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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 1-14760
RAIT INVESTMENT TRUST
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(Exact name of registrant as specified in its charter)
MARYLAND 23-2919819
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(State or other jurisdiction of (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 August 1, 2005, 25,601,402 common shares of beneficial interest, par value
$0.01 per share, of the registrant were outstanding.
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RAIT INVESTMENT TRUST
AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS...................................................................................... 1
Consolidated Balance Sheets at June 30, 2005 (unaudited) and December 31, 2004................................. 1
Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2005 and 2004........ 2
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2005 and 2004.............. 3
Notes to Consolidated Financial Statements - June 30, 2005 (unaudited)......................................... 4
Report of Independent Registered Public Accounting Firm........................................................ 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................................................ 24
ITEM 4. CONTROLS AND PROCEDURES................................................................................... 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS......................................................................................... 25
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS............................................... 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................................... 26
ITEM 6. EXHIBITS.................................................................................................. 26
SIGNATURES........................................................................................................ 27
EXHIBIT INDEX..................................................................................................... 28
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 DECEMBER 31,
(UNAUDITED) 2004
------------- -------------
ASSETS
Cash and cash equivalents $ 19,685,019 $ 13,331,373
Restricted cash 19,983,331 22,947,888
Tenant escrows 167,573 211,905
Accrued interest receivable 14,878,196 9,728,674
Real estate loans, net 615,960,148 491,281,473
Unconsolidated real estate interests 44,042,370 44,016,457
Consolidated real estate interests 138,053,261 136,487,247
Furniture, fixtures and equipment, net 607,375 639,582
Prepaid expenses and other assets 11,860,517 9,966,722
Goodwill, net 887,143 887,143
------------- -------------
Total assets $ 866,124,933 $ 729,498,464
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 3,230,959 $ 4,410,101
Accrued interest payable 1,483,431 480,168
Tenant security deposits 356,642 364,508
Borrowers' escrows 15,386,539 18,326,863
Dividends payable 15,614,197 --
Senior indebtedness relating to loans 147,713,827 51,305,120
Long-term debt secured by real estate owned 62,894,973 63,424,199
Secured lines of credit 74,424,447 49,000,000
------------- -------------
Total liabilities $ 321,105,015 $ 187,310,959
Minority interest 462,039 477,564
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; 2,760,000 shares issued and outstanding 27,600 27,600
8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00
per share; 2,258,300 shares issued and outstanding 22,583 22,583
Common shares, $.01 par value; 200,000,000 shares authorized; 25,597,044 shares and
25,579,948 shares, respectively, issued and outstanding 255,970 255,799
Additional paid-in-capital 540,878,754 540,627,203
Retained earnings 3,995,729 1,900,274
Loans for stock options exercised (268,665) (506,302)
Deferred compensation (354,092) (617,216)
------------- -------------
Total shareholders' equity 544,557,879 541,709,941
------------- -------------
Total liabilities and shareholders' equity $ 866,124,933 $ 729,498,464
============= =============
The accompanying notes are an integral part of these consolidated financial
statements
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -----------------------------
2005 2004 2005 2004
-------------- -------------- -------------- -------------
REVENUES
Interest income $ 19,034,961 $ 15,145,385 $ 38,010,151 $ 28,459,870
Rental income 7,418,982 6,641,154 14,900,077 12,708,352
Fee income and other 2,085,676 579,419 2,997,108 3,066,627
Investment income 2,461,759 1,123,493 3,780,407 1,955,387
-------------- -------------- -------------- -------------
Total revenues 31,001,378 23,489,451 59,687,743 46,190,236
-------------- -------------- -------------- -------------
COSTS AND EXPENSES
Interest 4,346,216 2,593,314 7,010,970 5,059,441
Property operating expenses 3,870,136 3,419,697 7,836,473 6,449,720
Salaries and related benefits 1,244,207 1,394,757 2,494,555 2,546,414
General and administrative 1,258,783 1,760,179 2,119,840 2,727,694
Depreciation and amortization 1,067,323 915,331 2,112,070 1,860,801
-------------- -------------- -------------- -------------
Total costs and expenses 11,786,665 10,083,278 21,573,908 18,644,070
-------------- -------------- -------------- -------------
Net income before minority interest $ 19,214,713 $ 13,406,173 $ 38,113,835 $ 27,546,166
Minority interest (5,266) 1,248 (15,255) (18,228)
-------------- -------------- -------------- -------------
Net income before gain on sale of real estate interests 19,209,447 13,407,421 38,098,580 27,527,938
Gain on sale of real estate interests -- 2,402,639 -- 2,402,639
-------------- -------------- -------------- -------------
Net income $ 19,209,447 $ 15,810,060 $ 38,098,580 $ 29,930,577
-------------- -------------- -------------- -------------
Dividends attributed to preferred shares 2,518,955 1,336,875 5,037,910 1,486,875
-------------- -------------- -------------- -------------
Net income available to common shareholders $ 16,690,492 $ 14,473,185 $ 33,060,670 $ 28,443,702
============== ============== ============== -------------
Net income per common share basic $ 0.65 $ 0.62 $ 1.29 $ 1.22
============== ============== ============== =============
Net income per common share diluted $ 0.65 $ 0.62 $ 1.28 $ 1.21
============== ============== ============== =============
2
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
2005 2004
--------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 38,098,580 $ 29,930,577
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest 15,255 18,228
Gain on sale of property interest - (2,402,639)
Depreciation and amortization 2,112,070 1,860,801
Accretion of loan discounts (5,863,556) (5,781,228)
Amortization of debt costs 317,031 297,548
Deferred compensation 263,124 135,739
Employee bonus shares 21,895 -
Decrease (increase) in tenant escrows 44,332 (27,682)
Increase in accrued interest receivable (7,007,574) (1,963,750)
(Increase) decrease in prepaid expenses and other assets (2,370,719) 7,905,354
(Decrease) increase in accounts payable and accrued liabilities (1,179,142) 129,180
Increase in accrued interest payable 1,003,263 25,817
Increase in tenant security deposits (7,866) (152,632)
Decrease (increase) in borrowers' escrows 24,234 (5,065,811)
--------------- -----------------
Net cash provided by operating activities 25,470,928 24,909,502
--------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture, fixtures and equipment (36,651) (147,292)
Real estate loans purchased (4,250,000) -
Real estate loans originated (223,487,652) (158,435,328)
Principal repayments from real estate loans 110,812,056 66,722,953
(Collection) release of escrows held to fund expenditures for consolidated real
estate interests (184,585) 319,678
Investment in consolidated real estate interests (3,296,218) (324,135)
Distributions paid by consolidated real estate interests (30,780) (31,140)
Investment in unconsolidated real estate interests (8,025,913) (11,965,054)
Proceeds from disposition of unconsolidated real estate interests 8,000,000 11,362,496
--------------- -----------------
Net cash used in investing activities (120,499,743) (92,497,822)
--------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments on senior indebtedness (91,293) (10,083,730)
Principal repayments on long-term debt (529,226) (546,373)
Proceeds of senior indebtedness 96,500,000 10,100,000
Advances on secured lines of credit 25,424,447 6,596,240
Issuance of preferred shares, net -- 66,574,578
Payment of preferred dividends (5,037,910) (1,486,875)
Issuance of common shares, net 151,245 46,574,985
Payment of common dividends (15,272,439) (13,928,428)
Principal payments on loans for stock options exercised 237,637 265,029
--------------- -----------------
Net cash provided by financing activities 101,382,461 104,065,426
--------------- -----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 6,353,646 36,477,106
--------------- -----------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,331,373 14,758,876
--------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,685,019 $ 51,235,982
=============== =================
3
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, these unaudited financial statements contain
all disclosures which are necessary to present fairly RAIT Investment Trust's
(the "Company") consolidated financial position at June 30, 2005, its results of
operations for the three and six months ended June 30, 2005 and 2004 and its
cash flows for the six months ended June 30, 2005 and 2004. 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, 2004. Certain reclassifications have been made to the consolidated
financial statements as of and for the three and six months ended June 30, 2004
to conform to the presentation for the three and six months ended June 30, 2005.
STOCK BASED COMPENSATION
At June 30, 2005, the Company accounts for its stock option grants under the
provisions of the Financial Accounting Standards Board ("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 June 30, 2005, 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 Company has adopted the disclosure only provisions of both Statement
of Financial Accounting Standards ("SFAS") No. 123 and SFAS No. 148, "Accounting
for Stock-Based Compensation -- Transition and Disclosure." Pursuant to the
requirements of SFAS No. 148, the following are the pro forma net income amounts
for the three and six months ended June 30, 2005 and 2004, as if the
compensation cost for the options had been determined based on the fair value at
the grant date:
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
2005 2004 2005 2004
-------------- --------------- --------------- ---------------
Net income available to common shareholders as
reported $ 16,690,000 $ 14,473,000 $ 33,061,000 $ 28,444,000
Less: stock based compensation determined under fair
value based method for all awards (7,000) (14,000) (14,000) (26,000)
-------------- --------------- --------------- ---------------
Pro forma net income $ 16,683,000 $ 14,459,000 $ 33,047,000 $ 28,418,000
Net income per share-basic, as reported $ 0.65 $ 0.62 $ 1.29 $ 1.22
Net income per share-basic, pro forma $ 0.65 $ 0.62 $ 1.29 $ 1.22
Net income per share-diluted, as reported $ 0.65 $ 0.62 $ 1.28 $ 1.21
Net income per share-diluted, pro forma $ 0.65 $ 0.62 $ 1.28 $ 1.21
The Company did not grant options to purchase common shares of beneficial
interest (the "Common Shares") of the Company during both the three and six
months ended June 30, 2005. The Company granted options to purchase 18,250
Common Shares during both the three and six months ended June 30, 2004. 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 during 2004: dividend yield of 8.3%; expected
volatility of 19%; risk-free interest rate of 4.0% and expected life of 8.8
years.
In December 2004, the FASB issued SFAS No. 123, "(Revised 2004) --
Share-Based Payment" ("SFAS No. 123R"). SFAS 123R replaces SFAS No. 123. SFAS
No. 123R requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements and be measured based on the
fair value of the equity or liability instruments issued. The Company
4
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
is allowed to implement SFAS No. 123R at the beginning of its 2006 fiscal year.
The Company does not believe that the adoption of SFAS No. 123R will have a
material effect on its consolidated financial statements.
At June 30, 2005, the Company had a phantom share plan pursuant to which
4,136 phantom shares were outstanding. The Company granted 1,392 and 1,392
phantom shares during the three and six months ended June 30, 2005,
respectively. The Company granted 0 and 1,829 phantom shares during the three
and six months ended June 30, 2004, respectively. Under applicable accounting
rules, grants under this plan resulted in variable accounting during the six
months ended June 30, 2005, which resulted in continuing compensation expenses
from the date of grant. During the three months ended June 30, 2005 and 2004,
the Company recognized $13,000 and $50,000, respectively, in compensation
expenses relating to phantom shares issued under this plan. During the six
months ended June 30, 2005 and 2004, the Company recognized $25,000 and $50,000,
respectively, in compensation expenses relating to phantom shares issued under
this plan. On July 19, 2005, outstanding phantom shares were modified to provide
that, upon redemption, they would be redeemed with an equivalent number of
Common Shares in lieu of cash.
VARIABLE INTEREST ENTITIES
The Company has adopted Financial Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" and revised FIN 46 ("FIN 46(R)").
In doing so, the Company has evaluated its various interests to determine
whether they are in variable interest entities. These variable interests are
primarily subordinated financings in the form of mezzanine loans or
unconsolidated real estate interests. The Company has identified 24 variable
interests, having an aggregate book value of $161.4 million that it holds as of
June 30, 2005. For one of these variable interests, with a book value of $40.8
million at June 30, 2005, the Company determined that the Company is the primary
beneficiary and such variable interest is included in the Company's consolidated
financial statements.
The variable interest entity consolidated by the Company is the borrower
under a first mortgage loan secured by a 594,000 square foot office building in
Milwaukee, Wisconsin. The Company purchased the first mortgage loan in June 2003
(face value and underlying collateral value are both in excess of $40.0 million)
for $26.8 million. At the time the Company purchased the loan, the Company
determined that the entity that owned the property was not a variable interest
entity.
Prior to the loan's maturity date, in August 2004, the Company entered into a
forbearance agreement with the borrower that provided that the Company will take
no action with regard to foreclosure or sale of the building for a period of
three years, with two one-year extension options, subject to the Company's
approval. The agreement also gives the Company total operational and managerial
control of the property with the owner relinquishing any right to participate.
The Company also agreed to make additional loan advances to fund certain
outstanding fees and commissions (some of which fees are owed to an affiliate of
the owner), and to fund shortfalls in operating cash flow, if necessary, during
the forbearance period. The loan remains outstanding in its full amount and,
aside from extending the maturity date of the loan, no other terms were
adjusted.
The Company concluded that the entering into of the forbearance agreement is
a triggering event under FIN 46(R) and thus the variable interest must be
reconsidered. Because the actual owner of the property no longer had a
controlling financial interest in the property and the Company has the
obligation to make additional advances under the Company's loan to fund any
potential losses, the Company determined that the borrower is a variable
interest entity and that the Company is the primary beneficiary due to the
Company absorbing the majority of the probability weighted expected losses, as
defined in FIN 46(R). The Company continues to hold a valid and enforceable
first mortgage and the value of the property exceeds the Company's carrying
value of the loan. However, as the primary beneficiary, the Company is required
to consolidate this variable interest entity pursuant to FIN 46(R).
The Company's consolidated financial statements as of and for the three and
six months ended June 30, 2005 include the assets, liabilities, and results of
operations of the variable interest entity, which are summarized below:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2005
-------------------------- ------------------------
Total assets..................................... $ 47,333,000 $ 47,333,000
============== ==============
Total liabilities................................ 315,000 315,000
============== ==============
Total income..................................... $ 2,287,000 $ 4,520,000
Total expense.................................... 1,339,000 2,760,000
-------------- --------------
Net income..................................... $ 948,000 $ 1,760,000
============== ==============
NOTE 2 - CONSOLIDATED STATEMENT OF CASH FLOWS
5
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
For the purpose of reporting cash flows, cash and cash equivalents include
non-interest earning deposits and interest earning deposits. Cash paid by the
Company for interest was $6.0 million and $5.0 million for the six months ended
June 30, 2005 and 2004, respectively.
Dividends declared during the six months ended June 30, 2005 and 2004, but
not paid until July 2005 and 2004, were $15.6 million and $13.9 million,
respectively.
NOTE 3 - RESTRICTED CASH AND BORROWERS' ESCROWS
Restricted cash and borrowers' escrows represent borrowers' funds held by
the Company to fund certain expenditures or to be released at the Company's
discretion upon the occurrence of certain pre-specified events, and to serve as
additional collateral for borrowers' loans.
NOTE 4 - REAL ESTATE LOANS
The Company's portfolio of real estate loans consisted of the following at
June 30, 2005:
First mortgages $ 358,257,648
Mezzanine loans 257,714,018
Unearned (fees) costs 214,639
Less: Allowance for loan losses (226,157)
----------------
Real estate loans, net 615,960,148
Less: Senior indebtedness related to loans (147,713,827)
----------------
Real estate loans, net of senior indebtedness $ 468,246,321
================
The following is a summary description of the assets contained in the
Company's portfolio of real estate loans as of June 30, 2005:
AVERAGE
NUMBER LOAN TO RANGE OF LOAN
TYPE OF LOAN OF LOANS VALUE (1) YIELDS (2) RANGE OF MATURITIES
- --------------------------------------------- -------- --------- ------------- -------------------
First mortgages.............................. 28 75% 6.2% -- 22.0% 7/29/05 -- 4/26/08
Mezzanine loans.............................. 51 85% 10.0% -- 23.0% 9/11/05 -- 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 most recent appraised value of the
underlying collateral.
(2) The Company's calculation of loan yield includes points charged.
The properties underlying the Company's portfolio of real estate loans
consisted of the following types as of June 30, 2005:
PRINCIPAL AMOUNT PERCENTAGE
---------------- ----------
Multi-family $ 338.3 million 55%
Office 75.1 million 12%
Retail and other 202.5 million 33%
---------------- ---
Total $ 615.9 million 100%
================ ===
As of June 30, 2005, the maturities of the Company's real estate loans in
each of the years 2005 through 2009 and the aggregate maturities thereafter are
as follows:
2005.................................................... $ 157,063,106
2006.................................................... 198,885,962
2007.................................................... 130,171,736
2008.................................................... 5,750,000
2009.................................................... 15,401,209
Thereafter.............................................. 108,699,653
---------------
$ 615,971,666
===============
6
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
As of June 30, 2005, $320.6 million in principal amount of loans were
pledged as collateral for amounts outstanding on the Company's lines of credit
and senior indebtedness relating to loans.
Senior indebtedness relating to loans arises when the Company sells a
participation or other interest in one of its first mortgages or mezzanine loans
to another lender. These participations and interests rank senior to the
Company's right to repayment under the relevant mortgage or loan in various
ways. As of June 30, 2005, senior indebtedness relating to 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 (4.1925% at June 30, 2005), 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%................ $ 10,273,827
Senior loan participation, secured by Company's interest in a first mortgage loan with a book value of $12,129,597,
payable interest only at LIBOR plus 250 basis points (5.81875% at June 30, 2005) due monthly, principal balance
due September 30, 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. The principal balance was due and paid July 26, 2005...... 1,800,000
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 (6.06875% at June 30, 2005) due monthly,
principal balance due March 28, 2006.............................................................................. 2,640,000
Term loan payable, secured by Company's interest in a first mortgage loan with a principal balance of $9,000,000,
payable interest only at 4.5% due monthly, principal balance due September 29, 2006. This first mortgage loan
also secures the next following term loan......................................................................... 6,500,000
Term loan payable, secured by Company's interest in a first mortgage loan with a principal balance of $9,000,000,
payable interest only at 5.5% due monthly, principal balance due September 29, 2006. This first mortgage loan
also secures the immediately preceding term loan.................................................................. 1,500,000
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 (6.06875% at June 30, 2005) due monthly,
principal balance due June 30, 2005 and was repaid on July 7, 2005................................................ 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
Senior loan participation, secured by Company's interest in a mezzanine loan with a book value of $5,050,444,
payable interest only at the bank's prime rate (6.25% at June 30, 2005) due monthly. The creditor may require
the principal balance be repaid June 10, 2005 or thereafter....................................................... 2,500,000
Senior loan participation, secured by Company's interest in a mezzanine loan with a book value of $4,156,876,
payable interest only at the bank's prime rate (6.25% at June 30, 2005) due monthly. The creditor may require the
principal balance be repaid June 10, 2005 or thereafter........................................................... 2,500,000
Senior loan participation, secured by Company's interest in a mezzanine loan with a book value of $19,307,337,
payable interest only at the bank's prime rate (6.25% at June 30, 2005) due monthly, principal balance due
January 30, 2006.................................................................................................. 2,500,000
Senior loan participation, secured by Company's interest in a mezzanine loan with a book value of $15,550,000,
payable interest only at LIBOR plus 225 basis points (5.56875% at June 30, 2005) due monthly, principal balance
due April 29, 2007................................................................................................ 11,000,000
Senior loan participation, secured by Company's interest in a mezzanine loan with a book value of $12,480,000,
payable interest only at LIBOR plus 225 basis points (5.56875% at June 30, 2005) due monthly, principal balance
due April 29, 2006................................................................................................ 5,000,000
7
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
Senior loan participation, secured by Company's interest in a mezzanine loan with a book value of $8,000,000,
payable interest only at LIBOR plus 225 basis points (5.56875% at June 30, 2005) due monthly, principal balance
due April 29, 2006................................................................................................ 5,000,000
Senior loan participation, secured by Company's interest in a mezzanine loan with a book value of $6,300,000,
payable interest only at LIBOR plus 225 basis points (5.56875% at June 30, 2005) due monthly, principal balance
due April 29, 2006................................................................................................ 5,000,000
Senior loan participation, secured by Company's interest in a mezzanine loan with a book value of $16,000,000,
payable interest only at 6.0% due monthly, principal balance due December 1, 2006................................. 12,000,000
Senior loan participation, secured by Company's interest in a mezzanine loan with a book value of $44,063,390,
payable interest only at 8.0% due monthly, principal balance due February 25, 2007................................ 35,000,000
Senior loan participation, secured by Company's interest in a mezzanine loan with a book value of $23,300,000,
payable interest only at LIBOR plus 225 basis points (5.56875% at June 30, 2005) due monthly, principal balance
due February 24, 2006............................................................................................. 18,500,000
Senior loan participation, secured by Company's interest in a mezzanine loan with a book value of $6,931,827,
payable interest only at LIBOR plus 225 basis points (5.56875% at June 30, 2005) due monthly, principal balance
due April 28, 2006................................................................................................ 5,000,000
------------
$147,713,827
============
As of June 30, 2005, the senior indebtedness relating to the Company's
loans maturing in the remainder of 2005 and over the next four years and the
aggregate indebtedness thereafter, is as follows:
2005 $ 19,535,328
2006 72,203,481
2007 55,975,018
2008 --
2009 --
Thereafter --
------------
$147,713,827
============
NOTE 5 - CONSOLIDATED REAL ESTATE INTERESTS
As of June 30, 2005, the Company owned the following controlling interests
in entities that own real estate. These interests are accounted for 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. The Company acquired its ownership interest for
$750,000 and, in March 2001, the Company 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 ($40.5 million at June 30, 2005), which
bears interest at an annual rate of 6.85% and is due on August 1, 2008.
The carrying value of this property at June 30, 2005 was $61.7 million.
- 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. The Company acquired this interest for $1.7 million. After
acquisition, the Company obtained non-recourse financing of $1.1
million ($971,300 at June 30, 2005), which bears interest at an annual
rate of 7.33% and is due on August 1, 2008. The carrying value of this
property at June 30, 2005 was $1.2 million.
- 100% membership interest in a limited liability company that owns a
216-unit apartment complex and clubhouse in Watervliet, New York. The
Company 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 ($5.2 million at June 30, 2005). The
loan assumed by the Company bears interest at an annual rate of 7.27%
and matures on January 1, 2008. The carrying value of this property at
June 30, 2005 was $8.2 million.
8
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
- 84.6% membership interest in a limited liability company that owns a
44,517 square foot office building in Rockville, Maryland. In October
2002, the Company acquired 100% of the limited liability company for
$10.7 million and simultaneously obtained non-recourse financing of
$7.6 million ($7.2 million at June 30, 2005). The loan bears interest
at an annual rate of 5.73% and is due November 1, 2012. In December
2002, the Company sold a 15.4% interest in the limited liability
company to a partnership whose general partner is a son of the
Company's 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. The carrying
value of this property at June 30, 2005 was $10.2 million.
- 100% membership interest in a limited liability company that owns a
110,421 square foot shopping center in Norcross, Georgia. In 1998, the
Company made loans in the aggregate amount of $2.8 million to the
former owner of the property. In July 2003, the Company negotiated the
acquisition of this property from this former owner. At that time the
Company assumed the existing senior, non-recourse mortgage financing on
the property ($9.0 million outstanding at June 30, 2005), which bears
interest at an annual rate of 7.55% and is due on December 1, 2008. The
carrying value of this property at June 30, 2005 was $13.9 million.
- Also included in the Company's consolidated real estate interests is a
first mortgage with a carrying amount of $40.8 million secured by a
594,000 square foot office building in Milwaukee, Wisconsin. In June
2003, the Company purchased the loan, which had a face value in excess
of $40.0 million, for $26.8 million. Upon entering into a forbearance
agreement with the owner of the property in August 2004, the Company
determined that the borrowing entity was a variable interest entity (as
defined in FIN 46) of which the Company was the primary beneficiary.
See Note 1 -- "Basis of Presentation -- Variable Interest Entities."
The carrying value of this consolidated interest at June 30, 2005 was
$42.2 million.
- Two parcels of land located in Willow Grove, Pennsylvania with a
carrying value of $613,500 at June 30, 2005.
The Company's consolidated real interest interests consisted of the
following types of properties at June 30, 2005:
Book Value Percentage Escrows(1)
-------------- ---------- ----------
Multi-family $ 9,214,223 6% $ 181,000
Office 129,890,419 84% $1,767,000
Retail and other 15,029,089 10% $1,917,000
-------------- ---
Subtotal 154,133,731 100%
===
Less: Accumulated depreciation (16,080,470)
--------------
Investment in real estate, net $ 138,053,261
==============
- ------------
(1) These escrow amounts are included in the book value and are held for payment
of real estate taxes, insurance premiums and repair and replacement costs.
As of June 30, 2005, non-recourse long-term debt secured by real estate
underlying the Company's consolidated real estate interests 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. $ 971,281
Loan payable, secured by real estate, monthly installments of $288,314,
including interest at 6.85%, remaining principal due August 1, 2008. 40,500,555
Loan payable, secured by real estate, monthly installments of $37,697, including
interest at 7.27%, remaining principal due January 1, 2008. 5,174,901
Loan payable, secured by real estate, monthly installments of $47,720, including
interest at 5.73%, remaining principal due November 1, 2012. 7,235,557
Loan payable, secured by real estate, monthly installments of $72,005, including
interest at 7.55%, remaining principal due December 1, 2008 9,012,679
--------------
$ 62,894,973
==============
9
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
As of June 30, 2005, the amount of long-term debt secured by the Company's
consolidated real estate interests that matures over the remainder of 2005, over
the next four years and the aggregate indebtedness maturing thereafter, is as
follows:
2005 $ 544,675
2006 1,156,961
2007 1,239,674
2008 53,305,833
2009 191,497
Thereafter 6,456,333
--------------
$ 62,894,973
==============
Expenditures for repairs and maintenance are charged to operations as
incurred. Significant renovations are capitalized. Fees and costs incurred in
the successful negotiation of leases are deferred and amortized on a
straight-line basis over the terms of the respective leases. Unamortized fees as
of June 30, 2005 were $2,324,000. 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 June 30, 2005
and 2004 was $1,029,000 and $844,000, respectively. Depreciation expense
relating to the Company's real estate investments for the six months ended June
30, 2005 and 2004 was $2,039,000 and $1,697,000, respectively.
The Company leases space in the buildings it owns to several tenants.
Approximate future minimum lease payments under noncancellable lease
arrangements as of June 30, 2005 are as follows:
2005................................................... $ 9,181,039
2006................................................... 13,710,188
2007................................................... 11,001,969
2008................................................... 10,228,776
2009................................................... 9,990,626
Thereafter............................................. 34,753,183
--------------
$ 88,865,781
==============
NOTE 6 - UNCONSOLIDATED REAL ESTATE INTERESTS
Unconsolidated real estate interests include the Company's non-controlling
interests in limited partnerships accounted for under the equity method of
accounting, unless such interests meet the requirements of Emerging Issues Task
Force ("EITF") Issue D-46 "Accounting for Limited Partnership Investments" to be
accounted for under the cost method of accounting. In accordance with EITF
03-16, "Accounting for Investments in Limited Liability Companies," the Company
accounts for its non-controlling interests in limited liability companies the
same way that it accounts for its non-controlling interests in limited
partnerships.
At June 30, 2005, the Company's unconsolidated real estate interests
consisted of the following:
- 11% limited partnership interest in a limited partnership that owns
a 500-unit multi-family apartment building in Philadelphia,
Pennsylvania. The Company owned 100% of the limited partnership
(cost of $19.8 million) until December 30, 2002, at which time the
Company 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, the Company 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 $19.4 million at June 30, 2005, which is
comprised of:
- $14.1 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 6.2%
and is due on December 1, 2009 and
- $1.3 million, which the Company provided to the purchaser of
the Company's 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 the
Company's balance sheet.
10
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
- 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, the
Company received these interests, together with a cash payment of
$2.5 million, in repayment of two loans with a combined net book
value of $2.3 million. The Company 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
June 30, 2005, 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 $3.4 million bearing interest at 6.75% and maturing on
March 1, 2013.
- Class B limited partnership interest in a limited partnership that
owns a 363-unit multifamily apartment complex in Pasadena (Houston),
Texas. The Company acquired its interest in September 2003 for $1.9
million. In July 2004, the Company contributed an additional
$600,000 to the limited partnership. The property is subject to
non-recourse financing of $8.0 million at June 30, 2005, which bears
interest at the 30-day London interbank offered rates, or LIBOR,
plus 3.0% (6.31875% at June 30, 2005) with a LIBOR floor of 2.0% and
an overall interest rate cap of 6.0%, and is due on October 9, 2005.
- 3% membership interest in a limited liability company that owns a
504-unit multifamily apartment complex in Sugarland (Houston),
Texas. The Company acquired its interest in April 2004 for $5.6
million. The property is subject to non-recourse financing of $14.4
million at June 30, 2005, which bears interest at an annual rate of
4.84%, and is due in November 1, 2009.
- 0.1% Class B membership interest in an limited liability company
that has an 100% interest in a limited liability company that has an
89.94% beneficial interest in a trust that owns a 737,308 square
foot 35-story urban office building in Chicago, Illinois. The
Company acquired its interest in December 2004 for $19.5 million.
The property is subject to non-recourse financing of $90.5 million
at June 30, 2005, which bears interest at an annual rate of 5.3% and
is due January 1, 2015.
- Class B membership interests in each of two limited liability
companies which together own a 231-unit multifamily apartment
complex in Wauwatosa, Wisconsin. The Company acquired its interest
in December 2004 for $2.9 million. The property is subject to
non-recourse financing of $18.0 million at June 30, 2005, which
bears interest at 5.3% and is due January 1, 2014.
- Class B membership interests in each of two limited liability
companies, one of which owns a 430-unit multifamily apartment
complex in Orlando, Florida and the other of which owns a 264-unit
multifamily apartment complex in Bradenton, Florida. The Company
acquired its membership interests in May 2005 for $8.9 million. As
of June 30, 2005 the Orlando property is subject to non-recourse
financing of $23.5 million bearing interest at 5.31% and maturing on
May 1, 2010. The Bradenton property is subject to non-recourse
financing of $14.0 million bearing interest at 5.31% and maturing on
June 1, 2010.
The Company's unconsolidated real estate interests consisted of the
following property types at the dates indicated below:
BOOK VALUE PERCENTAGE
-------------- ----------
Multi-family........................................ $ 22,946,674 52%
Office.............................................. 21,095,696 48%
-------------- ---
Unconsolidated real estate interests................ $ 44,042,370 100%
============== ===
NOTE 7 - LINES OF CREDIT
At June 30, 2005, the Company had five lines of credit, two of which have
$30.0 million of maximum possible borrowings, two of which have $25.0 million of
maximum possible borrowings and a fifth of which has $10.0 million of maximum
permissible borrowings. The aggregate amount of indebtedness outstanding under
these lines of credit was $74.4 million at June 30, 2005. As of June 30, 2005,
$106.5 million in principal amount of the Company's loans and a consolidated
real estate interest with a book value of $40.8 million were pledged as
collateral for amounts outstanding under these lines of credit. The following is
a description of the Company's lines of credit at June 30, 2005:
At June 30, 2005, the Company had $30.0 million outstanding under the
first of the Company's two $30.0 million lines of credit. This line of credit
bears interest at either: (a) the 30-day LIBOR, plus 2.5%, or (b) 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%. As of June 30, 2005 the
11
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
interest rate was 5.81875%. Absent any renewal, the line of credit will
terminate in October 2006 and any principal then outstanding must be paid by
October 2007. The lender has the right to declare any advance due and payable in
full two years after the date of the advance.
At June 30, 2005, the Company had no amount outstanding under the second
of the Company's two $30.0 million lines of credit. This line of credit bears
interest at the prime rate as published in the "Money Rates" section of The Wall
Street Journal. As of June 30, 2005 the interest rate was 6.25%. This line of
credit has a current term running through April 2006 with annual one-year
extension options and an 11-month non-renewal notice requirement. Approximately
$58,000 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 9.
At June 30, 2005, the Company had $19.5 million outstanding under the
first of the Company's two $25.0 million lines of credit. This line of credit
bears interest, at the Company's election, at either: (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 or (ii) the federal funds rate, as published by the
Federal Reserve Bank of New York, plus 1%. As of June 30, 2005 the interest rate
was 5.56875%. Absent any renewal, this line of credit will terminate in February
2006 and any principal then outstanding must be repaid.
At June 30, 2005, the Company had $22.4 million outstanding under the
second of the Company's two $25.0 million lines of credit. This line of credit
bears interest at the 30-day LIBOR plus 2.25%. As of June 30, 2005 the interest
rate was 5.56875% Absent any renewal, the line of credit will terminate in
December 2005 and any principal then outstanding must be repaid by December
2006. If the lender does not provide notice, at least 30 days prior to the
termination date, that the termination date will not be extended, the
termination date will be automatically extended for an additional year.
At June 30, 2005, the Company had $2.5 million outstanding under the
Company's $10.0 million line of credit. This line of credit bears interest at
either: (a) one month LIBOR plus 3.0% or (b) the prime rate as published in the
"Money Rates" section of The Wall Street Journal, at the Company's election. As
of June 30, 2005 the interest rate was 6.31875%. This line of credit terminated
July 1, 2005 and any principal then outstanding was required to be repaid by
July 1, 2010. All outstanding amounts were repaid July 25, 2005.
NOTE 8 - TRANSACTIONS WITH 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 ten and thirteen
properties underlying the Company's real estate interests at June 30, 2005 and
2004, respectively. Management fees in the amount of $192,000 and $206,000 were
paid to Brandywine for the three months ended June 30, 2005 and 2004,
respectively, relating to these interests. Management fees in the amount of
$426,000 and $442,000 were paid to Brandywine for the six months ended June 30,
2005 and 2004, respectively, relating to these interests. 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 Bancorp
Inc., a registered financial holding company for 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
from September 2000 to November 2003, was the Chief Executive Officer of Bancorp
from July 2000 to September 2000 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 June 30, 2005, the Company had approximately $13.1 million on
deposit, of which approximately $13.0 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 each
of the three months ended June 30, 2005 and 2004. The Company paid $30,000 for
these services for each of the six months ended June 30, 2005 and 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
12
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
approximately $83,000 and $62,000 for each of the three months ended June 30,
2005 and 2004, respectively. Rent paid to Bancorp Inc. was approximately
$145,000 and $124,000 for the six months ended June 30, 2005 and 2004,
respectively.
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 was 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 $11,000 and
14,000 for the three months ended June 30, 2005 and 2004. Rent paid to
Richardson was approximately $23,000 and $28,000 for the six months ended June
30, 2005 and 2004, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Letter of Credit
On February 20, 2003, a $1.0 million letter of credit was posted in
connection with the Company's sale of a real estate 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.
Between December 2003 and June 2004, an additional $384,000 has been funded,
reducing the letter of credit obligation to $58,000. $58,000 of availability
under the second of the Company's two $30.0 million lines of credit described in
Note 7 is reserved in the event the Company is required to make additional
payments under this letter of credit. Although the letter of credit relating to
the Company's guarantee was not issued until February 20, 2003, both the
agreement of sale of the partnership interests and the guarantee were executed
on December 31, 2002. Accordingly, the Company did not recognize a liability for
this guarantee under FASB Interpretation 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45") since the initial recognition and initial
measurement provisions of FIN 45 were to be applied only on a prospective basis
to guarantees issued after December 31, 2002.
Litigation
In December 2002, the Company entered into a contract pursuant to which it
sold the 1% general partnership interest and 88% limited partnership interest in
a partnership that owns a property located in Philadelphia, Pennsylvania to
affiliates of Michael Axelrod. On August 12, 2004, a complaint was filed in the
United States District Court of the Eastern District of Pennsylvania by Axelrod
and these affiliates naming the Company, Brandywine and others as defendants.
The complaint, which is based upon alleged breaches of contractual
representations and/or misrepresentations made with respect to the condition of
this property, seeks rescission of the contract and damages. Plaintiffs have
made related claims for damages based upon purported breach of contract, and are
seeking equitable relief declaring the Company responsible for certain senior
indebtedness on the property. The proceedings are now in the earliest stages and
the Company intends to vigorously defend the matter. Management does not expect
that the resolution of this matter will have a material adverse effect on the
Company's consolidated financial position or results of operations.
Guidance Line
In June 2005, the Company entered into an agreement with a borrower to
provide a line giving guidance over a two-year period as to financial and
underwriting parameters with respect to a potential series of first mortgage
bridge loans, up to a total of $150.0 million, with no loan in an amount greater
than $50.0 million. The Company expects that the credit and market risk of the
potential loans will not differ from that of the loans in the Company's current
portfolio.
NOTE 10 - EARNINGS PER SHARE
The Company's calculation of earnings per share for the three and six
months ended June 30, 2005 and 2004 in accordance with SFAS No. 128 is as
follows:
13
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
For the three months ended June 30, 2005 For the six months ended June 30, 2005
---------------------------------------- --------------------------------------
Income Shares Per share Income Shares Per share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ------------- --------- ----------- ------------- ----------
Basic earnings per share:
Net income available to common shareholders $ 16,690,492 25,591,644 $ 0.65 $33,060,672 25,587,366 $ 1.29
Effect of dilutive securities:
Options -- 185,213 -- -- 175,859 (.01)
Phantom Shares -- 3,692 -- -- 3,221 --
-------------- ---------- -------- ----------- ---------- --------
Net income available to common shareholders plus
assumed conversions $ 16,690,492 25,780,549 $ 0.65 $33,060,672 25,766,446 $ 1.28
============== ========== ======== =========== ========== ========
For the three months ended June 30, 2004 For the six months ended June 30, 2004
---------------------------------------- --------------------------------------
Income Shares Per share Income Shares Per share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ------------- --------- ----------- ------------- ----------
Basic earnings per share:
Net income available to common shareholders $ 14,473,185 23,328,323 $ 0.62 $28,443,702 23,268,603 $ 1.22
Effect of dilutive securities:
Options -- 165,170 -- -- 180,213 (.01)
Phantom Shares -- 1,829 -- -- 1,276 --
-------------- ------------- --------- ----------- ---------- ---------
Net income available to common shareholders plus
assumed conversions $ 14,473,185 23,495,322 $ 0.62 $28,443,702 23,450,092 $ 1.21
============== ============= ========= =========== ========== =========
14
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
NOTE 11 - DIVIDENDS
Common Shares
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 the declaration dates in the six months ended June 30, 2005 and 2004
set forth below, the Board of Trustees of the Company declared a cash dividend
in an amount per Common Share and in the aggregate dividend amount set forth
opposite such declaration date payable on the payment date to holders of Common
Shares on the record date set forth opposite the relevant declaration date.
Aggregate Dividend
Declaration Dates Record Date Payment Date Dividend Per Share Amount
- ----------------- ------------ ------------- ------------------ ------------------
6/15/05 6/28/05 7/15/05 $ 0.61 $ 15,614,197
3/25/05 4/7/05 4/15/05 $ 0.60 $ 15,351,018
6/10/04 6/21/04 7/15/04 $ 0.60 $ 13,932,458
3/23/04 4/5/04 4/15/04 $ 0.60 $ 13,928,428
Series A Preferred Shares
On the declaration dates in the six months ended June 30, 2005 and 2004
set forth below, the Board of Trustees of the Company declared a cash dividend
on the Company's 7.75% Series A Cumulative Redeemable Preferred Shares of
Beneficial Interest (the "Series A Preferred Shares") in the amount per share
payable on the payment date to holders of Series A Preferred Shares on the
record date in the aggregate dividend amount set forth opposite the relevant
declaration date.
Aggregate Dividend
Declaration Dates Record Date Payment Date Dividend Per Share Amount
- ----------------- ------------ ------------- ------------------ ------------------
5/18/05 6/1/05 6/30/05 $0.484375 $ 1,336,875
1/25/05 3/1/05 3/31/05 $0.484375 $ 1,336,875
4/27/04 6/1/04 6/30/04 $0.484375 $ 1,336,875
3/18/04 3/24/04 3/31/04 $ 0.0625 $ 150,000
Series B Preferred Shares
On the declaration dates in the six months ended June 30, 2005 and 2004
set forth below, the Board of Trustees of the Company declared a cash dividend
on the Company's 8.375% Series B Cumulative Redeemable Preferred Shares of
Beneficial Interest (the "Series B Preferred Shares") in the amount of
$0.5234375 per share payable on the payment date to holders of Series B
Preferred Shares on the record date in the aggregate dividend amount set forth
opposite the relevant declaration date.
Aggregate Dividend
Declaration Dates Record Date Payment Date Amount
- ----------------- ----------- ------------ ------------------
5/18/05 6/1/05 6/30/05 $ 1,182,080
1/25/05 3/1/05 3/31/05 $ 1,182,080
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Trustees and Shareholders
RAIT Investment Trust
We have reviewed the accompanying consolidated balance sheet of RAIT
Investment Trust and Subsidiaries as of June 30, 2005 and the related
consolidated statements of income and cash flows for the three-month and
six-month periods ended June 30, 2005 and 2004. These interim financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), 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 the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet as of December 31, 2004, 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 March 16, 2005 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, 2004 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
August 3, 2005
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 Annual Report on Form 10-K
for the year ended December 31, 2004, 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 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 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.
The first six months of 2005 were characterized by continued growth in our
total assets, revenues and net income. Our total assets grew 18.7% to $866.1
million at June 30, 2005, as compared to $729.5 million of total assets at
December 31, 2004. Revenues grew 32.0% and 29.2% to $31.0 million and $59.7
million in the three months and six months ended June 30, 2005, as compared to
$23.5 million and $46.2 million for the three months and six months ended June
30, 2004. Our net income available to common shareholders increased 15.3% and
16.2% to $16.7 million and $33.1 million for the three and six months ended June
30, 2005 as compared to $14.5 million and $28.4 million for the three and six
months ended June 30, 2004.
The principal reasons for this growth were:
- - Increased origination capability - We have continued our expansion of
programs intended to increase our origination sources. These programs
accounted for 67% of our new investments in the three months ended
June 30, 2005.
- - Increased mezzanine and bridge loans - In the first six months of 2005, we
continued to grow our core business of making mezzanine and bridge loans.
In this period, we originated or purchased $227.7 million in the aggregate
of mezzanine and bridge loans in geographic areas in which we had
previously invested.
- - Increased use of leverage - During the first six months of 2005, we
leveraged our common equity base by investing the $121.0 million aggregate
proceeds of our two offerings in 2004 of preferred shares and $121.9
million of additional borrowings from our lines of credit and senior
indebtedness relating to loans.
The current relatively low interest rate environment compared to
historical interest rates has had only a limited impact upon our ability to
originate investments within our investment parameters, including our targeted
rates of return. We attribute this to our ability to offer structured financing
that accommodates senior financing sources, to respond quickly to a borrower's
request and to tailor our financing packages to a borrower's needs. As a result,
we believe that we do not compete for a borrower's business on interest rates
alone. In addition, we are responding to the possibility of rising interest
rates by making variable rate loans in certain circumstances and evaluating ways
to potentially reduce the interest rates on amounts we borrow under lines of
credit while increasing availability.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of our liquidity and capital resources from our
commencement in January 1998 through June 30, 2005 have been our public
offerings of common shares, 7.75% Series A cumulative redeemable preferred
shares and 8.375% Series B
17
cumulative redeemable preferred shares. After offering costs and underwriting
discount and commissions, these offerings have allowed us to obtain net offering
proceeds of $532.0 million.
We issued 2,760,000 Series A preferred shares in March and April 2004 for
net proceeds of $66.6 million. Our Series A preferred shares accrue cumulative
cash dividends at a rate of $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 restrictions necessary to preserve our tax 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. For the both the three months ended June 30,
2005 and 2004, we paid dividends on our Series A preferred shares of $1.3 and
for the six months ended June 30, 2005 and 2004, we paid dividends on our Series
A preferred shares of $2.7 million and $1.5 million, respectively.
We issued 2,258,300 Series B preferred shares in October and November 2004
for net proceeds of $54.4 million. Our Series B preferred shares accrue
cumulative cash dividends at a rate of $2.09375 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 B preferred shares have no maturity date and we are not required
to redeem the Series B preferred shares at any time. We may not redeem the
Series B preferred shares before October 5, 2009, except in limited
circumstances relating to the ownership restrictions necessary to preserve our
tax qualification as a real estate investment trust. On or after October 5,
2009, we may, at our option, redeem the Series B 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. For the three and
six months ended June 30, 2005, we paid dividends on our Series B preferred
shares of $1.2 million and $2.4 million, respectively compared to no payments in
the same periods in 2004. Our Series A preferred shares and Series B preferred
shares rank on a parity with respect to dividend rights, redemption rights and
distributions upon liquidation.
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 $66.5 million remains available.
We also maintain liquidity through our lines of credit, two of which each
have $30.0 million of maximum possible borrowings, another two of which each
have $25.0 million of maximum possible borrowings and a fifth has $10.0 million
of maximum possible borrowings. The aggregate maximum possible borrowing under
our lines of credit was $120.0 million as of June 30, 2005.
At June 30, 2005, we had no availability under the first of our two $30.0
million lines of credit. This line of credit bears interest, at our election, at
either (a) the 30-day London interbank offered rate, or LIBOR, plus 2.5% or (b)
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%. As of June 30, 2005
the interest rate was 5.81875%. Absent any renewal, the line of credit will
terminate in October 2006 and any principal then outstanding must be repaid by
October 2007. The lender has the right to declare any advance due and payable in
full two years after the date of the advance.
At June 30, 2005, we had $30.0 million of availability under the second of
our $30.0 million lines of credit. This line of credit bears interest at the
prime rate as published in the "Money Rates" section of The Wall Street Journal.
As of June 30, 2005 the interest rate was 6.25%. This line of credit has a
current term running through April 2006 with annual one-year extension options
at the lender's option and an 11-month non-renewal notice requirement.
Approximately $58,000 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 9 of our consolidated financial statements.
At June 30, 2005, we had $5.5 million of availability under the first of
our two $25.0 million lines of credit. This line of credit bears interest, at
our election, at either (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 or
(ii) the federal funds rate, as published by the Federal Reserve Bank of New
York, plus 1%. As of June 30, 2005 the interest rate was 5.56875%. Absent any
renewal, this line of credit will terminate in February 2006 and any principal
then outstanding must be repaid at that time.
18
At June 30, 2005, we had $2.6 million of availability under the second of
our $25.0 million lines of credit. This line of credit bears interest at the
30-day LIBOR plus 2.25%. As of June 30, 2005 the interest rate was 5.56875%.
Absent any renewal, the line of credit will terminate in December 2005 and any
principal then outstanding must be repaid by December 2006. If the lender does
not provide notice, at least 30 days prior to the termination date, that the
termination date will not be extended, the termination date will be
automatically extended for an additional year.
At June 30, 2005, we had $7.5 million of availability under our $10.0
million line of credit. This line of credit bears interest, at our election, at
either (a) three month LIBOR plus 3.0% or (b) the prime rate as published in the
"Money Rates" section of The Wall Street Journal, at our election. As of June
30, 2005 the interest rate was 6.31875%. The line terminated July 1, 2005 and
any principal then outstanding was required to be repaid by July 1, 2010. All
outstanding amounts were repaid July 25, 2005.
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 $160.0
million and $35.0 million for the three months ended June 30, 2005 and 2004,
respectively and $215.3 million and $88.5 million for the six months ended June
30, 2005 and 2004, respectively.
We also receive funds from a combination of interest and fees on our
loans, rents and income from our real estate interests 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.
The aggregate dividend declared for the three months ended June 30, 2005 and
2004 (paid on July 15, 2005 and 2004, respectively) was $15.6 million and $13.9
million, respectively, of which $15.5 million and $13.8 million, respectively,
was in cash and $87,000 and $85,000, respectively, was in additional common
shares issued through our dividend reinvestment plan. The aggregate dividends
declared on our common shares for the six months ended June 30, 2005 and 2004
were $31.0 million and $27.9 million, respectively, of which $30.8 million and
$27.7 million, respectively, was in cash and $165,000 and $170,000,
respectively, was in additional common shares issued through our dividend
reinvestment plan. We paid $2.5 million of dividends, in the aggregate, on our
Series A and Series B preferred shares for the three months ended June 30, 2005
and we paid $1.3 million of dividends on our Series A preferred shares and $0 of
dividends on our Series B preferred shares for the three months ended June 30,
2004. We also paid $5.0 million of dividends, in the aggregate, on our Series A
and Series B preferred shares for the six months ended June 30, 2005 and we paid
$1.5 million of dividends on our Series A preferred shares and $0 of dividends
on our Series B preferred shares for the six months ended June 30, 2004.
We use our capital resources principally for originating and purchasing
loans and acquiring real estate interests. For the three months ended June 30,
2005, we originated or purchased ten loans in the aggregate amount of $119.3
million, as compared to ten loans in the aggregate amount of $78.2 million for
the three months ended June 30, 2004. For the six months ended June 30, 2005, we
originated or purchased 19 loans in the aggregate amount of $227.7 million, as
compared to 18 loans in the aggregate amount of $158.4 million for the six
months ended June 30, 2004. For both the three and six months ended June 30,
2005, we invested in two unconsolidated interests in real estate totaling $8.0
million as compared to investing in one unconsolidated interest in real estate
of $5.7 million and two unconsolidated interests in real estate totaling $12.0
million for the three and six months ended June 30, 2004, respectively. For the
three and six months ended June 30, 2005, we invested $3.2 million and $3.3
million in consolidated interests in real estate, respectively, as compared to
no investments in consolidated interests in real estate for the three and six
months ended June 30, 2004.
At June 30, 2005, we had approximately $19.7 million of cash on hand.
These funds combined with $38.3 million of loan repayments we received from July
1, 2005 through August 3, 2005 and $24.1 million of availability under our
secured lines of credit provided for $47.8 million of loan originations and
$9.3 million of repayments of senior debt relating to loans from July 1, 2005
to August 3, 2005, as well as payment of our second quarter dividends on our
common shares.
We believe that our existing sources of funds will be adequate for
purposes of meeting our liquidity and capital needs. We are evaluating ways to
potentially reduce the interest rates on amounts we borrow under our lines of
credit while increasing availability. Currently and in the course of our
business normally, we negotiate with existing and potential lenders with respect
to credit lines, both secured and unsecured and short and longer in term. 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 Annual Report on Form 10-K for the year ended December 31, 2004.
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
19
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 Annual Report on Form 10-K for the year ended December
31, 2004. 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 June 30, 2005:
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------
LESS THAN ONE TO THREE MORE THAN THREE MORE THAN
CONTRACTUAL OBLIGATIONS ONE YEAR YEARS TO FIVE YEARS FIVE YEARS TOTAL
- --------------------------------------------------- ------------ ------------- --------------- ---------- ------------
Operating leases................................... $ 287,613 $ 579,255 $ 578,606 $ 67,698 $ 1,512,872
Secured lines of credit............................ -- 71,924,447 -- 2,500,000 74,424,447
Indebtedness secured by real estate(1)............. 20,080,003 130,575,133 53,497,336 6,456,333 210,608,805
Deferred compensation(2)........................... 1,379,408 -- -- -- 1,379,408
------------ ------------- --------------- ---------- ------------
Total.............................................. $ 21,747,024 $ 203,078,835 $ 54,075,942 $9,023,731 $287,925,532
============ ============= =============== ========== ============
- -------------
(1) Indebtedness secured by real estate consists of our non-recourse senior
indebtedness relating to loans and long term debt secured by real estate
owned.
(2) Represents amounts due to fund our supplemental executive retirement plan
or SERP. See Note 9 of our consolidated financial statements, Item 8 of
our Annual Report on Form 10-K for the year ended December 31, 2004.
OFF-BALANCE SHEET ARRANGEMENTS
Refer to note 9 -- "Commitments and Contingencies -- Letter of Credit" to
our consolidated financial statements 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,
2004 for a discussion of our critical accounting policies. During the six months
ended June 30, 2005, there were no material changes to these policies, except
for the update described below.
Reserve for Loan Losses. We have a reserve for loan losses of $226,000 at
June 30, 2005. This reserve is a general reserve and is not related to any
individual loan or to an anticipated loss. In accordance with our policy, we
determined that this reserve was adequate as of June 30, 2005 based upon our
credit analysis of each of the loans in our portfolio. If that analysis were to
change, we may be required to increase our reserve, and such an increase,
depending upon the particular circumstances, could be substantial. Any increase
in reserves will constitute a charge against income. We will continue to analyze
the adequacy of this reserve on a quarterly basis. During the six months ended
June 30, 2005, the loans in our portfolio performed in accordance with their
terms and were current as to required payments.
RESULTS OF OPERATIONS
Interest Income. Interest income is comprised primarily of interest
accrued on our loans. In addition, 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. Our
interest income was $19.0 million for the three months ended June 30, 2005
compared to $15.1 million for the three months ended June 30, 2004. The $3.9
million increase was primarily due to the following:
20
- an additional $8.9 million of interest income accruing on 50 loans
totaling $454.6 million originated between April 1, 2004 and June 30,
2005, partially offset by a $4.8 million reduction of interest income due
to the repayment of 24 loans totaling $178.7 million during the same
period,
- an increase of $2.7 million in accretable yield included in our interest
income from the three months ended June 30, 2004 to the same period in
2005,
- a decrease of $3.0 million of accretable yield
due to the consolidation of a property underlying one of our loans in
accordance with FIN 46, as we describe in note 1-- "Basis of Presentation
-- Variable Interest Entities" of our consolidated financial statements.
Our interest income was $38.0 million for the six months ended June 30,
2005 compared to $28.5 million for the six months ended June 30, 2004. The $9.5
million increase was primarily due to the following:
- an additional $18.5 million of interest income accruing on 71 loans
totaling $515.5 million originated between January 1, 2004 and June 30,
2005, partially offset by a $9.1 million reduction of interest income due
to the repayment of 27 loans totaling $222.4 million during the same
period,
- an increase of $5.9 million in accretable yield included in our interest
income from the six months ended June 30, 2004 to the same period in 2005,
- a decrease of $5.8 million in accretable yield due to
the consolidation of a property underlying one of our loans in accordance
with FIN 46, as we describe in note 1-- "Basis of Presentation -- Variable
Interest Entities" of our consolidated financial statements.
Rental Income. We received rental income of $7.4 and $14.9 million for the
three and six months ended June 30, 2005 compared to $6.6 and $12.7 million for
the three and six months ended June 30, 2004, respectively. The increases in
rental income from the three and six months ended June 30, 2004 to the
comparable periods in 2005 were primarily due to the consolidation of one
consolidated real estate interest in August 2004, partially offset by the
disposition of one consolidated real estate interest in June 2004. The
acquisition that we recorded in August 2004 related to a loan we acquired in
June 2003, which was scheduled to mature in September 2004. Shortly before the
loan's maturity, we restructured our investment and determined that we were the
primary beneficiary of the variable interest entity that owned the property.
Accordingly, at that time we began consolidating the financial statements of
this variable interest entity. For a further description of this investment, see
note 1 -- "Basis of Presentation -- Variable Interest Entities" of our
consolidated financial statements.
Fee Income and Other. Revenues generated by our wholly owned subsidiary,
RAIT Capital Corp d/b/a Pinnacle Capital Group, are generally reported in this
income category. Pinnacle provides, or arranges for another lender to provide,
first-lien conduit loans to our borrowers. This service often assists us in
offering the borrower a complete financing package, including our mezzanine or
bridge financing. Where we have made a bridge loan to a borrower, we may be able
to assist our borrower in refinancing our bridge loan, for which we will earn
related fee income through Pinnacle. We also include financial consulting fees
in this income category. Financial consulting fees are generally negotiated on a
transaction by transaction basis and, as a result, the sources of such fees for
any particular period are not generally indicative of future sources and
amounts. We earned fee and other income of $2.1 million for the three months
ended June 30, 2005 which was primarily comprised of $1.5 million of revenue
generated by Pinnacle and $500,000 of financial consulting fees. We earned fee
and other income of $579,000 for the three months ended June 30, 2004 which was
primarily comprised of $413,000 of revenue generated by Pinnacle. We earned fee
and other income of $3.0 million for the six months ended June 30, 2005, which
was primarily comprised of $2.4 million of revenue generated by Pinnacle and
$500,000 of financial consulting fees. We earned fee and other income of $3.1
million for the six months ended June 30, 2004, which was primarily comprised of
$1.3 million of revenues generated by Pinnacle and $1.4 million of financial
consulting fees.
Investment Income. We derived our investment income from three primary
sources:
- return on unconsolidated real estate interests,
- appreciation interests in the cash flow, assets or both, underlying
our loans, and
- interest earned on cash held in bank accounts. Most of this
investment income was generated from our bank accounts with The
Bancorp Bank. See note 8 of our consolidated financial statements.
21
We received investment income of $2.5 million for the three months ended
June 30, 2005 of which $1.7 million was generated by eight unconsolidated
investments in real estate totaling $47.2 million and $600,000 was generated by
a participation interest that was realized upon the repayment of one of our
mezzanine loans. Our investment income for the three months ended June 30, 2004
was $1.1 million of which $1.0 million was generated by six unconsolidated
investments in real estate totaling $27.5 million. Cash held in bank accounts
generated investment income of $136,000 for the three months ended June 30, 2005
compared to $134,000 for the three months ended June 30, 2004.
We received investment income of $3.8 million for the six months ended
June 30, 2005 of which $2.9 million was generated by eight unconsolidated
investments in real estate totaling $47.2 million and $600,000 was generated by
a participation interest that was realized upon the repayment of one of our
mezzanine loans. Our investment income for the six months ended June 30, 2004
was $2.0 million of which $1.7 million was generated by seven unconsolidated
investments in real estate totaling $28.1 million. Cash held in bank accounts
generated investment income of $223,000 for the six months ended June 30, 2005
compared to $234,000 for the six months ended June 30, 2004.
Gain On Sale of Real Estate Interest. In June 2004 we recognized $ 2.4
million relating to our appreciation interest in one of our investments. Because
we had a controlling interest in the entity that owned the real estate, we
accounted for our equity interest on a consolidated basis. Accordingly, when our
appreciation interest was realized (with the economic intent of generating
additional interest income), under generally accepted accounting principles in
the United States, we recognized income as gain on sale of real estate interest.
As of June 30, 2004 we had restructured this investment into a mezzanine loan,
and thereafter have not accounted for it on a consolidated basis.
Interest Expense. Interest expense consists of interest payments made on
senior indebtedness relating to loans, long term debt secured by real estate
owned and interest payments made on our lines of credit. Interest expense was
$4.3 million for the three months ended June 30, 2005 as compared to $2.6
million for the three months ended June 30, 2004. The $1.7 million increase in
interest expense from the three months ended June 30, 2004 to the same period in
2005 was attributable to a $2.0 million increase in interest expense resulting
from the establishment and utilization of $153.1 million in additional
availability on new and existing lines of credit and senior indebtedness
relating to loans, partially offset by a $220,000 reduction of interest expense
on long term debt secured by real estate owned, due to the disposition of a
consolidated real estate interest in June 2004.
Interest expense was $7.0 million for the six months ended June 30, 2005
as compared to $5.1 million for the six months ended June 30, 2004. The $1.9
million increase from the six months ended June 30, 2004 to the same period in
2005 was attributable to a $2.4 million increase in interest expense resulting
from the establishment and utilization of $143.1 million in additional
availability on new and existing lines of credit and senior indebtedness
relating to loans partially offset by a $444,000 reduction of interest expense
on long term debt secured by real estate owned, due to the disposition of a
consolidated real estate interest in June 2004. We anticipate our interest
expense will increase as we increase our use of leverage to enhance our return
on our investments.
Property Operating Expenses; Depreciation and Amortization. Property
operating expenses were $3.9 million and $7.8 million for the three and six
months ended June 30, 2005, respectively, compared to $3.4 million and $6.4
million for the three and six months ended June 30, 2004, respectively.
Depreciation and amortization was $1.1 million and $2.1 million for the three
and six months ended June 30, 2005, respectively, as compared to $915,000 and
$1.9 million for the three and six months ended June 30, 2004, respectively. The
increases in property operating expenses and depreciation and amortization from
the three and six months ended June 30, 2004 to the corresponding periods in
2005 were due to the net effect of the acquisition of one consolidated real
estate interest partially offset by the disposition of one consolidated real
estate interest during 2004 as discussed in "Rental Income" above.
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 four of our interests in real estate
during both the three and six months ended June 30, 2005, and for the real
estate underlying five of our interests in real estate during both the three and
six months ended June 30, 2004. Fees paid to Brandywine for their services
totaled $115,000 and $270,000 for the three and six months ended June 30, 2005,
respectively, and for the three and six months ended June 30, 2004, fees paid to
Brandywine were $96,000 and $246,000, respectively. In addition, at June 30,
2005 and 2004, Brandywine provided management services for real estate
underlying six and eight, 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.
22
Salaries and Related Benefits; General and Administrative Expense.
Salaries and related benefits were $1.2 million and $2.5 million for the three
and six months ended June 30, 2005, respectively, as compared to $1.4 million
and $2.5 million for the three and six months ended June 30, 2004, respectively.
The decrease in salaries and related benefits from the three months ended June
30, 2004 to the corresponding period in 2005 was primarily due to earn-out
payments made in the second quarter of 2004 to the officers of Pinnacle,
relating to a three-year, revenue-based, incentive plan that was established
when we acquired Pinnacle in August 2000.
General and administrative expenses were $1.3 million and $2.1 million for
the three and six months ended June 30, 2005, respectively, as compared to $1.8
million and $2.7 million for the three and six months ended June 30, 2004,
respectively. The decrease in general and administrative expenses from the three
and six months ended June 30, 2004 to the corresponding periods in 2005 was
primarily due to approximately $630,000 of non-recurring business development
expenses recognized in the second quarter of 2004.
Despite the decreases in salaries and related benefits and general and
administrative expenses from 2004 to 2005, we anticipate that these expenses
will increase from the current levels primarily due to increased costs relating
to directors and officers insurance and regulatory compliance costs.
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 $83,000 and $62,000 for the three months ended
June 30, 2005 and 2004, respectively, and $145,000 and $124,000 for the six
months ended June 30, 2005 and 2004, respectively. The other sublease is with
The Richardson Group, Inc. We paid rent to Richardson in the amount of $11,000
and $14,000 for the three months ended June 30, 2005 and 2004, respectively and
$23,000 and $28,000 for the six months ended June 30, 2005 and 2004,
respectively. Also included in general and administrative expenses is $15,000
and $30,000 paid in the three and six months ended June 30, 2005, respectively
to Bancorp for technical support services provided to us. The same amounts were
paid to Bancorp for these services for the three and six months ended June 30,
2004. Our relationships with Bancorp and Richardson are described in note 8 of
our consolidated financial statements.
23
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, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure 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
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.
Under the supervision of our chief executive officer and chief financial
officer and with the participation of our disclosure committee, 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 at the reasonable assurance
level.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting
that occurred during the three months ended June 30, 2005 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Our disclosure relating to legal proceedings is contained in Part I, Item
3 of our Annual Report on Form 10-K for the year ended December 31, 2004.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c)
ISSUER PURCHASES OF EQUITY SECURITIES
- -------------------------------------------------------------------------------------------
(a) TOTAL (c) TOTAL NUMBER OF (d) MAXIMUM
NUMBER OF SHARES PURCHASED AS NUMBER OF SHARES
SHARES (OR (b) AVERAGE PART OF PUBLICLY THAT MAY YET BE
UNITS) PRICE PAID PER ANNOUNCED PLANS OR PURCHASED UNDER THE
PERIOD PURCHASED SHARE (OR UNIT) PROGRAMS PLANS OR PROGRAMS
- -------------------- ---------- --------------- ------------------- -------------------
4/1/2005 - 4/30/2005 - - - -
5/1/2005 - 5/31/2005 - - -
6/1/2005 - 6/30/2005 3,288(1) $30.41 - -
Total 3,288 $30.41 - -
- -----------
(1) These shares were not part of a publicly announced repurchase plan or
program. These shares were owned and tendered by an employee to us as
payment for an option exercise.
25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareholders held on May 18, 2005, pursuant to
the Notice of Annual Meeting of Shareholders and Proxy Statement dated April 8,
2005, the voting results were as follows:
(a) Each of the following nominees was elected to the Board of Trustees as
follows:
VOTES VOTES
VOTES FOR WITHHELD ABSTAINED UNVOTED
---------- -------- --------- -------
Betsy Z. Cohen 24,153,025 392,249 0 0
Edward S. Brown 24,378,507 166,766 0 0
Jonathan Z. Cohen 24,416,335 128,939 0 0
S. Kristin Kim 24,420,023 125,250 0 0
Arthur Makadon 24,301,320 243,953 0 0
Joel R. Mesznik 24,374,780 170,494 0 0
Daniel Promislo 24,359,502 185,772 0 0
(b) The proposal to approve an amendment and restatement of the RAIT Investment
Trust 1997 Stock Option Plan was approved as follows:
VOTES VOTES
VOTES FOR AGAINST ABSTAINED UNVOTED
- ---------- --------- --------- ---------
10,128,113 5,202,223 144,552 9,070,384
(c) The proposal to approve the selection of Grant Thornton LLP as our
independent public accountants for the fiscal year ending December 31, 2005 was
approved as follows:
VOTES VOTES
VOTES FOR AGAINST ABSTAINED UNVOTED
- ---------- --------- --------- -------
24,303,710 167,154 74,407 0
ITEM 6. EXHIBITS
(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.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RAIT INVESTMENT TRUST
(Registrant)
August 3, 2005 /s/ Ellen J. DiStefano
-------------------------------------------------
DATE Ellen J. DiStefano
Chief Financial Officer
(On behalf of the registrant and as its principal
financial officer)
27
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
3.1.1(1) Amended and Restated Declaration of Trust.
3.1.2(2) Articles of Amendment to Amended and Restated Declaration of Trust.
3.1.3(3) Articles of Amendment to 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.
3.1.7(6) Articles Supplementary relating to the 8.375% Series B Cumulative
Redeemable Preferred Shares of Beneficial Interest.
3.2(1) Bylaws, as amended.
3.3(1) Articles of Incorporation of RAIT General, Inc.
3.4(1) By-laws of RAIT General, Inc.
3.5(1) Articles of Incorporation of RAIT Limited, Inc.
3.6(1) By-laws of RAIT Limited, Inc.
3.7(1) Certificate of Limited Partnership of RAIT Partnership, L. P.
3.8(1) Limited Partnership Agreement of RAIT Partnership, L. P.
4.1(3) Form of Certificate for Common Shares of Beneficial Interest.
4.2(7) Form of Certificate for 7.75% Series A Cumulative Redeemable
Preferred Shares of Beneficial Interest.
4.3(6) Form of Certificate for 8.375% Series B 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.
28
(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 October 1, 2004 (File No.
1-14760).
(7) 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).
29