FORM 10-Q. -QUARTERLY REPORT UNDER SECTION 23 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1998
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Or
[ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file Number 1-14760
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RESOURCE ASSET INVESTMENT TRUST
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(Exact name of registrant as specified in its charter)
MARYLAND 23-2919819
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1845 WALNUT STREET, 10TH FLOOR, PHILADELPHIA, PA 19103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 861-7900
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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 ____
As of April 30, 1998, 3,333,434 common shares of beneficial interest, with a
par value of $0.01, were outstanding.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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RESOURCE ASSET INVESTMENT TRUST
and Subsidiaries
Consolidated Balance Sheet
March 31, 1998 December 31, 1997
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(Unaudited)
ASSETS:
Cash and cash equivalents ...................... $ 11,029,795 $ 0
Accrued interest receivable .................... 298,827 0
Investments in real estate loans ............... 50,590,312 0
Investment in real estate, net ................. 1,652,436 0
Equipment ...................................... 12,571 8,766
Prepaid expenses and other assets .............. 299,806 2,183,698
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Total assets ................................ $ 63,883,747 $ 2,192,464
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LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities ........ $ 170,898 657,751
Accrued interest payable ........................ 115,720 0
Deferred income ................................. 476,667 0
Borrower's escrow ............................... 300,000 0
Due to affiliate ................................ 0 1,579,330
Senior indebtedness ............................. 18,708,681 0
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Total liabilities ........................... 19,771,966 2,237,081
Preferred Shares, $.01 par value; 25,000,000
authorized shares ........................ 0 0
Common Shares, $.01 par value; 200,000,000
authorized shares, issued and outstanding,
3,333,434 and 100 shares, respectively ... 33,334 1
Additional paid-in-capital ...................... 44,082,579 999
Accumulated deficit ............................. (4,132) (45,617)
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Total shareholders' equity (deficiency) ..... 44,111,781 (44,617)
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$ 63,883,747 $ 2,192,464
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The accompanying notes are an integral part of these consolidated financial
statements.
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RESOURCE ASSET INVESTMENT TRUST
and Subsidiaries
Consolidated Income Statement
For the Three Months Ended March 31, 1998
(Unaudited)
REVENUES
Mortgage interest income 1,126,426
Fee income and other 56,824
Investment income 249,005
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Total revenues 1,432,255
COSTS AND EXPENSES
Interest 319,788
General and administrative 163,563
Depreciation and amortization 7,392
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Total costs and expenses 490,743
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Net income $ 941,512
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Net income per common share-basic $ .33
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Weighted average common shares outstanding 2,852,212
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Net income per common share-diluted $ .33
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Weighted average common shares outstanding 2,892,620
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The accompanying notes are an integral part of these consolidated financial
statements.
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RESOURCE ASSET INVESTMENT TRUST
and Subsidiaries
Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 1998
(Unaudited)
Cash flows from operating activities
Net income $ 941,512
Adjustments to reconcile net income to net
cash used by operating activities
Depreciation and amortization 7,128
Amortization of original issue discount (5,001)
Accretion of loan discount (51,704)
Accretion of interest (110,333)
Increase in accrued interest receivable (298,827)
Increase in prepaid expenses and other assets (245,206)
Decrease in accounts payable and accrued liabilities (486,853)
Increase in accrued interest payable 115,720
Increase in deferred income 587,000
Increase in borrower's escrow 300,000
Decrease in due to affiliate (1,579,330)
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Net cash used by operating activities (825,893)
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Cash flows from investing activities
Purchase of property and equipment (4,241)
Purchase of real estate loans (20,646,388)
Real estate loans originated (11,150,000)
Principal repayments of senior indebtedness (8,198)
Investment in real estate (1,654,928)
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Net cash used by investing activities (33,463,755)
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Cash Flows from financing activities
Issuance of common stock, net 46,219,471
Payment of dividends (900,027)
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Net cash provided by financing activities 45,319,444
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Net change in cash and cash equivalents 11,029,795
Cash and cash equivalents, beginning of period $ 0
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Cash and cash equivalents, end of period $ 11,029,795
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The accompanying notes are an integral part of these consolidated financial
statements.
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RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 1 - FORMATION AND BUSINESS ACTIVITY
Resource Asset Investment Trust (RAIT or the Company), together with its
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, 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. RAIT was initially capitalized through the sale of 100 common
shares for $1,000.
The General Partner and the Initial Limited Partner capitalized the
Operating Partnership by contributing to it the proceeds of the public
offering of RAIT's Common Shares (See Note 10 - Transactions With Affiliates)
The General Partner owns a 1% general partnership interest and the Initial
Limited Partner owns a 99% limited partnership interest in the Operating
Partnership.
RAIT's principal business activity is to provide mortgage or other debt
financing in situations that do not conform to the underwriting standards of
institutional lenders or sources that provide financing through
securitization. RAIT purchases or originates financing relating to multifamily
residential, office and other commercial properties. RAIT emphasizes junior
lien and subordinated financing, including wraparound financing, with
principal amounts generally between $1 million and $10 million. RAIT also
acquires real properties, or interests therein. The Operating Partnership
undertakes the business of RAIT, including the origination and acquisition of
financing and the acquisition of property interests.
RAIT principally competes with banks, insurance companies, savings and
loan associations, mortgage bankers, pension funds, investment bankers, and
other public or private real estate investment trusts for origination or
acquisition of real estate loans.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles (GAAP)
for interim reporting. The consolidated financial statements include the
accounts of the Company and its subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying financial statements
contain all adjustments, consisting of normal and recurring accruals,
necessary for a fair presentation of the Company's financial condition at
March 31, 1998, the results of its operations and its cash
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RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
flows for the three months ended March 31, 1998. Operating results for the
period ended March 31, 1998 are not necessarily indicative of the results that
may be expected for any other interim periods or the entire year ended
December 31, 1998.
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 revenues and expenses. Actual results could differ from those
estimates.
RAIT adopted Statement of Financial Accounting Standard (SFAS) No. 130,
"Reporting of Comprehensive Income," which requires financial statements to
include details of comprehensive income. Comprehensive income consists of net
income or loss for the current period and income, expense, gains, and losses
that bypass the income statement and are reported directly in a separate
component of equity. Adoption of this statement did not have an impact on the
presentation of its financial position or results of operations.
Investment in Real Estate Loans
Certain mortgage loans, for which the borrower is not current as to
original contractual principal and interest payments, are acquired by RAIT at
a discount from both the face value of the loan and the appraised value of the
property underlying the loan. For these loans, the difference between RAIT's
cost basis in the loan and the sum of projected cash flows from, 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 which 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.
Loans held for investment that are originated or purchased at face value
are stated at amortized cost, less any allowance 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 at the time the loan is
closed. This additional interest is recognized over the period of the loan to
which it relates. Loans are placed 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. 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 RAIT's originated loans or loans purchased at face value 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 allowance for
possible loan losses is based on known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay, historical
loss experience, 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 allowance
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RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
for possible loan losses will be increased by charges to income and decreased
by charge-offs (net of recoveries).
RAIT will account 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." This standard requires 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.
RAIT adopted SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," as amended by SFAS No.
127, which provides accounting guidance on transfers of financial assets,
servicing of financial assets and extinguishments of liabilities. Adoption of
this statement did not have a material impact on RAIT's consolidated financial
position or results of operations.
Investment in Real Estate
Investment in real estate is carried at cost less accumulated
depreciation (which is less than the net realizable value of the property).
The Company reviews its investment 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.
Deferred Income
Additional interest paid by the borrower at loan closing is recognized
over the period to which it is deemed to relate. Deferred income represents
the unrecognized portion of additional interest.
Borrower's Escrow
Borrower's Escrow represents borrower's funds held by the Company to fund
certain building improvements, to be released by the Company upon receipt from
the borrower of approved requests for reimbursement.
Depreciation and Amortization
Equipment is carried at cost less accumulated depreciation. Depreciation
is provided for by the straight-line method over the estimated useful life of
five years.
Organizational costs are being amortized over a five-year period. Costs
incurred relating to acquisition of the Initial Investments (see Note 10,
Transactions with Affiliates) are being amortized over the lives of the loans
acquired.
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RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
Employee Benefit Plans
RAIT accounts for its stock option plans under 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 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.
RAIT's stock option plan will be accounted for under APB Opinion No. 25.
Federal Income Taxes
RAIT intends to qualify and will elect to be taxed as a real estate
investment trust (REIT) under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended, commencing with its taxable year ending December 31,
1998. If RAIT 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 95% of its annual taxable income.
Earnings per Share
RAIT follows the provisions of SFAS No. 128, "Earnings per Share" which
eliminated primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share 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.
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 $204,068 for the three-month period ended March 31, 1998. Senior
indebtedness acquired in conjunction with the initial investments was
$18,716,879.
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RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 3-INVESTMENTS IN REAL ESTATE LOANS
The Company's loan portfolio consisted of the following at March 31,
1998:
Multi-family residential $ 10,707,085
Commercial real estate 39,883,227
Less: Allowance for loan losses 0
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Investments in real estate loans $50,590,312
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As of March 31, 1998, eleven of the loans currently in RAIT's portfolio
are in default under their terms as originally underwritten, although they are
subject to forbearance agreements or other contractual restructurings, and are
performing in accordance with the terms of such agreements. The remaining
three loans are all in compliance with the terms as originally underwritten.
NOTE 4-INVESTMENT IN REAL ESTATE
Investment in real estate is comprised of the following at March 31,
1998:
Land $ 159,710
Office building and improvements 1,495,218
Less: Accumulated depreciation (2,492)
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Investment in real estate, net $ 1,652,436
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Expenditures for repairs and maintenance are charged to operations as
incurred. Significant renovations are capitalized. Fees and costs incurred in
the successful negotiation of leases are deferred and amortized on a
straight-line basis over the terms of the respective leases. Rental revenue is
reported on a straight-line basis over the terms of the respective leases.
NOTE 5 - SENIOR INDEBTEDNESS
Senior indebtedness on properties underlying the Company's investments in
real estate loans consists of the following as of March 31, 1998:
Loan payable, secured by real estate, monthly
installments of $8,021, including interest at
9.75%, due July 1, 2005 $ 873,309
Loan payable, secured by real estate, monthly
installments of $10,669, including interest at
10.5%, due February 1, 2002 1,096,019
Loan payable, secured by real estate, monthly
installments of $10,317, including interest at
9.125%, due September 1, 2003 1,255,030
Loan payable, secured by real estate, monthly
installments of $116,964, including interest at
9%, due April 1, 2003 12,984,323
Loan payable, secured by real estate, monthly
installments of $20,833 consisting of interest
only at 10%, due December 31, 2002 2,500,000
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Total senior indebtedness $18,708,681
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The stated maturities of the senior indebtedness follows:
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RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1998 $ 196,606
1999 272,368
2000 285,407
2001 313,372
2002 3,860,788
Thereafter 13,780,140
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$18,708,681
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NOTE 6 - SHAREHOLDERS' EQUITY
RAIT filed a registration statement with respect to the public
offering and sale of 2,833,334 Common Shares that became effective January 8,
1998. The public offering closed on January 14, 1998 (the Closing Date). In
addition to the public offering, Resource America, Inc. (RAI) purchased
500,000 Common Shares, as sponsor of RAIT. Approximately 124,000 of the Common
Shares sold in the public offering were purchased by officers, directors and
trustees of RAIT, RAI, Brandywine Construction & Management, Inc.
(Brandywine), an affiliate of RAI, and related persons. These shares, along
with the RAI shares, are subject to restrictions on sale or disposal without
the consent of the underwriters for a period of 180 days following the Closing
Date. The remaining Common Shares were purchased separately and were freely
tradable immediately upon issuance. The initial public offering price of the
Common Shares was $15.00 per share. The 624,000 shares purchased by RAI and
related persons were purchased at $13.95 per share (a price equal to the
public offering price net of underwriting discounts and commissions). The net
proceeds received by RAIT in connection with the public offering were
approximately $46,500,000. Total offering costs approximated $5,230,000,
including underwriting discounts.
RAIT issued warrants to purchase 141,667 Common Shares to the underwriters
at an exercise price of $15.00, the initial offering price. The warrants are
exercisable for a period of four years commencing one year from the Closing
Date.
NOTE 7 - EARNINGS PER SHARE
RAIT's calculation of earnings per share in accordance with SFAS No. 128
is as follows:
Period ended March 31, 1998
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common shareholders $ 941,152 2,852,212 $ .33
Effect of dilutive securities
Options 0 40,408 0
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Diluted earnings per share
Net income available to common shareholders
plus assumed conversions $ 941,152 2,892,620 $ .33
======= ========= -----
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RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 8 - OPTION PLAN
In connection with the closing of the public offering, RAIT adopted a
qualified share option plan (the Option Plan), which provides for options to
purchase Common Shares. The maximum aggregate number of Common Shares that may
be issued pursuant to options granted under the Option Plan is 450,000. The
purpose of the Option Plan is to provide a means of performance-based
compensation in order to provide incentive for RAIT's key employees.
RAIT granted to certain of its officers options to acquire an aggregate
of 385,000 Common Shares at an exercise price of $15.00 per share. The options
are not exercisable immediately; rather, 25% of each option becomes
exercisable on each of the first four anniversaries of the Closing Date. The
options will terminate on the tenth anniversary of the Closing Date. In
addition, RAIT granted to its Trustees options to acquire an aggregate of
2,500 Common Shares under terms described above.
In addition, RAIT 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. See Note 6 - Shareholders' Equity.
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,
RAIT's net income and earnings per share would have been reduced to the pro
forma amounts indicated below.
March 31, 1998
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Net income As reported $941,512
Pro forma 927,512
Net income per common share - basic As reported .33
Pro forma .33
Net income per common share - diluted As reported .33
Pro forma .33
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 1998: dividend yield of 12%; expected
volatility of 15%; risk-free interest rate of 5.36%; and expected lives of
five years.
A summary of the status of the Option Plan as of March 31, 1998 and the
changes during the three months ending on that date is presented below:
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RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
March 31, 1998
Weighted
average
exercise
Shares price
------ -----
Outstanding, January 1, 1998 0 $ 0
Granted 387,500 15
Exercised 0 0
Outstanding, March 31, 1998 387,500 15
Options exercisable at March 31, 1998 0 0
Weighted average fair value of options
granted during the period $ .28
Weighted average remaining contractual life 8.45 years
NOTE 9 - COMMITMENTS
Lease Obligations
RAIT and its subsidiaries sub-lease office space under an operating lease
with JeffBanks, Inc. at an annual rental of $24,000 plus an allocation of
building operating expenses. The sub-lease expires May 14, 2008 and contains
two five-year renewal options. Rental expense was $3,000 for the three-month
period ended March 31, 1998.
Employment Agreements
RAIT has entered into automatically renewing, one-year employment
agreements with its Chairman and Chief Executive Officer and the President and
Chief Operating Officer. Compensation under these agreements is $250,000 and
$150,000 per year, respectively, and includes the grant of options to purchase
225,000 Common Shares and 75,000 Common Shares, respectively, upon the closing
of the public offering. 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.
NOTE 10 - TRANSACTIONS WITH AFFILIATES
In connection with the offering, RAI, acquired 15% of RAIT's outstanding
Common Shares. The Chairman and Chief Executive Officer of RAIT is the spouse
of the Chairman, Chief Executive Officer and President of RAI. A trustee of
RAIT is their son, who is also employed by RAIT. RAI advanced approximately
$1,615,000 to RAIT for organization, start-up and offering expenses.
Simultaneously with the closing of the public offering, RAIT purchased the
Initial Investments from RAI as described below. RAIT anticipates that it will
purchase additional investments from RAI subject to a maximum limit of 30% of
RAIT's investments, excluding the Initial Investments. RAIT may also from time
to time retain RAI to perform due diligence
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RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
investigations on properties underlying proposed investments (except
investments acquired from RAI).
The 12 Initial Investments were acquired from RAI at Closing at an
aggregate investment of approximately $18,100,000 together with certain senior
debt relating to four of the Initial Investments from third parties at a cost
of approximately $2,500,000. Two of the Initial Investments were originated by
RAIT and were purchased from RAI at cost. Eight of the Initial Investments
were acquired at a discount to the outstanding balance due from the borrower
on the loan and to the appraised value of the underlying property. RAIT's
investment (based upon book value) in the Initial Investments is 66% of the
appraised value of the underlying properties. There is an aggregate of
approximately $18,700,000 of debt held by third parties that is secured by the
properties underlying certain of the Initial Investments and to which such
Initial Investments are subordinated. In addition, in one of the Initial
Investments, RAI has retained a $2,500,000 senior secured interest to which
RAIT's interest is subordinated.
Brandywine, an affiliate of RAI, may provide real estate management or
management supervisory services to properties underlying RAIT's investments.
Management fees and leasing commissions in the amount of $49,000 were paid by
the underlying properties to Brandywine for the quarter ended March 31, 1998.
RAIT places its temporary excess cash in short-term money market
instruments with JeffBanks, Inc. (JBI). The Chairman and Chief Executive
Officer of RAIT is the Chairman and Chief Executive Officer of JBI; she and
her spouse (who is also an officer and director of JBI) are principal
shareholders of JBI. As of March 31, 1998, RAIT had $11,030,000 in deposits at
JBI, of which approximately $10,930,000 is over the FDIC insurance limit.
Ledgewood Law Firm, P.C. (Ledgewood), which has acted as counsel to RAIT
in connection with its organization and the Offering, previously has acted as
counsel to RAI, Brandywine, JBI and their affiliates and anticipates that it
will continue to do so in the future.
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RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In addition to historical information, this discussion and analysis
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly revise or update
these forward-looking statements to reflect events or circumstances that arise
after the date hereof.
Overview
The Company's principal business objective is to generate income for
distribution to its shareholders from a combination of interest, rents and
distributions in respect of rents from both financing funded and property
interests acquired. The Company commenced operations on January 14, 1998 upon
the conclusion of its initial public offering. The offering resulted in net
proceeds for the Company of approximately $46.2 million. Since the
commencement of operations, the Company has been in the process of building
its investment portfolio through investment of these proceeds.
Liquidity and Capital Resources
At the conclusion of the initial public offering, the Company had
approximately $44 million available for investment, excluding $500,000 held as
working capital reserves. The Company utilized $20.6 million immediately
following the initial public offering to acquire from RAI the twelve loans
that comprised the initial investments (the "Initial Investments") and to
acquire certain senior lien interests related thereto. Following the
acquisition of the Initial Investments, and through March 31, 1998, the
Company entered into two additional loan transactions, providing funding of
approximately $11.2 million, and purchased one property interest, at a cost of
approximately $1.7 million. On March 31, 1998, the Company paid dividends to
its shareholders aggregating approximately $900,000. At March 31, 1998, the
Company had approximately $10.5 million in funds available for investment. All
of such funds were temporarily invested in a money-market account that the
Company believed had a high degree of liquidity and safety.
Results of Operations
The Company had average earning assets for the quarter ended March
31,1998 of $31.6 million, including $5.5 million of average earning assets
invested in a money-market account. The money market account generally has an
interest rate that is substantially below interest rates the Company seeks in
providing financing, or rate of return the Company seeks to obtain from
property interests it acquires.
The Company's primary source of income for the period was interest income
from its earning assets, of which $1,126,000 was derived from financings and
$249,000 from the money market account. The yield on average earning financing
assets was 14% for the period, while the yield on average earning money market
account assets was 5.3%. The Company also derived $50,000 of income from a
subordination fee, which resulted from the restructuring of one of its
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financings and $7,000 from rents from its one property interest. Included in
interest income is approximately $110,000 of income recognized on $587,000 of
additional interest received in advance, $5,000 of amortization of original
issue discount, and $52,000 of accretion of loan discount.
Nine of the company's purchased real estate loans and two of the loans in
which the Company has purchased a participation are in default with respect to
their terms as originally underwritten; however, each of these loans is
subject to a forbearance or other contractual restructuring agreement. During
the period ending March 31,1998, all payments under the agreements were timely
made and all borrowers were otherwise in full compliance with the terms of the
agreements. The remaining three loans in the Company's portfolio are
performing in accordance with their terms as originally underwritten by the
Company and were current as to payments as of March 31, 1998.
The Company incurred expenses of $491,000 during the quarter ended March
31, 1998, consisting primarily of $137,000 in compensation expense and
$320,000 in interest expense. Interest expense relates to interest payments
made on senior indebtedness encumbering properties underlying the Company's
investments in real estate loans. The Company anticipates that compensation
expense and interest expense will increase in the second quarter to reflect
full period operations, increases in the Company's loan portfolio and an
increase in personnel required by full operations.
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PART II OTHER INFORMATION
-------------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Securities Sold
In August 1997, the Company sold 100 Common Shares to its
Chairman for $1,000 as part of the Company's organization.
Simultaneously with the closing of the Company's initial public
offering, the Company sold 500,000 Common Shares to RAI for aggregate
cash consideration of $6,975,000. RAI was the sponsor of the Company,
has one representative on the Company's Board of Trustees and sold
the Initial Investments (as referred to below) to the Company. The
sale of the Common Shares to RAI was exempt from the registration
requirements of the Securities Act by reason of Section 4(2) thereof
and, further, was not integrated with the public offering by reason
of Rule 152 promulgated under the Securities Act.
In addition, the Company issued to Friedman, Billings, Ramsey &
Co., Inc., the underwriter of the public offering, warrants to
purchase up to 141,667 Common Shares at a price per share of $15 as
additional consideration for underwriting the offering. The warrants
are exercisable for a period of four years commencing one year after
the closing date of the public offering. Such sale was made in
reliance of Section 4(2) of the Securities Act.
(d) Use of Proceeds
The Company's registration statement (File No. 333-35077)
registering the offer and sale of 2,833,334 common shares was
declared effective by the Securities and Exchange Commission on
January 8, 1998. The offering was underwritten by Friedman, Billings,
Ramsey & Co., Inc. The offering commenced on January 9, 1998 and
closed on January 14, 1998 with the sale of all of the offered common
shares for an aggregate offering price of $42,400,000. From the
effective date of the registration statement through March 31, 1998,
the Company incurred the following expenses in connection with the
offering:
Underwriting discounts and commissions $2,850,000
Other Expenses 2,380,000
---------
Total $5,230,000
=========
All expense payments were direct or indirect payments to
others. Net proceeds to the Company, after deducting these expenses,
were $37,170,000 (exclusive of 500,000 shares sold to RAI resulting
in net proceeds to the Company of $6,975,000 as referred to above).
Through March 31, 1998, the net offering proceeds had been used as
follows:
Investments in real estate $ 1,655,000
Investments in real estate loans 31,796,000
Repayment of senior indebtedness 8,000
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Payment of dividends 900,000
Temporary investments (money market account) 2,811,000
---------
$37,170,000
===========
All such payments were direct or indirect payments to others, except
that $20.6 of the Company's investments in real estate loans was paid to RAI
immediately following the closing of the offering to acquire the 12 loans that
comprised the Initial Investments (and to acquire certain senior lien
interests related thereto held by third parties) and $1,615,000 was paid to
RAI to reimburse it for legal, accounting and filing fees and expenses,
executive salaries, rent and other organizational expenses incurred by RAI in
sponsoring the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
Financial Data Schedule
(b) Reports on Form 8-K
(1) A Form 8-K was filed by the Company on March 30, 1998 that contained
disclosure of the Company's purchase of a $10.0 million loan
participation.
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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.
May 14, 1998 /s/ Ellen J. DiStefano
- -------------------------- ------------------------------------------------
DATE Ellen J. DiStefano
Chief Financial Officer
(On behalf of the Registrant and as its principal
financial officer)