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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 SEPTEMBER 30, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 1-14760
RAIT INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 23-2919819
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o RAIT PARTNERSHIP, L.P.
1818 MARKET STREET, 28TH FLOOR, PHILADELPHIA, PA 19103
(Address of principal executive offices) (Zip Code)
(215) 861-7900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 8, 2006, 28,161,947 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.......................................... 3
Consolidated Balance Sheets at September 30, 2006 (unaudited) and
December 31, 2005............................................... 3
Consolidated Statements of Income (unaudited) for the three and
nine months ended September 30, 2006 and 2005................... 4
Consolidated Statements of Other Comprehensive Income (unaudited)
for the three and nine months ended September 30, 2006 and
2005............................................................ 5
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended September 30, 2006 and 2005........................ 6
Notes to Consolidated Financial Statements -- September 30, 2006
(unaudited)..................................................... 7
Report of Independent Registered Public Accounting Firm............ 24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................... 25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 32
ITEM 4. CONTROLS AND PROCEDURES....................................... 32
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................. 33
ITEM 1A. RISK FACTORS................................................. 33
ITEM 5. OTHER INFORMATION............................................. 33
ITEM 6. EXHIBITS...................................................... 33
SIGNATURES............................................................... 34
EXHIBIT INDEX............................................................ 35
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
2006 DECEMBER 31,
(UNAUDITED) 2005
-------------- --------------
ASSETS
Cash and cash equivalents ............................................. $ 43,658,368 $ 71,214,083
Restricted cash ....................................................... 53,640,382 20,892,402
Accrued interest receivable ........................................... 16,542,614 13,127,801
Real estate loans, net ................................................ 1,036,658,736 714,428,071
Unconsolidated real estate interests .................................. 41,784,652 40,625,713
Consolidated real estate interests .................................... 57,621,214 55,054,558
Consolidated real estate interests held for sale ...................... 3,400,497 94,106,721
Furniture, fixtures and equipment, net ................................ 568,973 590,834
Prepaid expenses and other assets ..................................... 15,649,536 13,657,244
Goodwill .............................................................. 887,143 887,143
-------------- --------------
Total assets ....................................................... $1,270,412,115 $1,024,584,570
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued liabilities and other liabilities ........... $ 7,090,362 $ 3,259,360
Accrued interest payable .............................................. 3,290,684 2,213,639
Tenant security deposits .............................................. 4,185 3,185
Dividends payable ..................................................... 20,271,676 --
Borrowers' escrows .................................................... 43,213,779 15,981,762
Senior indebtedness relating to loans ................................. 126,000,000 66,500,000
Long-term debt secured by consolidated real estate interests .......... 37,981,953 8,118,511
Liabilities underlying consolidated real estate interests held for
sale ............................................................... 37,030 56,413,644
Repurchase facility ................................................... 64,572,000 --
Unsecured line of credit .............................................. 335,000,000 240,000,000
Secured line of credit ................................................ 20,000,000 22,400,000
-------------- --------------
Total liabilities .................................................. $ 657,461,669 $ 414,890,101
Minority interest ........................................................ 447,067 459,684
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 authorized shares;
issued and outstanding 28,155,105 and 27,899,065 shares ............ 281,551 278,991
Additional paid-in-capital ............................................ 607,071,537 602,919,108
Retained earnings ..................................................... 6,304,960 6,250,150
Loans for stock options exercised ..................................... -- (263,647)
Accumulated other comprehensive loss .................................. (1,204,852) --
-------------- --------------
Total shareholders' equity ......................................... $ 612,503,379 $ 609,234,785
-------------- --------------
Total liabilities and shareholders' equity ......................... $1,270,412,115 $1,024,584,570
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
3
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
REVENUES
Interest income............................... $24,662,023 $20,863,923 $66,695,989 $59,474,074
Rental income................................. 3,230,625 3,372,043 10,600,593 10,218,533
Fee income and other.......................... 3,815,421 991,335 11,702,182 3,988,443
Investment income............................. 2,770,163 1,252,554 5,080,151 4,199,417
----------- ----------- ----------- -----------
Total revenues............................. 34,478,232 26,479,855 94,078,915 77,880,467
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Interest...................................... 8,282,525 3,732,106 20,841,222 8,813,283
Property operating expenses................... 2,000,818 1,957,062 5,886,008 5,674,383
Salaries and related benefits................. 1,880,259 1,369,636 5,551,711 3,864,192
General and administrative.................... 1,095,319 923,192 3,158,537 3,043,031
Depreciation and amortization................. 373,345 364,446 1,115,514 1,083,507
----------- ----------- ----------- -----------
Total costs and expenses................... 13,632,266 8,346,442 36,552,992 22,478,396
----------- ----------- ----------- -----------
Net income before minority interest........... $20,845,966 $18,133,413 $57,525,923 $55,402,071
Non-operating interest income................. 290,536 63,487 943,038 297,031
Equity in undistributed net loss of
equity method investments.................. (232,935) -- (232,935) --
Minority interest............................. (8,024) (7,209) (18,163) (22,464)
----------- ----------- ----------- -----------
Net income from continuing operations......... 20,895,543 18,189,691 58,217,863 55,676,638
Gain from discontinued operations............. -- -- 2,788,663 --
Net income from discontinued operations....... 38,007 1,155,747 1,325,664 1,767,381
----------- ----------- ----------- -----------
Net income.................................... $20,933,550 $19,345,438 $62,332,190 $57,444,019
Dividends attributed to preferred shares...... 2,518,955 2,518,955 7,556,865 7,556,865
----------- ----------- ----------- -----------
Net income available to common shareholders... $18,414,595 $16,826,483 $54,775,325 $49,887,154
=========== =========== =========== ===========
Net income per common share basic............. $ 0.65 $ 0.65 $ 1.96 $ 1.94
=========== =========== =========== ===========
Net income per common share diluted........... $ 0.65 $ 0.65 $ 1.95 $ 1.93
=========== =========== =========== ===========
Dividends declared............................ $ 0.72 $ 0.65 $ 1.95 $ 1.82
=========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net income .......................................... $20,933,550 $19,345,438 $62,332,190 $57,444,019
Other comprehensive loss
Change in the fair value of cash flow hedges .. (1,204,852) -- (1,204,852) --
----------- ----------- ----------- -----------
Total other comprehensive loss ................... (1,204,852) -- (1,204,852) --
----------- ----------- ----------- -----------
Comprehensive income ................................ $19,728,698 $19,345,438 $61,127,338 $57,444,019
=========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
2006 2005
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .............................................................. $ 62,332,190 $ 57,444,019
Adjustments to reconcile net income to net cash provided by operating
activities:
Minority interest ....................................................... 18,163 22,464
Employee bonus shares ................................................... -- 21,895
Equity in net loss of equity method investment .......................... 232,935 --
Gain from sale of property interest ..................................... (2,788,663) --
Depreciation and amortization ........................................... 1,331,458 3,292,618
Accretion of loan discounts ............................................. (45,244) (10,925,181)
Amortization of debt costs .............................................. 598,889 499,442
Deferred compensation ................................................... 129,840 394,686
Decrease in tenant escrows .............................................. -- 46,435
Increase in accrued interest receivable ................................. (4,616,628) (7,261,623)
Increase in prepaid expenses and other assets ........................... (2,059,742) (3,634,079)
Increase (decrease) in accounts payable and accrued liabilities ......... 3,165,564 (304,280)
Increase in accrued interest payable .................................... 1,077,045 94,319
Increase (decrease) in tenant security deposits ......................... 1,000 (29,483)
(Increase)decrease in borrowers' escrows ................................ (5,515,963) 841,787
------------- -------------
Net cash provided by operating activities ........................... 54,308,803 40,503,019
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture, fixtures and equipment ........................... (87,818) (41,522)
Real estate loans purchased ............................................. (29,484,698) (12,250,000)
Real estate loans originated ............................................ (638,323,763) (331,673,835)
Principal repayments from real estate loans ............................. 343,833,358 200,710,930
Distributions paid from consolidated interests in real estate ........... (30,780) (41,040)
Investment in consolidated real estate interests ........................ (4,127,026) (4,501,681)
Proceeds from sale of property interests held for sale .................. 38,100,736 --
Investment in unconsolidated real estate interests ...................... (1,845,408) (8,005,705)
Repayments from unconsolidated real estate interests .................... 453,536 --
Release of escrows held to fund expenditures for consolidated real
estate Interests in real estate ....................................... 573,909 45,041
Proceeds from disposition of unconsolidated real estate interests ....... -- 10,053,660
------------- -------------
Net cash used in investing activities ............................... (290,937,954) (145,704,152)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments on senior indebtedness ............................. (2,500,000) (6,938,442)
Principal repayments on long-term debt .................................. (136,559) (794,754)
Principal repayments on notes underlying deferred compensation .......... 263,647 --
Proceeds of senior indebtedness ......................................... 27,000,000 111,500,000
Proceeds from long term debt ............................................ 30,000,000 --
Proceeds from participations sold to Taberna............................. 35,000,000 --
(Repayments) on secured lines of credit, net ............................ (2,400,000) (23,475,553)
Proceeds from participations sold to Taberna............................. 35,000,000 --
Borrowings on unsecured lines of credit, net ............................ 95,000,000 --
Borrowings on repurchase facility ....................................... 64,572,000 --
Payment of preferred dividends .......................................... (7,556,865) (7,556,865)
Payment of common dividends ............................................. (34,210,505) (30,799,927)
Principal payments on loans for stock options exercised ................. -- 240,339
Issuance of common shares, net .......................................... 4,041,718 62,151,066
------------- -------------
Net cash provided by financing activities ........................... 209,073,436 104,325,864
------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................................... (27,555,715) (875,269)
------------- -------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................. 71,214,083 13,331,373
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................... $ 43,658,368 $ 12,456,104
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
6
RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(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 September 30, 2006, its
results of operations for the three and nine months ended September 30, 2006 and
2005 and its cash flows for the nine months ended September 30, 2006 and 2005.
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, 2005 as updated by the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on July 17, 2006. Certain
reclassifications have been made to the consolidated financial statements as of
December 31, 2005 and for the three and nine months ended September 30, 2005 to
conform to the presentation as of and for the three and nine months ended
September 30, 2006.
SHARE BASED COMPENSATION
Effective January 1, 2006, the Company has adopted FASB Statement No. 123
(R), "Share-Based Payment". Statement 123 (R) requires that compensation cost
relating to share-based payment transactions be recognized in financial
statements. The cost is measured based on the fair value of the equity or
liability instruments issued.
Statement 123 (R) replaces FASB Statement No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting For
Stock Issued to Employees". Statement 123, as originally issued in 1995,
established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. The impact of
Statement 123 (R), if it had been in effect, on the net earnings and related per
share amounts for the years ended December 31, 2005, 2004 and 2003 was disclosed
in the Company's Form 10-K for the fiscal year ended December 31, 2005.
Because the Company adopted Statement 123 (R) using the modified
prospective transition method, prior periods have not been restated. Under this
method, the Company is required to record compensation expense for all awards
granted after the date of adoption and for the unvested portion of previously
granted awards that remain outstanding as of the beginning of the period of
adoption. The Company measured share-based compensation cost using the
Black-Scholes option pricing model for stock option grants prior to January 1,
2006 and anticipates using this pricing model for future grants. The Company did
not grant options during the three or nine months ended September 30, 2006.
Share-based compensation of $5,500 and $16,500 was recognized for the three
and nine months ended September 30, 2006, which related to the unvested portion
of options to acquire the Company's common shares of beneficial interest (the
"Common Shares") granted prior to January 1, 2006. Reported net income,
adjusting for share-based compensation that would have been recognized in the
three and nine months ended September 30, 2005 if Statement 123 (R) had been
followed in that quarter is presented in the following table:
7
FOR THE FOR THE
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2005
------------- -------------
Net income available to common shareholders,
as reported ................................ $16,826,000 $49,887,000
Less: stock based compensation determined under
fair value based method for all awards ..... (7,000) (21,000)
----------- -----------
Pro forma net income .......................... $16,819,000 $49,866,000
=========== ===========
Net income per share -- basic ................. $ 0.65 $ 1.94
as reported pro forma ...................... $ 0.65 $ 1.94
Net income per share -- diluted ............... $ 0.65 $ 1.93
as reported pro forma ...................... $ 0.65 $ 1.93
The adoption of Statement 123 (R) did not change the way that the Company
has accounted for stock awards in prior periods and therefore no such change is
reflected in the pro forma table above. The Company expenses the fair value of
stock awards determined at the grant date on a straight-line basis over the
vesting period of the award.
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 25 and 23
variable interests having an aggregate book value of $142.4 million and $182.4
million that it held as of September 30, 2006 and December 31, 2005,
respectively. For one of these variable interests, with a book value of $40.8
million at September 30, 2006, 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 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 entering into 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 had 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).
8
The Company's consolidated financial statements as of and for the three and
nine months ended September 30, 2006 include the assets, liabilities, and
results of operations of the variable interest entity, which are summarized
below:
AS OF AND AS OF AND
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2006 ENDED SEPTEMBER 30, 2006
------------------------ ------------------------
Total assets ....... $50,964,564 $50,964,564
=========== ===========
Total liabilities .. $ 434,584 $ 434,584
=========== ===========
Total income ....... $ 1,919,653 $ 6,889,139
Total expense ...... 1,809,431 4,944,899
----------- -----------
Net income ...... $ 110,222 $ 1,944,240
=========== ===========
DERIVATIVE INSTRUMENTS
The Company may use derivative financial instruments to hedge all or a
portion of the interest rate risk associated with its borrowings. Certain of the
techniques used to hedge exposure to interest rate fluctuations may also be used
to protect against declines in the market value of assets that result from
general trends in debt markets. The principal objective of such agreements is to
minimize the risks and/or costs associated with the Company's operating and
financial structure as well as to hedge specific anticipated transactions.
In accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended and
interpreted ("SFAS No. 133"), the Company measures each derivative instrument
(including certain derivative instruments embedded in other contracts) at fair
value and records such amounts in its consolidated balance sheet as either an
asset or liability. For derivatives designated as fair value hedges or for
derivatives not designated as hedges, the changes in fair value of both the
derivative instrument and the hedged item are recorded in earnings. For
derivatives designated as cash flow hedges, the effective portions of changes in
the fair value of the derivative are reported in other comprehensive income.
Changes in the ineffective portions of cash flow hedges are recognized in
earnings.
TRANSFERS OF FINANCIAL ASSETS
In some instances the Company may sell all or a portion of its investments
to a third party. To the extent the fair value received for an investment
exceeds the amortized cost of that investment and Financial Accounting Standards
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," criteria is met, under which control of the
asset that is sold is surrendered making it a "true sale," a gain on the sale
will be recorded through earnings as other income. To the extent an investment
that is sold has a discount or fees, which were deferred at the time the
investment was made and were being recognized over the term of the investment,
the unamortized portion of the discount or fees are recognized at the time of
sale and recorded as a gain on the sale of the investment through other income.
NOTE 2 -- CONSOLIDATED STATEMENT OF CASH FLOWS
9
For the purpose of reporting cash flows, cash and cash equivalents include
non-interest earning deposits and interest earning deposits. Cash paid for
interest was $22.8 million and $11.6 million for the nine months ended September
30, 2006 and 2005, respectively.
Dividends declared during the third quarter of 2006 and 2005, but not paid
until October 2006 and 2005, were $20.3 million and $15.6 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
September 30, 2006 and December 31, 2005:
SEPTEMBER 30,
2006 DECEMBER 31,
(UNAUDITED) 2005
-------------- ------------
First mortgages...................................... $ 728,759,733 $424,098,275
Mezzanine loans...................................... 311,682,257 291,158,720
-------------- ------------
Subtotal............................................. 1,040,441,990 715,256,995
Unearned fees........................................ (3,557,097) (602,767)
Less: Allowance for loan losses...................... (226,157) (226,157)
-------------- ------------
Real estate loans, net............................ $1,036,658,736 $714,428,071
============== ============
The following is a summary description of the assets contained in the
Company's portfolio of real estate loans as of September 30, 2006:
AVERAGE
NUMBER LOAN TO RANGE OF LOAN
TYPE OF LOAN OF LOANS VALUE (1) YIELDS (2) RANGE OF MATURITIES
- ------------ -------- --------- ------------- -----------------------
First mortgages 47 77% 7.5% - 19.0% 11/23/06 - 8/15/11
Mezzanine loans 101 85% 9.2% - 17.0% 11/18/06 - 5/1/21
- ----------
(1) Calculated as the sum of the outstanding balance of the Company's loan and
senior loan (if any) divided by the current appraised value of the
underlying collateral.
(2) 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 September 30, 2006 and December 31, 2005:
SEPTEMBER 30, 2006 DECEMBER 31, 2005
----------------------------- --------------------------
PRINCIPAL PRINCIPAL
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
---------------- ---------- -------------- ----------
Multi-family ...... $ 576.8 million 55% $351.0 million 49%
Office ............ 153.4 million 15% 146.2 million 20%
Retail and other .. 310.2 million 30% 218.0 million 31%
---------------- --- -------------- ---
Total ............. $1,040.4 million 100% $715.2 million 100%
================ === ============== ===
10
As of September 30, 2006, the maturities of the Company's real estate loans
in the remainder of 2006, in each year through 2010, and the aggregate
maturities thereafter are as follows:
2006.......... $ 134,723,731
2007.......... 302,055,187
2008.......... 180,429,735
2009.......... 128,690,887
2010.......... 11,543,442
Thereafter.... 282,999,008
--------------
Total......... $1,040,441,990
==============
11
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 September 30, 2006 and December 31, 2005, senior indebtedness
relating to loans consisted of the following:
SEPTEMBER 30,
2006 DECEMBER 31,
(UNAUDITED) 2005
------------- -----------
Senior loan participation, secured by Company's
interest in a first mortgage loan with a book value
of $12,786,014 and $12,782,840 at September 30, 2006
and December 31, 2005, respectively, payable interest
only at LIBOR plus 250 basis points (7.82188% at
September 30, 2006) due monthly, principal balance
due October 31, 2006. This participation was paid in
full................................................. $ 5,000,000 $ 5,000,000
Term loan payable, secured by Company's interest in a
first mortgage loan with a principal balance of
$9,750,000 and $9,000,000 at September 30, 2006 and
December 31, 2005, respectively, payable interest
only at 6.75% due monthly, principal balance due
September 29, 2009................................... 8,000,000 8,000,000
Senior loan participation, secured by Company's
interest in a first mortgage loan with a principal
balance of $15,500,000 at September 30, 2006 and
December 31, 2005, payable interest only at 5.0% due
monthly, principal balance due October 15, 2007...... 11,000,000 11,000,000
Senior loan participation, secured by Company's
interest in a mezzanine loan with a book value of
$12,168,169 and $19,468,759 at September 30, 2006 and
December 31, 2005, respectively, payable interest
only at the bank's prime rate (8.25% at September 30,
2006) due quarterly, principal balance due April 30,
2007................................................. -- 2,500,000
Senior loan participation, secured by Company's
interest in a first mortgage loan with a principal
balance of $52,946,971 and $45,252,334 at September
30, 2006 and December 31, 2005, respectively, payable
interest only at 6.0% due monthly, principal balance
due February 25, 2007................................ 35,000,000 35,000,000
Senior loan participation, secured by Company's
interest in a first mortgage loan with a principal
balance of $8,000,000 at September 30, 2006 and
December 31, 2005, payable interest only at LIBOR
plus 225 basis points (7.57188% at September 30,
2006) due monthly, principal balance due September 1,
2007................................................. 5,000,000 5,000,000
Term loan payable, secured by Company's interest in a
first mortgage loan with a principal balance of
$31,200,000 and $0 at September 30, 2006 and December
31, 2005, respectively, payable interest only at
LIBOR plus 165 basis points (6.97188% at September
30, 2006) due monthly, principal balance due November
29, 2006............................................. 27,000,000 --
84.98534429% pari passu participation, secured by
Company's interest in a first mortgage with a book
value of $13,843,563 and $13,516,426 at September 30,
2006 and December 31, 2005, respectively, due
monthly, principal balance due September 30, 2008.... 11,765,000 --
47.8468895% pari passu participation, secured by
Company's interest in a first mortgage with a book
value of $20,900,000 at both September 30, 2006 and
December 31, 2005, due monthly, principal balance due
December 28, 2008.................................... 10,000,000 --
21.87603306 pari passu participation, secured by
Company's interest in a first mortgage with a book
value of $60,500,000 and $0 at September 30, 2006 and
December 31, 2005, respectively, due monthly,
principal balance due August 30, 2008................ 13,235,000 --
------------ -----------
Total................................................... $126,000,000 $66,500,000
============ ===========
As of September 30, 2006, the senior indebtedness relating to loans
maturing in the remainder of 2006, over the next four years, and the aggregate
indebtedness maturing thereafter, is, as follows:
2006.......... $ 32,000,000
2007.......... 51,000,000
2008.......... 35,000,000
2009.......... 8,000,000
2010.......... --
Thereafter.... --
------------
Total...... $126,000,000
============
As of September 30, 2006 and December 31, 2005, $218.3 million and $138.8
million, respectively, in principal amount of loans were pledged as collateral
for amounts outstanding on the Company's secured lines of credit and senior
indebtedness relating to loans.
NOTE 5 -- CONSOLIDATED REAL ESTATE INTERESTS
As of September 30, 2006 and December 31, 2005, the Company owned the
following controlling interests in entities that own real estate. These
interests are accounted for on a consolidated basis:
- 100% limited and 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 ($942,477
and $959,442 at September 30, 2006 and December 31, 2005,
respectively), which bears interest at an annual rate of 7.33% and is
due on August 1, 2008. The book value of this property at both
September 30, 2006 and December 31, 2005 was $1.2 million.
12
- 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 ($7.0 million and $7.2 million at September 30, 2006 and
December 31, 2005, respectively). 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 book value of this property at
September 30, 2006 and December 31, 2005 was $9.9 million and $10.1
million, respectively.
- 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 book value of this consolidated interest (including
construction in progress) at September 30, 2006 and December 31, 2005
was $45.9 million and $42.6 million, respectively. In April 2006, the
Company obtained non-recourse financing secured by this real estate
interest in the amount of $30.0 million ($30.0 million at September
30, 2006). The loan bears interest at LIBOR plus 175 points (7.07188%
at September 30, 2006) and is due April 17, 2008.
- Two parcels of land located in Willow Grove, Pennsylvania with an
aggregate book value of $613,500 at both September 30, 2006 and
December 31, 2005.
The Company's consolidated real estate interests consisted of the following
property types at September 30, 2006 and December 31, 2005. Escrows and reserves
represent amounts held for payment of real estate taxes, insurance premiums,
repair and replacement costs, tenant improvements, and leasing commissions.
SEPTEMBER 30,
2006 DECEMBER 31,
(UNAUDITED) 2005
BOOK VALUE % BOOK VALUE %
------------- --- ------------ ----
Office ............................... 60,465,655 99% 56,338,627 99%
Retail and other ..................... 613,519 1% 613,519 1%
----------- --- ----------- ---
Subtotal .......................... 61,079,174 100% 56,952,146 100%
Plus: Escrows and reserves ........... 78,914 652,826
Less: Accumulated depreciation ....... (3,536,874) (2,550,414)
----------- -----------
Consolidated real estate interests ... $57,621,214 $55,054,558
=========== ===========
As of September 30, 2006 and December 31, 2005, non-recourse, long-term
debt secured by the Company's consolidated real estate interests consisted of
the following:
SEPTEMBER 30,
2006 DECEMBER 31,
(UNAUDITED) 2005
------------- ------------
Loan payable, secured by real estate, monthly
installments of $8,008, including interest
at 7.33%, remaining principal due
August 1, 2008 ............................ $ 942,477 $ 959,442
Loan payable, secured by real estate, monthly
installments of $47,720, including interest
at 5.73%, remaining principal due
November 1, 2012 .......................... 7,039,476 7,159,069
Loan payable, secured by real estate, payable
interest only at LIBOR plus 175 points
(7.07188% at September 30, 2006) due
monthly, principal due April 17, 2008 ..... 30,000,000 --
----------- ----------
Total ........................................ $37,981,953 $8,118,511
=========== ==========
As of September 30, 2006, the amount of long-term debt secured by the
Company's consolidated real estate interests that mature over the remainder of
2006, the next four years, and the aggregate indebtedness maturing thereafter,
is as follows:
2006.......... $ 48,000
2007.......... 198,066
2008.......... 31,088,058
2009.......... 191,497
13
2010.......... 202,924
Thereafter.... 6,253,408
-----------
Total...... $37,981,953
===========
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 September 30, 2006 and December 31, 2005 were $5,775 and $6,364,
respectively. Rental revenue is reported on a straight-line basis over the terms
of the respective leases. Depreciation expense relating to the Company's real
estate investments for the three months ended September 30, 2006 and 2005 was
$329,290 and $324,375, respectively. Depreciation expense relating to the
Company's real estate investments for the nine months ended September 30, 2006
and 2005 was $986,457 and $967,323, respectively. The Company leases space in
the buildings it owns to several tenants. Approximate future minimum lease
payments under noncancellable lease arrangements as of September 30, 2006 are as
follows:
2006.......... $ 1,002,773
2007.......... 3,482,756
2008.......... 3,310,969
2009.......... 3,244,002
2010.......... 3,014,883
Thereafter.... 6,073,632
-----------
Total...... $20,129,015
===========
NOTE 6 -- CONSOLIDATED REAL ESTATE INTERESTS HELD FOR SALE -- DISCONTINUED
OPERATIONS
As of October 3, 2005, the Company classified as "held for sale" one of its
consolidated real estate interests, consisting of an 89% general partnership
interest in a limited partnership that owns a building in Philadelphia,
Pennsylvania with 456,000 square feet of office/retail space. As of March 31,
2006, the Company classified as "held for sale" a consolidated real estate
interest consisting of a 110,421 square foot shopping center in Norcross,
Georgia. As of May 11, 2006, the Company classified as "held for sale" a
consolidated real estate interest consisting of a 216-unit apartment complex and
clubhouse in Watervliet, New York. In accordance with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets", the assets and liabilities
of these real estate interests have been separately classified on the Company's
balance sheet as of September 30, 2006 and December 31, 2005, and the results of
operations attributable to these interests have been reclassified, for all
periods presented, to "discontinued operations". Additionally, depreciation
expense was no longer recorded for these assets once they were classified as
"held for sale".
In September 2001, the Company provided mezzanine financing to the owner of
a 78,746 square foot retail shopping center in Chester, South Carolina. In 2002,
the Company purchased the existing first mortgage on the property. Both loans,
totaling $3.1 million, matured in 2003, but were not repaid at that time. The
underlying loan documents provided the Company with control of the rents at the
property, and the property owner (the borrower under the loan), was responsible
for paying the operating expenses of the property, thus providing for cash flow
from the property in amounts sufficient to keep the interest payments on both
loans current through early 2006, when the Company initiated foreclosure
proceedings. A court order granted the Company physical control of the property
effective July 1, 2006, at which time the Company hired a local property manager
to handle the day-to-day operations of the property. Also at that time, the
Company determined that entity that owned the property (the borrower under the
Company's loans), was a variable interest entity of which the Company was the
primary beneficiary, due to the likelihood that from that point forward the
company would be absorbing the majority of the property's expected losses, as
defined in FIN 46(R). Accordingly, as of July 1, 2006 the accounts of the
variable interest entity that owned the property were included in the Company's
consolidated financial statements. As of August 2, 2006, the Company classified
as "held for sale" this consolidated real estate interest. The property was sold
in November 2006 for approximately $3.4 million. There was no gain or loss
recognized on the sale of this property.
The following is a summary of the aggregate results of operations for the
buildings classified as "held for sale" for the three and nine months ended
September 30, 2006 and 2005, which have been reclassified to discontinued
operations in the Company's consolidated statement of income:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ---------- -----------
2006 2005 2006 2005
------- ---------- ---------- -----------
Rental income........................... $77,480 $4,972,048 $6,511,395 $13,025,636
Less:
Operating expenses................... 26,864 2,029,720 3,445,191 6,148,873
Interest expense..................... -- 970,478 1,524,597 2,900,272
Depreciation and amortization........ 12,609 816,103 215,943 2,209,110
------- ---------- ---------- -----------
Income from discontinued operations..... $38,007 $1,155,747 $1,325,664 $ 1,767,381
======= ========== ========== ===========
The Company sold the Philadelphia, Pennsylvania office building in May 2006
for approximately $74.0 million. The Norcross, Georgia shopping center and the
Watervliet, New York apartment complex were both sold in June 2006 for $13.0
million and $11.0 million, respectively. The Company recognized a net gain of
$2.8 million on the sale of these interests.
14
NOTE 7 -- 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 EITF:D-46 "Accounting
for Limited Partnership Investments" to be accounted for under the cost method
of accounting. The Company has two interests in two partnerships
accounted for under the equity method. 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 under
the cost method. The Company has six interests in unconsolidated real estate
accounted for under the cost method.
At September 30, 2006, the Company's unconsolidated
real estate interests accounted for under the equity method consisted of the
following:
- (a) 20% beneficial interest in a trust that owns a 58-unit apartment
building in Philadelphia, Pennsylvania and (b) 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 September 30,
2006 and December 31, 2005, the Pennsylvania property is subject to
non-recourse financing of $2.9 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 at both September 30, 2006 and
December 31, 2005, bearing interest at 6.75% and maturing on March 1,
2013.
At September 30, 2006, the Company's unconsolidated
real estate interests accounted for under the cost method consisted of the
following:
- 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 was subject to non-recourse
financing of $8.0 million at December 31, 2005, which bore interest at
the 30-day LIBOR plus 300 basis points but limited by an overall
interest rate cap of 6.0% with a LIBOR floor of 2.0%. This loan was
refinanced in April 2006. The new non-recourse financing is in the
amount of $9.8 million, bears interest at 7.41% and matures May 1,
2007.
- 3% membership interest in a limited liability company that has a 99.9%
limited partnership interest in a limited partnership 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 $14.1 million and
$14.3 million at September 30, 2006 and December 31, 2005,
respectively, which bears interest at an annual rate of 4.84%, and is
due on 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 $91.0 million at both
September 30, 2006 and December 31, 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 both September 30, 2006 and December 31,
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 which owns a 430-unit multifamily apartment complex in
Orlando, Florida and the other which owns a 264-unit multifamily
apartment complex in Bradenton, Florida. The Company acquired its
membership interests in May 2005 for an aggregate amount of $9.5
million. As of both September 30, 2006 and December 31, 2005, the
Orlando property is subject to non-recourse financing of $23.5 million
bearing interest at 5.31% and maturing on June 1, 2010. At both
September 30, 2006 and December 31, 2005 the Bradenton property is
subject to non-recourse financing of $14.0 million bearing interest at
5.31% and maturing on June 1, 2010.
- A 20% residual interest in the net sales proceeds resulting from any
future sale of a 27-unit apartment building located in Philadelphia,
Pennsylvania. The property had been part of the collateral underlying
one of the Company's mezzanine loans until the loan was repaid in full
in December 2005. The book value of the Company's interest at both
September 30, 2006 and December 31, 2005, $883,600, is computed using
an assumed sale price that is based upon a third-party appraisal.
15
- Class B membership interests in each of two limited liability
companies, one which owns a 115,747 square foot shopping center in
Austin, Texas and the other which owns a 77,352 square foot shopping
center in Austin, Texas. The Company acquired its membership interests
in June 2006 for an aggregate amount of $1.4 million. As of September
30, 2006 the first property is subject to non-recourse financing of
$11.0 million bearing interest at 6.23% and maturing on July 5, 2016.
At September 30, 2006 the second property is subject to non-recourse
financing of $9.6 million bearing interest at 6.2% and maturing on
July 5, 2016.
The Company's unconsolidated real estate interests consisted of the
following property types at September 30, 2006:
SEPTEMBER 30,
2006
(UNAUDITED) DECEMBER 31, 2005
----------------- -----------------
BOOK VALUE % BOOK VALUE %
----------- --- ----------- ---
Multi-family............................ $19,415,293 47% $19,530,016 48%
Office.................................. 20,994,359 50% 21,095,697 52%
Retail.................................. 1,375,000 3% -- --
----------- --- ----------- ----
Unconsolidated real estate interests.... $41,784,652 100% $40,625,713 100%
=========== === =========== ===
NOTE 8 -- REPURCHASE AGREEMENT AND LINES OF CREDIT
At September 30, 2006 the Company had:
- a repurchase facility with $160.0 of maximum possible borrowings
($64.6 million outstanding);
- an unsecured line of credit with $335.0 million of maximum
possible borrowings ($335.0 million outstanding); and
- two secured lines of credit, one of which has $30.0 million of
maximum possible borrowings and one which has $50.0 million of
maximum possible borrowings ($20.0 million outstanding).
The following is a description of the Company's repurchase facility and
unsecured and secured lines of credit at September 30, 2006:
REPURCHASE AGREEMENT
On September 20, 2006 the Company obtained a $160.0 million repurchase
facility, which matures on November 26, 2006. The facility bears interest at a
spread of 1.00% over 30-day LIBOR and provides for an advance rate of 75% for
assets bearing interest at a fixed rate and 80% for assets bearing interest at a
floating rate. The lender has a consent right to the inclusion of investments in
this facility, determines periodically the market value of the investments, and
has the right to require additional collateral if the estimated market value of
the included investments declines. The Company had no accrued interest and
borrowings of $64.6 million at 6.33% under this facility at September 30, 2006.
16
UNSECURED LINE OF CREDIT
The Company is party to a revolving credit agreement that, as of September
30, 2006, provides for a senior unsecured line of credit, or unsecured line, in
an amount up to $335.0 million, with the right to request an increase in the
facility of up to a maximum of $350.0 million. Borrowing availability under the
unsecured line is based on specified percentages of the value of eligible
assets. The unsecured line will terminate on October 24, 2008, unless the
Company extends the term an additional year upon the satisfaction of specified
conditions.
Amounts borrowed under the unsecured line bear interest at a rate equal to,
at the Company's option:
- LIBOR (30-day, 60-day, 90-day or 180-day interest periods, at the
Company's option) plus an applicable margin of between 1.35% and 1.85%
or
- an alternative base rate equal to the greater of: (i) the prime rate
of the bank serving as administrative agent, or (ii) the federal funds
rate plus 50 basis points, plus an applicable margin of between 0% and
0.35%.
The applicable margin is based on the ratio of the Company's total
liabilities to total assets which is calculated on a quarterly basis. The
Company is obligated to pay interest only on the amounts borrowed under the
unsecured line until the maturity date of the unsecured line, at which time all
principal and any interest remaining unpaid is due. The Company pays a
commitment fee quarterly on the difference between the aggregate amount of the
commitments in effect from time to time under the unsecured line and the
outstanding balance under the unsecured line. The commitment fee is equal to
fifteen basis points (twenty five basis points if this difference is greater
than 50% of the amount of the unsecured line of credit) per annum of this
difference.
The Company's ability to borrow under the unsecured line is subject to its
ongoing compliance with a number of financial and other covenants, including a
covenant that the Company not pay dividends in excess of 100% of its adjusted
earnings, to be calculated on a trailing twelve-month basis, provided however,
dividends may be paid to the extent necessary to maintain its status as a real
estate investment trust. The unsecured line also contains customary events of
default, including a cross default provision. If an event of default occurs, all
of the Company's obligations under the unsecured line may be declared
immediately due and payable. For events of default relating to insolvency and
receivership, all outstanding obligations automatically become due and payable.
At September 30, 2006, the Company had $335.0 million outstanding under the
unsecured line, of which $210.0 million bore interest at 6.98% and $125.0
million bore interest at 7.14%. On November 8, 2006, after closing the CDO, the
Company had $20.0 million outstanding under the unsecured line of credit with an
additional $5.0 million of availability based upon eligible assets. In
connection with the CDO discussed on Note 17 below, the Company obtained a
temporary waiver of a financial covenant under its unsecured line of credit
requiring that its ratio of secured debt to total assets be less than 0.4 to
1.0. This waiver ends on the earlier of December 31, 2006 and the consummation
of the Company's proposed merger with Taberna Realty Finance Trust.
SECURED LINES OF CREDIT
At September 30, 2006, the Company had no amounts outstanding under its
$30.0 million line of credit. This line of credit bears interest at either: (a)
the 30-day LIBOR, plus 2.25%, or (b) the prime rate as published in the "Money
Rates" section of The Wall Street Journal, at the Company's election. Absent any
renewal, the line of credit will terminate in October 2007 and any principal
then outstanding must be paid by October 2008. The lender has the right to
declare any advance due and payable in full two years after the date of the
advance.
At September 30, 2006, the Company had $20.0 million outstanding under its
$50.0 million line of credit. In February 2006, this credit line was increased
from $25.0 million to $50.0 million. This line of credit bears interest at the
30-day LIBOR plus 2.0%. The current interest rate is 7.32%. Absent any renewal,
the line of credit will terminate in February 2007 and any principal then
outstanding must be paid by February 2008.
In October 2006, the Company obtained a third secured line of credit which
has $30.0 million of maximum possible borrowings.
17
NOTE 9 -- DERIVATIVE FINANCIAL INSTRUMENTS
The Company may use derivative financial instruments to hedge all or a
portion of the interest rate risk associated with its borrowings. The principal
objective of such arrangements is to minimize the risks and/or costs associated
with the Company's operating and financial structure as well as to hedge
specific anticipated transactions. The counterparties to these contractual
arrangements are major financial institutions with which the Company and its
affiliates may also have other financial relationships. In the event of
nonperformance by the counterparties, the Company is potentially exposed to
credit loss. However, because of the high credit ratings of the counterparties,
the Company does not anticipate that any of the counterparties will fail to meet
their obligations.
CASH FLOW HEDGES
The Company has entered into various interest rate swap contracts to
hedge interest rate exposure on its unsecured line of credit. The Company
designates interest rate hedge agreements at inception and determines whether or
not the interest rate hedge agreement is highly effective in offsetting interest
rate fluctuations associated with the identified indebtedness. During the
three-months ended September 30, 2006, the Company designated its interest rate
swaps associated with its unsecured line of credit as hedges pursuant to SFAS
No. 133. At designation, these interest rate swaps had a fair value not equal to
zero. However, the Company concluded, at designation, that these hedging
arrangements were highly effective during their term using regression analysis
and determined that the hypothetical derivative method would be used in
measuring any ineffectiveness. At September 30, 2006, the Company updated its
regression analysis and concluded that these hedging arrangements were still
highly effective during their remaining term and used the hypothetical
derivative method in measuring the ineffective portions of these hedging
arrangements.
The interest rate hedge agreements are summarized as of September 30,
2006 and for the nine months ended September 30, 2006 as follows:
AMOUNTS AMOUNTS
RECLASSIFIED RECLASSIFIED
TO EARNINGS TO EARNINGS
FOR FOR
FAIR VALUE EFFECTIVE INEFFECTIVE
HEDGE HEDGED AGGREGATE AS OF HEDGES - HEDGES -
PRODUCT ITEM NOTIONAL STRIKE MATURITY SEPTEMBER 30, 2006 GAINS(LOSSES) GAINS(LOSSES)
- ------------- ---------------- ----------- ------ --------- ------------------ -------------- --------------
Interest rate Unsecured line
swaps of credit $21,200,000 5.398% 8/8/2011 $ (406,950) $-- $--
Interest rate Unsecured line
swaps of credit 21,890,000 5.351% 8/11/2011 (378,296) -- --
Interest rate Unsecured line
swaps of credit 31,200,000 5.379% 8/11/2011 (419,606) -- --
----------- ----------- --- ---
Total Portfolio $74,290,000 $(1,204,852) $-- $--
NOTE 10 -- EARNINGS PER SHARE
The Company's calculation of earnings per share for the three and nine
months ended September 30, 2006 and 2005 in accordance with SFAS No. 128 is as
follows:
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Numerator:
Net income from continuing operations $20,895,543 $18,189,691 $58,217,863 $55,676,638
Net income from discontinued operations 38,007 1,155,747 1,325,664 1,767,381
Gain from discontinued operations -- -- 2,788,663 --
----------- ----------- ----------- -----------
Net income $20,933,550 $19,345,438 $62,332,190 $57,444,019
Dividends attributable to preferred shares (2,518,955) (2,518,955) (7,556,865) (7,556,865)
----------- ----------- ----------- -----------
Net income available to common shareholders $18,414,595 $16,826,483 $54,775,325 $49,887,154
=========== =========== =========== ===========
Denominator:
Weighted average common shares outstanding -- basic 28,120,830 25,851,998 27,977,558 25,676,545
Add: effect of options 67,734 198,125 61,185 181,853
18
Add: effect of phantom units 68,149 11,096 63,658 5,873
----------- ----------- ----------- -----------
Weighted average common shares outstanding -- diluted 28,256,714 26,061,219 28,102,400 25,864,271
Basic earnings per share:
Net income $ 0.65 $ 0.61 $ 1.81 $ 1.87
Net income from discontinued operations -- 0.04 0.05 0.07
Gain from discontinued operations -- -- 0.10 --
----------- ----------- ----------- -----------
Net income available to common shareholders $ 0.65 $ 0.65 $ 1.96 $ 1.94
Diluted earnings per share:
Net income $ 0.65 $ 0.61 $ 1.80 $ 1.86
Net income from discontinued operations -- 0.04 0.05 0.07
Gain from discontinued operations -- -- 0.10 --
----------- ----------- ----------- -----------
Net income available to common shareholders $ 0.65 $ 0.65 $ 1.95 $ 1.93
NOTE 11 -- STOCK BASED COMPENSATION
The Company maintains the RAIT Investment Trust 2005 Equity Compensation
Plan (the "Equity Compensation Plan"). The maximum aggregate number of Common
Shares that may be issued pursuant to the Equity Compensation Plan is 2,500,000.
The Company has granted to its officers, trustees and employees phantom
shares pursuant to the RAIT Investment Trust Phantom Share Plan and phantom
units pursuant to the Equity Compensation Plan. Both phantom shares and phantom
units are redeemable for Common Shares issued under the Equity Compensation
Plan. Redemption occurs after a period of time after vesting set by the
Compensation Committee. All outstanding phantom shares issued to non-management
trustees vested immediately, have dividend equivalent rights and will be
redeemed upon separation from service from the Company. Phantom units granted to
non-management trustees vest immediately, have dividend equivalent rights and
will be redeemed upon the earliest to occur of (i) the first anniversary of the
date of grant, or (ii) a trustee's termination of service with the Company.
Phantom units granted to officers and employees vest in varying percentages
between two to four years, have dividend equivalent rights and will be redeemed
between one to two years after vesting as set by the Compensation Committee. The
Company has been accounting for grants of phantom shares and phantom units in
accordance with SFAS No. 123, which requires the recognition of compensation
expenses on the date of grant.
The Company did not grant any phantom shares during the three and nine
months ended September 30, 2006. The Company granted 0 and 1,392 phantom shares
during the three and nine months ended September 30, 2005, respectively. There
were 4,136 phantom shares outstanding at September 30, 2006. During the three
months ended September 30, 2006 and 2005, the Company recognized $0 and $17,600,
respectively, in compensation expense relating to phantom shares issued under
this plan. During the nine months ended September 30, 2006 and 2005, the Company
recognized $0 and $45,600, respectively, in compensation expenses relating to
phantom shares issued under this plan.
The Company granted 0 and 54,002 phantom units during the three and nine
months ended September 30, 2006, respectively. There were 63,570 and 8,966
phantom units outstanding at September 30, 2006 and 2005, respectively. In July
2006, 1,748 phantom units were fully vested and Common Shares were issued.
During the three and nine months ended September 30, 2006 the Company recognized
$169,000 and $469,000, respectively, in compensation expenses relating to
phantom units issued under this plan. During both the three and nine months
ended September 30, 2005, the Company recognized $285,000 in compensation
expenses relating to phantom units issued under this plan.
STOCK OPTIONS
In February and April 2002, the Company granted to its employees, executive
officers and trustees options to purchase 61,100 Common Shares at the fair
market value on the date of grant. These options, which were exercised in March
through May 2002, had exercise prices of $16.92 and $19.85, respectively, per
Common Share. The Common Shares issued pursuant to these exercises were subject
to restrictions that had lapsed as of the fourth anniversary date of the grants.
At the time of exercise, the Company provided loans to each person in the amount
necessary to exercise such options. Each of these loans bore interest at a rate
of 6% per annum. The aggregate principal amount of these loans was $0 and
$263,647 at September 30, 2006 and December 31, 2005, respectively. Interest on
the outstanding principal amount was payable quarterly and 25% of the original
principal amount of each loan was payable on each of the first four
anniversaries. The final payments on the remaining loans outstanding were made
by April 30, 2006.
19
From its inception through 2004, the Company has granted to its officers,
trustees and employees options to acquire Common Shares. The vesting period is
determined by the Compensation Committee and the option term is generally ten
years after the date of grant. At September 30, 2006 and December 31, 2005 there
were 242,842 and 477,360 options outstanding, respectively.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
GUARANTEE
The Company has guaranteed the obligation of its wholly owned subsidiary
under the Repurchase Agreement described in Note 8, "Repurchase Agreement and
Lines of Credit".
LITIGATION
As part of the Company's business, the Company acquires and disposes of
real estate investments and, as a result, expects that it will engage in routine
litigation in the ordinary course of that business. Management does not expect
that any such litigation will have a material adverse effect on the Company's
consolidated financial position or results of operations.
DELEGATED UNDERWRITING PROGRAM
In 2005 and 2006 the Company has entered into program agreements with eight
mortgage lenders that provide that the mortgage lender will locate, qualify, and
underwrite both a first mortgage loan and a mezzanine loan and then sell the
mezzanine loan to the Company. The mezzanine loans must conform to the business,
legal and documentary parameters in the program agreement and be in the range of
$250,000 to $2.5 million. In most cases, the Company expects to acquire the
mezzanine loan from the mortgage lender at the closing of the mezzanine loan. In
general, if any variations are identified or any of the required deliveries are
not received, the Company has a period of time to notify the mortgage lender of
its election to either waive the variations or require the mortgage lender to
repurchase the mezzanine loan. Each of the eight program agreements provides
that the Company will fund up to $50.0 million per calendar quarter of loans
that fit the pre-defined underwriting parameters. In the three and nine months
ended September 30, 2006, the Company funded 12 and 21 mezzanine loans totaling
$9.0 million and $16.4 million, respectively, through the delegated underwriting
program.
GUIDANCE LINES
In June 2005, the Company entered into an agreement with a borrower
establishing financial and underwriting parameters under which the Company would
consider first mortgage bridge loans sourced by the borrower, up to an aggregate
of $150.0 million, with no individual 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 those of the loans in the Company's current
portfolio.
In March 2006, the Company entered into an agreement with another borrower
establishing financial and underwriting parameters under which the Company would
consider first mortgage bridge loans sourced by the borrower, up to an aggregate
of $50.0 million, with no individual loan in an amount greater than $30.0
million. The Company expects that the credit and market risk of the potential
loans will not differ from those of the loans in the Company's current
portfolio.
LEASE OBLIGATIONS
The Company sub-leases both its downtown and suburban Philadelphia office
locations. The annual minimum rent due pursuant to the subleases for the
remainder of 2006, each of the next four years and thereafter is estimated to be
as follows as of September 30, 2006:
2006........... $ 118,233
2007........... 457,337
2008........... 457,337
2009........... 457,337
2010........... 304,891
Thereafter..... --
----------
Total....... $1,795,135
==========
20
The Company sub-leases a portion of its downtown Philadelphia office space
under an operating lease with Bancorp Inc., at an annual rental based upon the
amount of square footage the Company occupies. The sub-lease expires in August
2010 with two five-year renewal options. Rent paid to Bancorp Inc. was
approximately $101,000 and $269,000 for the three and nine months ended
September 30, 2006, respectively. Rent paid to Bancorp Inc. was approximately
$78,000 and $217,000 for the three and nine months ended September 30, 2005,
respectively. The Company's affiliation with Bancorp Inc. is described in Note
13.
The Company sub-leases the remainder of its downtown Philadelphia office
space under an operating lease with a third party. The annual rental is based
upon the amount of square footage the Company occupies. The sub-lease expires in
August 2010 with two five-year renewal options. Rent paid for this space was
approximately $11,500 and $10,000 for the three months ended September 30, 2006
and 2005, respectively. Rent paid for this space was approximately $34,300 and
$33,000 for the nine months ended September 30, 2006 and 2005, respectively.
The Company sub-leases suburban Philadelphia, Pennsylvania office space at
an annual rental of $15,600. This sublease currently terminates in February 2007
but renews automatically each year for a one year term unless prior notice of
termination of the sublease is sent by either party to the sublease to the other
party thereto.
EMPLOYMENT AGREEMENTS
The Company is party to employment agreements with Betsy Z. Cohen, Chairman
and Chief Executive Officer of the Company, and Scott F. Schaeffer, President
and Chief Operating Officer of the Company, that provide for compensation and
certain other benefits. The agreements also provide for severance payments under
certain circumstances.
In connection with the proposed merger involving the Company described in
Note 15, Mrs. Cohen and Mr. Schaeffer waived their rights to terminate their
existing employment agreements with the Company for "good reason," subject to
entering into amended employment agreements with RAIT, which have not yet been
finalized.
NOTE 13 -- 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 eleven
properties underlying the Company's real estate interests at September 30, 2006
and 2005, respectively. Management fees in the following amounts were paid to
Brandywine relating to these interest; $88,000 and $308,000 for the three and
nine months ended September 30, 2006, respectively, and $228,000 and $682,000
for the three and nine months ended September 30, 2005, respectively. The
Company believes that the management fees charged by Brandywine are comparable
to those that could be obtained from unaffiliated third parties. The Company
expects to continue to use Brandywine to provide real estate management services
to properties underlying the Company's investments.
Betsy Z. Cohen has been the Chairman of the Board of The Bancorp Bank
("Bancorp"), a commercial bank, since November 2003 and a director of The
Bancorp, Inc. ("Bancorp Inc"), a registered 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, demand
deposit, and restricted cash accounts at Bancorp. As of September 30, 2006 and
December 31, 2005, the Company had approximately $72.6 million and $84.2
million, respectively, on deposit, of which approximately $72.5 million and
$84.1 million, respectively, is over the FDIC insurance limit. The Company pays
Bancorp a monthly fee for information system technical support services.
Effective June 30, 2006 this fee was increased from $5,000 to $6,500. The
Company paid $19,500 and $15,000 for these services for the three month periods
ended September 30, 2006 and 2005, respectively. The Company paid $49,500 and
$45,000 for these services for the nine month periods ended September 30, 2006
and 2005, respectively. The Company subleases a portion of its downtown
Philadelphia office space under an operating lease with Bancorp Inc. For a
description of these operating leases, see Note 12, "Commitments and
Contingencies -- Lease Obligations".
21
Daniel G. Cohen is the beneficial owner of the corporate parent of Cohen
and Company, a registered broker-dealer of which Mr. Cohen is President and
Chief Executive Officer. As of September 6, 2006, The Company engaged Cohen and
Company in connection with a contemplated collateralized debt obligation
transaction by the Company that contemplates the payment of customary fees to
Cohen and Company in connection therewith.
Daniel G. Cohen is the Chairman of the Board and Chief Executive Officer of
Taberna Realty Finance Trust ("Taberna"). See Note 15, "Proposed Merger with
Taberna."
On September 29, 2006, the Company sold three real estate loans
participating in the aggregate amount of $35.0 million to Taberna.
In accordance with SFAS 140, these sales were accounted for as financings.
NOTE 14 -- 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 each declaration date set forth below, the Board of Trustees of the
Company declared a cash dividend in an amount per Common Share, in the aggregate
dividend amount and payable on the payment date to holders of Common Shares on
the record date opposite such declaration date.
DIVIDEND AGGREGATE
DECLARATION DATE RECORD DATE PAYMENT DATE PER SHARE DIVIDEND AMOUNT
- ---------------- ----------- ------------ --------- ---------------
09/15/06 09/27/06 10/06/06 $0.72 $20,271,676
06/19/06 07/06/06 07/17/06 $0.62 $17,428,889
03/24/06 04/05/06 04/14/06 $0.61 $17,019,949
Series A Preferred Shares
On each declaration date set forth below, the Board of Trustees of the
Company declared a cash dividend of $0.484375 per share on the Company's 7.75%
Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (the
"Series A Preferred Shares") in the aggregate dividend amount and payable on the
payment date to holders of Series A Preferred Shares on the record date opposite
such declaration date.
AGGREGATE
DECLARATION DATE RECORD DATE PAYMENT DATE DIVIDEND AMOUNT
- ---------------- ----------- ------------ ---------------
10/24/06 12/01/06 12/29/06 $1,336,875
07/25/06 09/01/06 10/02/06 $1,336,875
05/08/06 06/01/06 06/30/06 $1,336,875
01/24/06 03/01/06 03/31/06 $1,336,875
Series B Preferred Shares
On the declaration date set forth below, the Board of Trustees of the
Company declared a cash dividend of $0.5234375 per share on the Company's 8.375%
Series B Cumulative Redeemable Preferred Shares of Beneficial Interest (the
"Series B Preferred Shares") in the aggregate dividend amount and payable on the
payment date to holders of Series B Preferred Shares on the record date opposite
such declaration date.
AGGREGATE
DECLARATION DATE RECORD DATE PAYMENT DATE DIVIDEND AMOUNT
- ---------------- ----------- ------------ ---------------
10/24/06 12/01/06 12/29/06 $1,182,080
07/25/06 09/01/06 10/02/06 $1,182,080
05/08/06 06/01/06 06/30/06 $1,182,080
01/24/06 03/01/06 03/31/06 $1,182,080
22
NOTE 15 -- PROPOSED MERGER WITH TABERNA
On June 8, 2006, the Company and Taberna entered into an Agreement and Plan
of Merger (the "Merger Agreement"), pursuant to which a newly formed subsidiary
of the Company will, subject to the terms and conditions of the Merger
Agreement, merge with and into Taberna (the "Merger"), as a result of which the
Company will own all of the common shares of beneficial interest of Taberna
("Taberna Common Shares").
Subject to the terms and conditions of the Merger Agreement, which has been
unanimously approved by the boards of trustees of both companies, upon the
completion of the Merger each issued and outstanding Taberna Common Share will
be converted into 0.5389 Common Shares of the Company, with cash to be paid in
lieu of fractional Common Shares.
The Merger Agreement contains customary representations, warranties and
covenants of the Company and Taberna, including, among others, covenants (i) to
conduct their respective businesses in the ordinary course during the period
between the execution of the Merger Agreement and consummation of the Merger and
(ii) not to engage in certain kinds of transactions during such period. The
board of trustees of each company has adopted a resolution approving and
declaring advisable the Merger, and recommending that its shareholders, with
respect to Taberna, approve the Merger, and with respect to the Company, approve
the issuance of Common Shares in the Merger, and each party has agreed to hold a
shareholder meeting to put these matters before their shareholders for their
consideration. Each party has also agreed not to (i) solicit proposals relating
to alternative business combination transactions or (ii) subject to certain
exceptions, enter into discussions or negotiations or provide confidential
information in connection with any proposals for alternative business
combination transactions.
Consummation of the Merger is subject to various conditions, including,
among others, (i) requisite approvals of the shareholders of the Company and
Taberna, (ii) the absence of any law or order prohibiting the consummation of
the Merger, and (iii) listing of the Common Shares to be issued in the Merger on
the New York Stock Exchange. In addition, each party's obligation to consummate
the Merger is subject to certain other conditions, including, among others, (i)
subject to the standards set forth in the Merger Agreement, the accuracy of the
representations and warranties of the other party, (ii) compliance of the other
party with its covenants in all material respects, (iii) the delivery of
opinions from counsel to the Company and counsel to Taberna relating to the U.S.
federal income tax code treatment of the Merger and the real estate investment
trust status of both parties and (iv) there shall not have occurred any event,
change, effect or circumstance that has had or is reasonably likely to have a
material adverse effect on the other party.
The Merger Agreement contains certain termination rights for both the
Company and Taberna. In certain circumstances, the party that terminates the
Merger Agreement is required to pay the other party a termination fee of $18.0
million. The RAIT shareholder's meeting is set for December 11, 2006.
No assurance can be given that all closing conditions will be satisfied or
waived, or that the Merger will in fact be consummated.
NOTE 16 -- NEW ACCOUNTING PRONOUCEMENT
In March 2006, the FASB issued Statement of Financial Accounting Standard
No. 156, Accounting for Servicing of Financial Assets - an amendment of FASB
Statement No. 140 , (FAS156). This Statement amends FASB Statement 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" with respect to the accounting for separately recognized
servicing assets and servicing liabilities. Among other requirements, FAS156
requires an entity to recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a
servicing contract in certain situations. FAS156 is effective as of the
beginning of the Company's fiscal year beginning after September 15, 2006. The
adoption of this Statement is not expected to have a material impact on the
Company's financial position or results of operations.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments. Key provisions of SFAS No. 155 include: (1) a
broad fair value measurement option for certain hybrid financial instruments
that contain an embedded derivative that would otherwise require bifurcation;
(2) clarification that only the simplest separations of interest payments and
principal payments qualify for the exception afforded to interest-only strips
and principal-only strips from derivative accounting under paragraph 14 of SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, thereby
narrowing such exception; (3) a requirement that beneficial interests in
securitized financial assets be analyzed to determine whether they are
freestanding derivatives or whether they are hybrid instruments that contain
embedded derivatives requiring bifurcation; (4) clarification that
concentrations of credit risk in the form of subordination are not embedded
derivatives; and (5) elimination of the prohibition on a QSPE holding passive
derivative financial instruments that pertain to beneficial interests that are
or contain a derivative financial instrument. In general, these changes will
reduce the operational complexity associated with bifurcating embedded
derivatives, and increase the number of beneficial interests in securitization
transactions, including interest-only strips and principal-only strips, required
to be accounted for in accordance with SFAS No. 133. The Company is required to
adopt SFAS No. 155 in the first quarter of 2007. The Company does not expect
that the adoption of SFAS No. 155 will have a material effect on its
consolidated financial statements.
In September 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109 ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprise's financial statements in accordance with FASB Statement No.
109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The Company is
required to adopt FIN 48 in the first quarter of 2007 and is currently assessing
the impact that it will have on its consolidated financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108
to address diversity in practice in quantifying financial statement
misstatements. SAB 108 requires that registrants quantify the impact on the
current year's financial statements of correcting all misstatements, including
the carryover and reversing effects of prior years' misstatements, as well as
the effects of errors arising in the current year. SAB 108 is effective as of
the first fiscal year ending after November 15, 2006, allowing a one-time
transitional cumulative effect adjustment to retained earnings as of January 1,
2006, for errors that were not previously deemed material, but are material
under the guidance in SAB No. 108. The impact of adopting SAB No. 108 is
currently being evaluated.
NOTE 17 -- SUBSEQUENT EVENTS
On November 7, 2006, the Company issued approximately $1.0 billion of
collateralized debt obligations, or CDOs, through two newly-formed indirect
subsidiaries, RAIT CRE CDO I, Ltd., or the Issuer, and RAIT CRE CDO I, LLC, or
the Co-Issuer. The CDO consists of $818.0 million of investment grade notes, and
$35.0 million of non-investment grade notes, which were co-issued by the Issuer
and the Co-Issuer, and $165.0 million of preferred shares, which were issued by
the Issuer. The Company retained all non-investment grade securities, the
preferred shares and the common shares in the Issuer. The Issuer holds assets,
consisting primarily of whole loans, subordinate interests in whole loans,
mezzanine loans and preferred equity investments, which serve as collateral for
the CDO. The investment grade notes were issued with floating rate coupons with
a combined weighted average rate of one-month LIBOR plus .0657%, including
transaction costs. The CDO may be replenished, pursuant to certain rating agency
guidelines relating to credit quality and diversification, with substitute
collateral for loans that are repaid during the first five years of the CDO.
Thereafter, the CDO securities will be retired in sequential order from
senior-most to junior-most as loans are repaid. Proceeds from the sale of the
investment grade notes issued were used to repay substantially all outstanding
debt under our repurchase agreement, our secured and unsecured lines of credit
and the remaining amounts will be used to fund additional investments.
23
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 September 30, 2006 and the related
consolidated statements of income, comprehensive income and cash flows for the
three-month and nine-month periods ended September 30, 2006 and 2005. 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 generally
accepted auditing standards, 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 reviews, 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, 2005, 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 1, 2006 (except for Note 6, as
to which the date is July 13, 2006) 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, 2005 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
November 8, 2006
24
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, 2005, 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.
Our revenues increased $30.2% from $26.5 million for the three months ended
September 30, 2005 to $34.5 million for the three months ended September 30,
2006, while our net income available to common shareholders increased 9.4% to
$18.4 million for the three months ended September 30, 2006 from $16.8 million
for the three months ended September 30, 2005. Our revenues increased 20.8% from
$77.9 million for the nine months ended September 30, 2005 to $94.1 million for
the nine months ended September 30, 2006, while our net income available to
common shareholders increased 9.8% to $54.8 million for the nine months ended
September 30, 2006 from $49.9 million for the nine months ended September 30,
2005. Our total assets grew 20.6% to $1.2 billion at September 30, 2006 from
$1.0 billion at December 31, 2005. Our real estate loans, net, grew 40.2% from
$714.4 million at December 31, 2005 to $1.0 billion at September 30, 2006.
During the nine months ended September 30, 2006, we continued to grow our
core business of making mezzanine and bridge loans. We originated, purchased or
acquired $669.7 million, in the aggregate, of mezzanine and bridge loans in the
nine months ended September 30, 2006 as compared to $351.9 million in the nine
months ended September 30, 2005. We were able to fund this additional loan
production by obtaining larger and less expensive sources of debt financing in
the fourth quarter of 2005 and throughout 2006.
We have been seeking to increase the return on our investments in
appropriate cases by increasing our use of debt to leverage our investments
while seeking to minimize the cost of this debt. While the unsecured line of
credit described below under "Liquidity and Capital Resources" has enabled us to
borrow increasing amounts at lower interest rates than those available under our
secured lines of credit, we have found that the cost of the funds we borrow
under all our lines of credit has been increasing as interest rates generally
rise. To further reduce our cost of funds, on November 7, 2006, we issued
approximately $1.018 billion of collateralized debt obligations through two
newly-formed indirect subsidiaries, RAIT CRE CDO I, Ltd., or the Issuer, and
RAIT CRE CDO I, LLC, or the Co-Issuer. The CDO consists of $818.0 million of
investment grade notes, and $35.0 million of non-investment grade notes, which
were co-issued by the Issuer and the Co-Issuer, and $165.0 million of preferred
shares, which were issued by the Issuer. We retained all non-investment grade
securities, the preferred shares and the common shares in the Issuer. The Issuer
holds assets, consisting primarily of whole loans, subordinate interests in
whole loans, mezzanine loans and unconsolidated real estate interests,
investments, which serve as collateral for the CDO. The investment grade notes
were issued with floating rate coupons with a combined weighted average rate of
one-month LIBOR plus 0.657%, including transaction costs. The CDO may be
replenished, pursuant to certain ratings agency guidelines relating to credit
quality and diversification, with substitute collateral for loans that are
repaid during the first five years of the CDO. Thereafter, the CDO securities
will be retired in sequential order from senior-most to junior-most as loans are
repaid. Proceeds from the sale of the investment grade notes issued were used to
repay substantially all outstanding debt under our repurchase agreement, our
secured and unsecured lines of credit and the remaining amounts will be used to
fund additional investments. See Part II, Item 5 "Other Information" below for
the description of this CDO.
PROPOSED MERGER WITH TABERNA
On June 8, 2006, we and Taberna Realty Finance Trust, or Taberna, entered
into an agreement and plan of merger, pursuant to which our newly formed
subsidiary will, subject to the terms and conditions of the merger agreement,
merge with and into Taberna, as
25
a result of which we will own all of the common shares of beneficial interest of
Taberna. See note 15 of our consolidated financial statements. We have filed
with the Securities and Exchange Commission, or SEC, a registration statement on
Form S-4 (registration no. 333-136197). A definitive joint proxy
statement/prospectus has been sent to our shareholders and Taberna's
shareholders seeking approvals related to the proposed transaction. Our
shareholders and Taberna's shareholders and other investors are urged to read
the registration statement and the definitive joint proxy statement/prospectus
and any other materials filed by us with the SEC, as well as any amendments or
supplements to those documents. These documents contain important information,
which should be read carefully before any decision is made with respect to the
merger. Documents filed with the SEC are available for free at the SEC's website
(http://www.sec.gov). These documents are also available for free by accessing
our website (http://www.raitinvestmenttrust.com).
We, Taberna and certain of our and Taberna's trustees, executive officers,
members of management and employees, may be deemed to be participants in the
solicitation of proxies in connection with the proposed merger. Information
regarding the persons who may, under the rules of the SEC, be considered to be
participants in the solicitation of shareholders in connection with the proposed
merger, including any interest they have in the merger, is set forth in the
joint proxy statement/prospectus filed with the SEC.
This filing shall not constitute an offer to sell or the solicitation of an
offer to buy any securities, nor shall there be any sale of securities in any
jurisdiction in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such
jurisdiction. No offering of securities shall be made except by means of a
prospectus meeting the requirements of Section 10 of the U.S. Securities Act of
1933, as amended.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of our liquidity and capital resources from our
commencement in January 1998 through September 30, 2006 were our public
offerings of common shares, 7.75% Series A cumulative redeemable preferred
shares and 8.375% Series B cumulative redeemable preferred shares. After
offering costs and underwriting discounts and commissions, these offerings have
allowed us to obtain net offering proceeds of $594.3 million. We expect to
continue to rely on offerings of our securities as a principal source of our
liquidity and capital resources.
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 7.75% per year of the $25.00 liquidation preference,
equivalent to $1.9375 per year per share. Dividends are payable quarterly in
arrears at the end of each March, June, September and December. The Series A
preferred shares have no maturity date and we are not required to redeem the
Series A preferred shares at any time. We may not redeem the Series A preferred
shares before March 19, 2009, except in limited circumstances relating to the
ownership limitations necessary to preserve our tax 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 each of the nine month periods ended
September 30, 2006 and 2005, we paid dividends on our Series A preferred shares
of $4.0 million, in the aggregate.
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 8.375% per year of the $25.00 liquidation
preference, equivalent to $2.09375 per year per share. Dividends are payable
quarterly in arrears at the end of each March, June, September and December. 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 limitations 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 each of the nine month
periods ended September 30, 2006 and 2005, we paid dividends on our Series B
preferred shares of $3.5 million, in the aggregate. 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.
We also maintain liquidity through our repurchase facility, our unsecured
line of credit and our secured lines of credit. At September 30, 2006, our
repurchase facility provided for $160.0 million of maximum possible borrowings,
our unsecured line of credit provided for $335.0 million of maximum possible
borrowings (we have the right to request an increase in the unsecured line of up
to an additional $15.0 million, to a maximum of $350.0 million, subject to
certain pre-defined requirements) and our two secured lines of credit provided
for $80.0 million, in the aggregate of maximum possible borrowings.
In October 2006, we obtained a third secured line of credit which has
$30.0 million of maximum possible borrowings.
26
The following are descriptions of our repurchase facility and our
unsecured and secured lines of credit at September 30, 2006:
REPURCHASE FACILITY
On September 20, 2006 we obtained a $160.0 million repurchase facility,
which matures on November 26, 2006. The facility bears interest at a spread of
1.00% over 30-day LIBOR and provides for an advance rate of 75% for assets
bearing interest at a fixed rate and 80% for assets bearing interest at a
floating rate. The lender has a consent right to the inclusion of investments
in this facility, determines periodically the market value of the investments,
and has the right to require additional collateral if the estimated market
value of the included investments declines. We had no accrued interest and
borrowings of $64.6 million at 6.33% under this facility at September 30, 2006.
UNSECURED LINE OF CREDIT
We are party to a revolving credit agreement that, as of September 30,
2006, provides for a senior unsecured line of credit, or unsecured line, in an
amount up to $335.0 million, with the right to request an increase in the
unsecured line of up to a maximum of $350.0 million. Borrowing availability
under the unsecured line is based on specified percentages of the value of
eligible assets. The unsecured line will terminate on October 24, 2008, unless
we extend the term an additional year upon the satisfaction of specified
conditions.
Amounts borrowed under the unsecured line bear interest at a rate equal to,
at our option:
- LIBOR (30-day, 60-day, 90-day or 180-day interest periods, at our
option) plus an applicable margin of between 1.35% and 1.85% or
- an alternative base rate equal to the greater of: (i) the prime rate
of the bank serving as administrative agent or (ii) the Federal Funds
rate plus 50 basis points, plus an applicable margin of between 0% and
0.35%.
The applicable margin is based on the ratio of our total liabilities to
total assets which is calculated on a quarterly basis. We are obligated to pay
interest only on the amounts borrowed under the unsecured line until the
maturity date of the unsecured line.
27
of credit, at which time all principal and any interest remaining unpaid is due.
We pay a commitment fee quarterly on the difference between the aggregate amount
of the commitments in effect from time to time under the unsecured line and the
outstanding balance under the unsecured line. This commitment fee is equal to
fifteen basis points (twenty five basis points if this difference is greater
than 50% of the amount of the unsecured line of credit) per annum of this
difference.
Our ability to borrow under the unsecured line is subject to our ongoing
compliance with a number of financial and other covenants, including a covenant
that we not pay dividends in excess of 100% of our adjusted earnings, to be
calculated on a trailing twelve-month basis, provided however, dividends may be
paid to the extent necessary to maintain our status as a real estate investment
trust. The unsecured line of credit also contains customary events of default,
including a cross default provision. If an event of default occurs, all of our
obligations under the unsecured line of credit may be declared immediately due
and payable. For events of default relating to insolvency and receivership, all
outstanding obligations automatically become due and payable.
At September 30, 2006, we had $335.0 million outstanding under the
unsecured line, of which $210.0 million bore interest at 6.98%, $125.0 million
bore interest at 7.14%. At November 8, 2006, after closing the CDO described
above, we had $20.0 million outstanding under the unsecured line with an
additional $5.0 million of availability based upon our eligible assets.
SECURED LINES OF CREDIT
At November 8, 2006, after closing the CDO, we had a total of $110.0
million of availability on our three secured lines of credit.
Our first $30.0 million secured line of credit bears interest at either:
- the 30-day London interbank offered rate, or LIBOR plus 2.25% or
- the prime rate as published in the "Money Rates" section of The Wall
Street Journal, at our election.
Absent any renewal, the line of credit will terminate in October 2007 and any
principal then outstanding must be repaid by October 2008. The lender has the
right to declare any advance due and payable in full two years after the date of
the advance.
Our second $30.0 million secured line of credit (which we obtained in October
2006), bears interest at either:
- the 30-day London interbank offered rate, or LIBOR plus 2.0% or
- the prime rate as published in the "Money Rates" section of The Wall
Street Journal, at our election.
Absent any renewal, the line of credit will terminate in October 2008.
Our $50.0 million secured line of credit, (which was increased from $25.0
million in February 2006), bears interest at the 30-day LIBOR plus 2.0%. Absent
any renewal, the line of credit will terminate in February 2007 and any
principal then outstanding must be paid by February 2008.
We also maintain liquidity through the CDO described above.
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 $240.8
million and $331.8 million for the three and nine months ended September 30,
2006, respectively, as compared to $107.0 million and $322.3 million for the
three and nine months ended September 30, 2005, 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
dividend distribution for the quarters ended September 30, 2006 and 2005 (paid
on October 6, 2006 and October 17, 2005, respectively), was $20.3 million and
$15.6 million, respectively, of which $20.1 million and $15.5 million,
respectively, was in cash and $167,000 and $91,000, respectively, was in
additional common shares issued through our dividend reinvestment plan. We also
paid $7.6 million of dividends, in the aggregate, on our Series A and Series B
preferred shares for both nine month periods ended September 30, 2006 and 2005.
We expect to continue to use funds from these sources to meet these needs.
We use our capital resources principally for originating and purchasing
loans and acquiring real estate interests. For the three months ended September
30, 2006, we originated or purchased 33 loans in the aggregate amount of $250.8
million, as compared to 22 loans in the aggregate amount of $116.2 million for
the three months ended September 30, 2005. For the nine months ended September
30, 2006 we originated 76 loans in the aggregate amount of $667.8 million, as
compared to 41 loans in the aggregate amount of $343.9 million for the nine
months ended September 30, 2005.
28
loans originated through November 3, 2006 and to fund our third quarter dividend
payments. We anticipate that we will use the remaining $103.3 million to fund
investments that we expect to make through November 15, 2006.
We believe that our existing sources of funds will be adequate for purposes
of meeting our liquidity and capital needs. We do not currently experience
material difficulties in maintaining and accessing these resources. However, we
could encounter difficulties in the future, depending upon the development of
conditions in the credit markets and the other risks and uncertainties described
in our filings with the Securities and Exchange Commission, including those
described in the "Risk Factors" section of our Annual Report on Form 10-K for
the year ended December 31, 2005.
We may also seek to develop other sources of capital, including, without
limitation, long-term borrowings, offerings of our warrants and issuances of our
debt securities. Our ability to meet our long-term, that is, beyond one year,
liquidity and capital resources requirements is subject to obtaining additional
debt and equity financing. Any decision by our lenders and investors to enter
into such transactions with us will depend upon a number of factors, such as our
financial performance, compliance with the terms of our existing credit
arrangements, industry or market trends, the general availability of and rates
applicable to financing transactions, such lenders' and investors' resources and
policies concerning the terms under which they make such capital commitments and
the relative attractiveness of alternative investment or lending opportunities.
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 September 30, 2006:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------
LESS THAN ONE TO THREE TO MORE THAN
CONTRACTUAL OBLIGATIONS ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS TOTAL
- ----------------------- ----------- ------------ ---------- ---------- ------------
Operating leases ........................ $ 461,237 $ 914,673 $ 419,225 $ -- $ 1,795,135
Indebtedness secured by real estate(1) .. 32,048,000 117,286,124 8,394,421 6,253,409 163,981,954
Repurchase Agreement .................... 64,572,000 -- -- -- 64,572,000
Secured line of credit .................. -- 20,000,000 -- -- 20,000,000
Unsecured line of credit ................ -- 335,000,000 -- -- 335,000,000
Deferred compensation(2) ................ 1,647,268 -- -- -- 1,647,268
----------- ------------ ---------- ---------- ------------
$98,728,505 $473,200,797 $8,813,646 $6,253,409 $586,996,357
=========== ============ ========== ========== ============
- ----------
(1) Indebtedness secured by real estate consists of senior indebtedness
relating to loans, and long-term debt secured by consolidated real estate
interests.
(2) Represents amounts due to fund our supplemental executive retirement plan
or SERP. See note 10 of our consolidated financial statements, Item 8 of
our Annual Report on Form 10-K for the year ended December 31, 2005.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that we believe have had,
or are reasonably likely to have, a current or future effect on our financial
condition, revenues, 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,
2005 for a discussion of our critical accounting policies. During the three and
nine months ended September 30, 2006, there were no material changes to these
policies, except for the update described below.
Reserve for Loan Losses. We had a reserve for loan losses of $226,000 at
September 30, 2006 and 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 September 30, 2006,
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
29
reserve on a quarterly basis. During the three and nine months ended September
30, 2006 and 2005, the loans in our portfolio performed in accordance with their
terms.
RESULTS OF OPERATIONS
Interest Income. Interest income is comprised primarily of interest accrued
on our loans. In addition, certain of our loans provide for additional interest
payable to us based on the operating cash flow or appreciation in value of the
underlying real estate. We recognize this additional interest 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
$24.7 million for the three months ended September 30, 2006 compared to $20.9
million for the three months ended September 30, 2005. The $3.8 million increase
was primarily due to the following:
- an additional $15.1 million of interest accruing on 116 loans totaling
$795.9 million originated between October 1, 2005 and September 30,
2006, partially offset by a $6.4 million reduction of interest due to
the repayment of 38 loans totaling $277.8 million during the same
period,
- a decrease of $5.1 million in accretable yield included in our
interest income from the three months ended September 30, 2005 to the
same period in 2006.
Our interest income was $66.7 million for the nine months ended September
30, 2006 compared to $59.5 million for the nine months ended September 30, 2005.
The $7.2 million increase was primarily due to the following:
- an additional $40.1 million of interest accruing on 135 loans totaling
$999.8 million originated between January 1, 2005 and September 30,
2006, partially offset by a $22.2 million reduction of interest due to
the repayment of 65 loans totaling $388.1 million during the same
period,
- a decrease of $11.0 million in accretable yield included in our
interest income from the nine months ended September 30, 2005 to the
same period in 2006.
Rental Income. We received rental income of $3.2 million and $10.6 million
for the three and nine months ended September 30, 2006, respectively, compared
to $3.4 million and $10.2 million for the three and nine months ended September
30, 2005, respectively. The $400,000 increase from the nine months ended
September 30, 2005 to the corresponding period in 2006 was primarily the result
of one property's annual reconciliation of amounts due from a major tenant for
the portion of property operations expenses for which they are financially
responsible, pursuant to their lease.
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 $3.8 million and $11.7 million for
the three and nine months ended September 30, 2006, respectively, as compared to
$1.0 million and $4.0 million earned in the three and nine months ended
September 30, 2005, respectively. Consulting fees included in fee and other
income were $913,000 and $4.5 million for the three and nine months ended
September 30, 2006, respectively, and were $0 and $500,000 for the three and
nine months ended September 30, 2005, respectively. Revenue generated by
Pinnacle included in fee and other income was $1.8 million and $5.8 million for
the three and nine months ended September 30, 2006, respectively, and was
$905,000 and $3.2 million for the three and nine months ended September 30,
2005, respectively. We expect to generate fee income from the CDO described
above from our role as collateral manager and services with respect to the
collateral.
Investment Income. We derived our investment income from the return on our
unconsolidated real estate interests and from interest earned on cash held in
bank accounts. We received investment income of $3.1 million for the three
months ended September 30, 2006, compared to $1.3 million for the three months
ended September 30, 2005. The $1.8 million increase from the three months
30
ended September 30, 2005 to the corresponding period in 2006 was primarily due
to one of our appreciation interests.
We received investment income of $6.0 million for the nine months ended
September 30, 2006, compared to $4.5 million for the nine months ended September
30, 2005. The $1.5 million increase in investment income from the nine months
ended September 30, 2005 to the corresponding period in 2006 was primarily due
to one of our appreciation interests partially offset by the repayment of two
unconsolidated real estate interests, in accordance with their agreed upon
terms.
Interest Expense. Interest expense consists of interest payments made on
senior indebtedness relating to loans, long term debt secured by consolidated
real estate interests and interest payments made on our unsecured and secured
lines of credit. We anticipate our interest expense will increase as we increase
our use of leverage to both fund and enhance our return on our investments.
Interest expense was $8.3 million and $20.8 million for the three and nine
months ended September 30, 2006, respectively as compared to $3.7 million and
$8.8 million for the three and nine months ended September 30, 2005,
respectively. The increases in interest expense from the three and nine months
ended September 30, 2005 to the corresponding periods in 2006 were attributable
to the establishment, in the fourth quarter of 2005, and utilization throughout
2006 of our $335.0 million unsecured line of credit and $160.0 million
repurchase facility.
Property Operating Expenses; Depreciation and Amortization. Property
operating expenses were $2.0 for both the three months ended September 30, 2006
and 2005. Depreciation and amortization was $373,000 for the three months ended
September 30, 2006 as compared to $364,000 for the three months ended September
30, 2005. Property operating expenses were $5.9 million for the nine months
ended September 30, 2006 as compared to $5.7 million for the nine months ended
September 30, 2005. Depreciation and amortization was $1.1 million for the nine
months ended September 30, 2006 as compared to $1.1 million for the nine months
ended September 30, 2005. 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 our real estate interests.
Brandywine provided real estate management services to three and four properties
underlying our consolidated real estate interests at September 30, 2006 and
2005. We paid management fees of $39,000 and $107,000 to Brandywine for the
three and nine months ended September 30, 2006, respectively. We paid management
fees of $131,000 and $401,000 to Brandywine for the three and nine months ended
September 30, 2005, respectively. In addition, at September 30, 2006 and 2005,
Brandywine provided real estate management services for real estate underlying
six and seven of our unconsolidated real estate interests (whose results of
operations are not included in our consolidated financial statements). We
anticipate that we will continue to use Brandywine to provide real estate
management services.
Salaries and Related Benefits; General and Administrative Expense. Salaries
and related benefits were $1.9 million and $5.6 million for the three and nine
months ended September 30, 2006, respectively, as compared to $1.4 million and
$3.9 million for the three and nine months ended September 30, 2005,
respectively. General and administrative expenses were $1.1 million and $3.2
million for the three and nine months ended September 30, 2006, respectively.
Included in general and administrative expense is rental expense relating
to our downtown Philadelphia office space. We sublease from The Bancorp, Inc., a
portion of this space pursuant to an operating leases that provide for annual
rentals based upon the amount of square footage we occupy. The sub-lease expires
in August 2010 and contains two five-year renewal options. We paid rent to
Bancorp in the amount of $101,000 and $78,000 the three months ended September
30, 2006 and 2005, respectively. We paid rent to Bancorp in the amount of
$269,000 and $217,000 the nine months ended September 30, 2006 and 2005,
respectively. Also included in general and administrative expenses is $19,500
and $15,000 that we paid in the three month periods ended September 30, 2006 and
2005 to Bancorp for technical support services provided to us. Our relationship
with Bancorp is described in note 12 to our consolidated financial statements.
Non-operating interest income. We derived our non-operating interest income
primarily form interest earned on cash held in bank accounts. Our non-operating
interest income for the three and nine months ended September 30, 2006 were
$291,000 and $944,000, respectively. For the three and nine months ended
September 30, 2005, our non-operating interest income was $63,000 and $297,000,
respectively. The increase is primarily due to higher average cash balances and
higher average interest rates in 2006 compared to the corresponding periods in
2005.
Gain from discontinued operations. As of October 3, 2005, we classified as
"held for sale" one of our consolidated real estate interests, consisting of an
89% general partnership interest in a limited partnership that owns a building
in Philadelphia, Pennsylvania with 456,000 square feet of office/retail space.
As of March 31, 2006 we classified as "held for sale" another consolidated real
estate interest consisting of a 110,421 square foot shopping center in Norcross,
Georgia. As of May 11, 2006, we classified as "held for sale"
31
a consolidated real estate interest consisting of a 216-unit apartment complex
and clubhouse in Watervliet, New York. The results of operations attributable to
these interests have been reclassified, for all periods presented, to
"discontinued operations". Additionally, depreciation expense was no longer
recorded for these assets once they were classified as "held for sale".
In September 2001, we provided mezzanine financing to the owner of a 78,746
square foot retail shopping center in Chester, South Carolina. In 2002, the
Company purchased the existing first mortgage on the property. Both loans,
totaling $3.1 million, matured in 2003, but were not repaid at that time. The
underlying loan documents provided control of the rents at the property, and the
property owner (the borrower under the loan), was responsible for paying the
operating expenses of the property, thus providing for cash flow from the
property in amounts sufficient to keep the interest payments on both loans
current through early 2006, when we initiated foreclosure proceedings. A court
order granted physical control of the property effective July 1, 2006, at which
time we hired a local property manager to handle the day-to-day operations of
the property. Also at that time, we determined that the entity that owned the
property (the borrower under the our loans), was a variable interest entity of
which the Company was the primary beneficiary, due to the likelihood that from
that point forward the company would be absorbing the majority of the property's
expected losses, as defined in FIN 46(R). Accordingly, as of July 1, 2006 the
accounts of the variable interest entity that owned the property were included
in our consolidated financial statements. As of August 2, 2006, we classified as
"held for sale" this consolidated real estate interest as a result of our
intention to sell the property.
The following is a summary of the aggregate results of operations of our
investments which were classified as "held for sale" for the three and nine
months ended September 30, 2006 and 2005, which have been reclassified to
discontinued operations in our consolidated statements of income for all periods
presented:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ------------------------
2006 2005 2006 2005
------- ---------- ---------- -----------
Rental income ........................ $77,480 $4,972,048 $6,511,395 $13,025,635
Less: Operating expenses ............. 26,864 2,029,720 3,445,191 6,148,873
Interest expense .................. -- 970,478 1,524,597 2,900,272
Depreciation and amortization ..... 12,609 816,103 215,943 2,209,110
------- ---------- ---------- -----------
Income from discontinued operations .. $38,007 $1,155,747 $1,325,664 $ 1,767,380
======= ========== ========== ===========
We sold the Philadelphia, Pennsylvania office building in May 2006 for
approximately $74.0 million. The Norcross, Georgia shopping center and the
Watervliet, New York apartment complex were both sold in June 2006 for $13.0
million and $11.0 million, respectively. We recognized a net gain of $2.8
million on the sale of these interests. We sold the Chester, South Carolina
shopping center in November 2006 for approximately $3.4 million. There was no
gain or loss in the sale of this property.
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, 2005, as updated by our Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 17, 2006.
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 September 30, 2006 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
32
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As part of our business, we acquire and dispose of real estate investments
and, as a result, expect that we will engage in routine litigation in the
ordinary course of that business. Management does not expect that any such
litigation will have a material adverse effect on our consolidated financial
position or results of operations.
ITEM 1A. RISK FACTORS
Set forth below are risk factors relating to our proposed merger with
Taberna supplementing the risk factors disclosed in Item 1A of Part 1 of our
Annual Report on Form 10-K for the year ended December 31, 2005.
We expect to incur costs and expenses in connection with the merger.
We expect to incur costs and expenses of approximately $6.1 million in
connection with the merger. These costs and expenses include insurance costs,
investment banking, legal and accounting fees, printing expenses and other
related charges incurred and expected to be incurred by us. We cannot assure you
that the costs incurred by us in connection with the merger will not be higher
than expected or that the combined company will not incur additional
unanticipated costs and expenses in connection with the merger.
Failure to complete the merger could negatively impact the price of RAIT common
shares and future business and operations.
The merger is subject to customary conditions to closing, including the
receipt of required approvals from our shareholders and the shareholders of
Taberna. If any condition to the merger is not satisfied or, if permissible,
waived, the merger will not be completed. In addition, we and Taberna may
terminate the merger agreement in certain circumstances. If we and Taberna do
not complete the merger, the market price of RAIT common shares may fluctuate to
the extent that the current market price of RAIT common shares reflects a market
assumption that the merger will be completed. RAIT and Taberna also have paid,
and will be obligated to pay, certain fees and expenses in connection with the
merger, even if the merger is not completed. RAIT has to date paid fees of
$692,000 in connection with the merger. In addition, RAIT has utilized
significant management resources in an effort to complete the merger and is
subject to restrictions contained in the merger agreement on the conduct of its
business. If the merger is not completed for any reason, we will have incurred
costs including the diversion of management resources, for which we will have
received little or no benefit.
ITEM 5. OTHER INFORMATION
(a) The disclosure below is intended to satisfy any obligation of the
registrant to disclose the agreements and obligations described below pursuant
to Item 1.01- "Entry Into A Material Definitive Agreement", Item 2.03.-
"Creation of a Direct Financial Obligation Under An Off-Balance Sheet
Arrangement of a Registrant" and, with respect to the press release referenced
below, Item 8.01- "Other Events" of Form 8-K.
On November 7, 2006 (the "Closing Date"), RAIT Investment Trust
("RAIT") completed a long-term secured financing utilizing an on-balance sheet
collateralized debt obligation ("CDO") structure. The financing was effected
through the issuance by RAIT of $1.018 billion of commercial collateralized debt
obligations through two newly formed, indirect subsidiaries of RAIT, RAIT CRE
CDO I, Ltd. (the "Issuer") and RAIT CRE CDO I, LLC (together with the Issuer,
the "Co-Issuers"). RAIT used the majority of the net proceeds from the CDO
transaction to repay substantially all amounts outstanding under its repurchase
agreement and lines of credit. RAIT expects to use the remainder of the net
proceeds to fund additional investments. RAIT expects to treat the transaction
as a financing and will consolidate the Issuer for financial reporting purposes.
All CDO collateral assets will be reported in the consolidated assets of RAIT
and the investment grade notes issued to third party investors will be reported
as consolidated liabilities on RAIT's balance sheet.
Pursuant to the Indenture (the "Indenture") relating to this CDO
transaction dated as of November 7, 2006 among the Issuer, the Co-Issuer, Wells
Fargo Bank, National Association, as trustee, as backup advancing agent, as
securities intermediary, as paying agent, as collateral administrator and as
note registrar ("Wells Fargo"), and RAIT's indirect subsidiary RAIT Partnership,
L.P. ("RAIT Partnership"), as advancing agent, the Issuer and the Co-Issuer
issued the classes of notes (the "Notes") listed in the table below.
Concurrently with the issuance of the Notes, the Issuer also issued 165,000
Preference Shares (the "Preference Shares") and 250 ordinary shares,
representing all of the Issuer's capital shares. An indirect wholly-owned
subsidiary of RAIT purchased 100% of the Class J Notes, the Preference Shares
and the Ordinary Shares. The table below sets forth further information with
respect to the capital structure of the Issuer:
<Table>
<Caption>
Principal or Ratings Stated Maturity or
Notional (Fitch & S&P/ Scheduled
Class of Securities Amount Moody's) Redemption Date
- ------------------- ------------ ------------- ------------------
Class A-1A Notes $200,000,000 AAA/Aaa November 2046
Class A-1B Notes $275,000,000 AAA/Aaa November 2046
Class A-2 Notes $ 90,000,000 AAA/Aaa November 2046
Class B Notes $110,000,000 AA/Aa2 November 2046
Class C Notes $ 41,500,000 A+/A1 November 2046
Class D Notes $ 25,000,000 A/A2 November 2046
Class E Notes $ 16,000,000 A-/A3 November 2046
Class F Notes $ 22,000,000 BBB+/BaA1 November 2046
Class G Notes $ 20,500,000 BBB/BaA2 November 2046
Class H Notes $ 18,000,000 BBB-/Baa3 November 2046
Class J Notes $ 35,000,000 BB/Ba2 November 2046
Preference Shares $165,000,000 Not Rated November 2046
</Table>
In general, payments on any class of Notes are senior to all
payments on any Class of Notes with a lower alphabetical designation and
distributions in respect of the Preference Shares are subordinated to payments
on the Notes.
The Class A-1B Notes are a revolving class of Notes that will be fully issued
but were not borrowed under as of the Closing Date. Subject to compliance with
certain conditions, the Issuer may request and the holders of the Class A-1B
shall make advances under the Class A-1B Notes provided that the aggregate
principal amount of such advances may not exceed $275,000,000. A commitment fee
accrues on the aggregate undrawn amount of each Class A-1B commitment.
The Notes are limited-recourse debt obligations of the Co-Issuers secured
solely by a pledge of collateral pursuant to the Indenture. The aggregate
outstanding principal balance and the book value of the assets sold by RAIT
Partnership to the Issuer on the Closing Date to serve as collateral was
approximately $724.2 million. Under the terms of the Indenture, RAIT Partnership
has an initial investment period of just over eight months from the Closing Date
of the CDO during which it can sell up to $276.8 million of additional assets to
the CDO to serve as collateral. During the reinvestment period ending in
November 2011, RAIT can use the proceeds of collateral repayments to finance new
investments and replace any repaid collateral, subject to certain rating agency
guidelines relating to credit quality and diversification. Thereafter, the CDO
securities will be retired in order of priority as collateral is repaid. The
Preference Shares are issued share capital of the Issuer and will not be
secured.
Each class of Notes will mature at par in November, 2046, unless redeemed or
repaid prior thereto. Principal payments on each class of Notes will be made at
the stated maturity in accordance with the priority of payments as set forth in
the Indenture. RAIT expects that the Notes will be paid prior to the stated
maturity date. The weighted average lives of the Notes is currently expected to
be between 6.1 years and 10 years. The calculation of the weighted average lives
of the Notes assumes certain collateral characteristics and that there are no
prepayments, defaults or delinquencies. There is no assurance that such
assumptions will be met.
The Indenture contains customary events of defaults, including upon failure to
pay principal or interest when due and payable on the Notes (in accordance with
the terms of the Indenture) and a default in the performance of certain
covenants or other agreements of the Issuer or Co-Issuer under the Indenture
(subject to certain notice and cure periods). If an event of default occurs and
is continuing, Wells Fargo, as trustee, may, and will be required if directed by
a majority in aggregate outstanding amount of the Notes of the Notes
constituting the controlling class, declare the principal of and accrued and
unpaid interest on all the Notes to be immediately due and payable.
Principal of the Notes generally will not be payable prior to the end of the
reinvestment period except (a) upon the failure of the Issuer to meet certain
coverage tests applicable to any class of Notes, (b) in the event a rating
agency fails to confirm its rating within thirty days of the Closing Date and
certain other events occur, (c) in connection with a tax redemption or optional
redemption, (d) for the payment of any deferred interest amounts applicable to
any class of Notes, (e) in connection with a special amortization which occurs
if RAIT Partnership, as collateral manager, notifies Wells Fargo, as trustee,
that it has determined, in its sole discretion, that investments in additional
collateral would either be impractical or not beneficial, (f) in the case of
prepayments with respect to the Class A-1B Notes or (g) upon the occurrence and
continuation of a trading suspension arising out of a failure by the Issuer to
meet certain overcollateralization ratios.
Mandatory redemption is required in certain circumstances in the event that
certain tests applicable to any class of Notes under the Indenture are not
satisfied on the related determination date to the extent necessary to cause the
related test to be satisfied.
If the Notes have not been redeemed in full prior to November 2016, then an
auction of the collateral will be conducted by Wells Fargo, as trustee, on
behalf of the Issuer, and, provided that certain conditions set forth in the
Indenture are satisfied, the collateral will be sold and the Notes will be
redeemed, in whole but not in part, on such date or thereafter quarterly.
All of the Notes bear interest at a floating rate. At issuance, the
weighted-average interest rate of the Class A-1A Notes through Class H Notes was
one-month LIBOR plus 0.657% including up-front transaction costs amortized over
the expected life of the CDO. Interest on the Notes and distributions, if any,
on the Preference Shares will be payable monthly. Under the Indenture, RAIT
Partnership will act as advancing agent with respect to the collateral. The
advancing agent, subject to a recoverability determination, will make advances
in respect of certain interest shortfalls on the certain of the assets included
in the collateral under the circumstances and subject to the limitations set
forth in the Indenture.
RAIT Partnership will act as collateral manager under the CDO pursuant to a
collateral management agreement entered into between the Issuer and the
Collateral Manager on the Closing Date and will receive customary fees.
The Issuer, RAIT Partnership, as collateral manager, Wells Fargo and RAIT
Partnership entered into a servicing agreement, dated as of the Closing Date
pursuant to which Wells Fargo agreed to act as primary servicer with respect to
the collateral and RAIT Partnership agreed to act as special servicer with
respect to loans that become "specially serviced" loans (generally loans which
have suffered credit events or other defaults). The Servicing Agreement provides
that, if RAIT Partnership in the future meets certain criteria, RAIT Partnership
thereafter will succeed Wells Fargo as primary servicer. Prior thereto, pursuant
to a subservicing agreement between the Wells Fargo and RAIT Partnership, it is
expected that RAIT Partnership will perform most of the duties of Wells Fargo in
its capacity as primary servicer.
The offering of the Notes described above was made to certain placement agents
pursuant to a private placement. The placement agents sold or offered the
securities within the Unites States to qualified institutional buyers in
accordance with Rule 144A under the Securities Act of 1933 and outside the
United States in accordance with Regulation S under the Securities Act of 1933.
One of the placement agents was an affiliate of Daniel G. Cohen, the son of
RAIT's Chairman and Chief Executive Officer and the Chairman of the Board and
Chief Executive Officer of Taberna.
In connection with the CDO, RAIT obtained a temporary waiver of a financial
covenant under its unsecured line of credit requiring that its ratio of secured
debt to total assets be less than 0.4 to 1.0. This waiver ends on the earlier
of December 31, 2006 and the consummation of RAIT's proposed merger with
Taberna Realty Finance Trust.
RAIT issued a press release with respect to the CDO on November 9, 2006. A copy
of this press release is attached to this Form 10-Q as exhibit 99.1.
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.
33
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)
November 9, 2006 /s/ Ellen J. DiStefano
DATE ----------------------------------------
Ellen J. DiStefano
Chief Financial Officer
(On behalf of the registrant and as its
principal financial officer)
34
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
2.1 Agreement and Plan of Merger dated as of June 8, 2006 among RAIT
Investment Trust, RT Sub Inc. and Taberna Realty Finance Trust (1).
3.1 Amended and Restated Declaration of Trust of RAIT Investment Trust
(2).
3.1.1 Articles of Amendment to Amended and Restated Declaration of Trust of
RAIT Investment Trust (3).
3.1.2 Articles of Amendment to Amended and Restated Declaration of Trust of
RAIT Investment Trust (4).
3.1.3 Certificate of Correction to the Amended and Restated Declaration of
Trust of RAIT Investment Trust (5).
3.1.4 Articles Supplementary relating to the 7.75% Series A Cumulative
Redeemable Preferred Shares of Beneficial Interest (the "Series A
Articles Supplementary") (6).
3.1.5 Certificate of Correction to the Series A Articles Supplementary (6).
3.1.6 Articles Supplementary relating to the 8.375% Series B Cumulative
Redeemable Preferred Shares of Beneficial Interest (7).
3.2 By-laws of RAIT Investment Trust, as amended (2).
3.3 Articles of Incorporation of RAIT General, Inc. (2).
3.4 By-laws of RAIT General, Inc.(2).
3.5 Articles of Incorporation of RAIT Limited, Inc. (2).
3.6 By-laws of RAIT Limited, Inc. (2).
3.7 Certificate of Limited Partnership of RAIT Partnership, L.P. (2).
3.8 Limited Partnership Agreement of RAIT Partnership, L.P. (2).
3.8.1 Amendment to Limited Partnership Agreement of RAIT Partnership,
L.P.(1).
4.1 Form of Certificate for Common Shares of Beneficial Interest (4).
4.2 Form of Certificate for 7.75% Series A Cumulative Redeemable Preferred
Shares of Beneficial Interest (8).
4.3 Form of Certificate for 8.375% Series B Cumulative Redeemable
Preferred Shares of Beneficial Interest (7).
10.1 Letter Waiver dated June 8, 2006 among RAIT Investment Trust, Taberna
Realty Finance Trust and Betsy Z. Cohen to the Employment Agreement
dated January 23, 2002 between Betsy Z. Cohen and RAIT Investment
Trust (1).
10.2 Letter Waiver dated June 8, 2006 among RAIT Investment Trust, Taberna
Realty Finance Trust and Scott F. Schaeffer to the Employment
Agreement dated January 23, 2002 between Scott F. Schaeffer and RAIT
Investment Trust (1).
10.3 Employment Agreement dated as of June 8, 2006 by and between RAIT
Investment Trust, Daniel G. Cohen and, as to Section 7.14 thereof,
Taberna Realty Finance Trust (1).
10.4 Employment Agreement dated as of June 8, 2006 by and between RAIT
Investment Trust, Jack E. Salmon and, as to Section 7.14 thereof,
Taberna Realty Finance Trust (1).
10.5 Employment Agreement dated as of June 8, 2006 by and between RAIT
Investment Trust, Plamen Mitrikov and, as to Section 7.14 thereof,
Taberna Realty Finance Trust (1).
10.6 Employment Agreement dated as of June 8, 2006 by and between RAIT
Investment Trust, Raphael Licht and, as to Section 7.14 thereof,
Taberna Realty Finance Trust (1).
10.7 Amendment No. 1 dated as of June 8, 2006 among Mitchell Kahn, Taberna
Realty Finance Trust and RAIT Investment Trust to the Employment
Agreement dated as of April 28, 2005 between Mitchell Kahn and Taberna
Realty Finance Trust (1).
10.8 Master Repurchase Agreement dated as of September 20, 2006 between
RAIT Finance I, LLC and UBS Real Estate Securities Inc. (9)
10.9 Guarantee dated as of September 20, 2006 made by RAIT Investment Trust
on behalf of RAIT Finance I, LLC in favor of UBS Real Estate
Securities Inc.(9)
10.10 Form of Unit Award to Cover Grants to Section 16 Officers on
10/24/2006 (10).
35
15.1 Awareness Letter from Independent Accountants.
31.1 Rule 13a-14(a) Certification by the Chief Executive Officer 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.
99.1 Press Release
- ----------
(1) Incorporated herein by reference to RAIT Investment Trust's Form 8-K as
filed with the Securities and Exchange Commission on June 13, 2006 (File
No. 1-14760).
(2) Incorporated herein by reference to RAIT Investment Trust's Registration
Statement on Form S-11 (File No. 333-35077).
(3) Incorporated herein by reference RAIT Investment Trust's Registration
Statement on Form S-11 (File No. 333-53067).
(4) Incorporated herein by reference to RAIT Investment Trust's Registration
Statement on Form S-2 (File No. 333-55518).
(5) Incorporated herein by reference to RAIT Investment Trust's Form 10-Q for
the Quarterly Period ended March 31, 2002 (File No. 1-14760).
(6) Incorporated herein by reference to RAIT Investment Trust's Form 8-K as
filed with the Securities and Exchange Commission on March 18, 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 October 1, 2004 (File
No. 1-14760).
(8) 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).
(9) Incorporated herein by reference to RAIT Investment Trust's Form 8-K as
filed with the Securities and Exchange Commission on September 26, 2006
(File No. 1-14760).
(10) Incorporated herein by reference to RAIT Investment Trust's Form 8-K as
filed with the Securities and Exchange Commission on October 30, 2006
(File No. 1-14760).
36