SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from _______________ to _______________
Commission file number: 1-14760
RAIT INVESTMENT TRUST
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 23-2919819
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o RAIT PARTNERSHIP, L.P.
1818 MARKET STREET, 28TH FLOOR, PHILADELPHIA, PA 19103
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(Address of principal executive offices) (Zip Code)
(215) 861-7900
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
As of May 3, 2004, 23,219,034 common shares of beneficial interest, par value
$0.01 per share, of the registrant were outstanding.
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.................................................................................. 3
Consolidated Balance Sheets at March 31, 2004 (unaudited) and December 31, 2003........................... 3
Consolidated Statements of Income (unaudited) for the three months ended March 31, 2004 and 2003.......... 4
Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2004 and 2003...... 5
Notes to Consolidated Financial Statements - March 31, 2004 (unaudited)................................... 6
Report of Independent Certified Public Accountants........................................................ 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................ 22
ITEM 4. CONTROLS AND PROCEDURES............................................................................... 22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................................... 24
SIGNATURES..................................................................................................... 25
EXHIBIT INDEX.................................................................................................. 26
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004
(UNAUDITED) DECEMBER 31, 2003
--------------- -----------------
ASSETS
Cash and cash equivalents $ 70,484,165 $ 14,758,876
Restricted cash 10,145,795 7,660,835
Tenant escrows 217,789 204,772
Accrued interest receivable 15,793,096 12,731,283
Investments in real estate loans, net 379,397,025 344,499,320
Investments in real estate, net 137,610,941 137,540,199
Furniture, fixtures and equipment, net 731,718 621,501
Prepaid expenses and other assets 11,986,730 15,650,821
Goodwill, net 887,143 887,143
--------------- -----------------
Total assets $ 627,254,402 $ 534,554,750
=============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 1,787,374 $ 875,712
Accrued interest payable 449,186 518,527
Tenant security deposits 478,787 446,248
Borrowers' escrows 9,999,107 11,118,564
Dividends payable 13,927,991 -
Senior indebtedness relating to loans 45,334,868 55,376,280
Long-term debt secured by real estate owned 75,413,320 75,705,723
Secured lines of credit 55,000,000 23,903,760
--------------- -----------------
Total liabilities $ 202,390,633 $ 167,944,814
Minority interest 3,196,772 3,208,436
Shareholders' equity:
Preferred shares, $.01 par value; 25,000,000 shares authorized;
7.75% Series A cumulative redeemable preferred shares,
liquidation preference $25.00 per
share; 2,400,000 and no shares, respectively, issued and
outstanding 24,000 -
Common shares, $.01 par value; 200,000,000 shares authorized;
23,213,318 and 23,207,138 shares, respectively, issued and
outstanding 232,133 232,072
Additional paid-in-capital 423,460,796 365,349,647
Accumulated deficit (410,473) (453,000)
Loans for stock options exercised (761,126) (776,349)
Deferred compensation (878,333) (950,870)
--------------- -----------------
Total shareholders' equity 421,666,997 363,401,500
--------------- -----------------
Total liabilities and shareholders' equity $ 627,254,402 $ 534,554,750
=============== =================
The accompanying notes are an integral part of these consolidated
financial statements.
3
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
2004 2003
------------ ------------
REVENUES
Interest income $ 13,314,483 $ 8,540,657
Rental income 6,067,198 6,846,335
Fee income and other 2,487,208 532,180
Investment income 831,894 2,356,871
Gain on sale of property interests - 2,372,220
------------ ------------
Total revenues 22,700,783 20,648,263
------------ ------------
COSTS AND EXPENSES
Interest 2,466,125 2,217,996
Property operating expenses 3,030,023 3,801,344
Salaries and related benefits 1,151,657 704,186
General and administrative 967,515 549,744
Depreciation and amortization 945,469 977,379
------------ ------------
Total costs and expenses 8,560,789 8,250,649
------------ ------------
Net income before minority interest $ 14,139,994 $ 12,397,614
Minority interest (19,476) 23,712
------------ ------------
Net income $ 14,120,518 $ 12,421,326
------------ ------------
Dividends attributed to preferred shares 150,000 -
------------ ------------
Net income available to common shareholders $ 13,970,518 $ 12,421,326
============ ============
Net income per common share basic $ 0.60 $ 0.62
============ ============
Net income per common share diluted $ 0.60 $ 0.62
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 14,120,518 $ 12,421,326
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest 19,476 (23,712)
Depreciation and amortization 945,469 977,379
Accretion of loan discounts (2,764,617) (286,371)
Deferred compensation 72,537 58,358
(Increase) decrease in tenant escrows (13,017) 264,140
Increase in accrued interest receivable (3,061,813) (3,360,632)
Decrease (increase) in prepaid expenses and other assets 3,605,804 (557,448)
Increase in accounts payable and accrued liabilities 911,662 543,105
Decrease in accrued interest payable (69,341) (164,162)
Increase (decrease) in tenant security deposits 32,539 (258,083)
Decrease in borrowers' escrows (3,604,417) (4,574,264)
------------ ------------
Net cash provided by operating activities 10,194,800 5,039,634
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture, fixtures and equipment (142,449) (69,147)
Real estate loans purchased - (8,000,000)
Real estate loans originated (80,272,734) (32,770,953)
Principal repayments from real estate loans 48,136,348 9,194,812
Investment in real estate and improvements (5,216,031) (448,912)
Proceeds from disposition of real estate interests 4,262,497 5,871,812
------------ ------------
Net cash used in investing activities (33,232,369) (26,222,388)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments on senior indebtedness (10,041,412) (3,600,809)
Principal repayments on long-term debt (292,403) (239,266)
Proceeds of senior indebtedness underlying real estate loans - 3,200,000
Advances (repayments) on secured lines of credit 31,096,240 (30,243,155)
Issuance of preferred shares, net 57,990,000 -
Payment of preferred dividends (150,000) -
Issuance of common shares, net 145,210 40,008,681
Principal payments on loans for stock options exercised 15,223 -
------------ ------------
Net cash provided by financing activities 78,762,858 9,125,451
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 55,725,289 (12,057,303)
------------ ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,758,876 19,666,189
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 70,484,165 $ 7,608,886
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
5
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, these unaudited financial statements contain
all disclosures which are necessary to present fairly RAIT Investment Trust's
(the "Company") consolidated financial position at March 31, 2004, its results
of operations for the three months ended March 31, 2004 and 2003 and its cash
flows for the three months ended March 31, 2004 and 2003. The financial
statements include all adjustments (consisting only of normal recurring
adjustments) which in the opinion of management are necessary in order to
present fairly the financial position and results of operations for the interim
periods presented. Certain information and footnote disclosures normally
included in financial statements under accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003.
STOCK BASED COMPENSATION
On March 31, 2004, the Financial Accounting Standards Board ("FASB")
issued a proposed Statement, "Share-Based Payment an Amendment of FASB
Statements No. 123 and APB No. 95," that addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Under the FASB's proposal, all forms of share-based payments to employees,
including employee stock options, would be treated the same as other forms of
compensation by recognizing the related cost in the income statement. The
expense of the award would generally be measured at fair value at the grant
date. Current accounting guidance requires that the expense relating to
so-called fixed plan employee stock options only be disclosed in the footnotes
to the financial statements. The proposed Statement would eliminate the ability
to account for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company is currently evaluating
this proposed statement and its effects on its results of operations.
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 March 31, 2004, the Company had a stock-based employee compensation
plan. The Company accounts for that plan under the recognition and measurement
principles of APB No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Stock-based employee compensation costs are not
reflected in net income, as all options granted under the plan had an exercise
price equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
FOR THE THREE MONTHS ENDED MARCH 31,
2004 2003
-------------- --------------
Net income as reported $ 13,970,000 $ 12,421,000
Less: stock based compensation determined
under fair value based method for all awards (12,000) (4,000)
-------------- --------------
Pro forma net income $ 13,958,000 $ 12,417,000
Net income per share-basic, as reported $ 0.60 $ 0.62
Net income per share-basic, pro forma $ 0.60 $ 0.62
Net income per share-diluted, as reported $ 0.60 $ 0.62
Net income per share-diluted, pro forma $ 0.60 $ 0.62
The Company granted options to purchase 18,250 and 24,850 common shares
during the three months ended March 31, 2004 and 2003, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants for the quarter ended March 31, 2004 and 2003,
respectively: dividend yield of
6
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
8.3% and 9.6%; expected volatility of 19% and 17%; risk-free interest rate of
4.0% and 4.9% and expected lives of 8.8 and 9.5 years.
The Company adopted a Phantom Share Plan for Non-Employee Trustees on
January 29, 2004. On January 29, 2004, the Company granted 482 phantom shares to
each of two non-employee trustees, or 964 phantom shares in the aggregate. On
March 24, 2004, the Company granted 173 phantom shares to each of five
non-employee trustees, or 865 phantom shares, in the aggregate. Under current
accounting rules, grants under this Plan result in variable accounting, which
results in continuing compensation expenses from the date of grant to the date
the phantom shares are actually paid to the participant. During the three months
ended March 31, 2004, the Company recognized $50,000 in compensation expenses
relating to phantom shares issued under this plan.
VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Financial Interpretation No. 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. These entities are referred to as variable interest entities.
Variable interest entities within the scope of FIN 46 will be required to be
consolidated by their primary beneficiary. The primary beneficiary is the party
that absorbs a majority of the variable interest entities' expected losses
and/or receives a majority of the expected residual returns.
In December 2003, the FASB revised FIN 46 ("FIN 46(R)"), delaying the
effective date for certain entities created before February 1, 2003 and making
other amendments to clarify the application of the guidance. FIN 46(R) is
effective no later than the end of the first interim or annual period ending
after December 15, 2003 for entities created after January 31, 2003 and for
entities created before February 1, 2003, no later than the end of the first
interim or annual period ending after March 15, 2004. As required the Company
adopted the guidance of FIN 46(R) accordingly.
In adopting FIN 46 and FIN 46(R), the Company has evaluated its various
variable interests to determine whether they are in variable interest entities.
These variable interests are primarily subordinated financings in the form of
mezzanine loans or preferred equity investments. The Company has identified 21
variable interests totaling $102.9 million that it holds as of March 31, 2004.
For these variable interests it was determined that the Company was not the
primary beneficiary and such variable interest entities should not be
consolidated in the Company's financial statements.
REIT STATUS
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.
NOTE 2 - CONSOLIDATED STATEMENT OF CASH FLOWS
For the purpose of reporting cash flows, cash and cash equivalents include
non-interest earning deposits and interest earning deposits. Cash paid for
interest was $2.5 million and $2.4 million for the three months ended March 31,
2004 and 2003, respectively. Investments in real estate received in conjunction
with the Company's disposition of certain investments in real estate totaled
$1.9 million for the three months ended March 31, 2003.
NOTE 3 - RESTRICTED CASH AND BORROWERS' ESCROWS
Restricted cash and borrowers' escrows represent borrowers' funds held by
the Company to fund certain expenditures or to be released at the Company's
discretion upon the occurrence of certain pre-specified events, and to serve as
additional collateral for borrowers' loans.
7
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 4 - INVESTMENTS IN REAL ESTATE LOANS
The Company's portfolio of real estate loans consisted of the following at
March 31, 2004:
First mortgages $ 199,290,624
Mezzanine loans 179,257,586
Unearned (fees) costs 1,074,972
Less: Allowance for loan losses (226,157)
-------------
Investments in real estate loans 379,397,025
Less: Senior indebtedness secured by real estate
underlying the Company's loans (45,334,868)
-------------
Net investments in real estate loans $ 334,062,157
=============
The following is a summary description of the Company's portfolio of real
estate loans as of March 31, 2004:
AVERAGE
NUMBER LOAN TO RANGE OF LOAN RANGE OF
TYPE OF LOAN OF LOANS VALUE(1) YIELDS(2) MATURITIES
- --------------- -------- ------- ------------- -----------------
First mortgages 19 72% 6.2% - 12.0% 5/30/04 - 9/30/18
Mezzanine loans 36 86% 10.0% - 29.6% 9/18/04 - 4/30/21
(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 as of March 31, 2004:
PRINCIPAL AMOUNT PERCENTAGE
---------------- ----------
Multi-family $ 146.0 million 38%
Office 124.0 million 33%
Retail and other 108.5 million 29%
---------------- ---
Total $ 378.5 million 100%
================ ===
8
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
As of March 31, 2004, $142.6 million in principal amount of the Company's
loans were pledged as collateral for amounts outstanding under the Company's
lines of credit and senior indebtedness. As of March 31, 2004, senior
indebtedness relating to the Company's loans consisted of the following:
Loan payable, secured by real estate, monthly installments of principal
and interest based on an amortization schedule of 25 years, including
interest at a specified London interbank offered rate ("LIBOR") plus 135
basis points (2.46% at March 31, 2004), 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% $ 10,494,868
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 August 12, 2004 2,900,000
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 (3.86% at March 31, 2004) 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 book value of $8,000,000, payable interest only at
LIBOR plus 250 basis points (3.61% at March 31, 2004) 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 $3,369,233, payable interest
only at LIBOR plus 275 basis points (3.86% at March 31, 2004) due monthly,
principal balance due March 29, 2005 2,640,000
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 26, 2005 1,800,000
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
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
------------
$ 45,334,868
============
As of March 31, 2004, the senior indebtedness relating to the Company's
loans maturing in the remainder of 2004 and over the next four years and the
aggregate indebtedness thereafter, is as follows:
2004 $13,029,747
2005 4,626,622
2006 17,703,481
2007 9,975,018
2008 -
Thereafter -
-----------
$45,334,868
===========
9
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 5 - INVESTMENTS IN REAL ESTATE
The Company's investments in real estate are comprised of real estate that
the Company owns through consolidated subsidiaries and the Company's equity
investments in unconsolidated entities owning real estate, together with related
escrows. Investments in real estate are comprised of the following types of
properties at March 31, 2004:
Book Value Percentage
------------- -------------
Multi-family (1) $ 36,799,040 24%
Office (2) 97,258,027 64%
Retail and other (3) 17,364,892 12%
------------- --------
Subtotal 151,421,959 100%
========
Less: Accumulated depreciation (13,811,018)
-------------
Investment in real estate, net $ 137,610,941
=============
(1) Includes $2.0 million invested in a limited liability company that
owns an apartment building, $3.9 million invested in two limited
partnerships that each own apartment buildings and $1.8 million invested
in an entity, which is the beneficiary of a trust, that owns an apartment
building. Also includes escrows totaling $168,000 at March 31, 2004 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 $12.6 million invested in two limited liability
companies that each own an office building. Also includes escrows totaling
$976,000 at March 31, 2004 which are held for payment of real estate
taxes, insurance premiums, repair and replacement costs, tenant
improvements and leasing commissions.
(3) Includes $3.7 million invested in a limited liability company that
owns a retail center. Also includes escrows totaling $164,000 at March 31,
2004 which are held for payment of real estate taxes, insurance premiums,
repair and replacement costs, tenant improvements and leasing commissions.
10
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
As of March 31, 2004, long-term debt secured by real estate underlying the
Company's investments in real estate consisted of the following:
Loan payable, secured by real estate, monthly installments of $8,008, including
interest at 7.33%, remaining principal due August 1, 2008. $ 1,001,460
Loan payable, secured by real estate, monthly installments of $288,314,including
interest at 6.85%, remaining principal due August 1, 2008. 41,259,144
Loan payable, secured by real estate, monthly payments of $87,960, including
interest at 8.36%, remaining principal due March 11, 2028; as an
inducement to pay interest at 8.36% from April 11, 1998 onward, rather
than 7.89%, the Company received a buy-up premium of $418,482 which is
amortized over the term of the underlying debt (balance of $223,630 at
March 31, 2004). 11,243,910
Loan payable, secured by real estate, monthly installments of $37,697, including
interest at 7.27%, remaining principal due January 1, 2010. 5,259,933
Loan payable, secured by real estate, monthly installments of $47,720, including
interest at 5.73%, remaining principal due November 1, 2012. 7,417,842
Loan payable, secured by real estate, monthly installments of $72,005, including
interest at 7.55%, remaining principal due December 1, 2008 9,231,031
-----------
$75,413,320
===========
As of March 31, 2004, the amount of long-term debt secured by the
Company's investments in real estate that matures over the remainder of 2004,
over the next four years and the aggregate indebtedness maturing thereafter, is
as follows:
2004 $ 874,861
2005 1,256,747
2006 1,348,273
2007 1,446,510
2008 40,368,624
Thereafter 30,118,304
-----------
$75,413,320
===========
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 March 31, 2004 were $572,000. Rental revenue is reported on a straight-line
basis over the terms of the respective leases. Depreciation expense relating to
the Company's real estate investments for the three months ended March 31, 2004
was $853,000.
11
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 6 - LINES OF CREDIT
The following is a description of the Company's secured lines of credit at
March 31, 2004:
At March 31, 2004, the Company had $17.0 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%. The interest rate at March 31, 2004 was 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 March 31, 2004, the Company had $19.0 million outstanding under its
$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%. The interest rate at March 31, 2004
was 3.3414%. Absent any renewal, this line of credit will terminate in February
2006 and any principal then outstanding must be repaid at that time.
At March 31, 2004, the Company had $19.0 million outstanding under its
$20.0 million line of credit. This line of credit bears interest at the prime
rate as published in the "Money Rates" section of The Wall Street Journal. The
interest rate at March 31, 2004 was 4.0%. This line of credit has a current term
running through April 2005 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 8 below.
At March 31, 2004, the Company had no amounts 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 7 - TRANSACTIONS WITH AFFILIATES
Resource America, Inc. ("Resource America) was the sponsor of the Company.
Resource America had the right to nominate one person for election to the Board
of Trustees of the Company until its ownership of the outstanding Common Shares
fell below 5%, which occurred 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 America, and (ii) 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.
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. The transaction was reviewed and approved by the
independent trustees (as defined in the declaration of trust of the Company) of
the board of trustees of the Company and determined not to create a conflict of
interest.
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.
12
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
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 thirteen
properties underlying the Company's investments in real estate at March 31,
2004. Management fees in the amount of $236,000 were paid to Brandywine for the
three months ended March 31, 2004 relating to these investments. The Company
believes that the management fees charged by Brandywine are comparable to those
that could be obtained from unaffiliated third parties. The Company continues to
use Brandywine to provide real estate management services to properties
underlying the Company's investments.
Betsy Z. Cohen has been the Chairman of the Board of The Bancorp Bank
("Bancorp"), a commercial bank, since November 2003 and a director of The
Bancorp, Inc. ("Bancorp Inc."), a registered bank holding company that owns an
interest of approximately 38% in Bancorp, since September 2000 and the Chief
Executive Officer of both Bancorp and Bancorp Inc. since September 2000. Daniel
G. Cohen, Mrs. Cohen's son, (a) has been the Vice-Chairman of the Board of
Bancorp since November 2003, was the Chairman of the Board of Bancorp before
November 2003 and has been Chairman of the Executive Committee of Bancorp since
1999 and (b) has been the Chairman of the Board of Bancorp Inc. and Chairman of
the Executive Committee of Bancorp Inc. since 1999. The Company maintains most
of its checking and demand deposit accounts at Bancorp. As of March 31, 2004,
the Company had approximately $17.3 million on deposit, of which approximately
$17.2 million is over the FDIC insurance limit. The Company pays a fee of $5,000
per month to Bancorp for information system technical support services. The
Company paid $15,000 for these services for the three months ended March 31,
2004.
The Company subleases a portion of its downtown Philadelphia office space
under an operating lease with Bancorp Inc. The Company's annual rental is an
apportionment of the rental paid by Bancorp Inc. 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 Inc. was approximately $62,000
for the three months ended March 31, 2004.
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 Jonathan Z. Cohen, the 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 Ellen J. DiStefano, the Executive Vice President and Chief
Financial Officer of the Company. The Company's annual rental is an
apportionment of the rental paid by Richardson 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 $14,000 for
the three months ended March 31, 2004.
Daniel G. Cohen is the beneficial owner of the corporate parent of Cohen
Brothers & Company ("Cohen Brothers"), a registered broker-dealer of which Mr.
Cohen is President and Chief Executive Officer. 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 offering the Company made of its
7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest
("Series A Preferred Shares") in March 2004. In the March 2004 offering, Cohen
Brothers was allocated 60,000 Series A Preferred Shares at the public offering
price less a standard dealer's concession of $0.50 per share.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
At March 31, 2004, the Company has outstanding two letters of credit
totaling $2.4 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
13
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
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 6 above is reserved in the event the Company is required to
make additional payments under this letter of credit. As of March 31, 2004, the
Company had funded an additional $216,000 of the guaranteed return and $71,000
of capital improvements, thus reducing the letter of credit requirement to
$155,000.
On March 31, 2003, on behalf of a borrower, the Company extended a $2.0
million letter of credit as a guarantee of a portion of the senior indebtedness
underlying one of the Company's loans. This letter of credit expires in March
2005, but automatically extends for an additional year unless the Company gives
prior notice that it elects not to extend the expiration date. The principals of
the borrower have guaranteed repayment of any amounts the Company pays under
this letter of credit.
NOTE 9 - SHAREHOLDERS' EQUITY
On March 19, 2004, the Company issued 2.4 million Series A Preferred
Shares in a public offering at an offering price of $25.00 per share with
respect to 2,350,150 shares and $24.50 with respect to 49,850 shares sold to to
certain of the Company's trustees, officers and employees, together with their
relatives and friends. After offering costs, including the underwriter's
discount, and expenses of approximately $2.0 million, the Company received
approximately $58.0 million of net proceeds. On April 6, 2004, the Company
issued an additional 360,000 Series A Preferred Shares pursuant to the
underwriter's exercise of its over-allotment option. The exercise price was
$25.00 per share, resulting in receipt by the Company of net proceeds of
approximately $8.7 million.
NOTE 10 - EARNINGS PER SHARE
The Company's calculation of earnings per share for the three months ended
March 31, 2004 and 2003 in accordance with SFAS No. 128 is as follows:
For the three months ended March 31, 2004
-----------------------------------------------
Income Shares Per share
(Numerator) (Denominator) Amount
------------- ------------- ---------
Basic earnings per share:
Net income available to common
shareholders $ 13,970,518 23,208,884 $ 0.60
Effect of dilutive securities:
Options - 194,507 -
Phantom Shares - 723 -
------------- ------------- ---------
Net income available to common
shareholders plus assumed conversions $ 13,970,518 23,404,114 $ 0.60
============= ============= =========
For the three months ended March 31, 2003
-----------------------------------------------
Income Shares Per share
(Numerator) (Denominator) Amount
------------- ------------- ---------
Basic earnings per share:
Net income available to common
shareholders $ 12,421,326 19,970,949 $ 0.62
Effect of dilutive securities:
Options - 136,298 -
Warrants - 3,581 -
------------- ------------- ---------
Net income available to common
shareholders plus assumed conversions $ 12,421,326 20,110,828 $ 0.62
============= ============= =========
14
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 11 - DIVIDENDS
In order to maintain its election to qualify as a REIT, the Company must
currently distribute, at a minimum, an amount equal to 90% of its taxable
income. Because taxable income differs from cash flow from operations due to
non-cash revenues or expenses (such as depreciation), in certain circumstances,
the Company may generate operating cash flow in excess of its dividends or,
alternatively, may be required to borrow to make sufficient dividend payments.
On March 23, 2004 the Board of Trustees of the Company declared a cash
dividend of $0.60 per common share payable on April 15, 2004 to shareholders of
record on April 5, 2004. Total dividends declared by the Company on the common
shares aggregated $13.9 million for the three months ended March 31, 2004.
On March 18, 2004 the Board of Trustees of the Company declared a
pro-rated cash dividend on the Series A Preferred Shares aggregating $150,000
for the period from March 19, 2004 (date of issuance) through March 31, 2004
payable on March 31, 2004 to shareholders of record on March 24, 2004. On April
27, 2004, the Board of Trustees of the Company declared a cash dividend on the
Series A Preferred Shares for the three months ended June 30, 2004 aggregating
$1.3 million payable on June 30, 2004 to holders of record on June 1, 2004. As
of May 3, 2004, there are no dividend arrearages on the Series A Preferred
Shares.
Holders of Series A Preferred are entitled to receive, when and as
declared by the Board of Trustees, out of funds legally available for the
payment of dividends, cumulative preferential cash dividends at the rate of
7.75% per annum of the $25.00 liquidation preference, equivalent to a fixed
annual rate of $1.9375 per share. Dividends are cumulative from the date of
original issue and are payable quarterly in arrears on the last day of each
March, June, September and December or, if not a business day, the next
succeeding business day. Any dividend payable on the Series A Preferred Shares
for any partial dividend period will be computed on the basis of a 360-day year
consisting of twelve 30-day months. Dividends will be payable to holders of
record as of the close of business on the first day of the calendar month in
which the applicable dividend payment date falls or on another date designated
by the Board of Trustees of the Company for the payment of dividends that is not
more than 30 nor less than ten days prior to the dividend payment date.
15
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Trustees and Shareholders
RAIT Investment Trust
We have reviewed the accompanying consolidated balance sheet of RAIT
Investment Trust and Subsidiaries as of March 31, 2004 and the related
consolidated statements of income and cash flows for the three-month periods
ended March 31, 2004 and 2003. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion. Based on our review, we are not aware of any material modifications
that should be made to the accompanying financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheet as of December 31, 2003, and the related consolidated statements of
income, shareholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated January 21, 2004 (except for Note 16
as to which the date is February 23, 2004). We expressed an unqualified opinion
on those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31, 2003 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
May 6, 2004
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this discussion and analysis
contains forward-looking statements. These statements can be identified by the
use of forward-looking terminology including "may," "believe," "will," "expect,"
"anticipate," "estimate," "continue" or similar words. These forward-looking
statements are subject to risks and uncertainties, as more particularly set
forth in our filings with the Securities and Exchange Commission, including
those described in the "Risk Factors" section of our Registration Statement No.
333-103618 and our Annual Report on Form 10-K for the year ended December 31,
2003, that could cause actual results to differ materially from those projected
in the forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. We undertake no obligation to publicly
revise or update these forward-looking statements to reflect events or
circumstances that arise after the date of this report.
OVERVIEW
We began investment operations in January 1998. 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 three months ended March 31, 2004 we achieved significant
growth in our revenues, net income and total assets as compared to the three
months ended March 31, 2003. Our revenues grew 9.9% to $22.7 million for the
quarter ended March 31, 2004 from $20.6 million for the quarter ended March 31,
2003, while our net income available to common shareholders increased 12.5% to
$14.0 million for the quarter ended March 31, 2004 from $12.4 million for the
quarter ended March 31, 2003. Total assets grew 41.7% to $627.3 million at March
31, 2004 from $442.7 million at March 31, 2003.
We attribute this growth to the following principal factors:
- our ability to generate an increasing number of attractive real estate
investment opportunities in a national environment of low interest rates
as well as to leverage our investments with debt financing in appropriate
circumstances; and
- our ability to obtain additional capital through offerings of both our
common and preferred shares.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of our liquidity and capital resources from our
commencement through May 3, 2004 were our public offerings of common shares and
7.75% Series A cumulative redeemable preferred shares. After offering costs and
underwriting discounts and commissions, these offerings have allowed us to
obtain net offering proceeds of $424.0 million.
Our most recent public offering of 2,400,000 Series A preferred shares
resulted in net proceeds of $57.9 million in March 2004 and additional net
proceeds of $8.6 million in April 2004 upon the exercise of the underwriters'
overallotment option for an additional 360,000 Series A preferred shares. Our
Series A preferred shares accrue cumulative cash dividends at a rate of 7.75%
per year of the $25.00 liquidation preference, equivalent to $1.9375 per year
per share. Dividends are payable quarterly in arrears on the last calendar day
of each March, June, September and December or, if not a business day, the next
succeeding business day. The Series A preferred shares have no maturity date and
we are not required to redeem the Series A preferred shares at any time. We may
not redeem the Series A preferred shares before March 19, 2009, except in
limited circumstances relating to the ownership limitations necessary to
preserve our tax
17
qualification as a real estate investment trust. On or after March 19, 2009, we
may, at our option, redeem the Series A preferred shares, in whole or part, at
any time and from time to time, for cash at $25.00 per share, plus accrued and
unpaid dividends, if any, to the redemption date.
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 $178.7 million remains available.
We also maintain liquidity through the lines of credit we have established
with four different lending institutions, as described below:
At March 31, 2004 and May 3, 2004, we had $13.0 million and $30.0 million,
respectively, 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 both March 31, 2004 and May 3, 2004, we had $6.0 million of
availability under our $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%. The current interest rate is 3.3414%. Absent
any renewal, this line of credit will terminate in February 2006 and any
principal then outstanding must be repaid at that time.
At both March 31, 2004 and May 3, 2004, we had $558,000 of availability
under our $20.0 million line of credit. This line of credit bears interest at
the prime rate as published in the "Money Rates" section of The Wall Street
Journal. The current interest rate is 4.0%. This line of credit has a current
term running through April 2005 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 8
to our financial statements, Item 1 of this quarterly report on Form 10-Q.
At March 31, 2004 and May 3, 2004, we had $10.0 million and $6.2 million,
respectively, 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.
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 $52.4
million for the three months ended March 31, 2004 and $18.3 million for the
three months ended March 31, 2003.
We also receive funds from a combination of interest and fees on our
loans, rents and income from our interests in real estate, gains on sales of
loans and interests in real estate and consulting fees. As required by the
Internal Revenue Code, we use this income, to the extent of not less than 90% of
our taxable income, to pay distributions to our shareholders. For the three
months ended March 31, 2004 and 2003, we paid distributions of $13.9 million and
$12.9 million, respectively, of which $13.8 million and $12.8 million,
respectively, was in cash and $84,700 and $64,200, respectively, was in
additional common shares issued through our dividend reinvestment plan.
We use our capital resources principally for originating and purchasing
loans and acquiring interests in real estate. For the three months ended March
31, 2004, we originated or purchased eight loans in the aggregate amount of
$80.3 million, as compared to five loans in the aggregate amount of $40.8
million for the three months ended March 31, 2003. For the three months ended
March 31, 2004, we
18
acquired one interest in real estate totaling $6.0 million, as compared to the
three months ended March 31, 2003 when we did not acquire any interests in real
estate.
At March 31, 2004, we had approximately $70.5 million of cash on hand.
These funds, combined with $8.6 million of net proceeds from the exercise in
April 2004 of the overallotment option relating to our public offering of
Series A preferred shares, provided for $47.4 million of new loan originations
and repayment of $17.0 million on the amounts outstanding on our lines of credit
from April 1 through May 3, 2004. We also used our cash on hand to pay our $13.9
million first quarter dividend on our common shares. We anticipate utilizing the
loan repayments of $10.0 million that we received from April 1, through May 3,
2004, combined with the $42.8 million of availability on our lines of credit,
primarily for the origination of additional investments in the balance of the
second quarter of 2004.
We believe that our existing sources of funds will be adequate for
purposes of meeting our liquidity and capital needs. We do not currently
experience material difficulties in maintaining and accessing these resources.
However, we could encounter difficulties in the future, depending upon the
development of conditions in the credit markets and the other risks and
uncertainties described in our filings with the Securities and Exchange
Commission, including those described in the "Risk Factors" section of our
Registration Statement No. 333-103618 and our Annual Report on Form 10-K for the
year ended December 31, 2003.
We may also seek to develop other sources of capital, including, without
limitation, long-term borrowings, offerings of our warrants, issuances of our
debt securities and the securitization and sale of pools of our loans. Our
ability to meet our long-term, that is, 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 described in our filings with the Securities and Exchange Commission,
including those described in the "Risk Factors" section of our Registration
Statement No. 333-103618 and our Annual Report on Form 10-K for the year ended
December 31, 2003. In addition, as a REIT, we must distribute at least 90% of
our annual taxable income, which limits the amount of cash from operations we
can retain to fund our capital needs.
The following schedule summarizes our currently anticipated contractual
obligations and commercial commitments as of March 31, 2004:
LESS THAN ONE TO THREE FOUR TO FIVE AFTER FIVE
ONE YEAR YEARS YEARS YEARS TOTAL
------------ ------------ ------------ ------------ ------------
Operating leases $ 315,814 $ 637,057 $ 646,986 $ 458,282 $ 2,058,139
Secured lines of credit - 55,000,000 - - 55,000,000
Indebtedness secured by
real estate (1) 13,904,609 24,935,123 51,790,152 30,118,304 120,748,188
Deferred compensation 638,315 364,480 - - 1,002,795
------------ ------------ ------------ ------------ ------------
Total $ 14,858,738 $ 80,936,660 $ 52,437,138 $ 30,576,586 $178,809,122
============ ============ ============ ============ ============
(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.
19
OFF-BALANCE SHEET ARRANGEMENTS
Refer to Note 8 to our financial statements, Item 1 of this quarterly
report on Form 10-Q for a discussion of our off-balance sheet arrangements. We
do not believe these arrangements have had or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
Refer to our Annual Report on Form 10-K for the year ended December 31,
2003 for a discussion of our critical accounting policies. During the three
months ended March 31, 2004, there were no material changes to these policies,
except for the updates described below.
FIN 46. In January 2003, the FASB issued Financial Interpretation No. 46,
or 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. These entities are referred to as variable interest entities.
Variable interest entities within the scope of FIN 46 will be required to be
consolidated by their primary beneficiary. The primary beneficiary is the party
that absorbs a majority of the variable interest entities' expected losses
and/or receives a majority of the expected residual returns.
In December 2003, the FASB revised FIN 46, or FIN 46(R), delaying the
effective date for certain entities created before February 1, 2003 and making
other amendments to clarify the application of the guidance. FIN 46(R) is
effective no later than the end of the first interim or annual period ending
after December 15, 2003 for entities created after January 31, 2003 and for
entities created before February 1, 2003, no later than the end of the first
interim or annual period ending after March 15, 2004. We have adopted the
guidance of FIN 46(R) accordingly.
In adopting FIN 46 and FIN 46(R), we have evaluated our various variable
interests to determine whether they are in variable interest entities. These
variable interests are primarily subordinated financings in the form of
mezzanine loans or preferred equity investments. We have identified 21 variable
interests totaling $102.9 million that we hold as of March 31, 2004. For these
variable interests we have determined that we are not the primary beneficiary
and such variable interest entities should not be consolidated in our financial
statements.
Reserve for Loan Losses. We have a reserve for loan losses of $226,000.
This reserve is a general reserve and is not related to any individual loan or
to an anticipated loss. In accordance with our policy, we determined that this
reserve was adequate as of March 31, 2004 based upon our credit analysis of each
of the loans in our portfolio. If that analysis were to change, we may be
required to increase our reserve, and such an increase, depending upon the
particular circumstances, could be substantial. Any increase in reserves will
constitute a charge against income. We will continue to analyze the adequacy of
this reserve on a quarterly basis. During the three months ended March 31, 2004,
the loans in our portfolio performed in accordance with their terms and were
current as to payments.
RESULTS OF OPERATIONS
Interest Income. Our mortgage interest income was $13.3 million for the
quarter ended March 31, 2004 compared to $8.5 million for the quarter ended
March 31, 2003. The $4.7 million increase was primarily due to the following:
- an additional $5.7 million of interest accruing on 28 loans
totaling $227.7 million originated between January 1, 2003 and
March 31, 2004, partially offset by a $4.0 million reduction
of interest due to the repayment of 24 loans totaling $145.8
million during the same period, and
- accretable yield included in our interest income of $2.8
million and $286,000 for the three months ended March 31, 2004
and 2003, respectively. 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
20
"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. The significant increase in the
accretable yield from the three months ending March 31, 2003
to the corresponding period in 2004 was 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. We received rental income of $6.1 million for the quarter
ended March 31, 2004 compared to $6.8 million for the quarter ended March 31,
2003. The $779,000 rent decrease was primarily due to a decrease in rental
income of $1.0 million resulting from the sale of a real estate investment in
the first quarter of 2003, partially offset by rents of $329,000 generated by a
real estate investment that was acquired in mid-2003.
Fee Income and Other. We earned fee and other income of $2.5 for the
quarter ended March 31, 2004 as compared to $532,000 earned in the quarter ended
March 31, 2003. Included in fee and other income for the first quarter of 2004
were revenues of $934,000 from RAIT Capital Corp., which is $435,000 higher than
the revenues generated by RAIT Capital Corp. for the quarter ended March 31,
2003. Also included in fee and other income for the first quarter of 2004 were
consulting fees of $1.4 million while there were no consulting fees earned in
the first quarter of 2003. 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. We received investment income of $832,000 for the
quarter ended March 31, 2004, compared to $2.4 million for the quarter ended
March 31, 2003. We derived our investment income 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.
The $1.5 million decrease in investment income from the quarter ended
March 31, 2003 to the quarter ended March 31, 2004 was due to the recognition in
2003 of investment income of $1.7 million relating to our appreciation interests
in three of our investments. We did not recognize any income relating to our
appreciation interests in the quarter ended March 31, 2004. There was an
increase in income generated by our six unconsolidated investments in real
estate for the quarter ended March 31, 2004 of approximately $146,000, as
compared to two unconsolidated investments in real estate during the quarter
ended March 31, 2003. Cash held in bank accounts generated investment income of
$99,000 for the quarter ended March 31, 2004, compared to $92,000 for the
quarter ended March 31, 2003. Most of this investment income was generated from
our bank accounts with The Bancorp Bank. Our relationship with The Bancorp Bank
is described in Note 7 to our financial statements, Item 1 of this quarterly
report on Form 10-Q.
Gain On Sale of Property Interest. In March 2003, we sold a 40% limited
partnership interest and sole general partnership interest in a limited
partnership that owns a property to an unrelated party. We retained an 11%
limited partnership interest. The partnership interests we sold had a negative
book value of $1.4 million. The buyer paid $900,000 and we recognized a gain of
$2.3 million.
Interest Expense. Interest expense was $2.5 million for the quarter ended
March 31, 2004 as compared to $2.2 million for the quarter ended March 31, 2003.
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 $248,000 increase in interest expense
was attributable to
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a $64.5 million net increase in senior indebtedness relating to five loans
underlying our loans as well to the establishment and utilization of $45 million
in additional availability on new and existing lines of credit.
Property Operating Expenses; Depreciation and Amortization. Property
operating expenses were $3.0 million for the quarter ended March 31, 2004,
compared to $3.8 million for the quarter ended March 31, 2003. Depreciation and
amortization was $945,000 for the quarter ended December 31, 2004 as compared to
$977,000 for the quarter ended March 31, 2003. The decreases in property
operating expenses, depreciation and amortization from the quarter ended March
31, 2003 to the corresponding period in 2004 were due the sale of one property
interest in March 2003 partially offset by the acquisition of one property
interest in July 2003. 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 five of our interests in real
estate during the quarters ended March 31, 2004 and 2003. We paid management
fees of $150,000 and $120,000 to Brandywine for the quarters ended March 31,
2004 and 2003, respectively. In addition, at March 31, 2004 and 2003,
Brandywine provided management services for real estate underlying eight and
nine, respectively, of our investments in real estate whose operations are not
included in our consolidated financial statements. 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 $1.2 million for the quarter ended March 31,
2004, as compared to $704,000 for the quarter ended March 31, 2003. General and
administrative expenses were $968,000 for the quarter ended March 31, 2004, as
compared to $550,000 for the quarter ended March 31, 2003. The increases in
salaries and related benefits and in general and administrative expenses were
due to:
- 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,
- increased compliance costs relating to new regulatory
requirements and
- increased costs for directors' and officers' liability
insurance.
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 The Bancorp, Inc. We paid
rent to Bancorp in the amount of $62,000 and $61,000 for the three months ended
March 31, 2004 and 2003, respectively. The other sublease is with The Richardson
Group, Inc. We paid rent to Richardson in the amount of $14,000 and $13,000 for
the three months ended March 31, 2004 and 2003, respectively. Also included in
general and administrative expenses is $15,000 that we paid in both the three
months ended March 31, 2004 and 2003 to Bancorp for technical support services
provided to us. Our relationships with Bancorp and Richardson are described in
Note 7 to our financial statements, Item 1 of this quarterly report on Form
10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in our assessment of our sensitivity to
market risk since the presentation in our Annual Report on Form 10-K for the
year ended December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Securities Exchange Act of 1934
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our chief executive officer and
our chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, our management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
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Under the supervision of our chief executive officer and chief financial
officer and with the participation of our disclosure committee appointed by such
officers, we have carried out an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Based upon that evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures are
effective.
There have been no significant changes in our internal controls over
financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting during our most
recent fiscal quarter.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits furnished as part of this Quarterly Report on Form 10-Q are
identified in the Exhibit Index immediately following the signature page of this
Report. Such Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K
We filed three reports on Form 8-K during the three months ended March 31,
2004.
A report on Form 8-K dated January 22, 2004 was filed as of January 22,
2004. Pursuant to "Item 12 - Results of Operations and Financial Condition," we
disclosed that we had issued a press release regarding our earnings for the
three months and year ended December 31, 2003.
A report on Form 8-K dated March 17, 2004 was filed as of March 18, 2004.
Pursuant to "Item 5 - Other Events and Regulation FD Disclosure," we disclosed
that we had filed Articles Supplementary dated March 16, 2004 to our Declaration
of Trust and a Certificate of Correction to those Articles Supplementary
designating and classifying our 7.75% Series A Cumulative Redeemable Preferred
Shares of Beneficial Interest.
A report on Form 8-K dated March 15, 2004 was filed as of March 22, 2004.
Pursuant to "Item 5 - Other Events and Regulation FD Disclosure," we disclosed
that we had entered into an underwriting agreement with certain underwriters and
filed a prospectus supplement relating to a public offering of our 7.75% Series
A Cumulative Redeemable Preferred Series of Beneficial Interest.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RAIT INVESTMENT TRUST
(Registrant)
May 6, 2004 /s/ Ellen J. DiStefano
- ------------------ -------------------------------------
DATE Ellen J. DiStefano
Chief Financial Officer
(On behalf of the registrant and as its
principal financial officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1.1 (1) Amended and Restated Declaration of Trust.
3.1.2 (2) Articles of Amendment of Amended and Restated Declaration of Trust.
3.1.3 (3) Articles of Amendment of Amended and Restated Declaration of Trust.
3.1.4 (4) Certificate of Correction to the Amended and Restated Declaration of Trust.
3.1.5 (5) Articles Supplementary relating to the 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest
(the "Series A Articles Supplementary").
3.1.6 (5) Certificate of Correction to the Series A Articles Supplementary.
3.2.1 (1) Bylaws, as amended.
4.1 (3) Form of Certificate for Common Shares of Beneficial Interest.
4.2 (6) Form of Certificate for 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest.
15.1 Awareness Letter from Independent Accountants.
31.1 Rule 13a-14(a) Certification by the Chief Executive Office of RAIT Investment Trust.
31.2 Rule 13a-14(a) Certification by the Chief Financial Officer of RAIT Investment Trust.
32.1 Section 1350 Certification by the Chief Executive Officer of RAIT Investment Trust.
32.2 Section 1350 Certification by the Chief Financial Officer of RAIT Investment Trust.
(1) Incorporated herein by reference to RAIT Investment Trust's
Registration Statement on Form S-11 (File No. 333-35077), as amended.
(2) Incorporated herein by reference RAIT Investment Trust's Registration
Statement on Form S-11 (File No. 333-53067), as amended.
(3) Incorporated herein by reference to RAIT Investment Trust's
Registration Statement on Form S-2 (File No. 333-55518), as amended.
(4) Incorporated herein by reference to RAIT Investment Trust's Form 10-Q
for the Quarterly Period ended March 31, 2002 (File No. 1-14760).
(5) Incorporated herein by reference to RAIT Investment Trust's Form 8-K
as filed with the Securities and Exchange Commission on March 18, 2004
(File No. 1-14760).
(6) Incorporated herein by reference to RAIT Investment Trust's Form 8-K
as filed with the Securities and Exchange Commission on March 22, 2004
(File No. 1-14760).
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