and Amortization. Property
operating expenses were $12.7 million for the year ended December 31, 2003,
compared to $13.0 million and $12.2 million for 2002 and 2001, respectively.
Depreciation and amortization was $3.6 million for the year ended December 31,
2003, compared to $3.7 million and $3.3 million for 2002 and 2001, respectively.
The decreases in property operating expenses, depreciation and amortization from
the year ended December 31, 2002 to the corresponding period in 2003 were due to
the sale of one property interest in March 2003 partially offset by the
acquisition of two property interests, one in October 2002 and one in July 2003.
The increases in property operating expenses, depreciation and amortization from
the year ended December 31, 2001 to the corresponding period in 2002 were due to
the acquisition of two property interests in 2002. Included in property
operating expenses are management fees paid to Brandywine Construction &
Management, Inc., an affiliate of the spouse of our chairman and chief executive
officer, for providing real estate management services for the real estate
underlying six, five and two of our interests in real estate at December 31,
2003, 2002 and 2001, respectively. We paid management fees of $1.2 million, $1.1
million and $978,000 to Brandywine for the years ended December 31, 2003, 2002
and 2001, respectively. We anticipate that we will continue to use Brandywine to
provide real estate management services.
Salaries and Related Benefits; General and Administrative Expense.
Salaries and related benefits were $3.5 million for the year ended December 31,
2003, as compared to $2.4 million and $2.7 million for 2002 and 2001,
respectively. General and administrative expenses were $2.8 million for the
year ended December 31, 2003, as compared to $1.7 million and $1.3 million for
2002 and 2001, respectively. The increases in salaries and related benefits and
in general and administrative expenses from the year ended December 31, 2002 to
the corresponding period in 2003 and the increase in general and
administrative expenses from the year ended December 31, 2001 to the
corresponding period in 2002, 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. We experienced the same increases in salary and related benefits from
the year ended December 31, 2001 to the corresponding period in 2002, however
they were offset by deferral of loans 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 $244,000, $183,000 and $137,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. Our relationship with Bancorp is
described above. The other sublease is with The Richardson Group, Inc. whose
chairman is our vice-chairman, a member of our board of trustees and secretary,
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 $55,000 and $53,000 for the years ended December 31, 2003 and
2002, respectively. The increase in the amount of rent we paid from 2001 through
2003 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, 2003, 2002 and 2001 to Bancorp for
technical support services provided to us.
INFLATION
In our three most recent fiscal years, inflation and changing prices have
not had a material effect on our net income and revenue.
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. In November 2003 the letter of credit was
reduced to approximately $442,000 when we funded $489,000 of the guaranteed
return and $69,000 of capital
19
improvements. $442,000 of availability under our $20.0 million line of credit
described above is reserved in the event we are required to make additional
payments under this letter of credit.
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.
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, giving due consideration to materiality.
We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. Actual results may
differ from those estimates under different assumptions or conditions.
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. and Stobba
Associates, L.P., and our majority-owned and controlled limited liability
companies, RAIT Executive Boulevard, LLC and RAIT Carter Oak, 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 either 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 of 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, 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
20
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 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, 2003. 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,
2003 and 2002 based on 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 year ended December 31, 2003, the loans in our portfolio
performed in accordance with their terms and were current as to payments.
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 on 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
annually distribute at least 90% of our annual taxable income.
NEW ACCOUNTING PRONOUNCEMENTS
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", to
certain entities in which voting rights are not effective in identifying the
investor with the controlling financial interest. An entity is subject to
consolidation under FIN 46 if the investors do not have sufficient equity at
risk for the entity to finance its activities without additional subordinated
financial support, are unable to direct the entity's activities or are not
exposed to the entity's losses or entitled to its residual returns ("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.
Subsequent to the issuance of FIN 46, the FASB issued a revised
interpretation, FIN 46(R), the provisions of which must be applied to certain
variable interest entities by March 31, 2004. We plan to adopt the provisions
under the revised interpretation in the first quarter of 2004.
Some of the financing structures that we offer to our borrowers involve the
creation of entities that could be deemed to be 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 to determine whether or not such entities
would be required to be consolidated in our financial statements. The complexity
of the new consolidation rules and their evolving clarification make forecasting
their effect difficult.
21
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, 2003. The presentation, for each category of information, includes
the assets and liabilities by their maturity dates for maturities occurring in
each of the years 2004 through 2008 and the aggregate of each category maturing
thereafter.
<Table>
<Caption>
2004 2005 2006 2007 2008 THEREAFTER TOTAL
------------ ----------- ----------- ----------- ---------- ----------- ------------
Interest earning
assets:
Money market
accounts............ $ 14,758,876 -- -- -- -- -- $ 14,758,876
Average interest
rate................ 1.1% -- -- -- -- -- 1.1%
First mortgages...... 106,633,081 11,479,233 71,300,000 -- -- 12,080,000 201,492,314
Average interest
rate................ 9.8% 7.9% 8.4% -- -- 8.0% 9.1%
Mezzanine loans...... 33,248,709 4,618,066 36,157,500 19,082,723 -- 49,610,028 142,717,826
Average interest
rate................ 15.7% 17.3% 15.2% 12.7% -- 13.1% 14.3%
Interest bearing
liabilities:
Senior indebtedness
related to loans.... 18,071,160 9,626,622 17,703,481 9,975,018 -- -- 55,376,280
Average interest
rate................ 4.1% 3.9% 4.9% 8.7% -- -- 5.1%
Long-term debt
secured by real
estate owned........ 1,170,305 1,256,747 1,348,273 1,446,510 1,543,083 68,940,805 75,705,723
Average interest
rate................ 7.0% 7.0% 7.0% 7.0% 7.0 7.0% 7.0%
Secured lines of
credit.............. $ 23,903,760 -- -- -- -- -- $ 23,903,760
Average interest
rate................ 4.0% -- -- -- -- -- 4.0%
<Caption>
FAIR VALUE
------------
Interest earning
assets:
Money market
accounts............ $ 14,758,876
Average interest
rate................
First mortgages...... 203,868,611
Average interest
rate................
Mezzanine loans...... 145,704,688
Average interest
rate................
Interest bearing
liabilities:
Senior indebtedness
related to loans.... 57,489,382
Average interest
rate................
Long-term debt
secured by real
estate owned........ 76,606,549
Average interest
rate................
Secured lines of
credit.............. $ 23,903,760
Average interest
rate................
</Table>
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. At December 31, 2003, our
credit lines and $23.9 million of the borrowings underlying our loans were
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 available to
us for investment from repayment of our loans may be re-invested at lower rates
than we had obtained on the repaid loans. However, the value of our fixed rate
investments will generally increase as interest rates decrease.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RAIT INVESTMENT TRUST AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.......... 24
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2003 AND 2002... 25
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE YEARS ENDED
DECEMBER 31, 2003......................................... 26
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2003............... 27
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE YEARS
ENDED DECEMBER 31, 2003................................... 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. 29
SCHEDULE IV -- MORTGAGE LOANS ON REAL ESTATE................ 48
</Table>
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.
23
[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, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, 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, 2003. 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 21, 2004 (except for Note 16, as to which the date is February 23, 2004)
24
RAIT INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
---------------------------
2003 2002
------------ ------------
ASSETS
Cash and cash equivalents................................. $ 14,758,876 $ 19,666,189
Restricted cash........................................... 7,660,835 5,484,342
Tenant escrows............................................ 204,772 428,346
Accrued interest receivable............................... 12,731,283 7,421,907
Investments in real estate loans, net..................... 344,499,320 258,921,926
Investments in real estate, net........................... 137,540,199 139,518,051
Furniture, fixtures and equipment, net.................... 621,501 611,224
Prepaid expenses and other assets......................... 15,650,821 5,911,495
Goodwill, net............................................. 887,143 887,143
------------ ------------
Total assets........................................... $534,554,750 $438,850,623
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.................. $ 875,712 $ 421,149
Accrued interest payable.................................. 518,527 677,309
Tenant security deposits.................................. 446,248 657,921
Borrowers' escrows........................................ 11,118,564 10,150,938
Senior indebtedness relating to loans..................... 55,376,280 30,430,916
Long-term debt secured by real estate owned............... 75,705,723 84,160,993
Secured lines of credit................................... 23,903,760 30,243,155
------------ ------------
Total liabilities...................................... $167,944,814 $156,742,381
Minority interest........................................... 3,208,436 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 23,207,138 and
18,803,471 shares...................................... 232,072 188,035
Additional paid-in-capital................................ 365,349,647 274,606,899
(Accumulated deficit)/retained earnings................... (453,000) 5,079,319
Loans for stock options exercised......................... (776,349) (1,068,972)
Deferred compensation..................................... (950,870) (1,210,618)
------------ ------------
Total shareholders' equity............................. 363,401,500 277,594,663
------------ ------------
Total liabilities and shareholders' equity............. $534,554,750 $438,850,623
============ ============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
25
RAIT INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
REVENUES
Interest income....................................... $40,078,101 $33,785,368 $23,663,358
Rental income......................................... 24,375,905 26,010,905 22,151,409
Fee income and other.................................. 4,938,158 5,037,875 5,574,598
Investment income..................................... 6,798,849 1,879,474 506,173
Gain on early extinguishment of debt.................. -- -- 4,633,454
Gain on sale of loans................................. -- 947,974 534,958
Gain on sale of property interests.................... 2,372,220 2,850,645 --
Income from loan satisfaction......................... -- 3,181,670 --
----------- ----------- -----------
Total revenues...................................... 78,563,233 73,693,911 57,063,950
----------- ----------- -----------
COSTS AND EXPENSES
Interest.............................................. 8,711,251 9,302,458 10,627,540
Property operating expenses........................... 12,737,017 13,018,607 12,179,242
Salaries and related benefits......................... 3,511,943 2,404,149 2,711,606
General and administrative............................ 2,844,322 1,695,667 1,324,003
Depreciation and amortization......................... 3,628,815 3,710,246 3,348,347
----------- ----------- -----------
Total costs and expenses............................ 31,433,348 30,131,127 30,190,738
----------- ----------- -----------
Net income before minority interest................... $47,129,885 $43,562,784 $26,873,212
Minority interest..................................... 34,542 (58,118) 40,968
----------- ----------- -----------
Net income............................................ $47,164,427 $43,504,666 $26,914,180
=========== =========== ===========
Net income per common share -- basic.................. $ 2.24 $ 2.50 $ 2.68
=========== =========== ===========
Net income per common share -- diluted................ $ 2.23 $ 2.48 $ 2.65
=========== =========== ===========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
26
RAIT INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
<Table>
<Caption>
RETAINED
LOANS FOR EARNINGS TOTAL
COMMON ADDITIONAL STOCK OPTIONS DEFERRED (ACCUMULATED SHAREHOLDERS'
STOCK PAID-IN CAPITAL EXERCISED COMPENSATION DEFICIT) EQUITY
-------- --------------- ------------- ------------ ------------ --------------
Balance, January 1,
2001............... $ 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) (21,639,185)
Stock options
exercised.......... 250 212,250 -- -- -- 212,500
Common shares issued,
net................ 86,090 118,776,265 -- -- -- 118,862,355
-------- ------------ ----------- ----------- ------------ ------------
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
======== ============ =========== =========== ============ ============
Net income........... 47,164,427 47,164,427
Dividends............ 125 295,840 -- -- (52,696,746) (52,400,781)
Stock options
exercised.......... 373 423,050 292,623 -- -- 716,046
Warrants exercised... 188 281,722 -- -- -- 281,910
Compensation
expense............ -- -- 259,748 -- 259,748
Common shares issued,
net................ 43,351 89,742,136 -- -- -- 89,785,487
-------- ------------ ----------- ----------- ------------ ------------
Balance, December 31,
2003............... $232,072 $365,349,647 $ (776,349) $ (950,870) $ (453,000) $363,401,500
======== ============ =========== =========== ============ ============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
27
RAIT INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------- ------------- ------------
Cash flows from operating activities
Net Income..................................... $ 47,164,427 $ 43,504,666 $ 26,914,180
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest........................... (34,542) 58,118 (40,968)
Depreciation and amortization............... 3,628,815 3,710,246 3,348,347
Accretion of loan discounts................. (8,259,300) (39,230) (1,272,989)
Deferred compensation....................... 259,748 38,905 --
Gain on sale of loans....................... (947,974) (534,958)
Gain on sale of property interests.......... (2,372,220) (2,850,645) --
Income from loan satisfaction............... -- (3,181,670) --
Gain on consolidated extinguishment of
debt...................................... -- -- (4,633,454)
Decrease (increase) in tenant escrows....... 223,574 (138,911) (67,064)
Increase in accrued interest receivable..... (5,309,376) (3,009,078) (1,401,333)
Increase in prepaid expenses and other
assets.................................... (11,243,664) (2,288,632) (2,163,605)
Increase (decrease) in accounts payable and
accrued liabilities....................... 454,563 (711,950) 446,544
(Decrease) increase in accrued interest
payable................................... (158,782) 93,264 (622,593)
(Decrease) increase in tenant security
deposits.................................. (211,673) (154,396) 319,221
(Decrease) increase in borrowers' escrows... (1,208,867) 3,423,567 1,104,618
------------- ------------- ------------
Net cash provided by operating
activities............................. 22,932,703 37,506,280 21,395,946
------------- ------------- ------------
Cash flows from investing activities
Purchase of furniture, fixtures and
equipment................................... (107,390) (653,838) (6,511)
Real estate loans purchased.................... (34,844,298) (4,128,200) --
Real estate loans originated................... (192,860,481) (199,598,473) (144,415,693)
Principal repayments from real estate loans.... 139,014,125 134,215,133 87,335,350
Proceeds from disposition of real estate
interests................................... 11,508,758 14,646,133 --
Investment in real estate and improvements..... (16,111,276) (39,507,223) (182,084)
Proceeds from sale of loan..................... -- 2,200,000 2,654,021
------------- ------------- ------------
Net cash used in investing activities..... (93,400,562) (92,826,137) (54,614,917)
------------- ------------- ------------
Cash flows from financing activities.............
Principal repayments on senior indebtedness.... (15,110,817) (26,546,306) (23,749,435)
Principal repayments on long-term debt......... (921,903) (923,720) (786,907)
Proceeds of senior indebtedness................ 49,550,000 25,350,000 6,950,000
Proceeds of long-term debt..................... -- 7,588,570 2,275,000
(Repayments) advances on secured line of
credit...................................... (6,339,395) 28,243,155 (18,000,000)
Cash paid to acquire debt...................... -- -- (20,248,435)
Issuance of common shares, net................. 90,786,784 65,982,305 119,074,855
Payment of cash dividends...................... (52,696,746) (42,772,866) (21,639,185)
Principal payments on loans for stock options
exercised................................... 292,623 -- --
------------- ------------- ------------
Net cash provided by financing
activities............................. 65,560,546 56,921,138 43,875,893
------------- ------------- ------------
Net change in cash and cash equivalents.......... (4,907,313) 1,601,280 10,656,921
------------- ------------- ------------
Cash and cash equivalents, beginning of year..... $ 19,666,189 $ 18,064,909 $ 7,407,988
------------- ------------- ------------
Cash and cash equivalents, end of year........... $ 14,758,876 $ 19,666,189 $ 18,064,909
============= ============= ============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
28
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 $40.0 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 Company also arranges for conduit loans. 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 East,
Mid-Atlantic, Southeast and Mid-West 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. and Stobba Associates, L.P., and its majority-owned and controlled limited
liability companies, RAIT Executive Boulevard, LLC and RAIT Carter Oak, 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 all of the
following circumstances exist:
- the Company holds either the general partnership or managing membership
interest,
- the Company 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. Certain reclassifications have been made to the consolidated
financial statements as of December 31, 2002 and for the years ended December
31, 2002 and 2001 to conform to the presentation of the consolidated financial
statements as of and for the year ended December 31, 2003.
29
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 at the time the loan is closed. The additional interest, 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.
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. Deferred rent is included in prepaid expenses and other assets.
30
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.
PREPAID EXPENSES AND OTHER ASSETS
Included in prepaid expenses and other assets at December 31, 2003 is a
deposit in the amount of $8.0 million held by a third party relating to a loan
that closed in January 2004.
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 these
assets 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, 2003. 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, 2003, 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
31
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
Net income, as reported....................... $47,164,000 $43,505,000 $26,914,000
Less: stocks based compensation determined
under fair value based method for all
awards...................................... 79,000 90,000 376,000
----------- ----------- -----------
Pro forma net income.......................... $47,085,000 $40,415,000 $26,538,000
=========== =========== ===========
Net income per share -- basic................. $ 2.24 $ 2.50 $ 2.68
as reported pro forma....................... $ 2.24 $ 2.49 $ 2.64
Net income per share -- diluted............... $ 2.23 $ 2.48 $ 2.65
as reported pro forma....................... $ 2.22 $ 2.48 $ 2.62
</Table>
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, 2002 and 2001, respectively: dividend yield
of 9.6%, 11.0% and 11.3%; expected volatility of 17%, 22% and 14%; risk-free
interest rate of 4.9%, 4.8% and 5.1%; and expected lives of 9.5, 5 and 5 years.
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 $8.9 million, $9.2 million and $11.3 million for the years ended
December 31, 2003, 2002 and 2001, respectively. Long-term debt assumed in
conjunction with the acquisition of an investment in real estate was $0, $5.4
million and $0 for the years ended December 31, 2003, 2002 and 2001,
respectively. In July 2003, the Company acquired a property interest in
satisfaction of its loan in the amount of $12.6 million.
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.
32
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", to
certain entities in which voting rights are not effective in identifying the
investor with the controlling financial interest. An entity is subject to
consolidation under FIN 46 if the investors either do not have sufficient equity
at risk for the entity to finance its activities without additional subordinated
financial support, are unable to direct the entity's activities, or are not
exposed to the entity's losses or entitled to its residual returns ("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.
Subsequent to the issuance of FIN 46, the FASB issued a revised
interpretation, FIN 46(R), the provisions of which must be applied to certain
variable interest entities by March 31, 2004. The Company plans to adopt the
provisions under the revised interpretation in the first quarter of 2004.
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.
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 and 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 December 31, 2003, the Company has not entered into loan commitments that 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 was effective July 1, 2003. Based on the
Company's current business activities, Management has determined that the
provisions of SFAS No. 150 did not have a material impact on the Company's
financial position, results of operations, or disclosures.
33
NOTE 3 -- INVESTMENTS IN REAL ESTATE LOANS
The Company's portfolio of real estate loans consisted of the following at
the dates indicated below:
<Table>
<Caption>
DECEMBER 31,
---------------------------
2003 2002
------------ ------------
First mortgages.......................................... $201,492,314 $115,137,822
Mezzanine loans.......................................... 142,717,826 143,863,441
Unearned (fees) costs.................................... 515,337 146,820
Less: Allowance for loan losses.......................... (226,157) (226,157)
------------ ------------
Investments in real estate loans....................... 344,499,320 258,921,926
Less: Senior indebtedness secured by real estate
underlying the Company's loans......................... (55,376,280) (30,430,916)
------------ ------------
Net investments in real estate loans................... $289,123,040 $228,419,010
============ ============
</Table>
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, 2003:
<Table>
<Caption>
AVERAGE
NUMBER LOAN TO RANGE OF LOAN
TYPE OF LOAN OF LOANS VALUE(1) YIELDS(2) RANGE OF MATURITIES
- ------------ -------- ----------- ------------- -------------------
First mortgages............. 19 74% 6.2% - 12.5% 1/30/04 - 9/30/18
Mezzanine loans............. 31 86% 10.0% - 29.6%(1) 1/29/04 - 4/30/21
</Table>
- ---------------
(1) Calculated as the sum of the outstanding balance of the Company's loan and
senior loan (if any) divided by the current appraised value of the
underlying collateral.
(2) All the Company's loans are at fixed rates. The Company's calculation of
loan yield includes points charged and costs deferred.
The property type of the Company's portfolio of real estate loans consisted
of the following at the dates indicated below:
<Table>
<Caption>
DECEMBER 31,
-------------------------------------------------
2003 2002
----------------------- -----------------------
Multi family......................... $101.5 million 29.5% $106.8 million 41.2%
Office............................... 187.0 million 54.3% 94.5 million 36.5%
Retail and other..................... 55.7 million 16.2% 57.7 million 22.3%
-------------- ------ -------------- ------
Total.............................. $344.2 million 100.0% $259.0 million 100.0%
</Table>
As of December 31, 2003 and 2002, $112.3 million and $68.0 million in
principal amount of loans, respectively, were pledged as collateral for amounts
outstanding on the Company's lines of credit and senior indebtedness.
34
As of December 31, 2003 and 2002, senior indebtedness relating to the
Company's loans consisted of the following:
<Table>
<Caption>
2003 2002
----------- -----------
Loan payable, secured by real estate, monthly installments
of $28,090, including interest at 6.82%, remaining
principal due November 1, 2008. This loan was repaid on
April 11, 2003. ......................................... $ -- $ 4,093,838
Loan payable, secured by real estate, monthly installments
of $72,005, including interest at 7.55%, remaining
principal due December 1, 2008. In July 2003, the Company
acquired the property underlying this loan. Accordingly
the liability is now included in the Company's schedule
of long-term debt secured by real estate underlying the
Company's investments in real estate. See Note
4-Investments in Real Estate. ........................... -- 9,493,819
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 (2.47% at December 31, 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%........ 10,536,280 10,693,259
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 14, 2004.................. 2,900,000 --
Senior loan participation, secured by Company's interest in
a first mortgage loan with a book value of $8,000,000,
payable interest only at LIBOR plus 250 basis points
(3.62% at December 31, 2003) due monthly, principal
balance due October 1, 2004.............................. 5,000,000 --
Senior loan participation, secured by Company's interest in
a first mortgage loan with a principal balance of
$5,560,000, payable interest only at LIBOR plus 250 basis
points (3.62% at December 31, 2003) due monthly,
principal balance due May 9, 2005........................ 5,000,000 --
Senior loan participation, secured by Company's interest in
a first mortgage loan with a principal balance of
$2,550,000, payable interest only at 5.0% due monthly,
principal balance due July 29, 2005...................... 1,800,000 --
Senior loan participation, secured by Company's interest in
first mortgage loan with a principal balance of
$4,750,000, payable interest only at a specified LIBOR
plus 275 basis points (4.13% at December 31, 2002) due
monthly. This loan was repaid on February 4, 2003........ -- 3,510,000
Senior loan participation, secured by Company's interest in
first mortgage loan with a principal balance of
$3,369,233, payable interest only at LIBOR plus 275 basis
points (3.87% at December 31, 2003) due monthly,
principal balance due March 29, 2005..................... 2,640,000 2,640,000
Term loan payable, secured by Company's interest in a first
mortgage loan with a principal balance of $7,500,000,
payable interest only at 4.5% due monthly, principal
balance due June 23, 2006................................ 6,500,000 --
</Table>
35
<Table>
<Caption>
2003 2002
----------- -----------
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 December 31, 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
$10,434,217, payable interest only at LIBOR plus 275
basis points (3.87% at December 31, 2003) due monthly,
principal balance due September 30, 2004................. 5,000,000 --
Senior loan participation, secured by Company's interest in
a first mortgage loan with a principal balance of
$15,500,000, payable interest only at 5.0% due monthly,
principal balance due October 15, 2006................... 11,000,000 --
----------- -----------
$55,376,280 $30,430,916
=========== ===========
</Table>
As of December 31, 2003, the senior indebtedness relating to the Company's
loans maturing over the next five years and the aggregate indebtedness maturing
thereafter, is as follows:
<Table>
<Caption>
2004........................................................ $18,071,160
2005........................................................ 9,626,622
2006........................................................ 17,703,481
2007........................................................ 9,975,017
2008........................................................ --
Thereafter.................................................. --
-----------
$55,376,280
===========
</Table>
NOTE 4 -- INVESTMENTS IN REAL ESTATE
The Company's investments in real estate are comprised of real estate that
the Company owns through consolidated subsidiaries, the Company's equity
investments in unconsolidated entities owning real estate and related escrows.
Investments in real estate are comprised of the following at the dates indicated
below:
<Table>
<Caption>
DECEMBER 31,
---------------------------
2003 2002
------------ ------------
Multi-family(1).......................................... $ 39,757,752 $ 66,327,670
Office(2)................................................ 92,029,800 84,394,747
Retail and Other(3)...................................... 18,712,012 613,519
------------ ------------
Subtotal............................................... 150,499,564 151,335,936
Less: Accumulated depreciation........................... (12,959,365) (11,817,885)
------------ ------------
Investment in real estate, net........................... $137,540,199 $139,518,051
============ ============
</Table>
- ---------------
(1) Includes $4.9 million invested in a limited liability company that owns an
apartment building, $3.7 million invested in two limited partnerships that
each own apartment buildings, and $1.8 million invested in a trust that owns
an apartment building. Also includes escrows totaling $524,000 at December
31, 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 general partnership that owns an office
building and $6.6 million invested in a limited partnership that owns an
office building. Also includes escrows totaling $1.8 million
36
at December 31, 2003, which are held for payment of real estate taxes,
insurance premiums, repair and replacement costs, tenant improvements and
leasing commissions.
(3) Includes $18.1 million invested in three limited liability companies that
each own retail centers. Also includes escrows totaling $164,000 at December
31, 2003, which are held for payment of real estate taxes, insurance
premiums, repair and replacement costs, tenant improvements and leasing
commissions.
As of December 31, 2003 and 2002, long-term debt secured by real estate
underlying the Company's investments in real estate consisted of the following:
<Table>
<Caption>
2003 2002
----------- -----------
Loan payable, secured by real estate, monthly installments
of $8,008, including interest at 7.33%, remaining
principal due August 1, 2008............................. 1,006,857 1,027,294
Loan payable, secured by real estate, monthly installments
of $288,314, including interest at 6.85%, remaining
principal due August 1, 2008............................. 41,415,575 41,977,745
Loan payable, secured by real estate, monthly installments
of $107,255, including interest at 7.73%, remaining
principal due December 1, 2009. On March 31, 2003, the
Company's sold its general partnership and 40% limited
partnership interests in the limited partnership that
owns the property underlying this loan. At that time,
this loan was no longer included in the Company's
consolidated financial statements. ...................... -- 14,570,873
Loan payable, secured by real estate, monthly installments
of $15,396, including interest at 7.17%, remaining
principal due March 1, 2012. On March 31, 2003, the
Company's sold its general partnership and 40% limited
partnership interests in the limited partnership that
owns the property underlying this loan. At that time,
this loan was no longer included in the Company's
consolidated financial statements. ...................... -- 2,234,784
Loan payable, secured by real estate, monthly installments
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 $230,074 million and $262,589 at December 31,
2003 and 2002, respectively) which is amortized over the
term of the underlying debt.............................. 11,280,684 11,418,529
Loan payable, secured by real estate, monthly installments
of $37,697, including interest at 7.27%, remaining
principal due January 1, 2010............................ 5,277,113 5,343,198
Loan payable, secured by real estate, monthly installments
of $47,720, including interest at 5.73%, remaining
principal due November 1, 2012........................... 7,453,204 7,588,570
Loan payable, secured by real estate, monthly installments
of $72,005, including interest at 7.55%, remaining
principal due December 1, 2008........................... 9,272,290 --
----------- -----------
$75,705,723 $84,160,993
=========== ===========
</Table>
37
As of December 31, 2003, the amount of long-term debt secured by the
Company's investments in real estate that matures over the next five years, and
the aggregate indebtedness maturing thereafter, is as follows:
<Table>
<Caption>
2004........................................................ $ 1,170,305
2005........................................................ 1,256,747
2006........................................................ 1,348,273
2007........................................................ 1,446,510
2008........................................................ 1,543,083
Thereafter.................................................. 68,940,805
-----------
$75,705,723
===========
</Table>
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, 2003 and 2002 were $591,000 and $700,000, 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, 2003, 2002 and 2001 was $3.4 million, $3.4
million, and $3.1 million, respectively.
NOTE 5 -- LINES OF CREDIT
The following is a description of the Company's secured lines of credit at
December 31, 2003:
At December 31, 2003, the Company had $10.0 million outstanding under its
$30.0 million line of credit. 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. The minimum
interest rate is 4.0%. Absent any renewal, the line of credit will terminate in
October 2005 and any principal then outstanding must be paid by October 2006.
At December 31, 2003, the Company had $10.0 million outstanding under its
$20.0 million line of credit. This line of credit bears interest at the prime
rate as described above. This line of credit has a current term running through
April 2004 with annual one-year extension options at the lender's option and an
11-month non-renewal notice requirement. Approximately $442,000 of availability
under this line of credit is reserved in the event the Company is required to
make any payments under a letter of credit described in Note 10 below.
At December 31, 2003, the Company had $3.9 million outstanding under its
$10.0 million line of credit. This line of credit bears interest either at three
month LIBOR plus 3.0% or at the prime rate as described above, at the Company's
election. Absent any renewal, this line will terminate in July 2004 and any
principal then outstanding must be repaid by July 2009.
NOTE 6 -- SHAREHOLDERS' EQUITY
On October 22, 2003, the Company issued 2.0 million common shares in a
public offering at an offering price of $22.75 per share. After offering costs,
including the underwriter's discount, and expenses of approximately $2.1
million, the Company received approximately $43.4 million of net proceeds. On
October 31, 2003, the Company issued an additional 300,000 common shares
pursuant to the underwriter's exercise of its over-allotment option. The
exercise price was $22.75 per share, resulting in receipt by the Company of net
proceeds of approximately $6.5 million.
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. The exercise price
was $20.75 per share, resulting in receipt by the Company of net proceeds of
approximately $5.2 million.
38
In January 2003, Friedman Billings Ramsey ("FBR") acquired 18,794 common
shares pursuant to partial exercises of its warrant (the "FBR Warrant"). The
Company received proceeds of $281,910 from these exercises. The FBR Warrant to
purchase an additional 12,054 common shares expired on January 14, 2003.
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 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, after discounts and commissions, of total
net proceeds of $2.8 million.
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, after discounts and commissions, of total
net proceeds 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 2002, FBR acquired 110,819 common shares pursuant to partial exercises
of the FBR Warrant. The Company received proceeds of $1.7 million from these
exercises.
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 $134,500,
$99,700 and $67,500 for the years ended December 31, 2003, 2002 and 2001,
respectively.
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 years ended December 31, 2003 and 2002, the
Company recognized $586,000 and $96,000 of compensation expenses, respectively,
with regard to this commitment.
39
NOTE 8 -- EARNINGS PER SHARE
The Company's calculation of earnings per share in accordance with SFAS No.
128 is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2003
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EARNINGS PER SHARE:
Net income available to common shareholders..... $47,164,427 21,043,308 $2.24
Effect of dilutive securities:
Options....................................... -- 146,895 (.01)
----------- ---------- -----
Net income available to common shareholders plus
assumed conversions........................... $47,167,427 21,190,203 $2.23
=========== ========== =====
</Table>
<Table>
<Caption>
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
=========== ========== =====
</Table>
<Table>
<Caption>
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
=========== ========== =====
</Table>
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 $776,000 at December 31, 2003. Interest on the
40
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, 2003 there were 518,282 options outstanding.
A summary of the activity of the Option Plan is presented below.
<Table>
<Caption>
2003 2002 2001
------------------ ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- -------- -------- ------- --------
Outstanding, January 1,.... 427,682 $ 14.52 560,825 $13.16 586,825 $12.99
Granted.................... 129,850 22.84 87,100 18.12 10,000 13.65
Exercised.................. (39,250) 11.65 (220,243) 12.41 (36,000) 10.39
------- -------- -------
Outstanding, December
31,...................... 518,282 16.82 427,682 14.52 560,825 13.16
======= ======== =======
Options exercisable at
December 31,............. 374,682 378,932 508,244
======= ======== =======
Weighted average fair value
of options granted during
the year................. $ 0.68 $ 0.95 $ 0.24
======= ====== ======
</Table>
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT AVERAGE
EXERCISE PRICES DECEMBER 31, 2003 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2003 EXERCISE PRICE
- --------------- ----------------- ---------------- -------------- ----------------- --------------
$ 9.00 - 11.65 41,432 5.80 years $10.63 41,432 $10.63
$13.65 - 15.00 321,000 4.10 years $14.96 321,000 $14.96
$19.21 - 19.85 26,000 8.35 years $19.58 12,250 $19.67
$21.51 - 23.15 129,850 9.61 years $22.84 -- --
------- -------
518,282 374,682
======= =======
</Table>
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT
At December 31, 2003, the Company had 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. In November 2003
the letter of credit was reduced to approximately $442,000 when the Company
funded $489,000 of the guaranteed return and $69,000 of capital improvements.
$442,000 of availability under the Company's $20.0 million line of credit
described in Note 5 above is reserved in the event the Company is required to
make additional payments under this letter of credit.
41
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.
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:
<Table>
2004........................................................ $ 316,778
2005........................................................ 314,621
2006........................................................ 319,264
2007........................................................ 323,493
2008........................................................ 323,493
Thereafter.................................................. 539,156
----------
Total..................................................... $2,136,805
==========
</Table>
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 Vice-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
$244,000, $183,000 and $137,000 for the years ended December 31, 2003, 2002 and
2001, 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 Vice-Chairman, 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 $42,500 and $53,000
for the years ended December 31, 2003 and 2002, respectively.
The Company sub-leases suburban office space at an annual rental of
$10,000. This sublease currently terminates in February 2005 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 $298,000, $253,000 and $147,000 for the years
ended December 31, 2003, 2002 and 2001, respectively.
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, Inc. ("Resource America") was the sponsor of the Company.
Resource America held approximately 1.9%, 2.9% and 6.8% of the Company's
outstanding common shares at February 29, 2004, December 31, 2003 and 2002,
respectively. Resource America had the right to nominate one person for election
to the Board of Trustees of the Company until its ownership of the Company's
outstanding common shares fell below 5% in June 2003. The Chairman and Chief
Executive Officer of the Company, Betsy Z. Cohen, is (i) the spouse of Edward E.
Cohen, the Chairman and Chief Executive Officer of Resource
42
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
President, Chief Operating Officer and a director of Resource America. Jonathan
Cohen is also the Vice-Chairman, a Trustee and the Secretary of the Company and
served as Resource America's nominee to the Board of Trustees 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 2003, the Company engaged in the following transaction with Resource
America:
In December 2003, the Company was paid $100,000 for facilitating an
acquisition by an unrelated third party financial institution of a $10.0 million
participation in a loan owned by Resource America. The Company had previously
owned the participation from March 1999 until June 2002 and in order for another
party to acquire it, the Company had to reacquire it and then sell it to them.
The transaction was completed in January 2004, at which time the Company earned
an additional $23,000 representing interest for the eight days the Company had
funded the participation.
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 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.
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"), is an affiliate
of the spouse of Betsy Z. Cohen, the Chairman and Chief Executive Officer of the
Company. Brandywine provided real estate management services to 16 and 10
properties underlying the Company's investments in real estate at December 31,
2003, and 2002, respectively. Management fees in the amount of $1.2 million,
$1.1 million and $978,000 were paid to Brandywine for the years ended December
31, 2003, 2002 and 2001, respectively, relating to the properties owned by the
Company. 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.
43
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, Mrs. Cohen's son, 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, 2003 and 2002, the Company had $11.7 million and $12.6 million,
respectively, on deposit, of which approximately $11.6 million and $12.1
million, respectively, 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 $60,000 for each of the years ended December 31, 2003
and 2002. The Company subleases a portion of its downtown Philadelphia office
space from Bancorp. See Note 10.
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 has acted as a dealer in the public offerings
the Company made of its common shares in February 2003 and October 2003. In the
February 2003 offering, Cohen Brothers was allocated 150,000 common shares at
the public offering price less a standard dealer's concession of $0.48 per
share. In the October 2003 offering, Cohen Brothers was allocated 125,000 common
shares at the public offering price less a standard dealer's concession of $0.61
per share.
The Company sub-leases a portion 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 million 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.
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, 2003 and 2002 are outlined
below.
44
For cash and cash equivalents, the recorded book value of $14.8 million and
$19.7 million as of December 31, 2003 and 2002, respectively, approximated fair
value. The book value of restricted cash of $7.7 million and $5.5 million
approximated fair value at December 31, 2003 and 2002, respectively. The
recorded book value of the secured lines of credit totaling $23.9 million and
$30.2 million at December 31, 2003 and 2002, 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, 2003 and 2002 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:
<Table>
<Caption>
AT DECEMBER 31, 2003
--------------------------------------
CARRYING ESTIMATED DISCOUNT
AMOUNT FAIR VALUE RATE
------------ ------------ --------
First mortgages and senior loan
participations................................ $201,492,000 $203,869,000 8.0%
Mezzanine loans................................. 142,718,000 145,705,000 13.0%
Senior indebtedness secured by real estate
underlying the Company's loans................ 55,376,000 57,489,000 4.0%
Long-term debt secured by real estate underlying
equity interest............................... 75,706,000 76,607,000 6.75%
</Table>
<Table>
<Caption>
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%
</Table>
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 ("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.
45
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:
<Table>
<Caption>
FOR THE THREE MONTHS ENDED
-------------------------------------------------------
2003 DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ---- ------------ ------------- ---------- -----------
Mortgage interest income.......... $12,254,943 $10,608,732 $8,479,137 $ 8,540,657
Rental income..................... 5,989,174 6,114,316 5,426,080 6,846,335
Fee income and other.............. 1,569,648 1,892,902 943,428 532,180
Investment income................. 1,617,630 2,570,296 448,684 2,356,871
Gain on sale of loans............. -- -- -- --
Gain on sale of interests in real
estate.......................... -- -- -- 2,372,220
Interest expense.................. 2,358,022 2,442,796 1,692,437 2,217,996
Property operating expenses....... 2,807,459 3,340,562 2,787,652 3,801,344
Other operating expenses.......... 2,791,506 2,439,113 2,523,152 2,231,309
----------- ----------- ---------- -----------
Net income before minority
interest........................ 13,474,408 12,963,775 8,294,088 12,397,614
Minority interest................. 6,422 (28,586) 32,994 23,712
----------- ----------- ---------- -----------
Net income........................ $13,480,830 $12,935,189 $8,327,082 $12,421,326
=========== =========== ========== ===========
Basic earnings per share:
Net income...................... $ 0.60 $ 0.62 $ 0.40 $ 0.62
Diluted earnings per share
Net income...................... $ 0.60 $ 0.62 $ 0.40 $ 0.62
</Table>
<Table>
<Caption>
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
</Table>
46
NOTE 16 -- SUBSEQUENT EVENTS
On January 29, 2003, the Company adopted a Phantom Share Plan for
Non-Employee Trustees and granted 482 phantom shares to each of two non-employee
trustees, or 964 phantom shares in the aggregate. Under current accounting
rules, grants under this Plan will result in variable accounting, which will
result in continuing compensation expenses from the date of grant to the date
the phantom shares are actually paid to the participant.
On February 23, 2004, the Company entered into a $25.0 million line of
credit. This line of credit bears interest at either, at the Company's election,
(a) one, two or three month LIBOR, plus 2.25% or (b) a daily base rate equal to
the higher of (i) the bank's announced prime rate plus 1% or (ii) the Federal
Funds Rate plus 2%. Absent any renewal, this line of credit will terminate in
February 2006 and any principal then outstanding must be repaid at that time.
Subsequent to February 23, 2004, the Company had $19.0 million outstanding under
this line of credit and the interest rate was 3.35%.
47
SCHEDULE IV
RAIT INVESTMENT TRUST AND SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2003
<Table>
<Caption>
MATURITY PERIODIC FACE AMOUNT BOOK VALUE
LOAN TYPE/PROPERTY TYPE INTEREST RATE DATE PAYMENT TERMS PRIOR LIENS OF LOANS OF LOANS
- ------------------------- ------------- ----------- ------------- ------------ ------------ ------------
FIRST MORTGAGES:
Multi-family............. 8.00% 9/30/18 interest only $ -- $ 12,080,000 $ 12,080,000
Office................... 7.00% 6/30/04 interest only 5,000,000 10,434,217 10,434,217
Office................... 9.00% 10/15/06 interest only 11,000,000 15,500,000 15,500,000
Office................... % 9/30/04 interest only -- 39,385,640 31,726,164
Office................... 8.50% 12/31/06 interest only -- 37,400,000 37,400,000
Office................... 9.50% 1/30/04 interest only 39,180,999 39,180,999
All other multi-family... 5/30/04 -
9/30/04 7,640,000 20,210,739 19,897,884
All other office......... 7/29/05 -
3/31/06 6,800,000 13,450,000 13,450,000
All other retail and
other.................. 2/14/04 -
6/22/06 14,400,000 21,823,050 21,823,050
------------ ------------ ------------
Total first mortgages.... $ 44,840,000 $209,464,645 $201,492,314
------------ ------------ ------------
MEZZANINE LOANS:
Multi-family............. 11.43% 9/8/07 interest only 10,536,280 14,982,723 14,982,723
Retail and other......... 16.8% 3/9/06 interest only -- 13,500,000 13,500,000
All other multi-family... 11/24/04 -
9/30/18 102,859,043 54,528,877 54,528,877
All office............... 3/11/03 -
5/2/21 105,331,580 39,331,026 39,331,026
All other retail and
other.................. 63,399,552 20,375,200 20,375,200
------------ ------------ ------------
Total mezzanine loans.... $282,126,455 $142,717,826 $142,717,826
------------ ------------ ------------
Grand total.............. $326,966,455 $352,182,471 $344,210,140
============ ============ ============
</Table>
48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), 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.
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-15 as of the end of the period covered by this report. 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 procedures are effective in timely alerting
them to material information relating to us required to be included in our
Exchange Act reports.
There has been no change in our internal control over financial reporting
that occurred during the fourth fiscal quarter of our fiscal year ended December
31, 2003 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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 2004 annual meeting of shareholders, to be
filed on or before April 29, 2004 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in our definitive
proxy statement with respect to our 2004 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 following
this sentence in this Item, will be set forth in our definitive proxy statement
with respect to our 2004 annual meeting of shareholders, and is incorporated
herein by reference.
49
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2003.
<Table>
<Caption>
(A) (B) (C)
NUMBER OF SECURITIES WEIGHTED AVERAGE NUMBER OF SECURITIES REMAINING
TO BE ISSUED UPON EXERCISE PRICE AVAILABLE FOR FUTURE ISSUANCE
EXERCISE OF OF OUTSTANDING UNDER EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OPTIONS, WARRANTS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS, AND RIGHTS AND RIGHTS REFLECTED IN COLUMN (A))
- ------------- -------------------- ------------------ -------------------------------
Equity compensation
plans approved by
security holders...... 518,282 $16.82 734,050
Equity compensation
plans not approved by
security holders(1)... 58,912 $21.21 --
</Table>
- ---------------
(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.
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 2004 annual meeting of shareholders, and is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be set forth in our definitive
proxy statement with respect to our 2004 annual meeting of shareholders, and is
incorporated herein by reference.
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, 2003 and 2002
Consolidated Statements of Income for the three years ended December 31,
2003
Consolidated Statements of Changes in Shareholders' Equity for the three
years ended December 31, 2003
Consolidated Statements of Cash Flows for the three years ended December
31, 2003
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.
50
(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 of this annual report. Such Exhibit Index is incorporated herein
by reference.
(b) Reports on Form 8-K
We filed two reports on Form 8-K during the quarter ending December 31,
2003:
- A report on Form 8-K was dated October 20, 2003 and was filed on October
21, 2003. Pursuant to Item 12 "Results of Operations and Financial
Condition," we reported that we issued a press release regarding our
earnings for the third quarter of fiscal 2003.
- A report on Form 8-K was dated October 22, 2003 and was filed on October
28, 2003. Pursuant to Item 5 "Other Events and Required FD Disclosure,"
we reported that we entered into an underwriting agreement with certain
underwriters and filed a prospectus supplement relating to a public
offering of our common shares of beneficial interest.
51
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
By: /s/ BETSY Z. COHEN
------------------------------------
Betsy Z. Cohen
Chairman, Chief Executive Officer
and Trustee
March 4, 2004
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.
<Table>
By: /s/ BETSY Z. COHEN Chairman, Chief Executive Officer March 4, 2004
------------------------------------------ and Trustee (Principal Executive
Betsy Z. Cohen Officer)
By: /s/ SCOTT F. SCHAEFFER President and Chief Operating March 4, 2004
------------------------------------------ Officer
Scott F. Schaeffer
By: /s/ ELLEN J. DISTEFANO Executive Vice President and March 4, 2004
------------------------------------------ Chief Financial Officer
Ellen J. DiStefano (Principal Financial Officer and
Principal Accounting Officer)
By: /s/ JONATHAN Z. COHEN Secretary, Vice-Chairman and March 4, 2004
------------------------------------------ Trustee
Jonathan Z. Cohen
By: /s/ EDWARD S. BROWN Trustee March 4, 2004
------------------------------------------
Edward S. Brown
By: /s/ S. KRISTIN KIM Trustee March 4, 2004
------------------------------------------
S. Kristin Kim
By: /s/ ARTHUR MAKADON Trustee March 4, 2004
------------------------------------------
Arthur Makadon
By: /s/ JOEL R. MESZNIK Trustee March 4, 2004
------------------------------------------
Joel R. Mesznik
By: /s/ DANIEL PROMISLO Trustee March 4, 2004
------------------------------------------
Daniel Promislo
</Table>
52
EXHIBIT INDEX
<Table>
<Caption>
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)
10.1 Employment Agreement dated January 23, 2002 between Betsy Z.
Cohen and RAIT Investment Trust(5)
10.2 Employment Agreement dated January 23, 2002 between Scott F.
Schaeffer and RAIT Investment Trust(6)
10.3 Amended and Restated RAIT Investment Trust 1997 Stock Option
Plan (as amended through July 16, 2002)(7)
10.4 RAIT Investment Trust Phantom Share Plan for Non-Employee
Trustees
21 List of Subsidiaries
23 Consent of Grant Thornton LLP
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.
</Table>
- ---------------
(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 for its fiscal year ended December 31, 2002 (File No. 1-14760).
(6) 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).
(7) Incorporated by reference to RAIT Investment Trust's Registration Statement
on Form S-8 (Registration No. 333-100766).
53