UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(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, 2001
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 (IRS Employer
incorporation or organization) Identification No.)
c/o RAIT Partnership, L.P.
1818 MARKET STREET, 28TH FLOOR
PHILADELPHIA, PA 19103
(Address of principal executive offices) (Zip Code)
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 NYSE
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,
2002, was approximately $301.8 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for registrants 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, 2001, we had
total assets of $334.6 million including 36 loans with a book value of $197.3
million (less senior debt of $36.8 million) and five property interests with a
book value of $104.9 million (less senior debt of $72.1 million). 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 five property
interests with a book value of $107.9 million (less senior debt of $94.1
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
other things:
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 our inability to originate or acquire loans or property interests
on favorable terms; and
o our inability to maintain our real estate investment trust
qualification.
2
Direct Lending
We make real estate loans directly to borrowers whose financing needs
do not conform to the criteria of institutional lenders and 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, 2001, 29 of our 36 loans, constituting 58.8%
of our loans by book value, were junior lien loans. We also provide short-term
bridge financing. This financing may be 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.
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 36 loans in our portfolio as of
December 31, 2001, 18 have appreciation interests, constituting 59.2% of our
loans by book value. Five of these appreciation interests, with respect to loans
constituting 12.4% 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 properties, the borrowers'
historical credit problems, cash flow problems at the underlying properties 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, 2001, five of our loans,
constituting 7.4% 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 36 Loans in our portfolio as of December 31, 2001, 25 loans,
constituting 41.2% 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 eight loans at
December 31, 2001, constituting 8.1% 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 36 loans in our portfolio as of December
31, 2001, 15 related to properties located in the Philadelphia metropolitan
area, and eight 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, 2001. 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, 2001:
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).... $ 5,700,036 2 42% 10-12% 4/30/02-8/31/05
Mezzanine (including
wraparound) loans (5)............... 108,007,250 22 85% 11-45% 3/22/02-5/1/21
Short-term bridge loans (6)............ 83,728,208 12 75% 11-20% 3/31/02-11/13/03
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) Both of these loans 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) Both of these loans have appreciation interests.
(5) Includes $31.8 million of senior financing secured by real property
underlying our loans. All of these loans are junior lien loans or other
forms of subordinated financing. Three loans, in the aggregate amount of
$9.0 million at December 31, 2001, are cash flow loans and are subject to
forbearance agreements. 13 loans, in the aggregate amount of $71.4 million
at December 31, 2001, including three cash flow loans, in the aggregate
amount of $9.0 million at December 31, 2001, have appreciation interests.
(6) Includes $5.0 million of senior financing. Three of these loans, in the
aggregate amount of $45.4 million at December 31, 2001, have appreciation
interests. Three of these loans, in the aggregate amount of $17.1 million at
December 31, 2001, are secured by guarantees from the principals of the
borrowers.
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 equal
periodic payments that retire a loan over its specified term, including
structures that defer payment of some portion of accruing interest, or defer
repayment of principal, until loan maturity. Where a borrower must pay a loan
balance in 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 and which
may be subject to the same consideratons we describe in "Real Property
Considerations," below. In addition, mortgage lenders can lose their lien
priority in many jurisdictions, including those in which our existing loans are
located, to persons who supply labor and materials to a property. For these and
other reasons, the total amount that we may recover from one of our loans may be
less than the total amount of that loan or our cost of 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 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, 2001, 25 of our loans, constituting 41.2% of our
loans by book value, were not collateralized by recorded or perfected liens,
although 18 of these loans, constituting 29.4% of our loans by book value, 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. 18 of these loans,
constituting 33.9% of our loans by book value, are secured by pledges of equity
interests in the borrowers. These 25 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.
7
Financing with high loan-to-value ratios may involve increased risk of
loss. We anticipate that 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, 2001, 22 of our loans,
constituting 61.3% 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 financing.
Interest rate changes may adversely affect our investments. Changes in
interest rates affect the market value of our loan portfolio. In general, the
market value of a loan will change in inverse relation to an interest rate
change where a loan has a fixed interest rate or only limited interest rate
adjustments. Accordingly, in a period of rising interest rates, the market value
of such a loan will decrease. Moreover, in a period of declining interest rates,
real estate loans 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 those 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, increase in revenues, or
both. While we seek appreciation interests at rates of at least 25%, we may not
be able to obtain these rates. Moreover, we may not be able to negotiate
appreciation interest provisions in any of our loans. In addition, while we
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 the priority of our lien.
Because appreciation interests allow us to participate in the increase in a
property's value or revenue, courts, including a court in a bankruptcy,
arrangement or similar proceeding, may determine that we should be treated as a
partner of, or joint venturer with, the borrower. If a court makes that
determination, we could lose our lien priority in the property or lose any
benefit of our lien.
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. 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 bankers 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. 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. 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.
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
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 a 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:
9
o the actual receipt of income and actual payment of deductible
expenses, and
o the inclusion of that income and deduction of those 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 a cost
of $19.8 million. After acquisition, we obtained non-recourse financing of $15.0
million ($14.7 million at December 31, 2001), which bears interest at 7.73% and
is due on December 1, 2009 and $2.3 million ($2.3 million at December 31, 2001),
which bears interest at an annual rate of 7.17% and is due March 1, 2012.
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,
2001), which bears interest at 7.88% and is due on November 1, 2009 and $1.4
million ($1.4 million at December 31, 2001) which bears interest at an annual
rate of 6.82% and is due October 2011.
o 89% partnership interest in a partnership that owns a building in
Philadelphia, Pennsylvania with 456,000 square feet of office/retail space. We
acquired our interest for $750,000. In March 2001, we also acquired two
subordinated loans with respect to the property for $20.2 million. The aggregate
original principal amount of the two loans was $23.2 million. Including these
two loans, the property is subject to non-recourse financing of $44.0 million
($42.5 million at December 31, 2001) which bears interest at an annual rate of
6.85% and is due on August 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
($1.0 million at December 31, 2001), which bears interest at 7.33% and is due on
August 1, 2008.
o 50% 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 ($11.6 million at December 31,
2001), which bears interest at 8.37% 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. Income from, and appreciation of, our properties 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 real properties may also be affected by factors such as
the costs of compliance with regulations and liability under applicable
environmental laws, changes in interest rate and the availability of financing.
Income from a property will be adversely affected if a significant number of
tenants are unable to pay rent or if available space cannot be rented on
favorable terms. Operating and other expenses of 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 our
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, however, certain types of
losses, such as earthquakes, floods and hurricanes, that may be uninsurable or
not economically insurable. Also, inflation, changes in building codes and
ordinances, environmental considerations and other factors might make it
impracticable 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 which 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 which are inconsistent with our business interests or goals
and may be in a position to take action contrary to our instructions or to our
policies and objectives. Moreover, if we are a limited partner in a limited
partnership and have rights allowing us control over the partnership or its
property, we may be deemed to be a general partner and liable for the debts of
the partnership beyond the amount of our investment.
Real properties with environmental problems may create liability for
us. The existence of hazardous or toxic substances on a property will adversely
affect its value and our ability to sell or borrow against the property.
Contamination of 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 us as owner, operator or lender
for that cost. Many environmental laws can impose liability whether we know of,
or are responsible for, the contamination. In addition, if we arrange for the
disposal of hazardous or toxic substances at another site, we may be liable for
the costs of cleaning up and removing those substances from the site, even if it
neither own nor operate the disposal site. Environmental laws may require us to
incur substantial expenses, and may materially limit our use of our properties
and may adversely affect our ability to make distributions to our shareholders.
In addition, future or amended laws, or more stringent interpretations or
enforcement policies with respet to existing environmental requirements, may
increase our exposure to environmental liability.
11
Compliance with Americans with Disabilities Act may adversely affect
our financial condition. Under the Americans with Disabilities Act of 1990, all
public accommodations must meet federal requirements for access and use by
disabled persons. 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.
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, 2001 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.
12
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, 2001, we sold three loans totaling $2.8 million.
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.
PART II
Item 2. Properties
Our office is located in Philadelphia and is subleased under an
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 expired February 28, 2001; however, it 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 New York 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
High Low per share
---- --- ------------------
Fiscal 2001
- -----------
Fourth quarter $17.50 $15.55 $.56
Third quarter 17.25 13.90 .52
Second quarter 17.00 15.60 .52
First quarter 15.69 12.35 .52
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
As of March 19, 2002, there were 16,705,542 common shares outstanding held by
approximately 6,900 persons of record.
13
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.
For the
period
August 20,
1997 (date
of
inception)
As of and for the year ended December 31, through
----------------------------------------- December
2001 2000 1999 1998 31, 1997
---- ---- ---- ---- ----------
(dollars in thousands except per share data)
Operating data:
Total revenues $ 52,430 $ 38,549 $ 34,122 $ 17,177 --
Total costs and expenses 30,191 26,419 21,178 8,778 $ 46
Net income (Loss) before extraordinary item 22,240 12,055 12,962 8,474 (46)
Extraordinary item 4,633 -- -- -- --
Net income (loss) 26,914 12,055 12,962 8,474 (46)
Basic earnings per share:
Net income per share before extraordinary item 2.21 1.93 2.10 1.82
Net income per share 2.68 1.93 2.10 1.82
Diluted earnings per share:
Net income per share before extraordinary item 2.19 1.92 2.09 1.81
Net income per share 2.65 1.92 2.09 1.81
Balance sheet data:
Total assets 334,603 270,120 269,829 201,259 2,192
Indebtedness secured by real estate 108,935 148,434 161,164 114,204 --
Shareholders' equity (deficiency) 211,025 86,675 86,238 85,518 (45)
Shareholders' equity per share 14.12 13.74 13.91 13.87 --
Other data:
Funds from operations ("FFO")(2) 25,629 14,963 14,849 9,269 --
("FFO")(2) per share-basic 2.55 2.39 2.41 1.99 --
("FFO")(2) per share-diluted 2.53 2.39 2.40 1.98 --
Dividends per share 2.12 2.04 2.04 1.77 --
(1) Operations commenced on January 14, 1999.
(2) In accordance with guidelines of the National Association of Real Estate
Investment Trusts, funds from operations ("FFO") is net income before
extraordinary item (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 five public offerings of our common shares
(two during 1998 and three in 2001) and utilized these proceeds, combined with
repayment and refinancing of our loans and property interests and our line of
credit to build our investment portfolio.
Liquidity and Capital Resources
The principal sources of our capital were the five offerings of our
common shares. After offering costs and underwriting discounts and commissions,
we obtained net offering proceeds of $207.1 million. We also obtained capital
resources from principal payments on, refinancings of, and sales of loans in our
portfolio. These resources aggregated $95.7 million for the year ended December
31, 2001, including $7.0 million of debt refinancing, and $47.3 million for the
year ended December 31, 2000. In addition, during 2000 we obtained $6.0
million from draws on the $20.0 million secured line of credit.
We use our capital resources principally for originating and purchasing
loans and acquiring property interests. For the year ended December 31, 2001, we
originated or purchased 25 loans (including one increase in existing financing)
in the amount of $145.3 million, including senior debt of $7.0 million
underlying wraparound loans, as compared to ten loans in the amount of $39.7
million, including senior debt of $30.2 million underlying wraparound loans, in
2000. For the year ended December 31, 2001, we did not acquire any property
interests however for the year ended December 31, 2000, 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 90% of our taxable income, to
pay distributions to our shareholders. For the years ended December 31, 2001 and
2000, we paid distributions of $21.7 million and $12.8 million, respectively, of
which $21.6 million and $12.3 million was in cash and $39,500 and $472,000 was
in additional common shares issued through our dividend reinvestment plan. We
intend to maintain our current level of distributions in fiscal 2002.
14
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.
At December 31, 2001, we had approximately $8.4 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 2002, nine of our short-term bridge loans, totaling
$68.8 million net of underlying senior indebtedness of $5.0 million at December
31, 2001, will be repaid or refinanced, providing additional funds available for
investment in the approximate amount of $68.8 million.
We expect to continue to use cash provided by operations to meet our
short-term capital needs including general and administrative expenses and
dividend requirements. Factors that could negatively impact our ability to
generate cash from operations in the future include the following:
o A decline in the real estate market or economic conditions could
occur in the Mid-Atlantic region of the United States, where there is
a large concentration of properties that collateralize our loans.
o Due to increasing vacancy in the commercial property market, some of
our borrowers may experience a decline in market rents or in the
overall revenue of their properties, which collateralize our loan.
This may reduce the overall cash flow available to service the total
debt on the property, including payments due on our loans.
o Our borrowers or we may not be able to refinance our existing
indebtedness on terms as favorable as the terms of our existing
indebtedness, which would result in higher interest expense.
o Although we believe that the properties that collateralize our loans
are adequately insured, we are subject to the risk that the insurance
may not coverall of the costs to restore a property, which is damaged
by a fire or other catastrophic event.
We historically have financed our long-term capital needs through a
combination of the following:
o cash from operations;
o borrowings from our secured line of credit
o proceeds from repayments of loans;
o refinancing of loans.
Factors that could negatively impact our ability to finance our
long-term capital needs in the future include the following:
o As a REIT, we must distribute 90% of our annual taxable income,
which limits the amount of cash we have available for other
business purposes, including amount to fund our long-term capital
needs.
o Much of our ability to raise capital through issuance of Common
Shares is dependent upon the value of our Common Shares. As is the
case with any publicly traded securities, certain factors outside
of our control could influence the value of these shares.
Results of Operations
Our average interest-earning assets for the years ended December 31,
2001, 2000 and 1999 were $155.8 million, $85.5 million and $85.9 million,
respectively, including $12.7 million, $9.4 million and $9.1 million,
respectively, of average interest-earning assets invested in a money market
account. The increases in average interest earning assets and in average
interest earning assets invested in a money market account from the year ended
December 31, 2000 to the corresponding period in 2001 were due to the $120.0
million equity that was raised and utilized to originate loans throughout 2001.
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.
15
Our interest income from loans was $23.7 million for the year ended
December 31, 2001, compared to $18.3 million and $20.0 million in 2000 and 1999,
respectively. Interest income from our money market account was $352,000 for the
year ended December 31, 2001, compared to $548,000 and $312,000 for 2000 and
1999, respectively. The increase in interest income from the year ended December
31, 2000 to the corresponding period in 2001 was due to an increase in our
investments in real estate loans ($197.3 million at December 31, 2001 versus
$140.7 million at December 31, 2000). The decrease in interest income from the
money market account from the year ended December 31, 2000 to the corresponding
period in 2001 was due to a decrease in the interest rates paid by banks on
money market funds. 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, 2000 to the corresponding period in
1999 was due to a higher balance of assets invested in the account arising from
loan repayments we held in anticipation of loan fundings.
The net yield on average interest-earning non-money market assets was
22.2%, 21.4% and 21.1% for the years ending December 31, 2001, 2000 and 1999,
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 2.8%, 3.9% and 4.3%
for the years ending December 31, 2001, 2000 and 1999, 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 income is accretion of loan discount relating to loans we acquired
at a discount to the appraised value of the underlying properties of $1.2
million, $213,000 and $3.2 million in 2001, 2000 and 1999, 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 $22.2 million from rents from our property interests for
the year ended December 31, 2001, compared to $18.3 million and $12.4 million
for the years ended December 31, 2000 and 1999, respectively. The rent increases
from 1999 to 2000 and 2000 to 2001 were due to the increase in the number of
property interests we own from four in 1999 to five in 2000 and with the
addition, in 2001, of two loans whose returns are partially recognized in the
form of rental income.
We earned fee and other income of $5.7 million for the year ended
December 31, 2001 as compared to $1.4 million in 2000 and $153,000 for 1998.
Included in the 2001 fee and other income was $1,800,000 from RAIT Capital Corp
and $3.6 million relating to fees earned in the structuring of certain
transactions. 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.
We recognized a gain on the sale of three loans of $535,000 in 2001. We
recognized a gain of $131,000 on the sale of a loan in 1999. 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.
Five of our acquired loans remain subject to forbearance or similar
agreements. During the years ended December 31, 2001, 2000 and 1999, all
payments under the agreements were timely made and all borrowers were otherwise
in full compliance with the terms of the agreements. The remaining 31 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, 2001,
2000 and 1999.
During the year ended December 31, 2001, we incurred expenses of $30.2
million as compared to $26.4 million and $21.2 million in 2000 and 1999,
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
$10.6 million for the year ended December 31, 2001, as compared to $12.8 million
and $11.1 million in 2000 and 1999, respectively. Interest expense consists of
interest payments made on senior indebtedness on properties underlying our
wraparound loans and property interests, and interest payments made on our line
of credit. The decrease in interest expense from the year ended December 31,
2000 to the corresponding period in 2001 resulted from the repayment of
approximately $41.3 million of unsecured debt underlying our interests and on
our secured line of credit, with funds made available by our equity offerings.
In addition, the interest rate on our credit line decreased from an average of
9.2% in 2000 to an average of 6.9% in 2001. The increase in interest expense
from the year ended December 31, 1999 to the corresponding period in 2000 was
due to 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.
16
Property operating expenses were $12.2 million for the year ended
December 31, 2001, compared to $8.6 million and $6.3 million for 2000 and 1999,
respectively. Depreciation and amortization was $3.3 million for the year ended
December 31, 2001, compared to $2.9 million and $1.9 million for 2000 and 1999,
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 $2.7 million for the year ended
December 31, 2001, as compared to $1.5 million and 1.4 million for 2000 and
1999, respectively. General and administrative expenses were $1.3 million for
the year ended December 31, 2001, as compared to $637,000 and $433,000 for 2000
and 1999, respectively. The increases in salaries and related benefits and
general and administrative expenses from the year ended December 31, 2000 to the
corresponding period in 2001 were due to our acquisition of RAIT Capital Corp.
in August, 2000, as well as increased personnel and occupancy expenses which
reflect the expansion of our staff to support the increased size of our
portfolio, due to the significant infusion of new capital. 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.
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, 2001 and 2000. 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, 2001.
The presentation, for each category of information, aggregates the assets and
liabilities by their maturity dates for maturities occurring in each of the
years 2002 through 2006 and separately aggregates the information for all
maturities arising after 2006.
Interest Earning Assets and Interest Bearing Liabilities,
Aggregated by Maturity Date
2002 2003 2004 2005 2006 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Interest Earning Assets:
Money Market accounts ........... $18,064,900 --- --- --- --- --- $ 18,064,900
Average interest rate 2.0% --- --- --- --- --- 2.0%
First mortgages and senior
loan participations ........ $ 1,013,100 $ 428,400 $ 473,200 $ 3,785,300 --- --- $ 5,700,000
Average interest rate 10.0% 10.0% 10.0% 10.0% --- --- 10.0%
Mezzanine (including
wraparound) loans .......... $ 2,040,700 $ 4,364,400 $25,392,700 $ 3,520,700 $6,950,000 $ 5,738,700 $108,007,200
Average interest rate 12.8% 13.5% 16.1% 17.7% 15.0% 12.5% 13.8%
Bridge loans .................... $68,078,200 $15,650,000 --- --- --- --- $ 83,728,200
Average interest rate 11.2% 10.6% --- --- --- --- 11.1%
Interest bearing liabilities:
Senior Indebtedness
Secured by real estate
underlying wraparound loans.. $ 831,800 $ 5,865,000 $ 900,900 $ 905,200 $ 567,700 $27,772,500 $ 36,843,100
Average interest rate 8.8% 8.1% 8.7% 8.6% 7.6% 7.7% 7.9%
Long-term debt secured by
real estate owned ........... $ 864,300 $ 929,300 $ 999,100 $ 1,074,200 $1,152,000 $67,072,400 $ 72,091,300
Average interest rate 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3%
Secured line of credit --- $ 2,000,000 --- --- --- --- $ 2,000,000
Average interest rate --- 4.75% --- --- --- --- 4.75%
[restubbed table]
Fair Market
Value
-------------
Interest Earning Assets:
Money Market accounts ............. $ 18,064,900
Average interest rate
First mortgages and senior
loan participations ......... $ 6,225,000
Average interest rate
Mezzanine (including
wraparound) loans ........... $128,067,000
Average interest rate
Bridge loans $ 85,563,000
Average interest rate
Interest bearing liabilities:
Senior Indebtedness
Secured by real estate
underlying wraparound loans .. $ 35,614,700
Average interest rate
Long-term debt secured by
real estate owned ............ $ 69,466,400
Average interest rate
Secured line of credit $ 2,000,000
Average interest rate
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.
17
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, 2001 and 2000 F-3
Consolidated Statements of Income for the three years ended December 31, 2001 F-4
Consolidated Statements of Changes in Shareholders' Equity for the three years
ended December 31, 2001 F-5
Consolidated Statements of Cash Flows for the three years ended December 31, 2001 F-6
Notes to Consolidated Financial Statements F-7
Schedule IV -- Mortgage Loans on Real Estate F-25
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-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 as of December 31, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Grant Thornton LLP
- ------------------------------
Philadelphia, Pennsylvania
January 23, 2002 (except for note
16(a), as to which the date is
March 13, 2002 and note 16(b), as
to which the date is March 18, 2002)
F-2
RAIT INVESTMENT TRUST
and Subsidiaries
Consolidated Balance Sheets
December 31,
2001 2000
---- ----
ASSETS
Cash and cash equivalents $ 18,064,909 $ 7,407,988
Restricted cash 4,569,708 7,954,688
Tenant escrows 289,435 222,371
Accrued interest receivable 4,412,829 3,011,496
Investment sin real estate loans, net 197,255,782 140,724,787
Investments in real estate, net 104,889,208 107,907,967
Furniture, fixtures and equipment, net 326,335 49,007
Prepaid expenses and other assets 3,907,157 1,862,482
Goodwill, net 887,143 979,667
------------- -------------
Total assets $ 334,602,506 $ 270,120,453
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 1,437,054 $ 686,760
Accrued interest payable 584,045 1,663,631
Deferred interest payable -- 880,347
Tenant security deposits 812,317 493,096
Borrowers' escrows 5,812,737 8,093,099
Deferred income 1,436,201 492,588
Senior indebtedness secured by real estate
underlying the Company's loans 36,843,180 54,286,388
Long-term debt secured by real estate owned 72,091,483 94,147,937
Secured line of credit 2,000,000 20,000,000
------------- -------------
Total liabilities 121,017,017 180,743,846
Minority interest 2,560,525 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
14,947,147 shares and 6,310,242 shares,
respectively 149,472 63,102
Additional paid-in-capital 206,344,662 87,316,637
Retained earnings/accumulated deficit 4,530,830 (704,625)
------------- -------------
Total shareholders' equity 211,024,964 86,675,114
------------- -------------
Total liabilities and shareholders' equity $ 334,602,506 $ 270,120,453
============= =============
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 For the Year Ended For the Year Ended
December 31, 2001 December 31, 2000 December 31, 1999
----------------- ----------------- -----------------
REVENUES
Mortgage interest income $ 23,663,358 $ 18,274,567 $ 20,011,207
Rental income 22,151,409 18,305,725 12,386,251
Fee income and other 5,729,042 1,420,117 684,207
Investment income 351,729 548,322 311,631
Gain on sale of loans 534,958 -- 131,125
Income from loan satisfaction -- -- 597,742
------------ ------------ ------------
Total revenues 52,430,496 38,548,731 34,122,163
COSTS AND EXPENSES
Interest 10,627,540 12,777,804 11,104,947
Property operating expenses 12,179,242 8,607,170 6,344,473
Salaries and related benefits 2,711,606 1,488,390 1,407,955
General and administrative 1,324,003 637,060 433,239
Depreciation and amortization 3,348,347 2,908,623 1,887,560
------------ ------------ ------------
Total costs and expenses 30,190,738 26,419,047 21,178,174
------------ ------------ ------------
Net income before minority interest
and extraordinary gain $ 22,239,758 $ 12,129,684 $ 12,943,989
Minority interest 40,968 (74,959) 17,761
Extraordinary gain--consolidated
extinguishment of indebtedness
underlying investment in real estate 4,633,454 -- --
------------ ------------ ------------
Net income $ 26,914,180 $ 12,054,725 $ 12,961,750
============ ============ ============
Net income before minority interest
and extraordinary gain $ 2.21 $ 1.94 $ 2.10
Minority interest 0.01 (0.01) --
Extraordinary gain .46 -- --
------------ ------------ ------------
Net income per common share-basic $ 2.68 $ 1.93 $ 2.10
============ ============ ============
Weighted average common shares
outstanding-basic 10,039,788 6,251,828 6,168,248
============ ============ ============
Net income before minority interest and
extraordinary gain $ 2.19 $ 1.93 $ 2.09
Minority interest -- (0.01) --
Extraordinary gain .46 -- --
------------ ------------ ------------
Net income per common share-diluted $ 2.65 $ 1.92 $ 2.09
============ ============ ============
Weighted average common shares
outstanding-diluted 10,142,931 6,265,922 6,192,656
============ ============ ============
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, 2001
Retained
Additional Earnings Total
Preferred Common Paid-in (accumulated Shareholders'
Stock Stock Capital deficit) Equity
----- ----- ------- -------- ------
Balance, January 1, 1999 $ -- $ 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, net -- 125 146,750 -- 146,875
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2000 -- 63,102 87,316,637 (704,625) 86,675,114
------------- ------------- ------------- ------------- -------------
Net income -- -- -- 26,914,180 26,914,180
Dividends -- 30 39,510 (21,678,725) (21,639,189)
Stock options exercised -- 250 212,250 -- 212,500
Common shares issued, net -- 86,090 118,776,265 -- 118,862,359
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2001 $ -- $ 149,472 $ 206,344,662 $ 4,530,830 $ 211,024,964
============= ============= ============= ============= =============
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 For the Year Ended For the Year Ended
December 31, 2001 December 31, 2000 December 31, 1999
----------------- ----------------- -----------------
Cash flows from operating activities
Net Income $ 26,914,180 $ 12,054,725 $ 12,961,750
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on consolidated extinguishment of debt (4,633,454) -- --
Gain on sale of loans (534,958) -- (131,125)
Income from loan satisfaction -- -- (597,742)
Minority interest (40,968) 74,959 (17,761)
Depreciation and amortization 3,348,347 2,908,623 1,887,560
Accretion of loan discounts (1,272,989) (213,474) (3,206,162)
Increase in tenant escrows (67,064) (57,993) (164,378)
Increase in accrued interest receivable (1,401,333) (949,012) (487,065)
Increase in prepaid expenses and other assets (2,163,604) (819,732) (461,064)
Increase in accounts payable and accrued liabilities 446,544 152,306 189,973
(Decrease) increase in accrued interest payable (622,593) 630,147 359,437
Increase in deferred interest payable -- 91,506 673,273
Increase in tenant security deposits 319,221 222,188 126,078
Increase (decrease) in deferred income 943,613 (200,574) 669,162
Increase (decrease) in borrowers' escrows 1,104,618 146,661 (394,154)
------------- ------------- -------------
Net cash provided by operating activities 22,339,560 14,040,330 11,407,782
------------- ------------- -------------
Cash flows from investing activities
Purchase of furniture, fixtures and equipment (6,511) (35,074) (5,460)
Real estate loans purchased -- (1,850,000) (24,005,000)
Real estate loans originated (145,359,306) (37,840,982) (37,159,648)
Proceeds from sale of loan/loan participation 1,361,948 -- 2,481,782
Principal repayments from real estate loans 87,335,350 17,106,519 28,768,535
Purchase of real estate and improvements (182,084) (6,052,358) (3,976,651)
Cash paid for asset acquisition -- (630,378) --
------------- ------------- -------------
Net cash used in investing activities (56,850,603) (29,302,173) (33,896,442)
------------- ------------- -------------
Cash flows from financing activities
(Repayments)/advances on secured line of credit (18,000,000) 6,000,000 14,000,000
Issuance of common stock, net 119,074,855 539,574 --
Payment of cash dividends (21,639,185) (12,304,358) (12,241,911)
Principal repayments on senior indebtedness (22,457,364) (12,392,394) (374,941)
Principal repayments on long-term debt (786,907) (696,292) (443,078)
Proceeds of senior indebtedness 6,950,000 30,200,000 12,000,000
Proceeds of long-term debt 2,275,000 -- 15,860,225
Cash paid to acquire debt (20,248,435) -- --
------------- ------------- -------------
Net cash provided by financing activities 45,167,964 11,346,530 28,800,295
------------- ------------- -------------
Net change in cash and cash equivalents 10,656,921 (3,915,313) 6,311,635
------------- ------------- -------------
Cash and cash equivalents, beginning of year $ 7,407,988 $ 11,323,301 $ 5,011,666
------------- ------------- -------------
Cash and cash equivalents, end of year $ 18,064,909 $ 7,407,988 $ 11,323,301
============= ============= =============
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.
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 for 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 15 properties
underlying loans as of December 31, 2001 and three properties owned and 14
properties underlying loans as of December 31, 2000 were located in this area)
and in the Baltimore/Washington, D.C. corridor (one property owned and eight
properties underlying loans as of December 31, 2001 and one property owned and
six properties underlying loans at December 31, 2000 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
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.
F-7
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 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, 2001 and 2000, the Company had no such loans.
F-8
On April 1, 2001, the Company adopted SFAS No. 140, "Accounting for
Transfers of Servicing of Financial Assets and Extinguishments of Liabilities,"
which replaces SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," and revises the standards
for accounting for the securitization of other transfers of financial assets and
collateral. This standard also requires certain disclosures, but carries over
most of the provisions of SFAS No. 125. The adoption of this statement did not
have a material impact on the Company's consolidated financial statements.
On July 6, 2001, the Securites and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance
Methodology and Documentation Issues. This SAB was effective upon issuance and
provides guidance on the development, documentation, and application of a
systematic methodology for determining the allowance for loans in accordance
with US GAAP and was effective upon issuance. The adoption of SAB No. 102 did
not have a material impact on the Company's consolidated financial position or
results of operations.
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.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144
retains the existing requirements to recognize and measure the impairment of
long-lived assets to be held and used or to be disposed of by sale. However,
SFAS No. 144 makes changes to the scope and certain measurement requirements of
existing accounting guidance. SFAS No. 144 also changes the requirements
relating to reporting the effects of a disposal or discontinuation of a segment
of a business. SFAS No. 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years. The adoption of this statement is not expected to have a
significant impact on the consolidated financial position or consolidated
results of operations of the Company.
Derivative Financial Instruments
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The adoption of this statement
did not have a material effect on the Company's financial position or results of
operations. This statement 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. The adoption of SFAS No. 133 did not have a material
impact on the Company's consolidated financial position and results of
operations.
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.
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. On June 29,
2001, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Intangible Assets". These statements are expected to
result in significant modifications relative to the Company's accounting for
goodwill and other intangible assets. SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 must be accounted for under the
purchase method of accounting. SFAS No. 141 was effective upon issuance. SFAS
No. 142 modifies the accounting for all purchased goodwill and intangible
assets. SFAS No. 142 includes requirements to test goodwill and indefinite lived
intangibles assets for impairment rather than amortize them. SFAS No. 142 will
be effective for fiscal years beginning after December 31, 2001 and early
adoption is not permitted except for business combinations entered into after
June 30, 2001. Upon adoption of SFAS 142, on January 1, 2002, the Company will
no longer amortize goodwill, thereby eliminating annual amortization expense of
approximately $65,000.
F-9
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,
1999. If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its taxable income that is
distributed to its shareholders. A REIT is subject to a number of organizational
and operational requirements, including a requirement that it currently
distribute at least 90% of its annual taxable income.
Earnings per Share
The Company follows the provisions of SFAS No. 128, "Earnings per
Share." 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 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 $11.3 million, $11.8 million and $9.9 million for the years ended
December 31, 2001, 2000 and 1999, respectively. Senior indebtedness incurred in
conjunction with the acquisition and origination of real estate loans was $0 for
the years ended December 31, 2001 and 2000 and $34.5 million for the year ended
December 31, 1999. Long-term debt assumed in conjunction with the acquisition of
an investment in real estate was $0 million, $11.8 million and $860,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
F-10
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,
---------------------------------
2001 2000
---- ----
Long-term first mortgages and senior loan participations $ 5,700,036 $ 10,753,177
Mezzanine (including wraparound) loans 108,007,250 94,429,557
Short-term bridge loans 83,728,208 35,718,449
Loan costs 46,445 49,761
Less: Provision for loan losses (226,157) (226,157)
------------- -------------
Investments in real estate loans 197,255,782 140,724,787
Less: Senior indebtedness secured by real estate
underlying the Company's loans (36,843,180) (54,286,388)
------------- -------------
Net investments in real estate loans $ 160,412,602 $ 86,438,399
============= =============
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, 2001:
Number of Average
Type of Loan Loans loan-to-value Yield range Range of Maturities
Long-term first mortgages and senior loan participations 2 42% 10-12% 4/30/02-8/31/05
Mezzanine (including wraparound) loans 22 85% 11-45%(1) 3/22/02-5/1/21
Short term bridge loans 12 75% 11-20% (1) 3/31/02-11/13/03
F-11
At December 31, 2001, approximately $97.4 million in principal amount
of the loans were secured by multi-family residential properties and $100.0
million in principal amount of the loans were secured by commercial properties.
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 were secured by commercial properties.
As of December 31, 2001, five of the Company's purchased loans (ten at
December 31, 2000) 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, 2001, all payments under the
agreements were timely made and all borrowers were otherwise in full compliance
with the terms of the agreements. The remaining 31 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,
2001.
As of December 31, 2001 and 2000, senior indebtedness secured by real
estate underlying the Company's wraparound loans consisted of the following:
2001 2000
---- ----
Loan payable, secured by real estate, monthly installments of $13,789,
including interest at 7.08%, remaining principal due December 1, 2008 $ 1,846,393 $ 1,880,372
Loan payable, secured by real estate, monthly installments of $17,051,
including interest at 6.83%, remaining principal due December 1, 2008 2,333,839 2,375,281
Loan payable, secured by real estate, monthly installments of $10,070,
including interest at 6.83%, remaining principal due December 1, 2008 1,492,801 1,509,640
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
Loan payable, secured by real estate, monthly installments of $28,090,
including interest at 6.82%, remaining principal due November 1, 2008 4,149,577 4,201,677
Loan payable, secured by real estate, monthly installments of $72,005,
including interest at 7.55%, remaining principal due December 1, 2008 9,564,089 9,754,779
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(1) 10,835,791 10,968,835
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 $2,482,759 at
December 31, 2001 ($3,000,000 at December 31, 2000), monthly principal payments
of $34,483 plus interest at 10%, due November 2, 2005 1,620,690 2,000,000
Loan payable, secured by Company's interest in bridge loan of $7,500,000
interest only at 8% due monthly, principal balance due June 23, 2003 5,000,000 --
----------- -----------
$36,843,180 $54,286,388
=========== ===========
(1) The interest rate is subject to an interest rate swap agreement entered into
by the borrower which modifies the interest rate to 8.68%.
F-12
As of December 31, 2001, 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:
2002................ $ 831,839
2003................ 5,865,045
2004................ 900,913
2005................ 905,176
2006................ 567,721
Thereafter.......... 22,772,486
-----------
$36,843,180
===========
NOTE 4 -- INVESTMENTS IN REAL ESTATE
Investments in real estate are comprised of the following:
December 31,
------------
2001 2000
---- ----
Land $ 613,519 $ --
Commercial properties 71,079,197 70,907,909
Residential properties (1) 41,571,480 42,334,492
------------- -------------
Subtotal 113,264,196 113,242,401
Less: Accumulated depreciation (8,374,988) (5,334,434)
------------- -------------
Investment in real estate, net $ 104,889,208 $ 107,907,967
============= =============
(1) Includes a 648,000 investment at December 31, 2001 ($1,542,570 at December
31, 2000) or 25% interest, in a limited liability company, which owns an
apartment building.
Included in commercial properties and residential properties are escrow
balances totaling $2.4 million and $2.6 million at December 31, 2001 and 2000
respectively, which represent escrows for real estate taxes, insurance premiums,
repair and replacement, tenant improvements and leasing commissions reserves.
As of December 31, 2001 and 2000, long-term debt secured by the
Company's real estate investments consisted of the following:
2001 2000
---- ----
Loan payable, secured by real estate, monthly installments of $8,008,
including interest at 7.33%, remaining principal due August 1, 2008 $ 1,046,271 $ 1,060,893
Loan payable, secured by real estate, monthly installments of $288,314,
including interest at 6.85%, remaining principal due August 1, 2008 42,502,302 42,983,066
Loan payable, secured by real estate, monthly payments of interest only
at 10%, principal due August 1, 2008(1) -- 5,048,287
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
Loan payable, secured by real estate, monthly installments of $107,255,
including interest at 7.73%, remaining principal due December 1, 2009(2) 14,725,067 14,867,827
Loan payable, secured by real estate, monthly installments of $15,396,
including interest at 7.17%, remaining principal due March 1, 2012(2) 2,258,378 --
Loan payable, secured by real estate, monthly payments of $87,960,
Including interest at 8.367%, remaining principal due March 11, 2028(3) 11,559,465 11,691,602
----------- -----------
$72,091,483 $94,147,937
=========== ===========
F-13
(1) These loans from RAI both relate to a single investment in real estate.
(2) These loans relate both to a single investment in real estate.
(3) 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
$292,288 and $329,123 at December 31, 2001, and 2000, respectively) which is
amortized over the term of the underlying debt.
As of December 31, 2001, the amount of long-term debt secured by the
Company's real estate investments that matures over the next five years, and the
aggregate indebtedness maturing thereafter, is as follows:
2002................. $ 864,340
2003................. 929,208
2004................. 999,134
2005................. 1,074,249
2006................. 1,152,068
Thereafter........... 67,072,404
-----------
$72,091,483
===========
Expenditures for repairs and maintenance are charged to operations as
incurred. Significant renovations are capitalized. Fees and costs incurred in
the successful negotiation of leases are deferred and amortized on a
straight-line basis over the terms of the respective leases. Unamortized fees as
of December 31, 2001 and 2000 were $388,000 and $0, respectively. Rental revenue
is reported on a straight-line basis over the terms of the respective leases.
Depreciation expense relating to the Company's real estate investments for the
years ended December 31, 2001, 2000 and 1999 was $3.1 million, $2.9 million and
$1.9 million, 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, 2001 are as follows:
2002 $11,142,704
2003 10,860,525
2004 10,756,511
2005 9,806,883
2006 8,669,387
Thereafter 29,835,154
-----------
$81,071,164
===========
F-14
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. The unamortized balance as of
December 31, 2001 and 2000 is approximately $887,000 and $980,000.
NOTE 6 -- SECURED LINE OF CREDIT
The Company has 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, 2001 and 2000, $2.0 million and $20.0 million, respectively, was
outstanding on the line of credit at 4.75% and 9.5%, respectively, interest due
monthly.
NOTE 7 -- SHAREHOLDERS' EQUITY
The Company completed the sale of 2,800,000 common shares on March 28,
2001. The net proceeds received by the Company in connection with the public
offering were approximately $35.0 million. Total offering costs approximated
$3.6 million including underwriting discounts and a fee of $150,000 paid to a
trustee of the Company, who is also the son of the Chairman and Chief Executive
Officer, for organizing the underwriting syndicate. 370,000 of the Common Shares
sold in the public offering were purchased by RAI, and 119,450 Common Shares
sold in the public offering were purchased by officers, directors and trustees
of the Company, and related persons. The public offering price of the Common
Shares was $13.75 per share. The 370,000 shares purchased by RAI and the 119,450
shares purchased by related persons were purchased at $13.22 per share (a price
equal to the public offering price less the selling concession.
In May 2001, the Company issued an additional 420,000 shares associated
with the over allotment of its first quarter offering at $13.75 per share. After
underwriting discounts and commissions, the Company received total net proceeds
of $5.4 million.
The Company issued an additional 2,550,000 million common shares in a
public offering that closed on July 18,2001. The net proceeds received by the
Company in connection with the public offering were approximately $36.3 million.
Total offering costs approximated $2.7 million including underwriting discounts.
105,000 of the common shares sold in the public offering were purchased by RAI,
and 64,899 common shares sold in the public offering were purchased by officers
and trustees of the Company, and related persons. The public offering price of
the common shares was $15.25 per share. The shares purchased by RAI, officers
and trustees of the Company, and related persons were purchased at $14.41 per
share (a price equal to the public offering price less the selling concession).
In August 2001, the Company issued an additional 338,983 common shares
associated with the over allotment of the second quarter offering, at $15.25 per
share. After underwriting discounts and commissions, the Company received total
net proceeds of $4.9 million.
F-15
In November 2001, the Company filed a shelf registration statement to
allow the Company to sell any combination of its preferred or common shares,
warrants for its preferred or common shares or one or more series of debt
securities up to a total amount of $150 million.
The Company issued 2,500,000 million common shares in a public offering
that closed on December 24, 2001. The net proceeds received by the Company in
connection with the public offering were approximately $37.0 million. Total
offering costs approximated $2.8 million including underwriting discounts.
125,000 of the common shares sold in the public offering were purchased by RAI,
and 136,179 common shares sold in the public offering were purchased by officers
and trustees of the Company, and related persons. The public offering price of
the common shares was $16.00 per share. The shares purchased by RAI, officers
and trustees of the Company, and related persons were purchased at $15.12 per
share (a price equal to the public offering price less the selling concession).
In January 2002, the Company issued an additional 375,000 common shares
associated with the over-allotment of the fourth quarter offering, at $16.00 per
share. After underwriting discounts and commissions, the Company received total
net proceeds of $5.7 million.
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 $67,500,
$30,000 and $9,000 for the years ended December 31, 2001, 2000, and 1999,
respectively.
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, 2001
----------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Basic earnings per share
Net income available to common shareholders $26,914,180 10,039,788 $ 2.68
Effect of dilutive securities
Options -- 95,461 (.02)
Warrants -- 7,682 (.01)
----------- ---------- ------
Net income available to common shareholders
plus assumed conversions $26,914,180 10,142,931 $ 2.65
=========== ========== ======
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 (.01)
----------- --------- ------
Net income available to common shareholders
plus assumed conversions $12,054,725 6,265,922 $ 1.92
=========== ========= ======
F-16
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.
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 (.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.
NOTE 10 -- OPTION PLAN
The Company maintains a non-qualified and incentive share option plan
(the "Option Plan"). The maximum aggregate number of common shares that may be
issued pursuant to options granted under the Option Plan is 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
common shares. Under the Option Plan, the option price is equivalent to 100% of
the fair market value on the date of grant. The vesting period is determined by
the Compensaton Committee and the option term is generally ten years after the
date of grant. At December 31, 2001, there are 560,825 options outstanding.
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. The warrants are exercisable through January 14, 2003.
F-17
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.
2001 2000 1999
---- ---- ----
Net income As reported $26,914,000 $12,055,000 $12,962,000
Pro forma 26,138,000 11,200,000 12,457,000
Net income per common share- As reported 2.68 1.93 2.10
basic Pro forma 2.60 1.79 2.02
Net income per common share- As reported 2.65 1.92 2.09
diluted Pro forma 2.57 1.78 2.01
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 2001, 2000 and 1999, respectively:
dividend yield of 11.3%, 14.9%, and 14.7%; expected volatility of 14%, 30% and
19%; risk-free interest rate of 5.1%, 5.80% and 6.09%; and expected lives of
five years.
A summary of the activity of the Option Plan is presented below.
2001 2000 1999
---- ---- ----
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ ----- ------ ----- ------ -----
Outstanding, January 1, 586,825 $12.99 630,000 $13.19 450,000 $14.17
Granted 10,000 13.65 85,000 11.65 180,000 10.75
Exercised (36,000) 10.39 (52,175) 10.34 -- --
Terminated -- -- (76,000) 15.00 -- --
------- ------ ------- ------ ------- ------
Outstanding, December 31 560,825 13.16 586,825 12.99 630,000 13.19
======= ====== ======= ====== ======= ======
Options exercisable at
December 31, 508,244 281,663 112,500
======= ======= =======
Weighted average fair value of
options granted during the year $ 3.45 $ 4.34 $ 3.37
====== ====== ======
Options Outstanding Options Exercisable
Number Weighted average Weighted Number
Range of outstanding at remaining average outstanding at Weighted average
exercise prices December 31, 2001 contractual life exercise price December 31, 2001 exercise price
$9.00-11.65 239,325 8.02 years $10.75 196,744 $10.72
$13.65-15.00 321,500 6.14 years $14.96 311,500 $15.00
------- -------
560,825 508,244
======= =======
F-18
NOTE 11 -- COMMITMENTS
Lease Obligations
In October 2000, the Company began sub-leasing office space under an
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:
2002 $ 154,707
2003 158,046
2004 161,385
2005 164,724
2006 168,063
Thereafter 624,393
----------
Total $1,431,318
==========
The lease expires in August 2010 with two five-year renewal options.
Rental expense was $147,000, $82,000 and $24,000 for the years ended
December 31, 2001, 2000 and 1999. Rent paid to TheBancorp.com was approximately
$137,000 and 39,000 for the years ended December 31, 2001 and 2000,
respectively.
March 2000, the Company began sub-leasing suburban office space at an
annual rental of $10,000. The sublease expired February 28, 2001, however it
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.
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 an Executive
Vice President of RAI. The Company's President and Chief Operating Officer is a
director of RAI.
During 2001 the Company engaged in the following transactions with RAI:
In March 2001, the Company purchased from RAI two subordinate loans (in
the original principal amounts of $18.3 million and $4.9 million) underlying one
of the Company's property interests. The purchase price for the loans was $20.2
million. The difference between the purchase price and the underlying face value
of the loans resulted in an extraordinary gain of $4.6 million resulting from
the consolidated extinguishment of indebtedness underlying an investment in real
estate.
F-19
Also in March 2001, the Company sold its entire interest in two loans
to RAI for an aggregate purchase price of $21.6 million, which was the book
value of the interests.
In June 2001, the Company provided $1.6 million of financing in
connection with the borrower's acquisition of a loan from RAI with respect to an
81-unit apartment complex in Middletown, Connecticut. The loan is secured by a
collateral assignment of all of the underlying documents evidencing the loan
acquired from RAI, including assignment of the first mortgage encumbering the
property. The loan was repaid in July 2001.
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.
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 $0 and $8.4 million at December 31,
2001 and 2000, respectively) of which was contributed by the Company. In March
2001, the Company sold its entire interest in the loan to RAI for a price equal
to the book value of the loan.
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.
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, 2000), 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.
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 ten properties underlying the Company's loans at December 31, 2001 (two
properties and 13 properties underlying the Company's loans at December 31,
2000). Management fees in the amount of $978,000, $471,000 and $422,000 were
paid to Brandywine for the years ended December 31, 2001, 2000, and 1999
respectively, relating to the properties owned by the Company.
The Company entered into a technical support agreement with The
Bancorp.com. Under the technical support agreement, which commenced in January
2001, TheBancorp.com also provides technical support for the Company for a fee
of $5,000 a month. The Company paid $60,000 for the year ended December 31,
2001.
During the course of 2001, the RAIT sold participations totaling
$1,485,000 in loans from TheBancorp.com. The loans were sold at their current
book value, accordingly no gain was recorded on the sale.
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, 2001,
the Company had $12.2 million on deposit ($5.5 million as of December 31, 2000),
of which approximately $12.1 million ($5.4 million as of December 31, 2000) is
over the FDIC insurance limit.
F-20
In December 2001, the Company sold its interests in three loans
totaling $2.8 to a partnership whose general partner is the son of the Chairman
and Chief Executive Officer of the Company. The buyer paid $3.3 million, which
included the assumption of debt totaling $646,000. The Company recognized a gain
on sale of approximately $535,000.
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, 2001, the Company had $0 ($1.7
million at December 31, 2000) in deposits at Hudson United Bancorp, of which
approximately $0 ($1.6 million at December 31, 2000) 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
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 had 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 was fully repaid in July 2001.
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, 2001, 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-21
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, 2001 and 2000 are outlined
below.
For cash and cash equivalents, the recorded book value of $18.0 million
and $7.4 million as of December 31, 2001 and 2000, respectively, approximated
fair value. The book value of restricted cash of $4.6 million and $ 8.0 million
approximated fair value at December 31, 2001 and 2000, respectively. The
recorded book value of the secured line of credit totaling $2.0 million and
$20.0 million at December 31, 2001 and 2000, 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, 2001 and 2000 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, 2001
--------------------
Carrying Estimated Discount
Amount Fair Value Rate
------ ---------- ----
First mortgages and senior loan participations $ 5,700,000 $ 6,225,000 9.0%
Mezzanine (including wraparound) loans 108,007,000 128,067,000 11.8
Bridge loans 83,728,000 85,563,000 9.0
Senior indebtedness secured by real estate underlying the
Company's wraparound loans 36,843,000 35,614,700 8.0
Long-term debt secured by real estate owned 72,091,000 69,466,400 7.7
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
F-22
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
--------------------------
2001 December 31, September 30, June 30, March 31,
- ---- ------------ ------------- -------- ---------
Mortgage interest income $ 7,483,110 $ 5,877,477 $ 5,458,946 $ 4,843,825
Rental income 6,101,694 5,701,081 5,566,242 4,782,392
Other income 1,593,677 2,727,499 1,541,532 753,021
Interest expense 2,141,820 2,592,566 2,743,079 3,150,075
Property operating expenses 3,290,596 3,439,836 3,125,134 2,323,676
Other operating expenses 2,117,040 1,650,642 1,780,763 1,835,511
----------- ----------- ----------- -----------
Net income before minority interest
and extraordinary gain 7,629,025 6,623,013 4,917,744 3,069,976
Minority interest (9,294) 26,831 23,667 (236)
Extraordinary gain-consolidated
extinguishment of indebtedness
underlying real estate -- -- -- 4,633,454
----------- ----------- ----------- -----------
Net income $ 7,619,731 $ 6,649,844 $ 4,941,411 $ 7,703,194
=========== =========== =========== ===========
Basic earnings per share:
Net income before extraordinary gain $ 0.60 $ 0.56 $ 0.53 $ 0.48
=========== =========== =========== ===========
Net income $ 0.60 $ 0.57 $ 0.53 $ 1.20
=========== =========== =========== ===========
Diluted earnings per share
Net income before extraordinary gain $ 0.60 $ 0.56 $ 0.53 $ 0.48
=========== =========== =========== ===========
Net income $ 0.60 $ 0.56 $ 0.53 $ 1.19
=========== =========== =========== ===========
For the three months ended
--------------------------
2000 December 31, September 30, June 30, March 31,
- ---- ------------ ------------- -------- ---------
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 $ 3,041,978 $ 3,086,066
=========== =========== =========== ===========
Basic earnings per share:
Net income $ 0.47 $ 0.48 $ 0.48 $ 0.49
=========== =========== =========== ===========
Diluted earnings per share
Net income $ 0.47 $ 0.47 $ 0.48 $ 0.49
=========== =========== =========== ===========
F-23
NOTE 16 -- SUBSEQUENT EVENTS
(a) Initial Offering
The Company issued 1.2 million common shares in a public offering that
closed on March 13, 2002. The net proceeds received by the Company in
connections with the public offering were approximately $20.6 million. Total
offering costs approximated $1.1 million including underwriting discounts. The
public offering price of the common shares was $18.05 per share.
(b) Overallotment
On March 18, 2002, the Company issued an additional 180,000 common
shares associated with the over allotment of the first quarter offering, at
$18.05 per share. After underwriting discounts and commissions, the Company
received total net proceeds of $3.1 million.
F-24
SCHEDULE IV
RAIT Investment Trust
And Subsidiaries
Mortgage Loans on Real Estate
December 31, 2001
Periodic Payment Face Amount Book Value
Loan Type/Property Type Maturity Date Terms Prior Liens of Loans of Loans
- ----------------------- ------------- ---------------- ----------- ------------ -----------
Long Term First Mortgages and
Senior Loan Participations
- --------------------------
Residential 3/28/01-8/31/05 $ - $ 5,700,036 $ 5,700,036
--------------- ----------- -----------
Total Long Term First Mortgages
and Senior Loan Participations $ - 5,700,036 5,700,036
Mezzanine (including wraparound) loans
Residential 08-Sep-07 interest only $ 10,835,792 $ 15,550,207 $ 15,550,207
Commercial 30-Nov-08 interest only 9,564,089 12,636,339 12,636,339
Commercial 15-Feb-04 interest only 44,833,065 10,000,000 10,000,000
Commercial 24-Sep-11 interest only 17,125,000 7,311,127 7,311,127
Commercial 10-Jul-06 interest only 23,250,000 7,000,000 7,000,000
Commercial 18-Sep-04 interest only 16,300,000 6,950,000 6,950,000
All other commercial 5/31/02-5/1/21 85,345,632 26,209,831 26,209,831
All other residential 3/22/02-6/4/11 66,709,025 22,349,746 22,349,746
--------------- ------------ ------------
Total mezzanine (including wraparound) loans $ 273,962,603 $108,007,250 $108,007,250
--------------- ------------ ------------
Bridge Loans
- ------------
Residential 27-Jun-02 interest only $ - $ 32,000,000 $ 32,000,000
Residential 22-Jun-03 interest only 5,000,000 7,500,000 7,500,000
Residential 13-Nov-03 interest only - 7,400,000 7,400,000
Commercial 29-Jul-02 interest only 30,000,000 8,829,000 8,829,000
Commercial 12-Jul-02 interest only - 14,000,000 14,000,000
All other residential 4/4/02-4/24/02 7,162,195 6,950,000 6,950,000
All other commercial 3/31/02-12/27/02 30,871,676 7,049,208 7,049,208
--------------- ------------ ------------
Total Bridge Loans $ 73,033,871 $ 83,728,208 $ 83,728,208
--------------- ------------ ------------
Grand Total $ 346,996,474 $197,435,494 $197,435,494
=============== ============ ============
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
F-25
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, 2001 and 2000
Consolidated Statements of Income for the three years ended December 31, 2001
Consolidated Statements of Changes in Shareholders' Equity for the three years
ended December 31, 2001
Consolidated Statements of Cash Flows for the three years ended
December 31, 2001
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.
(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)
18
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
2001.
(c) Exhibits
19
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.
April 1, 2002 /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.
/s/ Betsy Z. Cohen Chairman, Chief Executive Officer and Trustee April 9, 2002
- ---------------------------
Betsy Z. Cohen
/s/ Scott F. Schaeffer President and Chief Operating Officer April 9, 2002
- ---------------------------
Scott F. Schaeffer
/s/ Ellen J. DiStefano Vice President and Chief Financial Officer April 9, 2002
- ---------------------------
Ellen J. DiStefano
/s/ Jonathan Z. Cohen Secretary and Trustee April 9, 2002
- ---------------------------
Jonathan Z. Cohen
/s/ Edward S. Brown Trustee April 9, 2002
- ---------------------------
Edward S. Brown
/s/ Joel R. Mesznik Trustee April 9, 2002
- ---------------------------
Joel R. Mesznik
/s/ Daniel Promislo Trustee April 9, 2002
- ---------------------------
Daniel Promislo
/s/ S. Peter Albert Trustee April 9, 2002
- ---------------------------
S. Peter Albert
20