UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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 WALNUT STREET, 28TH FLOOR
PHILADELPHIA, PA 19103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 861-7900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON SHARES OF BENEFICIAL INTEREST AMEX
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting shares held by non-affiliates
of the registrant, based upon the closing price of such shares on March 29,
2001, was approximately $72.3 million.
DOCUMENTS INCORPORTATED BY REFERENCE
Portions of the proxy statement for registrant's Annual Meeting of Shareholders
are incorporated by reference in Part III of this Form 10-K.
PART I
Item 1. Business
General
We are a real estate investment trust, or REIT, formed under Maryland
law. We conduct our operations through RAIT Partnership, L.P., a limited
partnership that owns substantially all of our assets. Our wholly-owned
subsidiaries, RAIT General, Inc. and RAIT Limited, Inc., are the sole general
partner and sole limited partner, respectively, of RAIT Partnership.
We have three principal business activities:
o we make real estate loans directly to borrowers,
o we acquire real estate loans from others, and
o we acquire real properties or interests in real properties.
We seek to generate income for distribution to our shareholders from a
combination of interest, rents, distributions in respect of rents where we own
an equity interest in a real property, and proceeds from the sale of our
investments.
We were formed in August 1997. We commenced operations upon completion
of our initial public offering in January 1998, which resulted in net proceeds
of $44.4 million. We made a second public offering in June 1998, which resulted
in an additional $41.1 million of net proceeds. At December 31, 2000, we had
total assets of $270.1 million including 26 loans with a book value of $140.7
million (less senior debt of $54.3 million) and property interests with a book
value of $107.9 million (less senior debt of $94.1 million). At December 31,
1998 we had total assets of $259.8 million including 23 loans with a book value
of $160.5 million (less senior debt of $78.5 million) and four property
interests with a book value of $89.9 million (less senior debt of $82.7
million).
Cautionary Statements for Purposes of the Safe Harbor
Statements made by the Company in written or oral form to various
persons, including statements made in filings with the U.S. Security and
Exchange Commission that are not historical in nature, including those using the
words "anticipate," "estimate," should," "expect," "believe," "intent," and
similar expressions, are forward-looking statements. These forward-looking
statements are subject to certain risks and uncertainties, including, among
others:
o business conditions and the general economy, especially as
they affect interest rates;
o defaults by borrowers in paying debt service on our loans,
particularly our subordinated and discounted loans;
o illiquidity of our portfolio of loans and property
interests;
o inability to originate or acquire loans or property
interests on favorable terms; and
o inability to maintain our real estate investment trust
qualification.
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Direct Lending
We make real estate loans directly to borrowers whose financing needs
do not conform to the criteria of institutional lenders that securitize loans.
We attempt to adapt the terms of our direct loans to meet the particular needs
of a borrower. We emphasize junior lien or other forms of subordinated, or
"mezzanine," financing, including wraparound financing, with principal amounts
generally between $2.0 million and $30.0 million. We are not limited in the
types of financing we may provide, however, and may provide first lien
financing. As of December 31, 2000, 17 of our 26 loans, constituting 76.4% of
our loans by book value, were junior lien loans. We also are not limited in the
amount of any investment, and may invest amounts that are smaller or larger than
our targeted size range. In addition, we provide short-term bridge financing in
excess of our targeted size range where the borrower has a committed source of
take-out financing, or we believe that it can arrange take-out financing, to
reduce our investment to an amount within our targeted size range. Our loans are
typically not insured by the Federal Housing Administration, guaranteed by the
Veteran's Administration or otherwise guaranteed or insured, except for
guarantees by borrowers or their affiliates, where appropriate.
We seek to include "appreciation interest" provisions in our loans.
These provisions require a borrower to pay us a percentage of any increase in
the value of a property underlying one of our loans over the value of the
property at the time the loan is made or over a value agreed upon by us and the
borrower. Alternatively, these provisions may require payment of a percentage of
the increase in a property's revenues over a stated revenue level, usually the
level at the time the loan is made. The measurement period for an appreciation
interest typically ends at loan repayment. We generally seek an appreciation
interest of at least 25%, and may seek to obtain both types of appreciation
interests in appropriate circumstances. Of the 26 loans in our portfolio as of
December 31, 2000, 14 have appreciation interests, constituting 61.0% of our
loans by book value. One of these appreciation interests, with respect to a loan
constituting 2.3% of our loans by book value, is less than the 25% target rate.
Loan Acquisition
We also acquire existing real property loans held by banks, other
institutional lenders or third-party investors. We focus on loans that, because
of one or more past defaults under the original loan terms due to lack of a
strong operating history for the underlying property, the borrower's historical
credit problems, the underlying property's cash flow problems or other factors,
we can acquire at a discount to their outstanding balances and the appraised
value of their underlying properties. We will not acquire any loan, however,
unless the prior loan holder, property owner or some other person has taken
material steps to resolve the problems relating to the loan and its underlying
property and where completion of the resolution process will not involve our
active intervention. We seek to acquire loans for which completion of the
resolution process will enhance our total return through increased yields or
realization of some portion or all of the discount at which they were acquired.
Typically, the resolution process for discounted loans involves
forbearance agreements. A forbearance agreement typically requires a borrower to
pay to the lender all revenue from the property after payment of that property's
operating expenses in return for the lender's agreement to withhold exercising
its rights under the loan documents. As of December 31, 2000, ten of our loans,
constituting 27.4% of our loans by book value, had been acquired at a discount
to both their outstanding balances and the appraised values of the underlying
properties. Each of the ten loans is in default under its original loan terms
but is current under the related forbearance agreement.
We may acquire loans that are not secured by recorded or perfected
liens. Of the 26 Loans in our portfolio as of December 31, 2000, 12 loans,
constituting 29.0% of our loans by book value were not collateralized by
recorded or perfected liens. Management believes that the following matters may
serve to mitigate our risks where no recorded or perfected lien exists. First,
rents and other cash flow from the underlying properties generally must be
deposited directly to a bank account controlled by us. Second, future liens
encumbering the underlying properties are generally prohibited by the senior
lenders. Finally, we generally hold a deed-in-lieu of foreclosure or nominal
cost purchase option that may enable us to enforce our rights against the
underlying property in an expedited fashion. However, none of these factors will
assure that these loans are collected. Moreover, filing a deed-in-lieu of
foreclosure with respect to these loans may (and, with respect to the existing
loans, will) constitute an event of default under related senior debt. Any such
default would require us to acquire or pay off the senior debt in order to
protect our investment.
3
Loan Origination Sources
To generate loan originations, we rely primarily upon the relationships
developed by our senior management in the mortgage lending, real estate and real
estate finance industries with developers, commercial real estate brokers,
mortgage bankers, real estate investors and other direct borrowers or referral
sources. With respect to loan acquisition, we also rely on our senior
management's existing knowledge of and relationships with institutional lenders
who may wish to dispose of under-performing loans in their existing portfolios
that meet our financing criteria. These institutional lenders may also refer to
us loan opportunities presented to them that they do not wish to underwrite.
Certain Financial Guidelines
We have established financial guidelines for use in evaluating
financing proposals. We may depart from one or more of the guidelines in
underwriting any particular loan, provided that our loan portfolio, in the
aggregate, is in compliance. The guidelines provide as follows:
o the property underlying the loan will have a current appraised value
that is not less than 25% below the property's estimated replacement
cost;
o the ratio of current cash flow to debt service on senior lien loans
with respect to the underlying property will be at least 1.25 to 1;
o the ratio of current cash flow to debt service on both senior loans
and our loan will be at least 1.1 to 1;
o the cash flow from the underlying property will be sufficient to
yield a current return on our investment of no less than 10% per
year;
o the aggregate of all outstanding senior debt may not exceed 75% of
the appraised value of the underlying property, and
o the aggregate of outstanding senior debt plus the amount of our loan
may not exceed 90% of the appraised value of the underlying property.
The "appraised value" of a property for purposes of the guidelines is the
estimate by an independent real estate appraiser of the fair market value of the
property, taking into account standard valuation methodologies. We generally
base our estimate as to replacement cost upon information we obtain from
developers, contractors and other persons regarding construction costs both
generally and with respect to similar properties in the area.
In departing from a particular guideline for any loan, we typically
consider factors that would cause the underlying property to be in compliance
with the guidelines within a reasonable time following initial funding of the
loan. For example, we may depart from the cash flow guidelines where the
borrower can demonstrate that historical cash flow will not be representative of
cash flow during the term of the loan, and may depart from loan-to-value
guidelines where the borrower can demonstrate that the application of the loan
proceeds will result in an increase in property value. Except for seven loans at
December 31, 2000, constituting 4.5% of our total assets, that exceeded the 90%
loan-to-value guideline, our loans conformed to the guidelines. Notwithstanding
the foregoing, these guidelines may be changed by our Board of Trustees without
notice to or approval by the shareholders.
Location of Properties Relating to Loans
We generally finance properties located in metropolitan areas of the
United States where there is a significant amount of small, multi-family
residential, office and other commercial properties. To date, we have focused
our financing activities in Philadelphia, Pennsylvania and the
Baltimore/Washington corridor. Of the 26 loans in our portfolio as of December
31, 2000, 14 related to properties located in the Philadelphia metropolitan
area, and six were located in the Baltimore/Washington corridor. We are not,
however, subject to geographic limitations and, accordingly, may provide loans
in metropolitan areas other than Philadelphia and the Baltimore/Washington
corridor, in metropolitan areas that do not readily fit our targeted
characteristics, or in geographic areas that are outside of metropolitan areas,
as appropriate opportunities are identified.
4
Types of Properties Relating to Loans
We focus our financing activities on multi-family residential, office
and other commercial properties with property values generally between $2.0
million and $30.0 million. We may, in appropriate circumstances as determined by
the Board of Trustees, provide financing to properties with values outside this
range, as was the case with nine loans, constituting 5.7% of our loans, by book
value, at December 31, 2000. We do not normally finance undeveloped property or
make loans in situations where construction is involved except where the
underlying property, and any additional real property collateral we may require
as security, as it exists at the time of financing, meets our loan-to-value
guidelines. In situations where a loan is made with respect to a property that
does not meet our cash flow guidelines, we typically require that the developers
and their controlling persons personally guarantee the loan, and that some of
all of these persons, individually or in the aggregate, have net worth
sufficient to repay the loan in the event of default. Any such loan may also
condition funding upon the satisfaction of certain property income or occupancy
criteria. We are not limited in the amount or percentage of our loans in any
category of property.
Lending Procedures
Prior to making or acquiring any loan, we conduct an acquisition
review. We estimate the value of the underlying property based upon a recent
independent appraisal obtained by the borrower, an independent appraisal
obtained by us, or valuation information obtained by us and thereafter confirmed
by an independent appraisal. We make an on-site inspection of the property and,
where appropriate, we require further inspections by engineers, architects or
property management consultants. We may also retain environmental consultants to
review potential environmental issues. We obtain and review available rental,
expense, maintenance and other operational information regarding the property
and prepare cash flow and debt service analyses. For acquired loans, we also
evaluate the adequacy of the loan documentation as, for example, the existence
and adequacy of notes, mortgages, collateral assignments of rents and leases,
and title policies insuring lien positions, and other available information,
such as credit and collateral files, and evaluate the status and efficacy of
programs to resolve problems to which the loan or its underlying property may
have been subject. We base the amount that we lend, or the amount of our offer
to purchase, upon the foregoing evaluations and analyses. We may modify these
procedures as appropriate in particular situations.
After originating or acquiring a loan, we follow specified procedures
to monitor loan performance and compliance. We generally require that all
revenues from the underlying property be deposited into an operating account on
which we are the sole signatory. On a monthly basis, we pay the senior debt
service, collect our debt service payments and all required reserves, and then
transfer the balance of the funds to the borrower. In some situations, the
borrower pays property expenses from an account that is subject to our review
and approval before payment. The borrower must supply monthly operating
statements and yearly certification of compliance with the terms of the loan. We
may also require a borrower to obtain our approval before any material contract
or commercial lease with respect to the property is executed and that the
borrower prepare a budget for the property not less than 60 days prior to the
beginning of a year, which we must review and approve.
Loan Portfolio
The following table sets forth information regarding our loans as of
December 31, 2000:
Investments in Average
real estate Number loan-to- Range of Range of
Type of loan loans of loans value(1) loan yields(2) maturities
------------ ------------- -------- --------- -------------- ----------
Long-term first mortgages and
senior loan participations(3)(4).... $ 10,753,177 6 43% 11-16% 3/28/01-7/14/09
Mezzanine (including
wraparound) loans (5)............... 94,429,557 15 83% 10-30% 12/27/01-1/31/09
Short-term bridge loans (6)............ 35,718,449 5 86% 14-35% 4/13/01-7/11/01
5
- -----------------
(1) Calculated as outstanding loan balance divided by the appraised value of
the underlying collateral based on appraisals we obtained when the loan was
originated or purchased.
(2) All of our loans are at fixed rates.
(3) Five of these loans, in the aggregate amount of $8.8 million at December
31, 2000, are cash flow loans or participations in cash flow loans. A cash
flow loan, although at a stated rate of interest, must pay interest to the
extent of all cash flow from the property underlying the loan after
property operating expenses. Our cash flow loans are loans in default under
the original loan terms that we acquired at a discount and are subject to
forbearance agreements.
(4) Five of these loans, in the aggregate amount of $5.4 million at December
31, 2000, including four cash flow loans, in the aggregate amount of $3.4
million at December 31, 2000, have appreciation interests.
(5) Includes $45.3 million of senior financing. Eleven of these loans, in the
aggregate amount of $39.9 million at December 31, 2000, are with recourse
only to the properties securing the loans. Five loans, in the aggregate
amount of $29.9 million at December 31, 2000, are cash flow loans and are
subject to forbearance agreements. Eight loans, in the aggregate amount of
$66.5 million at December 31, 2000, including three cash flow loans, in the
aggregate amount of $8.7 million at December 31, 2000, have appreciation
interests.
(6) Includes $9.0 million of senior financing. One of these loans, in the
aggregate amount of $14.0 million at December 31, 2000, have appreciation
interests. One of these loans, in the aggregate amount of $12.2 million at
December 31, 2000, is secured by guarantees from the principals of the
borrower.
Financing Considerations
The value of our loans depends on conditions beyond our control. Loan
defaults will reduce our current return on investment and may require us to
become involved in expensive and time-consuming proceedings, including
bankruptcy, reorganization or foreclosure proceedings. Our primary or sole
source of recovery is typically the real property underlying our loans.
Accordingly, the value of our loans depends upon the value of the underlying
real property. This value may be affected by numerous factors outside our
control, including those we describe in "Real Property Considerations," below.
Our loans typically provide payment structures other than
self-amortization, including structures that defer payment of some portion of
accruing interest, or defer repayment of principal, until loan maturity. Where a
borrower must make a large lump sum payment when a loan is due, its ability to
satisfy this obligation may depend upon its ability to obtain suitable
refinancing or otherwise to raise a substantial cash amount, which we do not
control. In addition, mortgage lenders can lose their lien priority to
mechanics', materialmen's and other liens in many jurisdictions, including those
in which our existing loans are located. For these and other reasons, the total
amount that we may recover from one of our loans may be less than the total
amount of that loan or our cost of acquisition.
Longer term, subordinate and non-conforming loans are illiquid and
their value may decrease. Our loans generally have maturities between four and
ten years and typically do not conform to standard loan underwriting criteria.
Many of our loans are subordinate loans. As a result, our loans are relatively
illiquid investments. We may be unable to vary our portfolio promptly in
response to changing economic, financial and investment conditions. As a result,
the fair market value of our portfolio may decrease in the future.
Investment in subordinate loans involves increased risk of loss. We
emphasize junior lien loans and other forms of subordinated financing, including
wraparound loans. Because of their subordinate position, junior lien loans carry
a greater credit risk than senior lien financing, including a substantially
greater risk of non-payment of interest or principal. Where, as part of a
financing structure, we take an equity or other unsecured position, our risk of
loss may be materially increased. A decline in the real estate market could
adversely affect the value of the property so that the aggregate outstanding
balances of senior liens may exceed the value of the underlying property. In the
event of a default on a senior loan, we may elect to
6
make payments, if we have the right to do so, in order to prevent foreclosure on
the senior loans. In the event of foreclosure, we will be entitled to share in
the proceeds only after satisfaction of the amounts due to senior lienors, which
may result in our being unable to recover the full amount or, indeed, any of our
investment. It is also possible that in some cases, a "due on sale" clause
included in a senior mortgage, which accelerates the amount due under the senior
mortgage in case of the sale of the property, may apply to the sale of the
property if we foreclose, increasing our risk of loss.
When we acquire a junior loan, we may not acquire the right to service
senior loans. The servicers of the senior loans are responsible to the holders
of those loans, whose interests will likely not coincide with ours, particularly
in the event of a default. Accordingly, the senior loans may not be serviced in
a manner advantageous to us.
As of December 31, 2000, 12 of our loans, constituting 29.0% of our
loans by book value, were not collateralized by recorded or perfected liens,
although they are secured by deeds-in-lieu of foreclosure, also known as "pocket
deeds." A deed-in-lieu of foreclosure is a deed executed in blank that the
holder is entitled to record immediately upon a default in the loan. These loans
are subordinate not only to existing liens encumbering the underlying property,
but also to future judgment or other liens that may arise. Furthermore, in a
bankruptcy we will have materially fewer rights than secured creditors and our
rights will be subordinate to the lien-like rights of the bankruptcy trustee.
Moreover, enforcement of our loans against the underlying properties will
involve a longer and more complex legal process than enforcement of a mortgage
loan.
Investment in non-conforming loans may involve increased risk of loss.
Loans we acquire generally do not conform to conventional loan criteria due to
past defaults by borrowers. These defaults typically result from lack of a
strong operating history for the properties underlying the loans, the borrower's
historical credit problems, the underlying properties' cash flow problems or
other factors. As a result, loans we acquire may have a higher risk of default
and loss than conventional loans.
Discounted loans may have high rates of default. We acquire loans at a
discount from both the outstanding balances of the loans and the appraised value
of the properties underlying the loans. Acquiring loans at a discount involves a
substantially higher degree of risk of non-collection than loans that conform to
institutional underwriting criteria. We do not acquire a loan unless material
steps have been taken toward resolving problems with the loan, or its underlying
property. However, previously existing problems may recur or other problems may
arise.
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Financing with high loan-to-value ratios may involve increased risk of
loss. We anticipate that, as permitted by our guidelines, many of our loans will
have loan-to-value ratios in excess of 80%. A loan-to-value ratio is the ratio
of the amount of our financing, plus the amount of any senior indebtedness, to
the appraised value of the property underlying the loan. As of December 31,
2000, 18 of our loans, constituting 64.1% of our loans by book value, had
loan-to-value ratios in excess of 80%. By reducing the margin available to cover
fluctuations in property value, a high loan-to-value ratio increases the risk
that, upon default, the amount obtainable from the sale of the underlying
property may be insufficient to repay the loan.
Interest rate changes may adversely affect our investments. Changes in
interest rates affect the market value of our loan portfolio. In general, the
market value of a loan will change in inverse relation to an interest rate
change where a loan has a fixed interest rate or only limited interest rate
adjustments. Accordingly, in a period of rising interest rates, the market value
of such a loan will decrease. Moreover, in a period of declining interest rates,
real estate loans may have less value than other fixed income securities due to
possible prepayments.
Interest rate changes will also affect the return we obtain on new
loans. In particular, during a period of declining rates, our reinvestment of
loan repayments may be at lower rates than we obtained in prior investments or
on the repaid loans. Also, increases in interest on debt we incur may not be
reflected in increased rates of return on the investments funded through that
debt, which would adversely affect our return on these investments. Accordingly,
interest rate changes may materially affect the total return on our investment
portfolio, which in turn will affect the amount available for distribution to
shareholders.
Lack of geographic diversification exposes our investments to a higher
risk of loss from regional economic factors. We emphasize financing properties
located in the Philadelphia, Pennsylvania metropolitan area and the
Baltimore/Washington corridor. While we have no specific geographic limitations
on where we may invest, we anticipate that our loans will continue to be
concentrated in the Philadelphia region and the Baltimore/Washington corridor
for the foreseeable future. This lack of geographic diversification may make our
loan portfolio more sensitive to economic developments of a primarily regional
nature, which may result in reduced rates of return or higher rates of default
than might be incurred with a more geographically diverse investment portfolio.
We may not obtain appreciation interests at the rate we seek, or at
all; we may not benefit from appreciation interests we do obtain. In addition to
an agreed upon interest rate, we seek to obtain appreciation interests from our
borrowers. Appreciation interests require a borrower to pay us additional
amounts based upon a property's increase in value, revenues, or both. While we
seek appreciation interests at rates of at least 25%, we may not be able to
obtain these rates. Moreover, we may not be able to negotiate appreciation
interest provisions in any of our loans. In addition, while we sought to
structure the
8
interest rates on our existing loans to maximize our current yield, we may in
the future accept a lower interest rate to obtain an appreciation interest. The
value of any appreciation interest depends on the performance and value of the
property underlying the loan and, thus, is subject to real estate investment
risks. Accordingly, we may not realize any benefits from our appreciation
interests. We do not anticipate receiving significant amounts from our
appreciation interests in the early years of our loans.
Appreciation interests may cause loss of our lien priority. Because
appreciation interests allow us to participate in the increase in a property's
value or revenue, courts, including a court in a bankruptcy, arrangement or
similar proceeding, may determine that we are a partner of, or joint venturer
with, the borrower. If a court makes that determination, we could lose our lien
priority in the property or lose any benefit of our lien.
Loans secured by interests in entities owning real property may involve
increased risk of loss. We may originate or acquire loans secured by interests
in entities that own real properties rather than by a direct security interest
in the underlying properties. The interests pledged as security for these loans
may be illiquid, or otherwise have features that may make it difficult for us to
obtain a return of our investment in the event of a default.
The competition for financing may inhibit our ability to achieve our
objectives. We may encounter significant competition from banks, insurance
companies, savings and loan associations, mortgage bankers, pension funds,
investment banks and others, including public or private real estate investment
trusts, or REITs. This competition could reduce our yields and make it more
difficult to obtain appreciation interests. It may also increase the price, and
thus reduce potential yields, on discounted loans we acquire. An increase in the
general availability of funds to lenders, or a decrease in the amount of
borrowing activity, may increase competition for making loans and may reduce
obtainable yields or increase the credit risk inherent in the available loans.
In addition, most of our competitors have substantially greater assets than we
do. As such, they have the ability to make larger loans to more creditworthy
borrowers and to have a more diversified loan portfolio, which reduces the risk
of loss from any one loan.
Lengthy loan commitment periods may reduce our returns. We typically
issue a loan commitment to a borrower before making the loan. From the time the
funds are committed until the loan is closed and the funds disbursed, we hold
the funds in temporary investments, which typically do not produce substantial
investment returns. If there is a substantial period between loan commitment and
loan closing, or if a borrower determines not to use our financing, our
investment returns will be adversely affected.
Usury statutes may impose interest ceilings and substantial penalties
for violations. Interest we charge on our loans, which may include amounts
9
received from appreciation interests, may be subject to state usury laws. These
laws impose maximum interest rates that may be charged on loans and penalties
for violation, including repayment of excess interest and unenforceability of
debt. We seek to structure our loans so that we do not violate applicable usury
laws, but uncertainties in determining the legality of interest rates and other
borrowing charges under some statutes may result in inadvertent violations.
Acquisition of Property Interests
We also acquire real property either directly, or indirectly through
ownership of an interest in an entity that itself owns real property. We believe
that acquiring property interests is advantageous for three reasons. First, it
gives us flexibility in addressing the financial needs and tax situations of
borrowers in situations where debt financing may not be appropriate. Second, it
provides us with the opportunity to participate in capital appreciation in
addition to current income. Third, it assists us in our tax planning. Certain of
our current loans and, we anticipate, some of our future loans, may result in
timing differences between:
o the actual receipt of income and the actual payment of deductible
expenses and
o the inclusion of that income and deduction of such expenses in
arriving at our REIT taxable income.
This would increase the amount that we must distribute to our shareholders to
avoid corporate income tax in such year, although we may not receive
contemporaneous corresponding cash payments. Depreciation deductions associated
with our property interests, however, should help offset such adverse tax
effects.
We currently own property interests as follows:
o 500-unit apartment building in Philadelphia, Pennsylvania with an
acquisition cost of $19.5 million. After acquisition, we obtained
non-recourse financing of $15.0 million ($14.9 million at December
31, 2000), which bears interest at 7.73% and is due on December 1,
2009.
o 25% preferred interest in a limited liability company that owns a
168-unit apartment complex in Baltimore, Maryland. We originally
acquired 100% of the limited liability company for $4.4 million. We
subsequently sold a 75% interest in the limited liability company to
a third party. The property is subject to $3.9 million of
non-recourse financing ($3.8 million at December 31, 2000), which
bears interest at 7.88% and is due on November 1, 2009.
o 89% partnership interest in a partnership that owns a building in
Philadelphia, Pennsylvania with 456,000 square feet of retail/office
space. We acquired our interest for $750,000. The property is subject
to non-recourse financing of $65.0 million ($68.2 million including
accrued and deferred interest at December 31, 2000), of which $43.4
million ($43.0 million at December 31, 2000) bears interest at 6.85%
and is due on August 1, 2008, $4.9 million ($5.0 million at December
31, 2000) bears interest at 10% and is due on August 1, 2008, and
$18.3 million ($20.2 million including accrued and deferred interest
at December 31, 2000) bears interest at 12% and is due on September
1, 2008.
o Building in Rohrerstown, Pennsylvania with 12,630 square feet on 2.93
acres used as a diagnostic imaging center. We acquired the property
for $1.7 million. After acquisition, we obtained non-recourse
financing of $1.1 million ($1.1 million at December 31, 2000), which
bears interest at 7.33% and is due on August 1, 2008.
o 51% preferred interest in a limited liability company that owns a
building in Philadelphia, Pennsylvania with 88 apartment units and
56,000 square feet of commercial space. We acquired our interest for
$5.6 million. The property is subject to financing of $11.6 million
($11.7 million at December 31, 2000), which bears interest at 8.367%
and is due on March 11, 2028.
We conduct an acquisition review with respect to property interests
similar to our review in acquiring or originating loans. We also require
satisfactory evidence, generally in the form of title insurance, that we, or the
entity owning the property in which we acquire an interest, has or will acquire
good and marketable title to the property, subject only to such encumbrances as
we find acceptable.
10
Real Property Considerations
The value of our property interests depends on conditions beyond our
control. Real property investments are subject to varying degrees of risk.
Yields from our real properties depend on their net income and capital
appreciation. Real property income and capital appreciation may be adversely
affected by general and local economic conditions, neighborhood values,
competitive overbuilding, weather, casualty losses and other factors beyond our
control. The value of our real property may also be adversely affected by
factors such as costs of complying with regulations and liability under
applicable environmental laws, interest rate changes and the availability of
financing. Income from a property will be adversely affected if a significant
number of tenants is unable to pay rent or if available space cannot be rented
on favorable terms. Operating and other expenses of our properties, particularly
significant expenses such as mortgage payments, real estate taxes and
maintenance costs, generally do not decrease when income decreases and, even if
revenues increase, operating and other expenses may increase faster than
revenues.
Property interests are illiquid and their value may decrease. Real
estate investments are relatively illiquid. Therefore, we may have only a
limited ability to vary our portfolio of property interests quickly in response
to changes in economic or other conditions. As a consequence, the fair market
value of some or all of our property interests may decrease in the future. In
addition, provisions in the Internal Revenue Code and related regulations impose
a 100% tax on gain realized by a REIT from property held primarily for sale to
customers in the ordinary course of business. These provisions may materially
adversely affect our ability to sell property interests.
Uninsured and underinsured losses may affect the value of, or return
from, our property interests. Our properties, and the properties underlying our
loans, have comprehensive insurance in amounts we believe are sufficient to
permit the replacement of the properties in the event of a total loss, subject
to applicable deductibles. There are certain types of losses, such as
earthquakes, floods and hurricanes, that may be uninsurable or not economically
insurable. Inflation, changes in building codes and ordinances, environmental
considerations and other factors also might make it impracticable for us to use
insurance proceeds to replace a damaged or destroyed property. If any of these
or similar events occurs, it may reduce our return from an affected property and
the value of our investment.
We may have less control of our investment when we invest in joint
ventures, partnerships or similar real property interests. Our acquisition of
equity interests in entities that own real property provides risks not present
in real property loans or direct property ownership. For example, the other
equity owners in the entity holding the property might have economic or business
interests or goals that are inconsistent with our business interests or goals
and may be in a position to take action contrary to our instructions or to our
policies and objectives. Moreover, if we are a limited partner in a limited
partnership and have the right to control the partnership or its property, we
may be deemed to be a general partner and liable for the debts of the
partnership beyond the amount of our investment.
Real properties with environmental problems may create liabilities for
us. The existence of hazardous or toxic substances on a property will adversely
affect its value and our ability to sell or borrow against the property.
Contamination of a real property by hazardous substances or toxic wastes not
only may give rise to a lien on that property to assure payment of the cost of
remediation, but also can result in liability to owners, operators or lenders
for that cost. Many environmental laws impose liability whether a person knows
of, or is responsible for, the contamination. In addition, if a property owner
arranges for the disposal of hazardous or toxic substances at another site, it
may be liable for the costs of cleaning up and removing those substances from
the site, even if it neither owned nor operated the disposal site. Environmental
laws may require us to incur substantial expenses and may materially limit our
use of our properties. In addition, future or amended laws, or more stringent
interpretations or enforcement policies of existing environmental requirements,
may increase exposure to environmental liability.
Compliance with Americans with Disabilities Act could be costly. Under
the Americans with Disabilities Act of 1990, all public accommodations must meet
federal requirements for access and use by disabled persons. We believe that our
properties, and those underlying our loans, substantially comply with the
requirements of the Americans with Disabilities Act. However, a determination
that these properties do not comply with the Americans with Disabilities Act
could result in liability for both governmental fines and damages to private
parties. If we or our borrowers were required to make unanticipated major
modifications to comply with the Americans with Disabilities Act, it could
adversely affect our ability to make distributions to shareholders.
11
Leverage
Although we may incur recourse debt to fund our investments, we
generally do not do so unless we do not have immediately available capital
sufficient to enable us to acquire a particular investment. We may also incur
recourse debt in order to prevent default under loans senior to our loans or to
discharge senior loans entirely if this becomes necessary to protect our loan.
This may occur if foreclosure proceedings are instituted by the holder of a
mortgage interest which is senior to our loan or if filing a deed-in-lieu of
foreclosure upon default of our loan would constitute a default under a related
senior loan. We may incur recourse indebtedness in order to assist in the
operation of any property financed by us whose operations we have taken over as
a result of default, or to protect our loan. We may also borrow to meet REIT
distribution requirements imposed by the Internal Revenue Code. Some or all of
our assets may collateralize debt we incur. We anticipate that, in normal
operations, we will not exceed a debt to equity ratio of 0.5 to 1.0. For
purposes of calculating this ratio, our indebtedness equals all of our recourse
indebtedness, and equity is based on the fair market value of our net assets.
However, where a loan is in the form of wraparound financing, the stated
principal amount of the loan for book purposes increases by the amount of the
senior debt to which the underlying property is subject, and we record a
corresponding liability, even where the sole recourse for the senior debt is to
the underlying property. Any such senior debt is not included in calculating our
debt to equity ratio. However, the amount of debt that we may incur, is not
subject to limitation; we may therefore have a debt to equity ratio that may
from time to time vary substantially from 0.5 to 1.0, if appropriate investment
opportunities are presented. At December 31, 2000 our debt to equity ratio did
not exceed 0.5 to 1.0.
In addition to indebtedness that we may incur, the properties
underlying our financing, or the property interests we acquire, may be subject
to pre-existing indebtedness. Provided that such indebtedness is without
recourse to us, we are not subject to limitations in connection with the amount
of non-recourse debt financing pertaining to properties underlying our loans or
property interests.
Leverage can reduce income available for distribution and cause losses.
Using leverage, whether with recourse to us generally or only with respect to a
particular property, to acquire investments creates an opportunity for increased
net income, but at the same time creates risks. For example, leverage can reduce
the net income available for distribution to shareholders in periods of rising
interest rates where interest rate increases are greater than increases in the
rates of return on our investments. We use leverage to acquire investments only
when we believe it will enhance our returns. However, we cannot be sure that our
use of leverage will prove to be beneficial. Moreover, when our debt is secured
by our assets, we can lose some or all of our assets through foreclosure if we
do not meet our debt service obligations.
Portfolio Turnover
We do not purchase investments with the intention of engaging in
short-term trading. We may, however, sell any particular investment and reinvest
proceeds, subject to distribution requirements and limitations on asset sales
imposed on a REIT by the Internal Revenue Code, if we believe it is prudent to
do so, regardless of the length of the holding period. In addition, we also
provide bridge loan financing requiring repayment within a substantially shorter
period of time than our other Loans. We may reinvest the proceeds of these loans
into new loans or may roll them over to permanent financing. For the year ended
December 31, 2000, we did not sell any loans.
Competition
Although the commercial mortgage loan origination and acquisition
business is generally competitive in virtually all of its aspects, our focus on
the origination or acquisition of loans in situations that, generally, do not
conform to the underwriting standards of institutional lenders or sources that
provide financing through securitization is a niche in which we believe there
are relatively few specialized investors. In the overall market for the
origination and acquisition of real estate obligations, however, there are a
substantial number of competitors including investment partnerships, financial
institutions, investment companies, public and private mortgage funds and other
entities.
Many of our competitors possess greater financial and other resources
than ours. As a result, we can offer no assurance that we will be able to effect
origination or acquisition of loans in the same manner and on the same terms as
in the past or that there will not be significant variations in the
profitability of our commercial mortgage loan origination and acquisition
business. In this regard, we will also have to compete for capital necessary to
fund our operations based largely upon the performance of our loan portfolio.
12
PART II
Item 2. Properties
Our office is located in Philadelphia and is subleased under an
anticipated operating lease with The Bancorp.com, Inc., whose Chief Executive
Officer is, and whose Chairman is the son of, our Chairman and Chief Executive
Officer. The sublease expires in August 2010. Our rent is based on the amount of
square footage we occupy plus an allocation of common area expenses. See Note
11, Notes to Consolidated Financial Statements in Item 8. For a description of
property interests owned, see Item 1.
In March 2000, we began subleasing suburban office space at an annual
rental of $10,000. The sublease expires February 28, 2001 and contains automatic
one-year renewal options.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Market for the Company's Common Equity and Related Shareholder Matters
Our common shares trade on the American Stock Exchange under the
symbol "RAS."
The following table sets forth the high and low sale prices of our
common shares and distribution payments on our common shares on a quarterly
basis for our last two fiscal years.
Cash
distributions
per
High Low share
---- --- -------------
Fiscal 2000
- -----------
Fourth quarter.......................................... $12.85 $11.25 $.51
Third quarter........................................... 12.88 10.44 .51
Second quarter.......................................... 11.13 9.94 .51
First quarter........................................... 11.44 10.06 .51
Fiscal 1999
- -----------
Fourth quarter.......................................... 11.13 9.94 .51
Third quarter........................................... 13.44 10.75 .51
Second quarter.......................................... 12.88 10.00 .51
First quarter........................................... 13.13 10.00 .51
13
As of February 27, 2001, there were 6,310,242 common shares outstanding
held by approximately 2,000 persons of record.
Item 6. Selected Financial Data
The following selected financial and operating information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements, including the
notes thereto, included elsewhere herein.
As of and for the year ended December 31,
----------------------------------------------
For the period August
20, 1997 (date of
inception) through
2000 1999 1998(1) December 31, 1997
---- ---- ---- -----------------
(dollars in thousands except per share data)
Operating data:
Total revenues $ 38,549 $ 34,122 $ 17,177 ---
Total costs and expenses 26,419 21,178 8,778 $ 46
Net income (loss) 12,055 12,962 8,474 (46)
Net income per share-basic 1.93 2.10 1.82 ---
Net income per share-diluted 1.92 2.09 1.81 ---
Balance sheet data:
Total assets 270,120 269,829 201,259 2,192
Indebtedness secured by real estate 148,434 161,164 114,204 ---
Shareholders' equity (deficiency) 86,675 86,238 85,518 (45)
Shareholders' equity per share 13.74 13.91 13.87 ---
Other data:
Funds from operations ("FFO")(2) 14,963 14,849 9,269 ---
FFO(2) per share-basic 2.39 2.41 1.99 ---
FFO(2) per share-diluted 2.39 2.40 1.98 ---
Dividends per share 2.04 2.04 1.77 ---
- ------------------
(1) Operations commenced on January 14, 1998.
(2) In accordance with guidelines of the National Association of Real Estate
Investment Trusts, funds from operations ("FFO") is net income (including
realized gains) adjusted by adding back real property depreciation and
certain amortization expenses.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Overview
We began investment operations in January 1998. Our principal business
objective is to generate income for distribution to our shareholders from a
combination of interest, rents and distributions in respect to rents where we
own an equity interest in a real property, and proceeds from the sale of
portfolio investments. We completed two public offerings of our common shares
during 1998. We used the offering proceeds, proceeds from loan repayments and
property interest refinancings and a line of credit we obtained in 1999 to build
our investment portfolio.
14
Liquidity and Capital Resources
The principal sources of our capital were the two offerings of our
common shares. After offering costs and underwriting discounts and commissions,
we obtained net offering proceeds of $86.0 million. We also obtained capital
resources from principal payments on, refinancings of, and sales of loans in our
portfolio. These resources aggregated $47.3 million for the year ended December
31, 2000, including $30.2 million of debt refinancing, and $59.1 million for the
year ended December 31, 1999. In addition, during 2000 and 1999 we obtained $6.0
million and $14.0 million, respectively, from draws on the $20.0 million secured
line of credit we obtained in 1999.
We use our capital resources principally for originating and purchasing
loans and acquiring property interests. For the year ended December 31, 2000, we
originated or purchased ten loans, including one refinancing and one increase in
existing financing, in the amount of $39.7 million, including senior debt of
$30.2 million underlying wraparound loans, as compared to nine loans in the
amount of $61.1 million, including senior debt of $12.0 million underlying
wraparound loans, in 1999. For the year ended December 31, 2000, we acquired one
property interest for $5.6 million. For the year ended December 31, 1999, we
acquired one property interest for $1.5 million and we converted two loans with
an aggregate outstanding balance of $19.5 million to property interests with an
appraised value of $20.1 million. In addition, we funded $2.5 million of
improvements to two properties.
We also receive funds from interest payments on our loans and operating
income from our property interests. As required by the Internal Revenue Code, we
used these funds, to the extent of not less than 95% of our taxable income, to
pay distributions to our shareholders. For fiscal 2001, the distribution
requirement decreases to 90%. For the years ended December 31, 2000 and 1999, we
paid distributions of $12.8 million and $12.6 million, respectively, of which
$12.3 million and $12.2 million was in cash and $472,000 and $342,000 was in
additional common shares issued through our dividend reinvestment plan. We
intend to maintain our current level of distributions in fiscal 2001.
In order to maintain our liquidity, we pursue the following strategies:
o providing shorter-term financing to our borrowers, generally
in the form of bridge financing, to increase the turnover of
our investments, and
o pursuing borrower refinancing of our loans through senior
lenders, where we retain junior interests.
We do not currently experience material difficulties in originating shorter-term
financings or obtaining senior loan refinancings on acceptable terms. However,
we could encounter difficulties in the future, depending upon the development of
conditions in the credit markets.
15
At December 31, 2000, we had approximately $7.4 million in funds
available for investment. All of these funds were temporarily invested in a
money market account that we believe has a high degree of liquidity and safety.
We expect that, during 2001, all of our short-term bridge loans, totaling $26.7
million net of underlying senior indebtedness of $9.0 million at December 31,
2000, will be repaid or refinanced, providing additional funds available for
investment in the approximate amount of $26.7 million.
Results of Operations
Our average interest-earning assets for the years ended December 31,
2000, 1999 and 1998 were $85.5 million, $85.9 million and $68.3 million,
respectively, including $9.4 million, $8.1 million and $22.0 million,
respectively, of average interest-earning assets invested in a money market
account. The slight decrease in average interest-earning assets and the slight
increase in average interest-earning assets invested in a money market account
from the year ended December 31, 1999 to the corresponding period in 2000 was
due to differences between the times when we made loans and our receipt of loan
repayments and interest, as well as temporary changes in other asset and
liability accounts. The increase in total average interest-earning assets and
the decrease in average interest-earning assets invested in a money market
account from the year ended December 31, 1998 to the corresponding period in
1999 was due to the origination of loans and the acquisition of loans and
property interests utilizing the remaining proceeds of our public offerings in
1998.
Our interest income from loans was $18.3 million for the year ended
December 31, 2000, compared to $20.0 million and $10.5 million in 1999 and 1998,
respectively. Interest income from our money market account was $548,000 for the
year ended December 31, 2000, compared to $312,000 and $928,000 for 1999 and
1998, respectively. The decrease in interest income from the year ended December
31, 1999 to the corresponding period in 2000 was due to a decrease in our
investments in real estate loans ($140.7 million at December 31, 2000 versus
$160.5 million at December 31, 1999) and an increase in our net investment in
real estate ($107.9 million at December 31, 2000 versus $89.9 million at
December 31, 1999). The increase in interest income from the money market
account from the year ended December 31, 1999 to the corresponding period in
2000 was due to a higher balance of assets invested in the account arising from
loan repayments we held in anticipation of loan fundings. The increase in
interest income from loans and the decrease in interest income from the money
market account from the year ended December 31, 1998 to the corresponding period
in 1999 were due to our investment of the proceeds of our two public offerings.
The net yield on average interest-earning non-money market assets was 21.4%,
21.1% and 19.3% for the years ending December 31, 2000, 1999 and 1998,
respectively. The increases in net yield result from our use of our secured line
of credit and non-recourse financings of individual loans as well as our ability
to increase the pricing of our loans in response to market conditions. The yield
on average interest-earning money market account assets was 3.9%, 4.3% and 5.2%
for the years ending December 31, 2000, 1999 and 1998, respectively. The
decreases in yield on average interest-earning money market assets was due to a
decrease in interest amounts paid by banks on money market funds. Included in
our interest
16
income is accretion of loan discount relating to loans we acquired at a discount
to the appraised value of the underlying properties of $213,000, $3.2 million
and $250,000 in 2000, 1999 and 1998, respectively. We realized $3.4 million of
this accretion in 1999 when two loans with a combined book value of $19.5
million were converted to a property interest with an appraised value of $20.1
million.
We received $18.3 million from rents from our property interests for
the year ended December 31, 2000, compared to $12.4 million and $4.6 million for
the years ended December 31, 1999 and 1998, respectively. The rent increases
from 1998 to 1999 and 1999 to 2000 were due to the increase in the number of
property interests we own from two in 1998, to four in 1999, and five in 2000.
We earned fee and other income of $1.4 million for the year ended
December 31, 2000 as compared to $684,000 in 1999 and $153,000 for 1998.
Included in the 2000 fee and other income was $500,000 earned for subordinating
one of our loans to additional senior debt, $300,000 relating to termination of
an appreciation interest in one of our loans, $286,000 of income generated by
RAIT Capital Corp., our first mortgage conduit loan subsidiary which holds the
assets we acquired from Pinnacle Capital Group, $169,000 of dividend income from
one of our property interests, $90,000 earned for services provided to one of
our property interests and $75,000 earned for restructuring the ownership and
financing of one of our property interests. Included in the 1999 fee and other
income was $325,000 earned for restructuring the ownership and financing of one
of our property interests, $250,000 earned for subordinating one of our loans to
additional senior debt, and $90,000 earned for services provided to one of our
property interests. Included in the 1998 fee and other income was $50,000 earned
for subordinating one of our loans to additional senior debt, $45,000 earned for
services provided to one of our property interests, and $45,000 earned in
referral fees.
We recognized a gain of $131,000 on the sale of a loan in 1999 and a
gain of $940,000 on the sale of a loan participation in 1998. In 1999, we also
recognized income from loan satisfactions of $598,000, which related to our
conversion of two loans with a combined book value of $19.5 million to a
property interest worth $20.1 million.
Ten of our acquired loans remain subject to forbearance or similar
agreements. During the years ended December 31, 2000, 1999 and 1998, all
payments under the agreements were timely made and all borrowers were otherwise
in full compliance with the terms of the agreements. The remaining 16 loans in
our portfolio are performing in accordance with their terms as we originally
underwrote them and were current as to payments as of each of December 31, 2000,
1999 and 1998.
During the year ended December 31, 2000, we incurred expenses of $26.4
million as compared to $21.2 million and $8.8 million in 1999 and 1998,
respectively. The expenses consisted of interest expense, operating expenses
relating to our property interests, salaries and related benefits, general and
administrative expenses, and depreciation and amortization. Interest expense was
$12.8 million for the year ended December 31, 2000, as compared to $11.1 million
and $4.3 million in 1999 and 1998, respectively. Interest expense consists of
17
interest payments made on senior indebtedness on properties underlying our
wraparound loans and property interests, and interest payments made on our line
of credit, all of which increased as a result of the increase in our loan
portfolio and number of property interests and our use of draws under our line
of credit to originate or acquire loans and property interests. Property
operating expenses were $8.6 million for the year ended December 31, 2000,
compared to $6.3 million and $2.3 million for 1999 and 1998, respectively.
Depreciation and amortization was $2.9 million for the year ended December 31,
2000, compared to $1.9 million and $796,000 for 1999 and 1998, respectively. The
increases in property operating expenses, depreciation and amortization were due
to the increased number of property interests in our portfolio. Salaries and
related benefits were $1.5 million for the year ended December 31, 2000, as
compared to $1.4 million and $866,000 in 1999 and 1998, respectively. General
and administrative expenses were $637,000 for the year ended December 31, 2000,
as compared to $433,000 and $233,000 in 1999 and 1998, respectively. Salaries
and related benefits and general and administrative expenses increased from 1999
to 2000 as a result of salary increases and incremental expenses of $383,000
associated with our August 2000 acquisition of Pinnacle Capital Group. The
increase from 1998 to 1999 was due to salary increases and reflected less than a
full year of operations during 1998.
During 1998 we initiated a reserve for loan losses of $226,000. This
reserve is a general reserve and is not related to any individual loan or to an
anticipated loss. In accordance with our policy, we determined that this reserve
was adequate as of December 31, 2000 and 1999. We will continue to analyze the
adequacy of this reserve on a quarterly basis.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in a money
market account, loans held in our portfolio, long-term debt underlying our loans
and property interests and our secured line of credit as of December 31, 2000.
The presentation, for each category of information, aggregates the assets and
liabilities by their maturity dates for maturities occurring in each of the
years 2001 through 2005 and separately aggregates the information for all
maturities arising after 2005.
Interest earning assets and interest bearing liabilities,
aggregated by maturity date
Fair Market
2001 2002 2003 2004 2005 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----------
Interest earning
assets:
Money market
accounts $ 7,408,000 --- --- --- --- --- $ 7,408,000 $ 7,408,000
Average interest rate 4.9% --- --- --- --- --- 4.9%
First mortgages and
senior loan
participations $ 2,910,000 $ 355,000 $2,386,000 $ 451,000 $3,875,000 $ 776,000 $10,753,000 $ 11,705,000
Average interest rate 13.7% 12.0% 11.4% 12.0% 12.0% 11.0% 12.2%
Mezzanine (including
wraparound) loans $ 3,281,000 $ 4,094,000 $ 621,000 $ 621,000 $ 569,000 $85,243,000 $94,430,000 $113,810,000
Average interest
rate 13.4% 14.5% 11.8% 11.8% 11.8% 11.5% 13.5%
Bridge loans $35,718,000 --- --- --- --- --- $35,718,000 $ 36,583,000
Average interest
rate 15.6% --- --- --- --- --- 15.6%
Interest bearing
liabilities:
Senior indebtedness
secured by real
estate underlying
wraparound loans $ 9,880,000 $ 1,752,000 $1,034,000 $1,082,000 $1,134,000 $39,404,000 $54,286,000 $ 53,927,000
Average interest
rate 9.4% 8.5% 8.4% 8.3% 8.3% 7.4% 7.8%
Long-term debt
secured by
real estate owned $ 783,000 $ 843,000 $ 905,000 $ 973,000 $1,047,000 $89,597,000 $94,148,000 $ 93,524,000
Average interest
rate 7.3% 7.3% 7.3% 7.3% 7.3% 8.4% 8.3%
Secured line of
credit --- $20,000,000 --- --- --- --- $20,000,000 $ 20,000,000
Average interest
rate --- 9.5% --- --- --- --- 9.5%
18
Market Risk
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, equity prices and real estate values.
All of our interest earning assets and interest bearing liabilities are at fixed
rates, except for our line of credit which bears interest at a varying rate
equal to the prime rate of interest as quoted by The Wall Street Journal. As a
result, our primary market risk exposure is to changes in interest rates, which
will affect the interest cost of outstanding draws on our line of credit.
Changes in interest rates may also affect the value of our investments and the
rates at which we reinvest funds obtained from loan repayments. As interest
rates increase, although the interest rates we obtain from reinvested funds will
generally increase, the value of our existing loans at fixed rates will
generally tend to decrease. As interest rates decrease, the amounts becoming
available to us for investment due to repayment of our loans may be invested at
lower rates than we had been able to obtain in prior investments, or than the
rates on the repaid loans. These relationships between interest rate and value
may be diminished or not applicable to our cash flow loans. We do not hedge or
otherwise seek to manage our interest rate risk. We do not enter into risk
sensitive instruments for trading purposes.
19
Item 8. Financial Statements and Supplementary Data.
RAIT INVESTMENT TRUST AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants...................... F-2
Consolidated Balance Sheets at December 31, 2000 and 1999............... F-3
Consolidated Statements of Income for the three years ended
December 31, 2000.................................................. F-4
Consolidated Statements of Changes in Shareholders' Equity for the
three years ended December 31, 2000................................ F-5
Consolidated Statements of Cash Flows for the three years ended
December 31, 2000.................................................. F-6
Notes to Consolidated Financial Statements.............................. F-7
Schedule IV -- Mortgage Loans on Real Estate
All other schedules are not applicable or are omitted since
either (i) the required information is not material or
(ii) the information required is included in the consolidated
financial statements and notes thereto............................. F-27
F-1
[Grant Thornton Letterhead]
Report of Independent Certified Public Accountants
Board of Trustees
RAIT Investment Trust
We have audited the accompanying consolidated balance sheets of RAIT Investment
Trust and Subsidiaries (formerly Resource Asset Investment Trust) as of December
31, 2000 and 1999, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of RAIT Investment
Trust and Subsidiaries as of December 31, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Grant Thornton LLP
- ----------------------
Philadelphia, Pennsylvania
January 24, 2001 (except for note 16(a) as to which the date is March 28, 2001
and note 16(b) as to which the date is March 31, 2001)
F-2
RAIT INVESTMENT TRUST
and Subsidiaries
Consolidated Balance Sheets
December 31,
--------------------------------
2000 1999
---- ----
ASSETS
Cash and cash equivalents $ 7,407,988 $ 11,323,301
Restricted cash 7,954,688 5,283,886
Tenant escrows 222,371 164,378
Accrued interest receivable 3,011,496 1,544,984
Investments in real estate loans, net 140,724,787 160,485,767
Investments in real estate, net 107,907,967 89,936,339
Furniture, fixtures and equipment, net 49,007 88,243
Prepaid expenses and other assets 1,862,482 1,001,775
Goodwill, net 979,667 --
------------- -------------
Total assets $ 270,120,453 $ 269,828,673
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued liabilities $ 686,760 $ 332,040
Accrued interest payable 1,663,631 1,033,484
Deferred interest payable 880,347 788,841
Tenant security deposits 493,096 270,908
Borrowers' escrows 8,093,099 5,308,136
Deferred income 492,588 693,162
Senior indebtedness secured by real estate underlying the Company's wraparound
loans 54,286,388 78,478,730
Long-term debt secured by real estate owned 94,147,937 82,685,074
Secured line of credit 20,000,000 14,000,000
------------- -------------
Total liabilities 180,743,846 183,590,375
Minority interest 2,701,493 --
Shareholders' equity:
Preferred shares, $.01 par value; 25,000,000 authorized shares -- --
Common shares, $.01 par value; 200,000,000 authorized shares; issued and
outstanding, 6,310,242 and 6,199,126 shares, respectively 63,102 61,991
Additional paid-in capital 87,316,637 86,159,238
(Accumulated deficit)retained earnings (704,625) 17,069
------------- -------------
Total shareholders' equity 86,675,114 86,238,298
------------- -------------
Total liabilities and shareholders' equity $ 270,120,453 $ 269,828,673
============= =============
The accompanying notes are an integral part of these consolidated
financial statements
F-3
RAIT INVESTMENT TRUST
and Subsidiaries
Consolidated Statements of Income
For the year ended December 31,
----------------------------------------------------------
2000 1999 1998
---- ---- ----
REVENUES
Mortgage interest income $18,274,567 $20,011,207 $10,544,689
Rental income 18,305,725 12,386,251 4,609,534
Fee income and other 1,420,117 684,207 153,440
Investment income 548,322 311,631 928,448
Gain on sale of loan/participation -- 131,125 940,448
Income from loan satisfaction -- 597,742 --
----------- ----------- -----------
Total revenues 38,548,731 34,122,163 17,176,559
COSTS AND EXPENSES
Interest 12,777,804 11,104,947 4,309,248
Property operating expenses 8,607,170 6,344,473 2,348,386
Salaries and related benefits 1,488,390 1,407,955 865,638
General and administrative 637,060 433,239 232,682
Depreciation and amortization 2,908,623 1,887,560 795,577
Provision for loan losses -- -- 226,157
----------- ----------- -----------
Total costs and expenses 26,419,047 21,178,174 8,777,688
---------- ----------- -----------
Net income before minority interest $12,129,684 $12,943,989 $ 8,398,871
Minority interest (74,959) 17,761 74,935
----------- ----------- -----------
Net income $12,054,725 $12,961,750 $ 8,473,806
=========== =========== ============
Net income per common share--basic $ 1.93 $ 2.10 $ 1.82
=========== =========== ===========
Weighted average common shares
outstanding--basic 6,251,828 6,168,248 4,655,633
=========== =========== ===========
Net income per common share--diluted $ 1.92 $ 2.09 $ 1.81
=========== =========== ===========
Weighted average common shares
outstanding--diluted 6,265,922 6,192,656 4,685,229
=========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements
F-4
RAIT INVESTMENT TRUST
and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the Three Years Ended December 31, 2000
(Accumulated Total
Preferred Common Additional deficit)/ shareholders'
stock stock paid-in capital retained earnings equity
----------- ------- --------------- ----------------- -------------
Balance, January 1, 1998 $ --- $ 1 $ 999 $ (45,617) $ (44,617)
Issuance of common shares,
net of expenses --- 61,653 85,816,333 --- 85,877,986
Net income --- --- --- 8,473,806 8,473,806
Dividends --- --- --- (8,788,716) (8,788,716)
----------- ------- ------------ ------------ ------------
Balance, December 31, 1998 61,654 85,817,332 (360,527) 85,518,459
----------- ------- ------------ ------------ ------------
Net income --- --- --- 12,961,750 12,961,750
Dividends --- 337 341,906 (12,584,154) (12,241,911)
----------- ------- ------------ ------------ ------------
Balance, December 31, 1999 --- 61,991 86,159,238 17,069 86,238,298
----------- ------- ------------ ------------ ------------
Net income --- --- --- 12,054,725 12,054,725
Dividends --- 464 471,597 (12,776,419) (12,304,358)
Stock options exercised --- 522 539,052 --- 539,574
Common shares issued 125 146,750 --- 146,875
----------- ------- ------------ ------------ ------------
Balance, December 31, 2000 $ --- $63,102 $ 87,316,637 $ (704,625) $ 86,675,114
=========== ======= ============ ============ =============
The accompanying notes are an integral part of these consolidated
financial statements
F-5
RAIT INVESTMENT TRUST
and Subsidiaries
Consolidated Statements of Cash Flows
For the year ended December 31,
---------------------------------------------------------
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net Income $ 12,054,725 $ 12,961,750 $ $8,473,806
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of loan/loan participation --- (131,125) (940,448)
Income from loan satisfaction --- (597,742) ---
Minority interest 74,959 (17,761) (74,935)
Depreciation and amortization 2,908,623 1,887,560 795,577
Provision for loan losses --- --- 226,157
Amortization of original issue discount --- --- (5,001)
Accretion of loan discounts (213,474) (3,206,162) (249,696)
Increase in tenant escrows (57,993) (164,378) ---
Increase in accrued interest receivable (949,012) (487,065) (1,057,919)
Increase in prepaid expenses and other assets (819,732) (461,064) (512,340)
Increase in accounts payable and accrued liabilities 152,306 189,973 33,544
Increase in accrued interest payable 630,147 359,437 674,047
Increase in deferred interest payable 91,506 673,273 115,568
Increase in tenant security deposits 222,188 126,078 144,830
(Decrease) increase in deferred income (200,574) 669,162 ---
Increase (decrease) in borrowers' escrows 146,661 (394,154) 418,402
------------- ------------ ------------
Net cash provided by operating activities 14,040,330 11,407,782 8,041,592
------------- ------------ ------------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment (35,074) (5,460) (117,712)
Real estate loans purchased (1,850,000) (24,005,000) (79,461,384)
Real estate loans originated (37,840,982) (37,159,648) (40,986,200)
Proceeds from sale of loan/loan participation --- 2,481,782 4,000,000
Principal repayments from real estate loans 17,106,519 28,768,535 38,412,212
Purchase of real estate and improvements (6,052,358) (3,976,651) (2,406,220)
Cash paid for asset acquisition (630,378) --- ---
Other --- --- 92,698
------------- ------------ ------------
Net cash used in investing activities (29,302,173) (33,896,442) (80,466,606)
------------- ------------ ------------
Cash flows from financing activities:
Advances on secured line of credit 6,000,000 14,000,000 ---
Issuance of common stock, net 539,574 --- 85,877,986
Payment of cash dividends (12,304,358) (12,241,911) (8,788,716)
Principal repayments on senior indebtedness (12,392,394) (374,941) (335,780)
Principal repayments on long-term debt (696,292) (443,078) (416,810)
Proceeds of long-term debt 30,200,000 27,860,225 1,100,000
------------- ------------ ------------
Net cash provided by financing activities 11,346,530 28,800,295 77,436,680
------------- ------------ ------------
Net change in cash and cash equivalents (3,915,313) 6,311,635 5,011,666
------------- ------------ ------------
Cash and cash equivalents, beginning of period 11,323,301 5,011,666 ---
------------- ------------ ------------
Cash and cash equivalents, end of period $ 7,407,988 $ 11,323,301 $ 5,011,666
============= ============ ============
Noncash items:
Stock issued for asset acquisition $ 146,875 $ --- $ ---
============= ============ ============
The accompanying notes are an integral part of these consolidated
financial statements
F-6
NOTE 1 -- FORMATION AND BUSINESS ACTIVITY
RAIT Investment Trust (the "Company" or "RAIT"), together with its wholly-owned
subsidiaries, RAIT Partnership, L.P. (the "Operating Partnership"), RAIT
General, Inc. (the "General Partner"), the General Partner of the Operating
Partnership, and RAIT Limited, Inc. (the "Initial Limited Partner"), the Initial
Limited Partner of the Operating Partnership (together the "Company"), were each
formed in August 1997. RAIT, the General Partner and the Initial Limited Partner
were organized in Maryland, and the Operating Partnership was organized as a
Delaware limited partnership. In September 2000, the Company changed its name
from Resource Asset Investment Trust to RAIT Investment Trust.
The Company's principal business activity is to provide or acquire loans (or
participation interests in such loans) secured by mortgages on commercial real
property or similar instruments in situations that, generally, do not conform to
the underwriting standards of institutional lenders or sources that provide
financing through securitization. The Company emphasizes subordinated (or
"mezzanine") financing, including wraparound financing, with principal amounts
generally between $2.0 million and $30.0 million. The Company also provides
short-term bridge financing in excess of the targeted size range where the
borrower has committed to obtain take-out financing (or the Company believes
that it can arrange such financing) to reduce the Company's investment to an
amount within the targeted size range. The Company also acquires real
properties, or interests therein. The Operating Partnership undertakes the
business of the Company, including the origination and acquisition of financing
and the acquisition of property interests.
The Company principally competes with banks, insurance companies, savings and
loan associations, mortgage bankers, pension funds, investment bankers, and
other public or private real estate investment trusts for origination or
acquisition of real estate loans.
The Company emphasizes financing with respect to properties located in
metropolitan areas of the United States, and has identified certain areas in
which it may concentrate its investments, particularly the Philadelphia,
Pennsylvania metropolitan area (three properties owned and 14 properties
underlying loans as of December 31, 2000 and two properties owned and 14
properties underlying loans as of December 31, 1999 were located in this area)
and in the Baltimore/Washington, D.C. corridor (one property owned and six
properties underlying loans as of December 31, 2000 and one property owned and
five properties underlying loans at December 31, 1999 related to properties
located in this area).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America. The consolidated financial statements include the accounts of the
F-7
Company, its wholly owned subsidiary, RAIT Capital Corp., and its majority-owned
subsidiaries, OSEB Associates L.P. and Stobba Associates, L.P. All material
intercompany balances and transactions have been eliminated in consolidation.
In preparing the consolidated financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities, and the reported amounts of
revenue and expenses. Actual results could differ from those estimates.
The principal estimate that is particularly susceptible to significant change in
the near term relates to the allowance for loan losses. The evaluation of the
adequacy of the provision for loan losses includes an analysis of the individual
investment in real estate loans and overall risk characteristics and size of the
different loan portfolios, and takes into consideration current economic and
market conditions, the capability of specific borrowers to pay specific loan
obligations, and current loan collateral values. However, actual losses on
specific loans, which also are encompassed in the analysis, may vary from
estimated losses.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 summarizes certain of the SEC's views on applying accounting principles
generally accepted in the United States of America to revenue recognition in
financial statements. On June 26, 2000, the SEC issued SAB 101B to defer the
effective date of implementation of SAB 101 until no later than the fourth
fiscal quarter of fiscal years beginning after December 31, 1999. The Company
adopted SAB 101 on October 1, 2000. The Company does not anticipate the adoption
of SAB 101 will have a material impact on the consolidated financial statements.
The Company follows the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for the way
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in subsequent interim financial reports
issued to shareholders. It also establishes standards for related disclosure
about products and services, geographic areas, and major customers. The
statement requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and assess performance.
Under current conditions, the Company is reporting in one operating segment.
Investments in Real Estate Loans
Investments in real estate loans consists of loans that are originated at par or
acquired at face value ("Par Loans") and certain mortgage loans, for which the
borrower is not current as to original contractual principal and interest
F-8
payments, that are acquired at a discount from both the face value of the loan
and the appraised value of the property underlying the loan ("Discounted
Loans"). For Discounted Loans, the difference between the Company's cost basis
in the loan and the appraised value of the underlying property (up to the amount
of the loan) is accreted into interest income over the estimated life of the
loan using a method that approximates the level interest method. Projected cash
flows and appraised values of the property are reviewed on a regular basis and
changes to the projected amounts reduce or increase the amounts accreted into
interest income over the remaining life of the loan. The Company has the ability
and the intent to hold these loans to maturity.
Par Loans are originated or purchased at face value and are stated at amortized
cost, less any provision for loan losses, because the Company has the ability
and the intent to hold them for the foreseeable future or until maturity or
payoff. Interest income is accrued as it is earned. In some instances, the
borrower pays additional interest ("points") at the time the loan is closed. The
points are recognized over the term of the loan to which it relates. The Company
will place loans on non-accrual status after being delinquent greater than 89
days, or earlier if the borrower is deemed by management to be unable to
continue performance. When a loan is placed on non-accrual status, interest
accrued but not received is reversed out of current year income or the allowance
for loan losses in relation to the period recognized. While a loan is on
non-accrual status, interest is recognized only as cash is received. Loans are
returned to accrual status only when the loan is reinstated and ultimate
collectibility of future interest is no longer in doubt (none of the Company's
loans is on non-accrual status). Gains and losses on disposal of such assets are
computed on a specific identification basis.
Management's periodic evaluation of the adequacy of the provision for loan
losses is based on known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions and trends. Such
estimates are susceptible to change, and actual losses on specific loans may
vary from estimated losses. The provision for loan losses will be increased by
charges to income and decreased by charge-offs (net of recoveries).
The Company accounts for the impairment of loans under SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan: Income Recognition and Disclosures."
These statements require that a creditor measure impairment based on the present
value of expected future cash flows discounted at the loan's effective interest
rate, except that as a practical expedient, a creditor may measure impairment
based on a loan's observable market price, or the fair value of the collateral
if the loan is collateral dependent. Regardless of the measurement method, a
creditor must measure impairment based on the fair value of the collateral when
the creditor determines that foreclosure is probable. At December 31, 2000 and
1999, the Company had no such loans.
In September 2000, the Financial Accounting Standards Board ("FASB") adopted
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which replaces SFAS No.125, "Accounting for
Transfers and Servicing of Financial Asset and Extinguishments of Liabilities."
F-9
SFAS No. 140 revises the standards for accounting for the securitizations and
other transfers of financial assets and collateral. This new standard also
requires certain disclosures, but carries over most of the provisions of SFAS
125. SFAS 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. However, for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral, this statement is effective for
fiscal years ending after December 15, 2000 (with earlier application not
allowed) and is to be applied prospectively. The adoption of this statement is
not expected to have a material impact on the Company's consolidated financial
statements.
Investments in Real Estate
Investments in real estate are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over an estimated useful
life of 39 years (non-residential) and 27.5 years (residential). The Company
reviews its investments in real estate for impairment as defined in SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.
Derivative Financial Instruments
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended in June 1999 by SFAS 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133,"
and in June 2000 by SFAS 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" (collectively, SFAS 133), requires that entities
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. Under SFAS 133,
an entity may designate a derivative as a hedge of exposure to changes in: (a)
fair value of a recognized asset or liability or firm commitment, (b) cash flows
of a recognized or forecasted transaction, or (c) foreign currencies of a net
investment in foreign operations, firm commitments, available-for-sale
securities or a forecasted transaction. Depending upon the effectiveness of the
hedge and/or the transaction being hedged, any changes in the fair value of the
derivative instrument is recognized in earnings in the current year, deferred to
future periods, or recognized in other comprehensive income. Changes in the fair
value of all derivative instruments not recognized as hedge accounting are
recognized in current year earnings. SFAS 133 is required for all fiscal
quarters or fiscal years beginning after June 15, 2000. The Company adopted SFAS
133 effective January 1, 2001. No adjustment was required as a result of the
change in accounting principle.
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 the loans.
F-10
Depreciation and Amortization
Furniture, fixtures and equipment are carried at cost less accumulated
depreciation. Furniture and equipment are depreciated using the straight-line
method over an estimated useful life of five years. Leasehold improvements are
amortized using the straight-line method over the life of the related lease.
Goodwill, which resulted from the Pinnacle Capital Group acquisition, is being
amortized using the straight-line method over 15 years.
Stock Option Plans
The Company accounts for its stock option grants under the provisions of FASB
No. 123, "Accounting for Stock-Based Compensation," which contains a fair
value-based method for valuing stock-based compensation that entities may use,
and measures compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, the standard permits entities to continue
accounting for employee stock options and similar instruments under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting defined in
SFAS No. 123 had been applied. The Company accounts for its stock options under
APB Opinion No. 25.
Federal Income Taxes
The Company qualifies and has elected to be taxed as a Real Estate Investment
Trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of
1986, as amended, commencing with its taxable year ending December 31, 1998. If
the Company qualifies for taxation as a REIT, it generally will not be subject
to federal corporate income tax on its taxable income that is distributed to its
shareholders. A REIT is subject to a number of organizational and operational
requirements, including a requirement that it currently distribute at least 90%
of its annual taxable income.
Earnings per Share
The Company follows the provisions of SFAS No. 128, "Earnings per Share." This
statement eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share ("EPS") in conjunction with
the disclosure of the methodology used in computing such earnings per share.
Basic earnings per share excludes dilution and is computed by dividing income
available to common shares by the weighted average common shares outstanding
during the period. Diluted earnings per share takes into account the potential
dilution that could occur if securities or other contracts to issue common stock
F-11
were exercised and converted into common stock. EPS is computed based on the
weighted average number of shares of common stock outstanding.
Consolidated Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
non-interest earning deposits and interest earning deposits. Cash paid for
interest was $11.8 million, $9.9 million and $3.5 million for the years ended
December 31, 2000, 1999 and 1998, respectively. Senior indebtedness incurred in
conjunction with the acquisition and origination of real estate loans was $30.0
million, $34.5 million and $49.7 million for the years ended December 31, 2000,
1999 and 1998, respectively. Long-term debt assumed in conjunction with the
acquisition of an investment in real estate was $11.8 million, $860,000 and
$66.5 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
During 1999, the Company converted two loans with a combined book value of $19.5
million to a 100% equity interest in a property with an appraised value of $20.1
million, which resulted in income from loan satisfaction of approximately
$600,000.
NOTE 3 -- INVESTMENTS IN REAL ESTATE LOANS
The Company's portfolio of investments in real estate loans consisted of the
following:
December 31,
--------------------------------------
2000 1999
---- ----
Long-term first mortgages and senior loan participations............ $ 10,753,177 $ 11,030,530
Mezzanine (including wraparound) loans.............................. 94,429,557 115,762,704
Short-term bridge loans............................................. 35,718,449 33,860,161
Loan costs 49,761 58,529
Less: Provision for loan losses..................................... (226,157) (226,157)
------------ -------------
Investments in real estate loans............................... 140,724,787 160,485,767
------------ -------------
Less: Senior indebtedness secured by real estate
underlying the Company's wraparound loans...................... (54,286,388) (78,478,730)
------------ ------------
Net investments in real estate loans........................... $ 86,438,399 $ 82,007,037
============ ============
The following is a summary description of the assets contained in the Company's
portfolio of investments in real estate loans as of December 31, 2000:
Type of Loan Average loan- Range of
Number of loans to-value Yield range maturities
--------------- ------------- ----------- ---------------
Long-term first mortgages and senior loan
participations.................................. 6 43% 11-16% 3/28/01-7/14/09
Mezzanine (including wraparound
loans........................................... 15 83% 10-30% 12/27/01-1/31/09
Short-term bridge loans............................. 5 86% 14-35% 4/13/01-7/11/01
F-12
At December 31, 2000, approximately $67.7 million in principal amount of the
loans were secured by multi-family residential properties and $73.2 million in
principal amount of the loans were secured by commercial properties. At December
31, 1999, approximately $60.1 million in principal amount of the loans were
secured by multi-family residential properties and $100.5 million in principal
amount were secured by commercial properties.
As of December 31, 2000, ten of the Company's purchased loans (ten at December
31, 1999) were still subject to forbearance agreements or other contractual
restructurings that existed at the time the Company acquired the loans. During
the year ended December 31, 2000, all payments under the agreements were timely
made and all borrowers were otherwise in full compliance with the terms of the
agreements. The remaining 16 loans in the Company's portfolio were performing in
accordance with their terms as originally underwritten by the Company and were
current as to payments as of December 31, 2000.
As of December 31, 2000 and 1999, senior indebtedness secured by real estate
underlying the Company's wraparound loans consisted of the following:
2000 1999
---- ----
Loan payable, secured by real estate, monthly installments of $13,789,
including interest at 7.08%, remaining principal due December 1, 2008 $1,880,372 $ 1,909,721
Loan payable, secured by real estate, monthly installments of $17,051,
including interest at 6.83%, remaining principal due December 1, 2008 2,375,281 2,413,958
Loan payable, secured by real estate, monthly installments of $10,070,
including interest at 6.83%, remaining principal due December 1, 2008 1,509,640 1,525,356
Loan payable, secured by real estate, monthly installments of $80,427,
including interest at 6.95%, remaining principal due July 1, 2008 11,833,389 11,970,859
Loan payable, secured by real estate, monthly installments of $28,090,
including interest at 6.82%, remaining principal due November 1, 2008 4,201,677 4,250,351
Loan payable, secured by real estate, monthly installments of $72,005,
including interest at 7.55%, remaining principal due December 1, 2008 9,754,779 9,877,287
Loan payable, secured by Company's interest in first mortgage bridge loan of
$17,576,712, interest only at 8.25% due monthly, principal balance due
May 31, 2000 ---- 12,000,000
Loan payable, secured by real estate, monthly installments of $249,497,
including interest at 7.625%, remaining principal due November 1, 2007 ---- 34,531,198
Loan payable, secured by real estate, monthly installments of principal and
interest based on an amortization schedule of 25 years, including interest at
LIBOR (London interbank offered rates) plus 135 basis points (8.06% at December
31, 2000), remaining principal due September 15, 2007 10,968,835 ----
F-13
2000 1999
---- ----
Loan payable, secured by real estate, interest only at LIBOR plus 200 basis
points with a ceiling of 10% and a floor of 8.6% (8.71% at December
31, 2000), principal due September 30, 2002 762,415 ----
Loan payable, secured by Company's interest in first mortgage bridge loan of
$14,000,000, interest only at 9.5%, principal balance due July 29, 2001 9,000,000 ----
Loan payable, secured by Company's interest in mezzanine loan of $3,000,000,
monthly principal payments of $34,483 plus interest at 10%,
due November 2, 2005 2,000,000 ----
------------ -----------
$ 54,286,388 $78,478,730
============ ===========
As of December 31, 2000, the senior indebtedness secured by real estate
underlying the Company's wraparound loans maturing over the next five years, and
the aggregate indebtedness maturing thereafter is as follows:
2001 $ 9,879,465
2002 1,752,160
2003 1,034,282
2004 1,082,294
2005 1,134,055
Thereafter 39,404,132
-----------
$54,286,388
===========
NOTE 4 -- INVESTMENTS IN REAL ESTATE
Investments in real estate are comprised of the following:
December 31,
-----------------------------
2000 1999
---- ----
Land $ 12,162,187 $ 7,169,710
Office buildings and improvements 65,748,199 65,065,326
Apartment buildings(1) 35,332,015 20,169,320
------------ -----------
Subtotal 113,242,401 92,404,356
Less: Accumulated depreciation (5,334,434) (2,468,017)
------------ -----------
Investments in real estate, net $107,907,967 $89,936,339
============ ===========
- ----------------------
(1) Includes a 1.5 million investment, or 25% interest, in a limited liability
company which owns an apartment building.
Included in office buildings and improvements and apartment buildings are escrow
balances totaling $2.6 million at both December 31, 2000 and 1999, which
F-14
represent escrows for real estate taxes, insurance premiums, repair and
replacement, tenant improvements and leasing commissions reserves.
As of December 31, 2000 and 1999, long-term debt secured by the Company's above
referenced real estate investments consisted of the following:
2000 1999
---- ----
Loan payable, secured by real estate, monthly installments of $8,008,
including interest at 7.33%, remaining principal due August 1, 2008 $ 1,060,893 $ 1,078,418
Loan payable, secured by real estate, monthly installments of
$288,314, including interest at 6.85%, remaining principal due
August1, 2008(1) 42,983,066 43,440,360
Loan payable, secured by real estate, monthly payments of interest
only at 10%, principal due August 1, 2008(1) 5,048,287 4,860,161
Loan payable, secured by partnership interests in a real estate
partnership, monthly payments of interest only at 8.19%, additional
interest of 3.81% is deferred and payable from net cash flow, principal
and deferred interest due September 1, 2008(1) 18,496,262 18,306,135
Loan payable, secured by real estate, monthly installments of $107,255,
including interest at 7.73%, remaining principal due December 1, 2009 14,867,827 15,000,000
Loan payable, secured by real estate, monthly payments of $87,960,
including interest at 8.367%, remaining principal due March 11, 2028 11,691,602 ----
----------- -----------
$94,147,937 $82,685,074
=========== ===========
- --------------------------
(1) These loans from RAI all relate to a single investment in real estate.
(2) As an inducement to pay interest at 8.36% from April 11, 1998 onward, rather
than 7.89%, the Company received a buy-up premium of $418,482 (balance of
$329,123 at December 31, 2000) which is amortized over the term of the
underlying debt.
As of December 31, 2000, the amount of long-term debt secured by the Company's
above-referenced real estate investments that matures over the next five years,
and the aggregate indebtedness maturing thereafter, is as follows:
2001 $ 783,322
2002 842,171
2003 905,458
2004 973,519
2005 1,046,714
Thereafter 89,596,753
-----------
$94,147,937
===========
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. Rental revenue is reported on a
straight-line basis over the terms of the respective leases. Depreciation
F-15
expense relating to the Company's real estate investments for the years ended
December 31, 2000, 1999 and 1998 was $2.9 million, $1.9 million and $800,000,
respectively.
The Company leases space in the buildings it owns to several tenants.
Approximate future minimum lease payments under noncancellable leasing
arrangements as of December 31, 2000 are as follows:
2001 $10,672,468
2002 9,386,946
2003 8,394,346
2004 8,154,655
2005 7,059,248
Thereafter 24,040,776
-----------
$67,708,439
===========
NOTE 5-- ACQUISITION
In August 2000, the Company formed a wholly-owned subsidiary, RAIT Capital
Corp., t/a Pinnacle Capital Group, which acquired the net assets of Pinnacle
Capital Group, a first mortgage conduit lender. The Company acquired Pinnacle
for consideration of $980,000, which included the issuance of 12,500 of the
Company's common shares and paid cash of approximately $800,000. The excess of
consideration paid over net assets acquired of $979,000 is reflected on the
Company's consolidated balance sheet as goodwill and is being amortized on a
straight-line basis over a period of 15 years.
NOTE 6 -- SECURED LINE OF CREDIT
In April 1999, the Company established a $20.0 million secured line of credit
bearing interest at The Wall Street Journal prime rate. The facility has a
two-year term with annual one-year extension options, and an 11-month
non-renewal notice requirement. The line of credit is secured by the Company's
long-term first mortgages and senior loan participations, and one short-term
bridge loan. As of December 31, 2000 and 1999, $20.0 million and $14.0 million,
respectively, was outstanding on the line of credit at 9.5% and 8.5%,
respectively, interest due monthly.
NOTE 7 -- SHAREHOLDERS' EQUITY
The Company filed a registration statement with respect to the public offering
and sale of 2,833,334 common shares that became effective January 8, 1998. The
public offering closed on January 14, 1998. In conjunction with the public
offering, Resource America, Inc. ("RAI") purchased 500,000 common shares, as
sponsor of the Company, at a price of $13.95, which was the offering price net
of underwriting discounts. The initial public offering price of the common
shares was $15.00. The net proceeds received by the Company in connection with
the public offering were approximately $44.4 million. Total offering costs
approximated $5.3 million, including underwriting discounts.
F-16
The Company issued warrants to purchase 141,667 common shares to the
underwriters at an exercise price of $15.00, the initial offering price. The
warrants are exercisable for a period of four years commencing on January 14,
1999.
The Company filed a second registration statement with respect to the public
offering and sale of 2,800,000 common shares that became effective June 23,
1998. The public offering closed on June 29, 1998. The offering price of the
common shares was $15.75. The net proceeds received by the Company in connection
with the public offering were approximately $41.1 million. Total offering costs
approximated $2.5 million, including underwriting discounts.
On July 24, 1998, the underwriters exercised their over-allotment option to
purchase, at the initial offering price less underwriting discounts and
commissions, 31,900 common shares. The net proceeds received by the Company in
connection with the exercise of the over-allotment option were approximately
$475,000.
NOTE 8 -- 401(K) PROFIT SHARING PLAN
The Company has a 401(k) savings plan covering substantially all employees.
Under the plan, the Company matches 75% of employee contributions for all
participants. Contributions made by the Company were approximately $30,000 for
the year ended December 31, 2000 and $9,000 for both years ended December 31,
1999 and 1998.
NOTE 9 -- EARNINGS PER SHARE
The Company's calculation of earnings per share in accordance with SFAS No. 128
is as follows:
Year ended December 31, 2000
------------------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Basic earnings per share
Net income available to common shareholders...... $12,054,725 6,251,828 $ 1.93
Effect of dilutive securities
Options................................................ --- 14,094 (0.01)
----------- --------- -------
Net income available to common shareholders
plus assumed conversions......................... $12,054,725 6,265,922 $ 1.92
=========== ========= =======
Options to purchase 396,500 shares at $15.00 per share and warrants to purchase
141,667 shares at $15.00 per share were outstanding during 2000. They were not
included in the computation of diluted earnings per share because the option
exercise price was greater than the average market price.
F-17
Year ended December 31, 1999
------------------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Basic earnings per share
Net income available to common shareholders $12,961,750 6,168,248 $ 2.10
Effect of dilutive securities
Options.............................................. --- 24,408 (0.01)
----------- --------- ------
Net income available to common shareholders
plus assumed conversions....................... $12,961,750 6,192,656 $ 2.09
=========== ========= ======
Options to purchase 387,500 shares at $15.00 per share and warrants to purchase
141,667 shares at $15.00 per share were outstanding during 1999. They were not
included in the computation of diluted earnings per share because the option
exercise price was greater than the average market price.
Year ended December 31, 1998
-----------------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Basic earnings per share
Net income available to common shareholders........ $8,473,806 4,655,633 $ 1.82
Effect of dilutive securities
Options.................................................. --- 29,208 (0.01)
Warrants................................................. --- 1,403 ---
---------- --------- -----
Net income available to common shareholders
plus assumed conversions........................... $8,473,806 4,686,244 $ 1.81
========== ========= ======
NOTE 10 -- OPTION PLAN
The Company has adopted a qualified share option plan (the "Option Plan"). The
maximum aggregate number of common shares that may be issued pursuant to options
granted under the Option Plan is 800,000. The purpose of the Option Plan is to
provide a means of performance-based incentive compensation for the Company's
key employees.
The Company has granted to certain of its officers options to acquire an
aggregate of 385,000 common shares at an exercise price of $15.00 per share. The
options are not exercisable immediately; rather, 25% of each option becomes
exercisable on each January 14 during the period 1999 through 2002. The options
will terminate on January 14, 2008. The Company has also granted to its trustees
who are not executive officers options to acquire an aggregate of 2,500 common
shares under substantially the same terms, except that the options were
immediately exercisable.
The Company issued to the underwriters of the public offering warrants to
purchase up to 141,667 common shares at an exercise price of $15.00 per share.
On October 9, 1998, the Company granted to certain of its officers options to
acquire an aggregate of 62,500 common shares at an exercise price of $9.00 per
share. The options are not exercisable immediately; rather, 25% of each option
F-18
becomes exercisable on each October 9 during the period 1999 through 2002. The
options will terminate on October 9, 2008.
On November 9, 1999, the Company granted to its officers and trustees options to
acquire an aggregate of 180,000 common shares at an exercise price of $10.75 per
share. The options are not exercisable immediately; rather 50% of each option
becomes exercisable on each November 9 of 2000 and 2001. The options will
terminate on November 9, 2009.
On November 1, 2000, the Company granted to certain officers options to acquire
an aggregate of 85,000 common shares at an exercise price of $11.65 per share.
The vesting of these options is: 30,000 options were exercisable immediately,
27,500 will become exercisable at the end of 2001 and 27,500 will become
exercisable at the end of 2002. The options will terminate on January 14, 2008.
Had compensation cost for the Option Plan been determined based on the fair
value of the options at the grant dates consistent with SFAS No. 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below.
2000 1999 1998
---- ---- ----
Net income As reported $12,055,000 $12,962,000 $8,474,000
Pro forma 11,097,000 12,457,000 8,048,000
Net income per common share--- As reported 1.93 2.10 1.82
basic Pro forma 1.79 2.02 1.73
Net income per common share--- As reported 1.92 2.09 1.81
diluted Pro forma 1.78 2.01 1.73
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 2000, 1999 and 1998, respectively: dividend yield
of 14.9%, 14.7% and 11.5%; expected volatility of 30%, 19% and 55%; risk-free
interest rate of 5.80%, 6.09% and 5.29%; and expected lives of five years.
2000 1999 1998
------------------------ ---------------------- -----------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ -------- ------ -------- ------ --------
Outstanding, January 1,..................... 630,000 $13.19 450,000 $14.17 ---
Granted.................................... 85,000 11.65 180,000 10.75 450,000 $14.17
Exercised................................... (52,175) 10.34 --- ---
Terminated.................................. (76,000) 15.00 --- ---
-------- ------ ------- ------ ------- ------
Outstanding, December 31.................... 586,825 12.99 630,000 13.19 450,000 14.17
======== ====== ======= ====== ======= ======
Options exercisable at
December 31,........................... 281,663 112,500 ---
======== ======= =======
Weighted average fair value of
options granted during year............ $ 4.34 $ 3.37 $ 4.14
====== ====== ======
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------- ---------------------------------------
Number Weighted average Weighted Number
Range of outstanding at remaining average outstanding at Weighted average
exercise prices December 31, 2000 contractual life exercise price December 31, 2000 exercise price
- --------------- ----------------- ---------------- -------------- ----------------- -----------------
$9.00-11.65 275,325 8.87 years $10.71 125,163 $10.81
$15.00 311,500 7.04 years $15.00 156,500 $15.00
------- -------
586,825 281,663
======= =======
F-19
NOTE 11 -- COMMITMENTS
Lease Obligations
In October 2000, the Company began sub-leasing office space under an anticipated
operating lease with The Bancorp.com, Inc., whose Chief Executive Officer is,
and whose Chairman is the son of, the Chairman and Chief Executive Officer of
the Company, at an annual rental based upon the amount of square footage the
Company occupies plus an allocation of common area expenses. The annual minimum
rent is estimated to be as follows:
2001 $ 151,359
2002 154,697
2003 158,035
2004 161,374
2005 164,713
Thereafter 792,403
----------
Total $1,582,581
==========
The lease expires in August 2010 with two five-year renewal options.
The Company terminated its sub-lease of office space with Hudson United Bancorp
in September 2000. Rental expense was $82,000 for the year ended December 31,
2000, and $24,000 for both years ended December 31, 1999 and 1998.
In March 2000, the Company began sub-leasing suburban office space at an annual
rental of $10,000. The sublease expires February 28, 2001 and contains automatic
one-year renewal options.
Employment Agreements
The Company has entered into automatically renewing, one-year employment
agreements with its Chairman and Chief Executive Officer. In the event of
termination other than for cause, the contracted employee will receive a lump
sum benefit equal to "average compensation," which is defined as the average
compensation in the three most highly compensated years during the previous five
years. In addition, upon termination, all options to acquire common shares vest
on the later of the effective date of termination or six months after the
options were granted.
F-20
Indemnification
The Company has indemnified the senior lender in three loans underlying the
Company's wraparound loans from and against those items for which the senior
lender customarily has recourse against the owner of the property, limited to
fraud, misappropriation of rents, environmental obligations and other similar
matters. The Company received substantially all of the proceeds from these
loans.
NOTE 12 -- TRANSACTIONS WITH AFFILIATES
The Chairman and Chief Executive Officer of the Company is the spouse of the
Chairman, Chief Executive Officer and President of RAI and a parent of a
director of RAI. A trustee of the Company is her son, who is also a director and
Senior Vice President of RAI. The Company's President and Chief Executive
officer is a director of RAI.
During 2000 the Company engaged in the following transactions with RAI:
In May 2000, the Company purchased an interest held by RAI that is junior to one
of the Company's existing loans for $1.8 million (face value plus accrued
interest).
In June 2000, the Company received a payment of $300,000 for the termination of
the Company's appreciation interest in one of the Initial Investments (as
defined below).
In September 2000, the Company and RAI executed an agreement of purchase and
sale relating to two subordinate loans held by RAI in the original principal
amounts of $18.3 million and $4.9 million. The purchase price for the loans is
$20,000,000 plus an amount equal to the amortization on the senior financing on
the property from September 30, 2000 until the closing of the transaction. In
January 2001, the purchase agreement was amended to provide an interest
abatement period on the $18.3 million loan, which bears interest at 12%, from
October 1, 2000 to March 31, 2001 (the anticipated closing date). As a result of
this transaction, management does not believe that any additional interest will
be paid under this loan. On March 30, 2001, the Company completed this
transaction.
During 1999 the Company engaged in the following transactions with RAI:
The Company and RAI jointly acquired a loan at a purchase price of $14.6
million, $10.0 million (balance of $8.4 million and 10.0 million at December 31,
2000 and 1999, respectively) of which was contributed by the Company. The
Company's interest is subordinate to the $64.5 million at December 31, 2000
($58.6 million at December 31, 1999) interest of an unaffiliated party, but
senior to RAI's interest.
The Company repurchased a $4.0 million junior lien interest from RAI for
$4,135,000. This loan was converted to a property interest as of December 31,
1999.
F-21
The Company sold a $2.5 million first mortgage to RAI and recognized a gain on
sale of $131,000.
The Company purchased from RAI two loans totaling $44.4 million (balance of
$44.0 million at December 31, 1999), which included a $34.5 million (balance of
$34.5 million at December 31,1999) senior lien interest of an unaffiliated
party. Both loans were repaid in full by the borrower in February 2000.
During 1998, the Company engaged in the following transactions with RAI:
In connection with the Company's initial public offering, RAI acquired 15% of
the Company's outstanding common shares and advanced approximately $1.6 million
to the Company for organization, start-up and offering expenses. Simultaneously
with the closing of the public offering, the Company purchased certain
investments (the "Initial Investments") from RAI as described below. The Company
anticipates that it will purchase additional investments from RAI subject to a
maximum limit of 30% of the Company's investments, excluding the Initial
Investments. The Company may also from time to time retain RAI to perform due
diligence investigations on properties underlying proposed investments (except
investments acquired from RAI).
The 12 Initial Investments were acquired from RAI at closing at an aggregate
investment of approximately $18.1 million together with certain senior debt
relating to four of the Initial Investments from third parties at a cost of
approximately $2.5 million. Two of the Initial Investments were originated by
the Company and were purchased from RAI at cost. Eight of the Initial
Investments were acquired at a discount to the outstanding balance due from the
borrower on the loan and to the appraised value of the underlying property.
The Company purchased senior lien interests in three loans from RAI at an
aggregate purchase price of $18.0 million (balance of $7.4 million and $7.7
million at December 31, 2000 and 1999, respectively).
The Company and RAI jointly acquired a loan at a purchase price of $85.5
million, $10.0 million (balance of $10.8 million and $10.5 million as of
December 31, 2000 and 1999, respectively) of which was contributed by the
Company. The Company's interest is subordinate to the $69.5 million ($67.7
million and $68.5 million as of December 31, 2000 and 1999, respectively)
interest of an unaffiliated party, but senior to RAI's interest.
The Company and RAI jointly originated a loan in the amount of $17.3 million,
$4.0 million of which was contributed by the Company. The Company's interest is
senior to RAI's interest and subordinate to the $12.2 million (balance of $11.8
million and $12.0 million as of December 31, 2000 and 1999, respectively)
interest of an unaffiliated party.
The Company purchased an 89% interest in a limited partnership, which owns a
property in Philadelphia, PA, for $750,000. The property was subject to a loan
F-22
payable to RAI, existing at the time of the Company's acquisition of its
interest, of approximately $65.0 million. The loan bore interest at 10%. The
limited partnership obtained senior financing from an unaffiliated party in the
original principal amount of $44.0 million ($43.0 million and $43.4 million at
December 31, 2000 and 1999, respectively) to reduce the loan to approximately
$22.9 million and to restructure it into two loans, one with an original
principal balance of $18.4 million ($20.2 million and $19.5 million, including
accrued and deferred interest, at December 31, 2000 and 1999, respectively) and
the other with an original principal balance of $4.5 million ($5.0 million and
$4.9 million at December 31, 2000 and 1999, respectively), both of which are
subordinate to the senior financing.
The Company purchased a $5.8 million lien interest from RAI, which included a
$1.8 million senior lien interest of an unaffiliated party. These interests were
repaid in 1999.
The Company sold a $4.0 million junior lien interest to RAI and recognized a
gain on sale of $940,000.
The Company anticipates that it will purchase and sell additional loans and lien
interests in loans to and from RAI, and participate with it in other
transactions.
Transactions with Other Affiliates:
Brandywine Construction & Management, Inc., an affiliate of RAI, provided real
estate management services to two properties owned by the Company and 13
properties underlying the Company's loans at December 31, 2000 (two properties
and 12 properties underlying the Company's loans at December 31, 1999).
Management fees in the amount of $471,000 and $422,000 were paid to Brandywine
for the years ended December 31, 2000 and 1999, respectively, relating to the
properties owned by the Company.
The Company placed a portion of its temporary excess cash and restricted cash in
short-term money market instruments with The Bancorp.com, Inc., whose Chief
Executive Officer is, and whose Chairman is the son of, the Chairman and Chief
Executive Officer of the Company. As of December 31, 2000, the Company had $5.5
million on deposit, of which approximately $5.4 is over the FDIC insurance
limit.
The Company placed a portion of its temporary excess cash in short-term money
market instruments with Hudson United Bancorp, as successor in interest to
JeffBanks, Inc. The Chairman and Chief Executive Officer of the Company was a
director of Hudson United Bancorp until July 2000 and the Chairman of the
Jefferson Bank Division of Hudson United Bank (Hudson United Bancorp's banking
subsidiary) until March 2000. As of December 31, 2000, the Company had $1.7
million ($10.4 million at December 31, 1999) in deposits at Hudson United
Bancorp, of which approximately $1.6 million ($10.3 million at December 31,
1999) is over the FDIC insurance limit.
In 1999, the Company originated a loan in the amount of $950,000 to a
partnership in which the son of the Chairman and Chief Executive Officer of the
Company, who is also the Chairman of Bancorp.com and a director of RAI, is a
F-23
partner. The loan yields 15.0% and is secured by the partnership interests in
the partnership that owns the underlying properties.
One of the Company's officers has an indirect 36% interest in a borrower to
which the Company made a $2.6 million loan in July 1999. The loan was made more
than a year before the officer was appointed and was not made in anticipation of
the appointment. The loan became due on January 13, 2001. The Company extended
the due date for 90 days upon payment of a 0.75% extension fee.
NOTE 13 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. Such financial
instruments are recorded in the financial statements when they become payable.
Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated balance sheets.
The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as they do for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation. As of December 31, 2000, the Company did not
have such commitments.
NOTE 14 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an entity's
assets and liabilities considered to be financial instruments. For the Company,
the majority of its assets and liabilities are considered financial instruments
as defined in SFAS No. 107. However, many such instruments lack an available
trading market, as characterized by a willing buyer and seller engaging in an
exchange transaction. Also, it is the Company's general practice and intent to
hold its financial instruments to maturity and not to engage in trading or sales
activities, except for certain loans. Therefore, the Company has used
significant assumptions and present value calculations in estimating fair value.
F-24
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, there may not be reasonable
comparability between institutions due to the wide range of permitted
assumptions and methodologies in the absence of active markets. This lack of
uniformity gives rise to a high degree of subjectivity in estimating financial
instrument fair values.
Estimated fair values have been determined by the Company using the best
available data and an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used, the estimated fair
values, and recorded book values at December 31, 2000 and 1999 are outlined
below.
For cash and cash equivalents, the recorded book value of $7.4 million and $11.3
million as of December 31, 2000 and 1999, respectively, approximated fair value.
The book value of restricted cash of $ 7.2 million and $5.3 million approximated
fair value at December 31, 2000 and 1999, respectively. The recorded book value
of the secured line of credit totaling $20.0 million and $14.0 million at
December 31, 2000 and 1999, respectively, approximated its fair value.
The net loan portfolio, senior indebtedness secured by real estate underlying
the Company's wraparound loans, and long term debt secured by real estate owned
at December 31, 2000 and 1999 have been valued using a present value of expected
future cash flows. The discount rate used in these calculations is the estimated
current market rate adjusted for credit risk. The carrying value of accrued
interest approximates fair value.
The following tables describe the carrying amounts and fair value estimates of
the Company's investments in real estate loans and long-term debt underlying the
Company's wraparound loans and property interests:
At December 31, 2000
---------------------
Carrying Estimated Discount
Amount Fair Value Rate
-------- ---------- --------
First mortgages and senior loan participations............ $10,753,000 $ 11,705,000 8.5%
Mezzanine (including wraparound) loans.................... 94,430,000 113,810,000 11.5
Bridge loans ............................................. 35,718,000 36,583,000 10.5
Senior indebtedness secured by real estate
underlying the Company's wraparound loans................. 54,286,000 53,927,000 8.0
Long-term debt secured by real estate owned............... 94,148,000 93,524,000 8.6
At December 31, 1999
--------------------
Carrying Estimated Discount
Amount Fair Value Rate
-------- ---------- --------
First mortgages and senior loan participations............ $ 11,031,000 $ 12,128,000 9.0%
Mezzanine (including wraparound) loans.................... 115,763,000 137,153,000 11.5
Bridge loans.............................................. 33,860,000 36,233,000 11.0
Senior indebtedness secured by real estate underlying
the Company's wraparound loans..................... 78,479,000 72,422,000 8.4
Long-term debt secured by real estate owned............... 82,685,000 74,254,000 9.3
F-25
NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the Company
which, in the opinion of management, reflects all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
Company's results of operations.
For the three months ended
-----------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
----------- ------------- -------- ---------
2000
- ----
Mortgage interest
income $4,698,617 $4,868,917 $4,046,307 $4,660,726
Rental income 4,793,575 4,725,219 4,936,921 3,850,010
Other income 628,841 296,490 728,936 314,172
Interest expense 3,275,036 3,488,359 3,212,113 2,802,296
Property operating
expenses 2,133,274 2,229,926 2,284,384 1,959,586
Other operating
expenses 1,692,219 1,191,527 1,173,916 976,411
---------- ---------- ---------- -------
Net income before
minority interest $3,020,504 $2,980,814 $3,041,751 $3,086,615
Minority interest (38,977) 9,340 (26,773) (18,549)
---------- ---------- ---------- ----------
Net income $2,981,527 $2,990,154 $3,014,978 $3,068,066
========== ========== ========== ==========
Per share data
Net income per common
share-basic $ 0.47 $ 0.48 $ 0.48 $ 0.49
========== ========== ========== ==========
Net income per common
share-diluted $ 0.47 $ 0.47 $ 0.48 $ 0.49
========== ========== ========== ==========
For the three months ended
-----------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
----------- ------------- -------- ---------
1999
- ----
Mortgage interest
income $4,954,974 $5,328,173 $5,173,243 $4,554,817
Rental income 3,574,267 3,174,264 2,932,094 2,705,626
Other income 1,093,147 100,615 195,589 335,354
Interest expense 2,793,567 2,791,536 2,894,959 2,624,885
Property operating
expenses 1,874,737 1,741,340 1,516,918 1,211,478
Other operating
expenses 1,160,956 726,020 1,004,879 836,899
---------- ---------- ---------- ----------
Net income before
minority interest 3,793,128 3,344,156 2,884,170 2,922,535
Minority interest --- --- --- 17,761
---------- ---------- ---------- ----------
Net income $3,793,128 $3,344,156 $2,884,170 $2,940,296
========== ========== ========== ==========
Per share data
Net income per common
share-basic $ 0.61 $ 0.54 $ 0.47 $ 0.48
========== ========== ========== ==========
Net income per common
share-diluted $ 0.61 $ 0.54 $ 0.47 $ 0.48
========== ========== ========== ==========
NOTE 16 -- SUBSEQUENT EVENTS
(a) Public Offering
On March 28, 2001, the Company completed the sale of 2,800,000 common shares.
The offering price of the common shares was $13.75. RAI purchased 370,000
common shares at a price of $13.22, which was the offering price net of selling
concession of $0.53 per share. Net proceeds received by the Company after
underwriting discounts and offering expenses were approximately $35.6 million.
(b) Transaction with Affiliates
In September 2000, the Company and RAI executed an agreement of purchase and
sale relating to two subordinate loans held by RAI in the original principal
amounts of $18.3 million and $4.9 million. The purchase price for the loans is
$20,000,000 plus an amount equal to the amortization on the senior financing on
the property from September 30, 2000 until the closing of the transaction. In
January 2001, the purchase agreement was amended to provide an interest
abatement period on the $18.3 million loan, which bears interest at 12%, from
October 1, 2000 to March 31, 2001 (the anticipated closing date). As a result of
this transaction, management does not believe that any additional interest will
be paid under this loan. On March 30, 2001, the Company completed this
transaction.
F-26
SCHEDULE IV
RAIT Investment Trust
And Subsidiaries
Mortgage Loans on Real Estate
December 31, 2000
Periodic Payment Face Amount of Book Value of
Loan Type/Property Type Maturity Date Terms Prior Liens Loans Loans
- ----------------------- ------------- ----- ------------ -------- --------
Long term first mortgages and
senior loan participations
12 yr amortization,
Multifamily 31-Aug-05 $3,499,310 balloon $ -- $ 5,395,571 $ 5,395,517
All other 11/30/01-7/14/09 -- 8,321,504 5,357,606
------------ ------------ ------------
Total long term first
mortgages and senior loan
participations $ -- $ 13,717,075 $ 10,753,177
Mezzanine
(including wraparound) loans
Commercial n/a interest only $ 67,660,257 $ 12,846,309 $ 12,846,309
Commercial n/a interest only 64,676,659 8,360,445 8,360,445
Multifamily 31-Jul-08 interest only 11,833,389 17,450,000 17,450,000
Multifamily 31-Oct-08 interest only 4,201,677 5,675,000 5,675,000
Commercial 30-Nov-08 interest only 9,754,779 12,713,218 12,713,218
Multifamily 08-Sep-07 interest only 11,731,250 18,725,644 18,725,644
All other 2/1/02-1/31/09 16,727,000 20,831,793 18,658,941
------------ ------------ ------------
Total mezzanine
(including wraparound) loans $186,585,011 $ 96,602,409 $ 94,429,557
------------ ------------ ------------
Bridge Loans
Commercial 11-Jul-01 interest only $ 9,000,000 $ 14,000,000 $ 14,000,000
Commercial 13-Apr-01 interest only 24,000,000 12,200,000 12,200,000
Multi-family 29-Jun-01 interest only 3,000,000 6,000,000 6,000,000
All other 4/13/01-7/4/01 7,162,195 3,518,449 3,518,449
------------ ------------ ------------
Total Bridge Loans $ 50,324,390 $ 35,718,449 $ 35,718,449
------------ ------------ ------------
Grand Total $236,909,401 $146,037,932 $140,901,183
============ ============ ============
F-27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Trustees and Executive Officers of the Registrant.
The information required by this item will be set forth in Company's
definitive proxy statement with respect to its 2001 annual meeting of
shareholders, to be filed on or before April 30, 2001 (the "Proxy Statement"),
and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item will be set forth in the Proxy
Statement, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be set forth in the Proxy
Statement, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be set forth in the Proxy
Statement, and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) Listed below are all financial statements, financial statement
schedules, and exhibits filed as part of this 10-K and herein included.
(1) Financial Statements
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Income for the three years ended
December 31, 2000
Consolidated Statements of Changes in Shareholders' Equity
for the three years ended December 31, 2000
Consolidated Statements of Cash Flows for the three years ended
December 31, 2000
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule IV - Mortgage Loans on Real Estate
All other schedules are not applicable or are omitted since either (i)
the required information is not material or (ii) the information
required is included in the consolidated financial statements and notes
thereto.
20
(3) Exhibits
3.1 Amended and Restated Declaration of Trust(1)
3.1.1 Articles of Amendment of Amended and Restated Declaration of
Trust(2)
3.1.2 Articles of Amendment of Amended and Restated Declaration of
Trust(3)
3.2 By-laws as amended(1)
3.3 Articles of Incorporation of RAIT General, Inc.(1)
3.4 By-laws of RAIT General, Inc.(1)
3.5 Articles of Incorporation of RAIT Limited, Inc.(1)
3.6 By-laws of RAIT Limited, Inc.(1)
3.7 Certificate of Limited Partnership of RAIT Partnership, L.P.(1)
3.8 Limited Partnership Agreement of RAIT Partnership, L.P.(1)
4 Form of Certificate for Common Shares of the Company (3)
10.1 Form of Indemnification Agreement (1)
10.2 Form of Agreement between Company and Resource America, Inc. (1)
10.3 Employment Agreement between Betsy Z. Cohen and Registrant (1)
10.4 Revolving Credit Loan and Security Agreement(3)
10.4.1 First Amendment to Revolving Credit Loan and Security
Agreement(3)
21 List of Subsidiaries
23 Consent of Grant Thornton LLP
(1) Filed previously as an Exhibit to the Company's Registration
Statement on Form S-11 (Registration No. 333-35077)
(2) Filed previously as an Exhibit to the Company's Registration
Statement on Form S-11 (Registration No. 333-53067)
(3) Filed previously as an Exhibit to the Company's Registration
Statement on Form S-2 (Registration No. 333-55518)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
fourth quarter of 2000.
(c) Exhibits
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 30, 2001 /s/ Scott F. Schaeffer
------------------------------
Scott F. Schaeffer
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Betsy Z. Cohen Chairman, Chief Executive Officer and Trustee March 30, 2001
------------------
Betsy Z. Cohen
/s/ Scott F. Schaeffer President and Chief Operating Officer March 30, 2001
----------------------
Scott F. Schaeffer
/s/ Ellen J. DiStefano Vice President and Chief Financial Officer March 30, 2001
----------------------
Ellen J. DiStefano
/s/ Jonathan Z. Cohen Secretary and Trustee March 30, 2001
---------------------
Jonathan Z. Cohen
/s/ Edward S. Brown Trustee March 30, 2001
-------------------
Edward S. Brown
/s/ Joel R. Mesznik Trustee March 30, 2001
-------------------
Joel R. Mesznik
/s/ Daniel Promislo Trustee March 30, 2001
-------------------
Daniel Promislo
/s/ S. Peter Albert Trustee March 30, 2001
------------------
S. Peter Albert
22