UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 No. 001-13937
ANTHRACITE CAPITAL, INC.
(Exact name of Registrant as specified in its charter)
MARYLAND 13-3978906
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
345 Park Avenue
29th Floor
New York, New York 10154
------------------------------ ---------------
(Address of principal executive office) (Zip Code)
(212) 409-3333
----------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act: Not Applicable
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.001 PAR VALUE NEW YORK STOCK EXCHANGE (NYSE) (Title of
each class) (Name of each exchange on which registered)
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 the 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. |X|
As of March 21, 2000, the aggregate market value of the registrant's common
stock, $.001 par value, held by nonaffiliates of the registrant, computed
by reference to the closing price of 75/16 as reported on the New York
Stock Exchange as of the close of business on March 21, 2000: $152,423,966
(for purposes of this calculation affiliates include only directors and
executive officers of the Company).
The number of shares of the registrant's common stock, $.001 par value,
outstanding as of March 21, 2000 was 20,955,434 shares.
ANTHRACITE CAPITAL, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business............................................................4
Item 2. Properties .......................................................21
Item 3. Legal Proceedings .................................................21
Item 4. Submission of Matters to a Vote of
Security Holders ..................................................21
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters ...................................22
Item 6. Selected Financial Data ...........................................23
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations .....................23
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk .......................................................37
Item 8. Financial Statements and Supplementary Data .......................42
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ............................70
PART III
Item 10. Directors and Executive Officers of the Registrant ................71
Item 11. Executive Compensation ............................................74
Item 12. Security Ownership of Certain Beneficial
Owners and Management .............................................76
Item 13. Certain Relationships and Related Transactions ....................78
PART IV
Item 14. Exhibits ..........................................................81
Signatures ........................................................82
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein are not, and certain statements
contained in future filings by Anthracite Capital, Inc. (the "Company")
with the SEC, in the Company's press releases or in the Company's other
public or stockholder communications may not be, based on historical facts
and are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements which
are based on various assumptions (some of which are beyond the Company's
control), may be identified by reference to a future period or periods, or
by the use of forward-looking terminology, such as "may," "will,"
"believe," "expect," "anticipate," "continue," or similar terms or
variations on those terms, or the negative of those terms. Actual results
could differ materially from those set forth in forward-looking statements
due to a variety of factors, including, but not limited to, those related
to the economic environment, particularly in the market areas in which the
Company operates, competitive products and pricing, fiscal and monetary
policies of the U.S. Government, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk
management, asset/liability management, the financial and securities
markets and the availability of and costs associated with sources of
liquidity. The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
PART I
ITEM 1. BUSINESS
GENERAL
Anthracite Capital, Inc. (the "Company"), a Maryland corporation, was
formed in November 1997 to invest in multifamily, commercial and
residential mortgage loans, mortgage-backed securities and other real
estate related assets in both U.S. and non-U.S. markets. The Company uses
its equity capital and borrowed funds to seek to achieve strong investment
returns by maximizing the spread between investment income (net of credit
losses) earned on a diversified portfolio of real estate assets and the
cost of financing and hedging these assets. The Company seeks to pay
quarterly dividends consistent with earnings.
On March 23, 1998, the Securities and Exchange Commission (the "SEC")
declared effective the Company's Registration Statement on Form S-11 (File
No. 333-40813) relating to the initial public offering of 20,000,000 shares
of the Company's common stock, par value $.001, per share (the "Common
Stock"). On March 27, 1998, the Company received $296.8 million of net
proceeds from the initial public offering of 20,000,000 shares and the
private placement of 1,365,198 shares of its common stock, which the
Company used to acquire its initial portfolio of investments.
Currently, the authorized capital stock of the Company consists of
400,000,000 shares of common stock and 100,000,000 shares of preferred
stock, par value $0.001 per share ("Preferred Stock"). As of December 31,
1999, 1,200,000 shares of Preferred Stock, designated as 10.5% Series A
Senior Cumulative Redeemable Preferred Stock ("Series A Preferred Stock")
and 20,961,530 shares of Common Stock were outstanding.
The Company is involved in the single business segment of providing
financial services and conducts a variety of business activities within
this segment. The Company's primary business activities consist of the
acquisition and management of loans secured by real estate and related
securities. The Company's business decisions depend on changing market
factors, and the Company pursues various strategies and opportunities in
different market environments.
The day-to-day operations of the Company are managed by BlackRock Financial
Management, Inc. (the "Manager" or "BlackRock"), subject to the direction
and oversight of the Company's board of directors (the "Board of
Directors"). The Manager is a wholly owned subsidiary of BlackRock, Inc.,
which is listed for trading on the New York Stock Exchange ("NYSE") under
the symbol "BLK". BlackRock, Inc. is 70% owned by PNC Bank, National
Association ("PNC Bank"), which is itself a wholly owned subsidiary of PNC
Bank Corp (NYSE: PNC). Established in 1988, the Manager is a registered
investment adviser under the Investment Advisers Act of 1940, as amended
(the "Investment Advisers Act") and is one of the largest investment
management firms in the United States. The Manager, in its discretion,
subject to the supervision of the Board of Directors, evaluates and
monitors the Company's assets and how long such assets should be held in
the Company's portfolio. The Manager is permitted to actively manage the
Company's assets, and such assets may or may not be held to maturity.
Although the Company intends to manage its assets actively, it does not
intend to acquire, hold or sell assets in such a manner that such assets
would be characterized as dealer property for Federal income tax purposes.
INVESTMENTS
The Company's investment strategy is to achieve strong investment returns
by maximizing the spread between investment income (net of expected credit
losses) earned on its portfolio of investments and the cost of financing
and hedging these investments. The Company seeks to pay dividends
consistent with earnings. The Company's core strategy is to engage in the
acquisition, origination and syndication of non-investment grade rated
mezzanine debt in the form of mortgage loans and mortgage backed
securities. This strategy is balanced by maintaining a portfolio of liquid
investment grade rated mortgage-backed securities and other investments.
The Company may pursue other strategies from time to time to take advantage
of market opportunities as they arise.
In creating and managing its investment portfolio, the Company utilizes the
Manager's expertise and significant business relationships between the
Manager and its affiliates, as well as unrelated participants in the real
estate and securities industries.
The Company takes an opportunistic approach to its investments. The
Company's policy is to acquire or originate those mortgage assets which it
believes are likely to generate the highest returns on capital invested,
after considering the following factors: (i) the amount and nature of
anticipated cash flows from the asset, (ii) the Company's ability to pledge
the asset to secure collateralized borrowings, (iii) the capital
requirements resulting from the purchase and financing of the asset, (iv)
the potential for appreciation and the costs of purchasing, financing,
hedging and managing the asset.
Prior to acquisition or origination, potential returns on capital employed
are assessed over the expected life of the asset and in a variety of
interest rate, yield spread, financing cost, credit loss and prepayment
scenarios. In managing the Company's portfolio, the Manager also considers
balance sheet management and risk diversification factors.
Assets which the Company may acquire or originate from time to time
include: (i) mortgage-backed securities ("MBS") including commercial
mortgage backed securities ("CMBS") and residential mortgage-backed
securities ("RMBS"); (ii) multifamily, commercial and residential term
mortgage loans ("Mortgage Loans"); (iii) non-U.S. Mortgage Loans and MBS;
(iv) multifamily and commercial real properties; and (v) other real estate
related assets.
The dollar value of the Company's investments by category of strategic
investment are summarized as follows:
Estimated Fair Value Estimated Fair Value
December 31, 1999 December 31, 1998
Description (dollars in thousands) (dollars in thousands)
CMBS:
Non-investment grade rated subordinated
securities $243,708 $248,734
Non-rated subordinated securities 29,025 24,284
Non-rated commercial mortgage loans 66,842 33,263
-----------------------------------------------
Total core strategy operating portfolio 339,575 306,281
Cash and cash equivalents 22,265 1,087
Restricted cash equivalents - 3,243
Single-family RMBS:
Agency adjustable rate securities 58,858 17,999
Agency fixed rate securities 165,825 13,023
Privately issued investment grade rated 76,821 157,753
fixed rate securities
Agency insured project loan 2,958 3,275
-----------------------------------------------
Total non-core strategy liquidity portfolio 326,727 196,380
TRADING STRATEGIES PORTFOLIO:
Deposits with brokers as collateral for securities
sold short - 276,617
U.S. Treasury securities - 166,835
Securities sold short:
U.S. Treasury securities - (223,757)
Agency fixed rate note - (51,328)
----------------------------------------------
Total trading strategies portfolio - 168,367
TOTAL - ALL STRATEGIES $666,302 $671,028
==============================================
As of December 31, 1999, and 1998, substantially all of the Company's
investments were pledged to secure its short-term borrowings and/or
obligations under securities sold short.
As of December 31, 1999, and 1998, the CMBS held by the Company consisted
of subordinated securities collateralized by adjustable and fixed rate
commercial and multifamily Mortgage Loans. The RMBS held by the Company
consisted of adjustable rate and fixed rate residential pass-through or
mortgage-backed securities collateralized by adjustable and fixed rate
single-family residential Mortgage Loans. The agency RMBS held by the
Company were issued by Federal Home Loan Mortgage Corporation (FHLMC),
Federal National Mortgage Association (FNMA) or Government National
Mortgage Association (GNMA). The privately issued RMBS held by the Company
were issued by entities other than FHLMC, FNMA or GNMA. The agency insured
project loan held by the Company consisted of a participation interest in a
Mortgage Loan guaranteed by the Federal Housing Administration (FHA).
As of December 31, 1999 the Company held two commercial mortgage loans. One
is secured by a second lien on five luxury hotels located in London,
England and the surrounding vicinity (the "London Loan"), and the other
mortgage loan is secured by a second mortgage construction loan on an
office complex located in Santa Monica, California (the "California Loan").
The London Loan has a five-year maturity and may be prepaid at any time.
The London Loan is denominated in pounds sterling and bears interest at a
rate based upon the London Interbank Offered Rate (LIBOR) for pounds
sterling. The California Loan has a three-year maturity and may be prepaid
at any time. The California Loan bears interest at a LIBOR-based variable
rate. The Company's investment in these loans is carried at amortized cost
in its financial statements, and the London Loan is calculated in U.S.
dollars according to the exchange rate in effect on the reporting date.
As holder of the non-investment grade tranches of CMBS transactions the
Company is exposed to credit loss. As of December 31, 1999 and 1998, twelve
and two of the Mortgage Loans underlying the CMBS held by the Company were
delinquent, respectively. The twelve and two mortgage loans comprised 0.78%
and 0.28% of the aggregate principal balance of the Mortgage Loans
underlying the Company's CMBS, respectively. The Company believes its
current loss estimates with respect to the delinquent loans are
appropriate. The Company's other investments were current in payment status
as of December 31, 1999 and December 31, 1998.
As part of its short-term trading strategies, the Company had commitments
outstanding as of December 31, 1998 to purchase or sell agency RMBS.
Information with respect to such commitments as of December 31, 1998 is
summarized as follows (dollars in thousands):
Estimated
Principal Contract Fair Net
Amount of Price of Value of Gross Gross Unrealized
Subject Subject Subject Unrealized Unrealized Gains
Description Securities Securities Securities Gains Losses (Losses)
- ---------------------------------------------------------------------------------------------------
Forward commitments
to purchase $1,370,000 $1,356,210 $1,356,762 $2,133 $1,581 $552
Forward commitments 980,000 970,302 971,204 335 1,237 (902)
to sell -------------------------------------
Total $2,468 $2,818 $(350)
- --------------------- =====================================
The gross unrealized gains and gross unrealized losses listed above are
included in other assets and other liabilities, respectively, in the
Company's statement of financial condition as of December 31, 1998. In
instances where a forward commitment has been closed out with the same
counterparty and a right of setoff exists, only the net unrealized gain or
loss is reflected in other assets or liabilities.
As of December 31, 1998, all the Company's forward commitments to purchase
agency RMBS related to delivery of such securities in January 1999. The
Company generally closes out its forward commitments prior to the date
specified for delivery of the subject securities. In January 1999, the
Company took delivery of subject securities with respect to certain
matching forward commitments (that is, forward commitments to purchase and
sell agency RMBS with identical principal amounts, subject securities and
settlement dates) that were outstanding at December 31, 1998. The
securities had been sold prior to delivery and the resulting net realized
gain was not materially different from the net unrealized gain reflected in
the Company's financial statements as of and for the period ended December
31, 1998.
As of December 31, 1999, the Company had no such commitments outstanding to
report.
The Company's anticipated yields to maturity on its investments are based
upon a number of assumptions that are subject to certain business and
economic uncertainties and contingencies. Examples of such contingencies
include, among other things, expectation of credit losses, the rate and
timing of principal payments (including prepayments, repurchases, defaults
and liquidations), the pass-through or coupon rate, and interest rate
fluctuations. Additional factors that may affect the Company's anticipated
yields to maturity on its subordinated CMBS include interest payment
shortfalls due to delinquencies on the underlying mortgage loans and the
timing and magnitude of credit losses on the Mortgage Loans underlying the
subordinated CMBS that are a result of the general condition of the real
estate market (including competition for tenants and their related credit
quality) and changes in market rental rates. As these uncertainties and
contingencies are difficult to predict and are subject to future events
which may alter these assumptions, no assurance can be given that the
Company's anticipated yields to maturity will be achieved.
The following is a summary of the types of assets, among others, that the
Company may invest in from time to time.
MORTGAGE BACKED SECURITIES. The Company acquires both investment grade and
non-investment grade classes of MBS, from various sources. MBS typically
are divided into two or more interests, sometimes called "tranches" or
"classes." The senior classes are often securities which, if rated, would
have ratings ranging from low investment grade "BBB" to higher investment
grades "A," "AA" or "AAA." The junior, subordinated classes typically would
include one or more non-investment grade classes which, if rated, would
have ratings below investment grade "BBB." Such subordinated classes also
typically include an unrated higher-yielding, credit support class (which
generally is required to absorb the first losses on the underlying mortgage
loans).
MBS are generally issued either as "CMOs" or "Pass-Through Certificates."
CMOs are debt obligations of special purpose corporations, owner trusts or
other special purpose entities secured by commercial mortgage loans or MBS.
Pass-Through Certificates evidence interests in trusts, the primary assets
of which are mortgage loans. CMO Bonds and Pass-Through Certificates may be
issued or sponsored by agencies or instrumentalities of the United States
Government or private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage bankers, commercial
banks, investment banks and other entities. MBS may not be guaranteed by an
entity having the credit status of a governmental agency or instrumentality
and in this instance are generally structured with one or more of the types
of credit enhancements described below. In addition, MBS may be illiquid.
The Company acquires both CMBS and RMBS. The mortgage collateral supporting
CMBS may be pools of whole loans or other MBS, or both. Unlike RMBS, which
typically are collateralized by thousands of single family mortgage loans,
CMBS are collateralized generally by a more limited number of commercial or
multifamily mortgage loans with larger principal balances than those of
single family mortgage loans. As a result, a loss on a single mortgage loan
underlying a CMBS will have a greater negative effect on the yield of such
CMBS, especially the subordinated MBS in such CMBS.
MORTGAGE LOANS. The Company acquires or originates fixed and
adjustable-rate mortgage loans secured by senior, mezzanine or subordinate
liens on multifamily residential, commercial, single-family (one-to-four
unit) residential or other real property as a significant part of its
investment strategy.
Mortgage loans may be originated by or purchased from various suppliers of
mortgage assets throughout the United States and abroad, such as savings
and loan associations, banks, mortgage bankers, home builders, insurance
companies and other mortgage lenders. The Company acquires mortgage loans
directly from originators and from entities holding mortgage loans
originated by others. The Company also originates its own mortgage loans,
particularly mezzanine financing of mortgage loan and real property
portfolios.
The Company may invest in or provide loans used to finance construction,
loans secured by real property and used as temporary financing, and loans
secured by junior liens on real property. The Company may invest in
multifamily and commercial mortgage loans that are in default or for which
default is likely or imminent or for which the borrower is making monthly
payments in accordance with a forbearance plan.
The Company may provide mezzanine financing on commercial property that is
subject to first lien mortgage debt. The Company's mezzanine financing
takes the form of subordinated loans, commonly known as second mortgages,
or, in the case of loans originated for securitization, partnership loans
(also known as pledge loans) or preferred equity investments. For example,
on a commercial property subject to a first lien mortgage loan with a
principal balance equal to 70% of the value of the property, the Company
could lend the owner of the property (typically a partnership) an
additional 15% to 20% of the value of the property.
Typically in a mezzanine mortgage loan, as security for its debt to the
Company, the property owner would pledge to the Company either the property
subject to the first lien (giving the Company a second lien position
typically subject to an inter-creditor agreement) or the limited
partnership and/or general partnership interest in the owner. If the
owner's general partnership interest is pledged, then the Company would be
in a position to take over the operation of the property in the event of a
default by the owner. By borrowing against the additional value in their
properties, the property owners obtain an additional level of liquidity to
apply to property improvements or alternative uses. Mezzanine mortgage
loans generally provide the Company with the right to receive a stated
interest rate on the loan balance plus various commitment and/or exit fees.
In certain instances, subject to the REIT Provisions of the Code, the
Company may negotiate to receive a percentage of net operating income or
gross revenues from the property, payable to the Company on an ongoing
basis, and a percentage of any increase in value of the property, payable
upon maturity or refinancing of the loan, or the Company will otherwise
seek terms to allow the Company to charge an interest rate that would
provide an attractive risk-adjusted return. Alternatively, the mezzanine
mortgage loans can take the form of a non-voting preferred equity
investment in a single purpose entity borrower with substantially similar
terms.
The Company may acquire or originate mortgage loans secured by real
property located outside the United States or acquire such real property.
The Company has no limitations on the geographic scope of its investments
in foreign real properties and such investments may be made in a single
foreign country or among several foreign countries as the Board of
Directors may deem appropriate. Investing in real estate related assets
located in foreign countries creates risks associated with the uncertainty
of foreign laws and markets and risks related to currency conversion. The
Company may be subject to foreign income tax with respect to its
investments in foreign real estate related assets. Any foreign tax credit
that otherwise would be available to the Company for Federal income tax
purposes will not flow through to the Company's stockholders.
MULTIFAMILY AND COMMERCIAL REAL PROPERTIES. The Company believes that under
appropriate circumstances the acquisition of multifamily and commercial
real properties may offer significant opportunities to the Company. The
Company's policy is to conduct an investigation and evaluation of the real
properties in a portfolio of real properties before purchasing such a
portfolio. Prior to purchasing real estate related assets, the Manager
generally will identify and contact real estate brokers and/or appraisers
in the relevant market areas to obtain rent and sale comparables for the
assets in a portfolio contemplated to be acquired. This information is used
to supplement due diligence performed by the Manager's employees.
The Company may acquire real properties with known material environmental
problems and Mortgage Loans secured by such real properties subsequent to
an environmental assessment that would reasonably indicate that the present
value of the cost of clean-up or rededication would not exceed the
realizable value from the disposition of the mortgage property.
The Company may invest in net leased real estate on a leveraged basis. Net
leased real estate is generally defined as real estate that is net leased
to tenants who are customarily responsible for paying all costs of owning,
operating, and maintaining the leased property during the term of the
lease, in addition to paying a monthly net rent to the landlord for the use
and occupancy of the premises ("Net Leased Real Estate"). The Company will
consider investing in net leased real estate that is either leased to
creditworthy tenants or is underlied by real estate that can be leased to
other tenants in the event of a default of the initial tenant.
OTHER REAL ESTATE RELATED ASSETS. The Company may invest in a variety of
other real estate related investments, the principal features of which are
summarized below.
FHA and GNMA Project Loans. The Company may invest in loan participations
and pools of loans insured under a variety of programs administered by the
Department of Housing and Urban Development ("HUD"). These loans will be
insured under the National Housing Act and will provide financing for the
purchase, construction or substantial rehabilitation of multifamily
housing, nursing homes and intermediate care facilities, elderly and
handicapped housing, and hospitals.
Similar to CMBS, investments in FHA and GNMA Project Loans will be
collateralized by a more limited number of loans, with larger average
principal balances, than RMBS, and will therefore be subject to greater
performance variability. Loan participations are most often backed by a
single FHA-insured loan. Pools of insured loans, while more diverse, still
provide much less diversification than pools of single family loans.
FHA insured loans will be reviewed on a case by case basis to identify and
analyze risk factors which may materially impact investment performance.
Property-specific data such as debt service coverage ratios, loan-to-value
ratios, HUD inspection reports, HUD financial statements and rental
subsidies will be analyzed in determining the appropriateness of a loan for
investment purposes. The Manager will also rely on the FHA insurance
contracts and their anticipated impact on investment performance in
evaluating and managing the investment risks. FHA insurance covers 99% of
the principal balance of the underlying project loans. Additional GNMA
credit enhancement may cover 100% of the principal balance.
Pass-Through Certificates. The Company's investments in mortgage assets are
expected to be concentrated in Pass-Through Certificates. The Pass-Through
Certificates to be acquired by the Company will consist primarily of
pass-through certificates issued by FNMA, FHLMC and GNMA, as well as
privately issued adjustable-rate and fixed-rate mortgage pass-through
certificates. The Pass-Through Certificates to be acquired by the Company
will represent interests in mortgages that will be secured by liens on
single-family (one-to-four units) residential properties, multifamily
residential properties, and commercial properties. Pass-Through
Certificates backed by adjustable-rate Mortgage Loans are subject to
lifetime interest rate caps and to periodic interest rate caps that limit
the amount an interest rate can change during any given period. The
Company's borrowings are generally not subject to similar restrictions. In
a period of increasing interest rates, the Company could experience a
decrease in net income or incur losses because the interest rates on its
borrowings could exceed the interest rates on adjustable-rate Pass-Through
Certificates owned by the Company. The impact on net income of such
interest rate changes will depend on the adjustment features of the
mortgage assets owned by the Company, the maturity schedules of the
Company's borrowings and related hedging.
Privately Issued Pass-Through Certificates. Privately Issued Pass-Through
Certificates are structured similar to the FNMA, FHLMC and GNMA
pass-through certificates discussed below and are issued by originators of
and investors in Mortgage Loans, including savings and loan associations,
savings banks, commercial banks, mortgage banks, investment banks and
special purpose subsidiaries of such institutions. Privately Issued
Pass-Through Certificates are usually backed by a pool of conventional
Mortgage Loans and are generally structured with credit enhancement such as
pool insurance or subordination. However, Privately Issued Pass-Through
Certificates are typically not guaranteed by an entity having the credit
status of FNMA, FHLMC or GNMA guaranteed obligations.
FNMA Certificates. FNMA is a federally chartered and privately owned
corporation. FNMA provides funds to the mortgage market primarily by
purchasing Mortgage Loans on homes from local lenders, thereby replenishing
their funds for additional lending.
FNMA Certificates may be backed by pools of Mortgage Loans secured by
single-family or multi-family residential properties. The original terms to
maturity of the Mortgage Loans generally do not exceed 40 years. FNMA
Certificates may pay interest at a fixed rate or adjustable rate. Each
series of FNMA adjustable-rate certificates bears an initial interest rate
and margin tied to an index based on all loans in the related pool, less a
fixed percentage representing servicing compensation and FNMA's guarantee
fee. The specified index used in each such series has included the Treasury
Index, the 11th District Cost of Funds Index, LIBOR and other indices.
Interest rates paid on fully-indexed FNMA adjustable-rate certificates
equal the applicable index rate plus a specified number of basis points
ranging typically from 125 to 250 basis points. In addition, the majority
of series of FNMA adjustable-rate certificates issued to date have
evidenced pools of Mortgage Loans with monthly, semi-annual or annual
interest rate adjustments. Adjustments in the interest rates paid are
generally limited to an annual increase or decrease of either 100 or 200
basis points and to a lifetime cap of 500 or 600 basis points over the
initial interest rate. Certain FNMA programs include Mortgage Loans which
allow the borrower to convert the adjustable mortgage interest rate of its
adjustable-rate Mortgage Loan to a fixed rate. Adjustable-rate Mortgage
Loans which are converted into fixed rate Mortgage Loans are repurchased by
FNMA, or by the seller of such loans to FNMA, at the unpaid principal
balance thereof plus accrued interest to the due date of the last
adjustable rate interest payment.
FNMA guarantees to the registered holder of a FNMA Certificate that it will
distribute amounts representing scheduled principal and interest (at the
rate provided by the FNMA Certificate) on the Mortgage Loans in the pool
underlying the FNMA Certificate, whether or not received, and the full
principal amount of any such Mortgage Loan foreclosed or otherwise finally
liquidated, whether or not the principal amount is actually received. The
obligations of FNMA under its guarantees are solely those of FNMA and are
not backed by the full faith and credit of the United States. If FNMA were
unable to satisfy such obligations, distributions to holders of FNMA
Certificates would consist solely of payments and other recoveries on the
underlying Mortgage Loans and, accordingly, monthly distributions to
holders of FNMA Certificates would be affected by delinquent payments and
defaults on such Mortgage Loans.
FHLMC Certificates. FHLMC is a privately owned corporate instrumentality of
the United States created pursuant to an Act of Congress. The principal
activity of FHLMC currently consists of the purchase of conforming Mortgage
Loans or participation interests therein and the resale of the loans and
participations so purchased in the form of guaranteed MBS.
Each FHLMC Certificate issued to date has been issued in the form of a
Pass-Through Certificate representing an undivided interest in a pool of
Mortgage Loans purchased by FHLMC. The Mortgage Loans included in each pool
are fully amortizing, conventional Mortgage Loans with original terms to
maturity of up to 40 years secured by first liens on one-to-four unit
family residential properties or multi-family properties.
FHLMC guarantees to each holder of its certificates the timely payment of
interest at the applicable pass-through rate and ultimate collection of all
principal on the holder's pro rata share of the unpaid principal balance of
the related Mortgage Loans, but does not guarantee the timely payment of
scheduled principal of the underlying Mortgage Loans. The obligations of
FHLMC under its guarantees are solely those of FHLMC and are not backed by
the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates
would consist solely of payments and other recoveries on the underlying
Mortgage Loans and, accordingly, monthly distributions to holders of FHLMC
Certificates would be affected by delinquent payments and defaults on such
Mortgage Loans.
GNMA Certificates. GNMA is a wholly owned corporate instrumentality of the
United States within HUD. GNMA guarantees the timely payment of the
principal of and interest on certificates that represent an interest in a
pool of Mortgage Loans insured by the FHA and other loans eligible for
inclusion in mortgage pools underlying GNMA Certificates. GNMA Certificates
constitute general obligations of the United States backed by its full
faith and credit.
Collateralized Mortgage Obligations (CMOs). The Company may invest, from
time to time, in adjustable rate and fixed rate CMOs issued by private
issuers or FHLMC, FNMA or GNMA. CMOs are a series of bonds or certificates
ordinarily issued in multiple classes, each of which consists of several
classes with different maturities and often complex priorities of payment,
secured by a single pool of Mortgage Loans, Pass-Through Certificates,
other CMOs or other mortgage assets. Principal prepayments on collateral
underlying a CMO may cause it to be retired substantially earlier than the
stated maturities or final distribution dates. Interest is paid or accrues
on all interest bearing classes of a CMO on a monthly, quarterly or
semi-annual basis. The principal and interest on underlying Mortgages Loans
may be allocated among the several classes of a series of a CMO in many
ways, including pursuant to complex internal leverage formulas that may
make the CMO class especially sensitive to interest rate or prepayment
risk.
CMOs may be subject to certain rights of issuers thereof to redeem such
CMOs prior to their stated maturity dates, which may have the effect of
diminishing the Company's anticipated return on its investment.
Privately-issued single-family, multi-family and commercial CMOs are
supported by private credit enhancements similar to those used for
Privately-Issued Certificates and are often issued as senior-subordinated
mortgage securities. In general, the Company intends to only acquire CMOs
or multi-class Pass-Through certificates that represent beneficial
ownership in grantor trusts holding Mortgage Loans, or regular interests
and residual interests in REMICs, or that otherwise constitute REIT Real
Estate Assets.
Mortgage Derivatives. The Company may acquire Mortgage Derivatives,
including Interest-Only securities (IOs), Inverse IOs, Sub IOs and floating
rate derivatives, as market conditions warrant. Mortgage Derivatives
provide for the holder to receive interest only, principal only, or
interest and principal in amounts that are disproportionate to those
payable on the underlying Mortgage Loans. Payments on Mortgage Derivatives
are highly sensitive to the rate of prepayments on the underlying Mortgage
Loans. In the event that prepayments on such Mortgage Loans occur more
frequently than anticipated, the rates of return on Mortgage Derivatives
representing the right to receive interest only or a disproportionately
large amount of interest, i.e., IOs, would be likely to decline.
Conversely, the rates of return on Mortgage Derivatives representing the
right to receive principal only or a disproportional amount of principal,
i.e., POs, would be likely to increase in the event of rapid prepayments.
Some IOs in which the Company may invest, such as Inverse IOs, bear
interest at a floating rate that varies inversely with (and often at a
multiple of) changes in a specific index. The yield to maturity of an
Inverse IO is extremely sensitive to changes in the related index. The
Company also may invest in inverse floating rate Mortgage Derivatives which
are similar in structure and risk to Inverse IOs, except they generally are
issued with a greater stated principal amount than Inverse IOs.
Other IOs in which the Company may invest, such as Sub IOs, have the
characteristics of a Subordinated Interest. A Sub IO is entitled to no
payments of principal; moreover, interest on a Sub IO often is withheld in
a reserve fund or spread account to fund required payments of principal and
interest on more senior tranches of mortgage securities. Once the balance
in the spread account reaches a certain level, excess funds are paid to the
holders of the Sub IO. These Sub IOs provide credit support to the senior
classes and thus bear substantial credit risks. In addition, because a Sub
IO receives only interest payments, its yield is extremely sensitive to the
rate of prepayments (including prepayments as a result of defaults) on the
underlying Mortgage Loans.
IOs can be effective hedging devices because they generally increase in
value as fixed-rate mortgage securities decrease in value. The Company also
may invest in other types of derivatives currently available in the market
and other Mortgage Derivatives that may be developed in the future if the
Manager determines that such investments would be advantageous to the
Company.
Other. The Company may invest in fixed-income securities that are not
mortgage assets, including securities issued by corporations or issued or
guaranteed by U.S. or sovereign foreign entities, loan participations,
emerging market debt, high yield debt and collateralized bond obligations.
HEDGING ACTIVITIES
The Company may enter into hedging transactions to protect its investment
portfolio from interest rate fluctuations and other changes in market
conditions. These transactions may include interest rate swaps, the
purchase or sale of interest rate collars, caps or floors, options,
Mortgage Derivatives and other hedging instruments. These instruments may
be used to hedge as much of the interest rate risk as the Manager
determines is in the best interest of the Company's stockholders, given the
cost of such hedges and the need to maintain the Company's status as a
REIT. The Manager may elect to have the Company bear a level of interest
rate risk that could otherwise be hedged when the Manager believes, based
on all relevant facts, that bearing such risk is advisable. The Manager has
extensive experience in hedging mortgages and mortgage-related assets with
these types of instruments.
Hedging instruments often are not traded on regulated exchanges, guaranteed
by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there may be no requirements with
respect to record keeping, financial responsibility or segregation of
customer funds and positions. The Company will enter into these
transactions only with counterparties with long term debt rated "A" or
better by at least one nationally recognized statistical rating
organization. The business failure of a counterparty with which the Company
has entered into a hedging transaction will most likely result in a
default, which may result in the loss of unrealized profits and force the
Company to cover its resale commitments, if any, at the then current market
price. Although generally the Company will seek to reserve for itself the
right to terminate its hedging positions, it may not always be possible to
dispose of or close out a hedging position without the consent of the
counterparty, and the Company may not be able to enter into an offsetting
contract in order to cover its risk. There can be no assurance that a
liquid secondary market will exist for hedging instruments purchased or
sold, and the Company may be required to maintain a position until exercise
or expiration, which could result in losses.
The Company's hedging activities are intended to address both income and
capital preservation. Income preservation refers to maintaining a stable
spread between yields from mortgage assets and the Company's borrowing
costs across a reasonable range of adverse interest rate environments.
Capital preservation refers to maintaining a relatively steady level in the
market value of the Company's capital across a reasonable range of adverse
interest rate scenarios. However, no strategy can insulate the Company
completely from changes in interest rates.
As of December 31, 1998, the Company's hedging transactions outstanding
consisted of forward currency exchange contracts pursuant to which the
Company has agreed to exchange (pound)8,053 (pounds sterling) for $13,323
(U.S. dollars) on March 31, 1999. Upon the maturity of this contract, the
Company entered into a similar forward currency exchange contract. As of
December 31, 1999 the Company agreed to exchange (pound)8,000 (pounds
sterling) for $12,702 (U.S. dollars) on January 18, 2000. On January 18,
2000 the Company agreed to exchange (pound)8,000 (pounds sterling) for
$13,152 (U.S. dollars) on July 21, 2000. These contracts are intended to
hedge currency risk in connection with the Company's investment in a
commercial mortgage loan denominated in pounds sterling. The estimated fair
value of the forward currency exchange contracts was a liability of $(221)
and $(21) at December 31, 1999 and 1998, respectively, which was recognized
as a reduction of net foreign currency gains (losses).
As of December 31, 1999, the Company had outstanding a short position of
186 thirty-year U.S. Treasury Bond future contracts and 1,080 five-year and
200 ten-year U.S. Treasury Note future contracts expiring in March 31,
2000, which represented $18,600 and $128,000 in face amount of U.S.
Treasury Bonds and Notes, respectively. Realized gains and losses on closed
contracts are recognized as a net adjustment to the basis of the hedged
security. The estimated fair value of these contracts was approximately
$1,925 at December 31, 1999 and is included in the carrying value of the
hedged available for sale securities. During 1998 the Company did not enter
into any such financial futures contracts.
During 1998, the Company entered into an interest rate swap transaction
that was, for accounting purposes, designated as being intended to modify
the interest rate characteristics of certain of the Company's securities
available for sale from fixed to variable rate. In connection with the sale
of a portion of the Company's portfolio of securities available for sale,
the swap transaction, which had a notional amount of $100,000, was
terminated later in the year at a loss of $(3,804). The Company monitored
the swap to ensure that it remained effective through the date of its
termination. The portion of the loss associated with securities available
for sale sold by the Company during 1998, $(2,771), is included in the loss
on sale of securities available for sale in the statement of operations and
comprehensive income (loss). The remaining portion of the loss, $(1,033),
which is associated with certain of the Company's remaining securities
available for sale, was added to the cost basis of such securities and is
being amortized as a yield adjustment over the previously scheduled term of
the swap transaction, which was ten years. During 1999 the Company did not
enter into any such interest rate swap transactions.
FINANCING AND LEVERAGE
The Company has financed its assets with the net proceeds of its initial
public offering through issuance of preferred stock and through short-term
borrowings under repurchase agreements and the lines of credit discussed
below. In the future, operations may be financed by future offerings of
equity securities and borrowings, and the Company expects that, in general,
it will employ leverage consistent with the type of assets acquired and the
desired level of risk in various investment environments. The Company's
governing documents do not explicitly limit the amount of leverage that the
Company may employ. Instead, the Board of Directors has adopted an
indebtedness policy for the Company that gives the Manager extensive
discretion as to the amount of leverage to be employed, depending on the
Manager's assessment of acceptable risk and consistent with the nature of
the assets then held by the Company, subject to periodic review by the
Company's Board of Directors. At December 31, 1999 and 1998, the Company's
debt-to-equity ratio for at-risk assets was approximately 3.0 to 1 and 2.0
to 1, respectively. The Company anticipates that it will maintain
debt-to-equity ratios for at-risk assets of between 2.5 to 1 and 4.5 to 1
in the foreseeable future, although this ratio may be higher or lower from
time to time. The Company considers its at-risk assets to be its core
strategy operating portfolio and its non-core strategy liquidity portfolio.
The Company's indebtedness policy may be changed by the Board of Directors
in the future.
During 1998, the Company entered into a master assignment agreement, as
amended, and the related Note, which provide multi-currency financing for
the Company's investments (the "Master Assignment Agreement"). The Master
Assignment Agreement with Merrill Lynch Mortgage Capital Inc. ("Merrill
Lynch") permits the Company to borrow up to $400,000, and was to terminate
on August 20, 1999. In August 1999, Merrill Lynch extended the termination
date of the Master Assignment Agreement to August 20, 2000 and reduced the
available funds to $200,000. As of December 31, 1999, and 1998 the
outstanding borrowings under this line of credit were $64,575 and $65,921,
respectively. The Master Assignment Agreement requires assets to be pledged
as collateral, which may consist of rated CMBS, rated RMBS, residential and
commercial mortgage loans, and certain other assets. Outstanding borrowings
under this line of credit bear interest at a LIBOR based variable rate.
In June 1999, the Company closed a $17,500, three year term financing
secured by the Company's $35,000 California Loan. As of December 31, 1999,
the Company had drawn $14,131 under this loan. Outstanding borrowings under
this term financing bear interest at a LIBOR based variable rate.
On July 19, 1999, the Company entered into a $185,000 committed credit
facility with Deutsche Bank, AG. The facility has a two-year term and
provides for a one-year extension at the Company's option. The facility can
be used to replace existing reverse repurchase agreement borrowings and the
finance the acquisition of MBS and loan investments which will be used to
collateralize borrowings under the facility. As of December 31, 1999, the
outstanding borrowings under this facility were $5,022. Outstanding
borrowings under this credit facility bear interest at a LIBOR based
variable rate.
In December, 1999 the Company entered into a two year $50,000 credit
facility with an institutional lender. This facility will be used to
finance the acquisition of MBS and loan investments. As of December 31,
1999, the Company borrowed $8,910 under this facility. Outstanding
borrowings under this term financing bear interest at a LIBOR based
variable rate.
On December 2, 1999 the Company authorized and issued 1,200,000 shares of
Series A Preferred Stock for aggregate proceeds of $30,000. The new series
of Preferred Stock carries a 10.5% coupon and is convertible into Common
Stock at a price of $7.35. The Series A Preferred Stock has a seven-year
maturity at which time, at the option of the holders, the shares may be
converted into common shares or liquidated for $27.75 per share. If
converted, the Preferred Stock would convert into approximately 4 million
shares of the Company's Common Stock.
The Company is subject to various covenants in its lines of credit,
including maintaining: a minimum GAAP net worth of $140,000, a
debt-to-equity ratio not to exceed 4.5 to 1, a minimum cash requirement
based upon certain debt to equity ratios, a minimum debt service coverage
ratio of 1.5, and a minimum liquidity reserve of $10,000. Additionally, the
Company's GAAP net worth cannot decline by more than 37% during the course
of any two consecutive fiscal quarters. As of December 31, 1999 and 1998,
the Company was in compliance with all such covenants.
The Company has entered into reverse repurchase agreements to finance most
of its securities available for sale which are not financed under its lines
of credit. The reverse repurchase agreements are collateralized by most of
the Company's securities available for sale and bear interest at rates that
have historically moved in close relationship to LIBOR.
Certain information with respect to the Company's collateralized borrowings
at December 31, 1999 is summarized as follows:
Lines of Reverse Total
Credit and Repurchase Collateralized
Term Loans Agreements Borrowings
---------------------------------------------
Outstanding borrowings $94,035 $377,498 $471,533
Weighted average borrowing rate 7.25% 6.32% 6.50%
Weighted average remaining maturity 360 Days 36 Days 101 Days
Estimated fair value of assets pledged $133,301 $412,983 $546,284
At December 31, 1999, $22,375 of borrowings outstanding under the line of
credit were denominated in pounds sterling, and interest payable is based
on sterling LIBOR.
At December 31, 1999, the Company's collateralized borrowings had the
following remaining maturities:
Lines of Reverse Total
Credit and Repurchase Collateralized
Term Loan Agreements Borrowings
--------------------------------------
Within 30 days - $157,918 $157,918
31 to 59 days - 219,580 219,580
Over 60 days $94,035 - 94,035
--------------------------------------
$94,035 $377,498 $471,533
======================================
As of December 31, 1999 $179,978 of the Company's $185,000 committed credit
facility with Deutsche Bank, AG was available for future borrowings,
$41,090 was available under the Company's $50,000 credit facility, and
$3,369 was available under the Company's term financing secured by the
California Loan.
Certain information with respect to the Company's collateralized borrowings
at December 31, 1998 is summarized as follows:
Reverse Total
Line of Repurchase Collateralized
Credit Agreements Borrowings
--------------------------------------------------
Outstanding borrowings $ 65,921 $ 420,143 $ 486,064
Weighted average borrowing rate 6.98% 5.57% 5.76%
Weighted average remaining
maturity 232 Days 15 Days 45 Days
Estimated fair value of assets
pledged $ 98,331 $ 462,787 $ 561,118
At December 31, 1998, $23,014 of borrowings outstanding under the line of
credit were denominated in pounds sterling.
At December 31, 1998, the Company's collateralized borrowings had the
following remaining maturities:
Reverse Total
Line of Repurchase Collateralized
Credit Agreements Borrowings
----------------------------------------------------
Within 30 days - $ 407,769 $ 407,769
31 to 59 days - - -
Over 60 days $65,921 12,374 78,295
====================================================
$65,921 $ 420,143 $ 486,064
====================================================
Under the line of credit and the reverse repurchase agreements, the lender
retains the right to mark the underlying collateral to estimated market
value. A reduction in the value of its pledged assets will require the
Company to provide additional collateral or fund cash margin calls. From
time to time, the Company expects that it will be required to provide such
additional collateral or fund margin calls. The Company maintains adequate
liquidity to meet such calls.
OPERATING POLICIES
The Company has adopted compliance guidelines, including restrictions on
acquiring, holding and selling assets, to ensure that the Company meets the
requirements for qualification as a REIT and is excluded from regulation as
an investment company. Before acquiring any asset, the Manager determines
whether such asset would constitute a REIT Real Estate Asset under the REIT
Provisions of the Code. The Company regularly monitors purchases of
mortgage assets and the income generated from such assets, including income
from its hedging activities, in an effort to ensure that at all times the
Company's assets and income meet the requirements for qualification as a
REIT and exclusion under the Investment Company Act of 1940.
The Company's unaffiliated directors review all transactions of the Company
on a quarterly basis to ensure compliance with the operating policies and
to ratify all transactions with PNC Bank and its affiliates, except that
the purchase of securities from PNC and its affiliates require prior
approval. The unaffiliated directors rely substantially on information and
analysis provided by the Manager to evaluate the Company's operating
policies, compliance therewith and other matters relating to the Company's
investments.
In order to maintain the Company's REIT status, the Company generally
intends to distribute to stockholders aggregate dividends equaling at least
95% of its taxable income each year.
REGULATION
The Company intends to continue to conduct its business so as not to become
regulated as an investment company under the Investment Company Act. Under
the Investment Company Act, a non-exempt entity that is an investment
company is required to register with the Securities and Exchange Commission
("SEC) and is subject to extensive, restrictive and potentially adverse
regulation relating to, among other things, operating methods, management,
capital structure, dividends and transactions with affiliates. The
Investment Company Act exempts entities that are "primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on
and interests in real estate" ("Qualifying Interests"). Under current
interpretation by the staff of the SEC, to qualify for this exemption, the
Company, among other things, must maintain at least 55% of its assets in
Qualifying Interests. Pursuant to such SEC staff interpretations, certain
of the Company's interests in agency pass-through and mortgage-backed
securities and agency insured project loans are Qualifying Interests. In
general, the Company will acquire subordinated CMBS only when such mortgage
securities are collateralized by pools of first mortgage loans, when the
Company can monitor the performance of the underlying mortgage loans
through loan management and servicing rights, and when the Company has
appropriate workout/foreclosure rights with respect to the underlying
mortgage loans. When such arrangements exist, the Company believes that the
related subordinated CMBS constitute Qualifying Interests for purposes of
the Investment Company Act. Therefore, the Company believes that it should
not be required to register as an "investment company" under the Investment
Company Act as long as it continues to invest primarily in such
subordinated CMBS and/or in other Qualifying Interests. However, if the SEC
or its staff were to take a different position with respect to whether the
Company's subordinated CMBS constitute Qualifying Interests, the Company
could be required to modify its business plan so that either (i) it would
not be required to register as an investment company or (ii) it would
comply with the Investment Company Act and be able to register as an
investment company. In such event, (i) modification of the Company's
business plan so that it would not be required to register as an investment
company would likely entail a disposition of a significant portion of the
Company's subordinated CMBS or the acquisition of significant additional
assets, such as agency pass-through and mortgage-backed securities, which
are Qualifying Interests or (ii) modification of the Company's business
plan to register as an investment company would result in significantly
increased operating expenses and would likely entail significantly reducing
the Company's indebtedness (including the possible prepayment of the
Company's short-term borrowings), which could also require it to sell a
significant portion of its assets. No assurances can be given that any such
dispositions or acquisitions of assets, or deleveraging, could be
accomplished on favorable terms. Consequently, any such modification of the
Company's business plan could have a material adverse effect on the
Company. Further, if it were established that the Company were an
unregistered investment company, there would be a risk that the Company
would be subject to monetary penalties and injunctive relief in an action
brought by the SEC, that the Company would be unable to enforce contracts
with third parties and that third parties could seek to obtain recission of
transactions undertaken during the period it was established that the
Company was an unregistered investment company. Any such results would be
likely to have a material adverse effect on the Company.
COMPETITION
The Company's net income depends, in large part, on the Company's ability
to acquire mortgage assets at favorable spreads over the Company's
borrowing costs. In acquiring mortgage assets, the Company competes with
other mortgage REITs, specialty finance companies, savings and loan
associations, banks, mortgage bankers, insurance companies, mutual funds,
institutional investors, investment banking firms, other lenders,
governmental bodies and other entities. In addition, there are numerous
mortgage REITs with asset acquisition objectives similar to the Company,
and others may be organized in the future. The effect of the existence of
additional REITs may be to increase competition for the available supply of
mortgage assets suitable for purchase by the Company. Many of the Company's
anticipated competitors are significantly larger than the Company, have
access to greater capital and other resources and may have other advantages
over the Company. In addition to existing companies, other companies may be
organized for purposes similar to that of the Company, including companies
organized as REITs focused on purchasing mortgage assets. A proliferation
of such companies may increase the competition for equity capital and
thereby adversely affect the market price of the Company's common stock.
EMPLOYEES
The Company does not have any employees other than officers, each of whom
are full-time employees of the Manager, whose duties include performing
administrative activities for the Company.
MANAGEMENT AGREEMENT
The Company is managed pursuant to a management agreement, dated March 27,
1998, between the Company and the Manager (the "Management Agreement"),
pursuant to which, the Manager is responsible for the day-to-day operations
of the Company and performs such services and activities relating to the
assets and operations of the Company as may be appropriate. The Manager
primarily engages in three activities: (i) acquiring and originating
mortgage loans and other real estate related assets; (ii) asset/liability
and risk management, hedging of floating rate liabilities, and financing,
management and disposition of assets, including credit and prepayment risk
management; and (iii) capital management, structuring, analysis, capital
raising and investor relations activities. In conducting these activities,
the Manager formulates operating strategies for the Company, arranges for
the acquisition of assets by the Company, arranges for various types of
financing and hedging strategies for the Company, monitors the performance
of the Company's assets and provides certain administrative and managerial
services in connection with the operation of the Company. At all times, the
Manager is subject to the direction and oversight of the Company's Board of
Directors.
The Company may terminate, or decline to renew the term of, the Management
Agreement without cause at any time after the first two years upon 60 days
written notice by a majority vote of the unaffiliated directors. Although
no termination fee is payable in connection with a termination for cause,
in connection with a termination without cause, the Company must pay the
Manager a termination fee, which could be substantial. The amount of the
termination fee will be determined by independent appraisal of the value of
the Management Agreement for the next four years. Such appraisal is to be
conducted by a nationally-recognized appraisal firm mutually agreed upon by
the Company and the Manager.
In addition, the Company has the right at any time during the term of the
Management Agreement to terminate the Management Agreement without the
payment of any termination fee upon, among other things, a material breach
by the Manager of any provision contained in the Management Agreement that
remains uncured at the end of the applicable cure period.
TAXATION OF THE COMPANY
The Company has elected to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code"), commencing with its taxable year
ended December 31, 1998, and the Company intends to continue to operate in
a manner consistent with the REIT Provisions of the Code. The Company's
qualification as a REIT depends on its ability to meet the various
requirements imposed by the Code, through actual operating results, asset
holdings, distribution levels, and diversity of stock ownership.
Provided the Company qualifies for taxation as a REIT, it generally will
not be subject to Federal corporate income tax on its net income that is
currently distributed to stockholders. This treatment substantially
eliminates the "double taxation" (at the corporate and stockholder levels)
that generally results from an investment in a corporation. If the Company
fails to qualify as a REIT in any taxable year, its taxable income would be
subject to Federal income tax at regular corporate rates (including any
applicable alternative minimum tax). Even if the Company qualifies as a
REIT, it will be subject to Federal income and excise taxes on its
undistributed income.
If in any taxable year the Company fails to qualify as a REIT and, as a
result, incurs additional tax liability, the Company may need to borrow
funds or liquidate certain investments in order to pay the applicable tax,
and the Company would not be compelled to make distributions under the
Code. Unless entitled to relief under certain statutory provisions, the
Company would also be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification is lost.
Although the Company currently intends to operate in a manner designated to
qualify as a REIT, it is possible that future economic, market, legal, tax
or other considerations may cause the Company to fail to qualify as a REIT
or may cause the Board of Directors to revoke the Company's REIT election.
The Company and its stockholders may be subject to foreign, state and local
taxation in various foreign, state and local jurisdictions, including those
in which it or they transact business or reside. The state and local tax
treatment of the Company and its stockholders may not conform to the
Company's Federal income tax treatment.
ITEM 2. PROPERTIES
The Company does not maintain an office and owns no real property. It
utilizes the offices of the Manager, located at 345 Park Avenue, New York,
New York 10154.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any matured legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1999, through the solicitation of proxies or
ortherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange under
the symbol "AHR." The following table sets forth, for the periods
indicated, the high, low and last sale prices in dollars on the New York
Stock Exchange for the Company's common stock as were traded during these
respective time periods.
Last
1998 High Low Sale Dividends
- ---- ---- --- ---- ---------
First Quarter*.............. $151/4 $15 $15
Second Quarter.............. 15 1/2 133/8 137/8 .27
Third Quarter............... 1315/16 81/4 8 1/2 .36
Fourth Quarter.............. 83/8 35/8 713/16 .29
1999
- ----
First Quarter............... 715/16 63/8 71/2 .29
Second Quarter.............. 711/16 61/2 69/16 .29
Third Quarter............... 71/8 61/2 67/8 .29
Fourth Quarter.............. 615/16 6 63/8 .29
2000
- ----
First Quarter through March 21, 73/8 61/4 75/16 .29
2000
* From March 24 to March 31.
On March 21, 2000, the closing sale price for the Company's common stock,
as reported on the New York Stock Exchange, was $75/16. As of March 21,
2000, there were approximately 129 record holders of the common stock and
one record holder of the Preferred Stock. This figure does not reflect
beneficial ownership of shares held in nominee name.
Sales of unregistered securities
On December 2, 1999, the Company sold 1,200,000 shares of its Series A
Preferred Stock in a private placement to RECP II Anthracite, LLC, a wholly
owned subsidiary of DLJ Real Estate Capital Partners II, L.P. Although the
common stock into which the Series A Preferred Stock is convertible was
subsequently registered in a registration statement on Form S-3, dated
March 10, 2000, the Series A Preferred Stock was sold without registration
under the Securities Act of 1933 in reliance upon the exemption provided by
Section 4(2) thereof.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the year ended December 31,
1999, and the period March 24, 1998 (commencement of operations) through
December 31, 1998 has been derived from the Company's audited financial
statements. This information should be read in conjunction with "Item 1.
Business" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations", as well as the audited financial
statements and notes thereto included in "Item 8. Financial Statements and
Supplementary Data".
For the Period
For the Year March 24, 1998
Ended December Through
(In thousands, except per share data) 31, 1999 December 31, 1998
- ------------------------------------------------------------------------------
Interest income $57,511 $46,055
Expenses 33,564 29,004
Other gains (losses) 2,442 (18,440)
Net income (loss) 26,673 (1,389)
Net income (loss) available to common 26,389 (1,389)
shareholders
Net income (loss) per share:
Basic 1.27 (0.07)
Diluted 1.26 (0.07)
Dividends declared per common share 1.16 0.92
Total assets 679,662 956,395
Total liabilities 481,379 774,666
Total stockholders' equity 168,261 181,729
Redeemable convertible preferred stock 30,022 -
The net loss in 1998 reflects realized losses of $18,262 resulting from the
sale of a substantial portion of the Company's available for sales
securities and termination of an interest rate swap agreement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL: The Company was organized in November 1997 to invest in a
diversified portfolio of multifamily, commercial and residential Mortgage
Loans, MBS and other real estate related assets in the U.S. and non-U.S.
markets. In March 1998, the Company received $296.9 million of net proceeds
from the initial public offering of 20,000,000 shares and the private
placement of 1,365,198 shares of its Common Stock, which the Company used
to acquire its initial portfolio of investments. The Company commenced
operations on March 24, 1998.
The Company is a real estate finance company that generates income based on
the spread between the interest income on its investments and the interest
expense from borrowings used to finance its investments. Because the
Company has elected to be taxed as a REIT its income is largely exempt from
corporate taxation and the Company is able to generate a higher level of
net interest earnings than otherwise obtainable by a taxable corporation
making similar investments. The principal risks that the Company faces are
(i) credit risk on the high yield real estate loans and securities it
underwrites, (ii) interest rate risk on the spread between the rates
(typically one month LIBOR) at which the Company borrows and the generally
longer term rates (as represented by the U.S. Ten Year Treasury) at which
the Company lends; and (iii) funding risk in the amount and cost of debt
financing employed by the Company over time versus the level of such
funding that is sustainable by the financing markets. These risks are
discussed in more detail below, under the heading, "Quantitative and
Qualitative Disclosures About Market Risk and under Capital Resources and
Liquidity".
The following discussion should be read in conjunction with the financial
statements and related notes. Dollar amounts are expressed in thousands,
other than per share amounts.
MARKET CONDITIONS:
Credit: The Company considers The Lehman Brothers delinquency index for
1998 transactions to be the most relevant for its CMBS holdings. Pursuant
to this index as of December 31, 1998, 38 different securitizations were
being monitored by the index and 0.17% of principal balances were
delinquent. As of December 31, 1999, 41 different securitizations are being
monitored by the index and 0.47% of principal balances were delinquent. The
broader Lehman Brothers CMBS collateral delinquency index representing all
CMBS conduit deals dates back to 1993 originations. As of December 31, 1998
106 securitizations were being monitored and 0.34% were delinquent,
compared to 147 securitizations as of December 31, 1999 and 0.51%
delinquent. Morgan Stanley Dean Witter (MSDW) also tracks CMBS loan
delinquencies using a slightly smaller universe. Their index tracks all
CMBS transactions with more than $200,000 of collateral that have been
seasoned for at least one year. This will generally adjust for the lower
delinquencies that occur in newly originated collateral. As of December 31,
1998 MSDW delinquencies on 92 securitizations was 0.93%. As of December 31,
1999 this same index tracked 117 securitizations with delinquencies of
0.89%.
Real Estate: The commercial real estate market in the U.S. remains healthy.
The strength of the economy continues to push rents up to levels well above
inflation while demand for space across all property types has been the
strongest it has been during the current cycle. Construction activity has
remained high but not out of balance. While many analysts believe this
growth will slow down, the market is expected to maintain equilibrium going
forward, with selected property types and markets showing slower rent
growth.
Interest Rates: The primary shift in the real estate capital markets during
1999 was the increase in interest rates. During 1999 the yield on the
ten-year U.S. Treasury Note increased by 180 basis points from 4.66% to
6.44%. Short term rates followed, as one month LIBOR increased by 76 basis
points from 5.06% to 5.82%. The Federal Reserve's continued concern about
inflation has kept upward pressure on short term rates. See below the
section titled, "Quantitative and Qualitative Disclosures About Market
Risk" for a detailed discussion of how interest rates and spreads affect
the Company.
Real Estate Capital Markets: During 1999 the market for high yield CMBS and
commercial loans made a modest recovery from the liquidity crisis of 1998.
While credit spreads tightened from 1998 year-end levels, they remain at
historically wide levels despite continued strength in the commercial real
estate credit markets. Capital flow into the real estate market continues
to be weak. Mutual fund flows in the sector produced net outflows of $1.06
billion in 1998 and net outflows of $1.22 billion in 1999 indicating a
continuing trend in capital moving out of the sector. This has led to
significant reinvestment opportunities, provided that the real estate and
credit markets remain steady. As an example of the relative opportunity in
real estate, evidence shows that investors continue to demand greater
compensation for real estate related high yield paper than similarly rated
corporate high yield paper in other industries. The chart below compares
the credit spreads for high yield CMBS to high yield corporate bonds.
Average Credit Spreads (in basis points)*
-----------------------------------------
BB CMBS BB Corporate Difference
------- ------------ ----------
As of December 31, 1999 550 349 201
As of December 31, 1998 645 362 283
B CMBS B Corporate Difference
------- ------------ ----------
As of December 31, 1999 915 496 419
As of December 31, 1998 1,032 606 426
* Source - Lehman Brothers CMBS High Yield Index & Lehman Brothers High
Yield Index
EFFECT OF MARKET CONDITIONS ON COMPANY PERFORMANCE:
The increase in interest rates during the year led to a decline in the
value of the Company's investment portfolio. The unrealized loss on the
Company's holdings of CMBS increased from $79,137 at December 31, 1998 to
$101,139 at December 31, 1999. This decline in the value of the investment
portfolio represents current market valuation changes which the Company
believes are temporary losses. The Company performs a detailed review of
its loss assumptions on a quarterly basis. As of December 31, 1999 the
Company concluded that real estate credit fundamentals remain solid, and
the Company believes there has been no material change in the credit
quality of its portfolio.
The Company purchased its CMBS portfolio at prices that reflect the
assumption that credit losses will occur. The adjusted purchase price of
the Company's CMBS portfolio as of December 31, 1999 represents 62.2% of
its par amount. As the portfolio matures the Company expects to recoup its
original purchase price, provided that the credit losses experienced are
not greater than the credit losses assumed in the purchase analysis. The
adjusted purchase price net of liabilities of the Company's entire
portfolio including loans, non-credit sensitive securities, cash and other
assets at December 31, 1999 was $269,400, or $12.85 per share.
The Company's earnings depend, in part, on the relationship between
long-term interest rates and short-term interest rates. A significant part
of Company's investments bear interest at fixed rates determined by
reference to the yields of medium or long-term U.S. Treasury securities or
at adjustable rates determined by reference (with a lag) to the yields on
various short-term instruments. Approximately $70,000 of the Company's
assets earn interest at rates that are determined with reference to LIBOR.
All of the Company's borrowings bear interest at rates that are determined
with reference to LIBOR. To the extent that interest rates on the Company's
borrowings increase without an offsetting increase in the interest rates
earned on the Company's investments, the Company's earnings could be
negatively affected. The chart below compares the rate for the ten year
U.S. Treasury securities to the one month LIBOR rate.
Ten Year One month
U.S Treasury Securities LIBOR Difference
----------------------- ----- ----------
December 31, 1999 6.44% 5.82% 0.62%
December 31, 1998 4.66% 5.06% (0.40%)
The increase in LIBOR from December 31, 1998 to December 31, 1999 had a
negative impact on the Company's financing costs. At the end of February
2000, the ten-year U.S. Treasury yield had decreased from its December 31,
1999 level to 6.38%, while one month LIBOR increased slightly to 5.88%
during the same period.
The Company's CMBS represents approximately $600,000 of par collateralized
by underlying pools of commercial mortgages with a balance of over $9.3
billion as of December 31, 1999. The Company is in a first loss position
with respect to these loans. The Company manages its credit risk through
conservative underwriting, diversification, active monitoring of loan
performance and exercise of its right to control the workout process as
early as possible. All of these processes are based on the extensive
intranet-based analytic systems developed by BlackRock.
In underwriting loans, the Company performs site inspections and/or desk
top reviews of all loans in the pools. This process includes detailed
analysis of regional economic factors, industry outlooks, project viability
and documentation. Unacceptable risks are removed from the pool. An
assumption of expected losses is developed and the securities are priced
accordingly.
The Company maintains diversification of credit exposures through this
underwriting process and can shift its focus in future investments by
adjusting the mix of loans in subsequent acquisitions. During 1999 the
Company added approximately $40,872 of par value in CMBS collateralized by
$760,414 of loans. The comparative credit risk profiles of the loans
underlying the Company's CMBS by property type are:
---------------------------------------------------------------------------------------
12/31/98 12/31/99
EXPOSURE EXPOSURE
---------------------------------------------------------------------------------------
PROPERTY TYPE LOAN BALANCE % OF TOTAL LOAN BALANCE % OF TOTAL % CHANGE
IN EXPOSURE
---------------------------------------------------------------------------------------
Multifamily $2,944,569 34.38% $3,258,741 34.95% 1.64%
Retail $2,263,869 26.43% $2,467,237 26.46% 0.10%
Office $1,591,294 18.58% $1,751,756 18.79% 1.11%
Lodging $845,890 9.88% $877,945 9.42% -4.67%
Industrial $511,054 5.97% $561,406 6.02% 0.89%
Healthcare $376,733 4.40% $376,733 4.04% -8.15%
Parking $30,937 0.36% $30,937 0.33% 0.00%
---------------------------------------------------------------------------------------
TOTAL $8,564,346 100% $9,324,761 100%
---------------------------------------------------------------------------------------
The table above shows that the Company reduced the percentage of its loans
in the lodging and healthcare industries favoring multifamily and office
properties during 1999.
Active monitoring of loan performance is a critical function that is
performed via electronic uploads of information gathered from the loan
servicers, PNC Bank and external data providers. This world wide web
("Web") based system allows the Company to monitor payments, debt service
coverage ratios, regional economic statistics, general real estate market
trends and other relevant factors.
The Company also uses the Web-based system to monitor delinquencies. The
Company updates this information monthly allowing for more detailed
analysis of loans before problems develop. The following table shows the
comparison of delinquencies:
- ----------------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------
NUMBER OF % OF NUMBER OF % OF
PRINCIPAL LOANS COLLATERAL PRINCIPAL LOANS COLLATERAL
- ----------------------------------------------------------------------------------------------------------
Past due 30 days to 60 days $2,936 2 0.03% $23,800 2 0.28%
Past due 60 days to 90 days $13,522 3 0.14% 0 0 0.0%
Past due 90 days or more $34,631 6 0.37% 0 0 0.0%
Resolved loans $22,296 1 0.24% 0 0 0.0%
TOTAL $73,385 12 0.78% $23,800 2 0.28%
During 1999 the Company addressed delinquency issues with regard to 25
different loans including the two outstanding on December 31, 1998. During
1999 one loan was put back to the originator for documentation concerns and
twelve were brought current without experiencing a loss. One loan, with a
principal of $22,296 was resolved in November 1999 with slightly modified
payment terms at no loss to the Company. This loan continues to be carried
as a delinquent loan although the borrower is in compliance with the
restructured payment terms. Of the 11 delinquent loans remaining at
December 31, 1999, 5 are delinquent due to technical reasons and the
remaining six were in foreclosure proceedings or workout negotiations.
Regarding one of the remaining six loans, the party which originally
contributed the loan to the CMBS trust has indemnified the trust against a
loss of up to $1,300. This loan has a principal balance of $9,065.
The Company's delinquency experience of 0.78% with the resolved loan is in
line with directly comparable collateral experience shown in the Lehman
Brothers 1998 CMBS index at 0.47%. Without the resolved loan the Company's
delinquencies as of December 31, 1999 would be 0.54%.
During 1999 the Company also experienced early payoffs of $33,348,
representing 0.36% of the existing pool balance. These loans were paid at
par with no loss. The anticipated losses attributable to these loans will
be reallocated to the loans remaining in the pools.
Subsequent to December 31, 1999, one of the 11 loans was brought current,
and two were foreclosed upon. The $1,300 indemnification referred to above
relates to one of the loans foreclosed upon. Six new loans with a current
balance of $17,357 were added to the 30 day delinquent category.
Additionally, three loans with a total balance of $38,848 were paid off at
par with no loss to the Company.
The Company also owns two mezzanine whole loans. The California Loan is a
$35 million second mortgage on an office construction project in Santa
Monica, California. The building is expected to be completed on time by mid
2000. The building is currently 25% leased at rents of approximately $40
per square foot. This is higher than the base case expectations at
origination. Furthermore, the real estate values for this class of office
space in Santa Monica have increased significantly since origination.
During 1999 the Company closed a match funded financing facility for this
asset.
The London Loan is a 21,470 Sterling denominated loan that was funded in
August of 1998. It is secured by five luxury hotel properties in and around
London. The operations of the hotels continue to meet expectations. While
the underlying properties have performed well, the loan's liquidation value
as of December 31, 1998 was 93.25% of par. In early 1999 it was further
marked down to 89.5% due to the continuing liquidity problems in the high
yield real estate market, and has since partially recovered to a dollar
price of 92% as of December 31, 1999. The Company continues to expect this
loan to pay off its balance at its maturity on June 30, 2002.
RECENT EVENTS: On February 8, 2000 the Company entered into a definitive
merger agreement with CORE Cap, Inc. ("CORE Cap"). The merger agreement
provides for the Company to acquire 100% of the outstanding common shares
of CORE Cap in exchange for Common Stock of the Company, using an exchange
ratio based upon the respective net asset values attributable to each
company's common stock. As of December 31, 1999 CORE Cap had equity capital
of approximately $90 million, comprised of common stock and 10% cumulative
convertible preferred stock. In the merger, CORE Cap's preferred stock
would be exchanged for a new series of the Company's preferred stock with
substantially identical terms. As of December 31, 1999 CORE Cap had assets
of approximately $1.4 billion, comprised of investment grade quality
residential mortgage loans and MBS. The Company expects to operate the
combined company at debt to capital ratios of less than 4.5 to 1.
The merger, which is structured as a taxable stock-for-stock transaction,
is expected to close in the first half of 2000, subject to the approval of
CORE Cap stockholders. The board of directors of CORE Cap and the Company
have approved the merger. In connection with the transaction the board of
directors of the Company would be expanded to include a current
representative of the board of CORE Cap, and a representative of GMAC
Mortgage Corporation, Inc.
In connection with the merger, the merged Company will obtain for a $2.15
million payment the right to require GMAC Mortgage Asset Management, Inc.,
CORE Cap's current manager, to assign its management contract with CORE Cap
to BlackRock. Under the terms of such assignment, BlackRock would be
primarily obligated to make all payments required to satisfy the
termination provisions of the management contract. CORE Cap's assets, as
included in the merged company would be managed by BlackRock under its
existing agreement with the Company.
On February 11, 2000, the Company closed its short position of 186
thirty-year U.S. Treasury Bond future contracts and 1,080 five-year and 200
ten-year U.S. Treasury Note future contracts which expired in March 31,
2000 for a realized gain of $2,998. Simultaneously, the Company took a
short position of 186 thirty-year U.S. Treasury Bond future contracts and
1,080 five-year and 200 ten-year U.S. Treasury Note future contracts which
expire in June 30, 2000. Additionally on March 3, 2000 the Company
increased its short position of ten-year U.S. Treasury Note future
contracts by 250.
FUNDS FROM OPERATIONS (FFO): Most industry analysts, including the Company,
consider FFO an appropriate supplementary measure of operating performance
of a REIT. In general, FFO adjusts net income for non-cash charges such as
depreciation, certain amortization expenses and gains or losses from debt
restructuring and sales of property. However, FFO does not represent cash
provided by operating activities in accordance with GAAP and should not be
considered an alternative to net income as an indication of the results of
the Company's performance or to cash flows as a measure of liquidity.
The Company computes FFO in accordance with the definition recommended by
the National Association of Real Estate Investment Trusts. The Company
believes that the exclusion from FFO of gains or losses from sales of
property was not intended to address gains or losses from sales of
securities as it applies to the Company. Accordingly, the Company includes
gains or losses from sales of securities in its calculation of FFO.
The Company's FFO for the year ended December 31, 1999 and the period March
24, 1998 through December 31, 1998 were $26,673, and $(1,389),
respectively, which were the same as its reported GAAP net income (loss)
for the periods. The Company reported cash flows provided by (used) in
operating activities of $188,735 and $(141,801), cash flows (used) in
investing activities $(165,453) and of $(611,175) and cash flows (used) in
provided by financing activities of $(2,104) and $753,863 in its statement
of cash flows for the year ended December 31, 1999 and the period March 24,
1998 through December 31, 1998, respectively.
RESULTS OF OPERATIONS
Net income for the year ended December 31, 1999 was $26,389, or $1.27 per
share ($1.26 diluted). Net loss for the period March 24, 1998 through
December 31, 1998 was $1,389, or $0.07 per share (basic and diluted). The
increase in income in 1999 is primarily due to the fact that the Company
was in operation for a full year in 1999 versus approximately three
quarters in 1998, and that the Company realized significant losses in 1998
from the sale of a substantial portion of its available for sale securities
and termination of an interest rate swap agreement. Further details of the
changes are set forth below.
INTEREST INCOME: The following table sets forth information regarding the
total amount of income from certain of the Company's interest-earning
assets and the resulting average yields. Information is based on monthly
average balances during the period.
For the Year Ended December 31, 1999
-------------------------------------------
Interest Average Annualized
Income Balance Yield
-------------------------------------------
CMBS $33,788 $354,713 9.53%
Other securities available for sale 14,318 223,410 6.41%
Commercial mortgage loan 5,549 51,787 10.71%
Cash and cash equivalents 670 11,473 5.84%
-------------------------------------------
Total $54,325 $641,383 8.47%
===========================================
For the Period March 24, 1998
Through December 31, 1998
-------------------------------------------
Interest Average Annualized
Income Balance Yield
-------------------------------------------
Securities available for sale $42,576 $749,396 7.33%
Commercial mortgage loan 1,432 16,548 11.16%
Cash and cash equivalents 679 15,552 5.63%
-------------------------------------------
Total $44,687 $781,496 7.37%
===========================================
In addition to the foregoing, the Company earned $3,186 and $1,368 in
interest income from securities held for trading during the year ended
December 31, 1999, and for the period March 24, 1998 through December 31,
1998, respectively.
INTEREST EXPENSE: The following table sets forth information regarding the
total amount of interest expense from certain of the Company's
collateralized borrowings. Information is based on daily average balances
during the period.
For the Year Ended December 31, 1999
-------------------------------------------
Interest Average Annualized
Expense Balance Rate
-------------------------------------------
Reverse repurchase agreements $16,454 $283,322 5.81%
Lines of credit and term loan 5,314 82,540 6.44%
-------------------------------------------
Total $21,768 $365,862 5.95%
===========================================
For the Period March 24, 1998
Through December 31, 1998
-------------------------------------------
Interest Average Annualized
Expense Balance Rate
-------------------------------------------
Reverse repurchase agreements $21,932 $482,409 5.86%
Lines of credit borrowings 1,545 26,772 7.44%
-------------------------------------------
Total $23,477 $509,181 5.95%
===========================================
In addition to the foregoing, the Company incurred $4,108 and $1,288 in
interest expense from collateralized borrowings relating to its securities
held for trading and securities sold short during the year ended December
31, 1999, and for the period March 24, 1998 through December 31, 1998.
NET INTEREST MARGIN AND NET INTEREST SPREAD FROM THE PORTFOLIO: The Company
considers its portfolio to consist of its securities available for sale,
its commercial mortgage loan and its cash and cash equivalents because
these assets relate to its core strategy of acquiring and originating high
yield loans and securities backed by commercial real estate, while at the
same time maintaining a portfolio of liquid investment grade securities to
enhance the Company's liquidity.
Net interest margin from the portfolio is annualized net interest income
from the portfolio divided by the average market value of interest-earning
assets in the portfolio. Net interest income from the portfolio is total
interest income from the portfolio less interest expense relating to
collateralized borrowings. Net interest spread from the portfolio equals
the yield on average assets for the period less the average cost of funds
for the period. The yield on average assets is interest income from the
portfolio divided by average amortized cost of interest earning assets in
the portfolio. The average cost of funds is interest expense from the
portfolio divided by average outstanding collateralized borrowings.
The following chart describes the interest income, interest expense, net
interest margin, and net interest spread for the Company's portfolio.
For the Period
For the Year March 24, 1998
Ended Through
December 31, 1999 December 31, 1998
--------------------------------------
Interest Income $54,325 $44,687
Interest Expense $21,768 $23,477
Net Interest Margin 6.02% 3.95%
Net Interest Spread 2.59% 0.73%
OTHER EXPENSES: Expenses other than interest expense consist primarily of
management fees and general and administrative expenses. Management fees of
$4,565 for the year ended December 31, 1999 and $3,474 for the period March
24, 1998 through December 31, 1998 were comprised solely of the base
management fee paid to the Manager for such periods (as provided pursuant
to the management agreement between the Manager and the Company), as the
Manager earned no incentive fee for such periods. Other expenses of $2,839
for the year ended December 31, 1999, and $765 for the period March 24,
1998 through December 31, 1998, were comprised of accounting agent fees,
custodial agent fees, directors' fees, fees for professional services,
insurance premiums, broken deal expenses, due diligence costs, and other
miscellaneous expenses, which increased in 1999 primarily due to the
Company being in operation for a full year, and its investigations of
various strategic acquisitions during that period.
OTHER GAINS (LOSSES): During the year ended December 31, 1999 the Company
sold a portion of its securities available for sale for total proceeds of
$47,843, resulting in a realized loss of $516. The loss on sale of
securities available for sale of $18,262 for the period March 24, 1998 to
December 31, 1998 consisted of a loss of $15,491 on the sale of securities
available for sale and $2,771 of associated termination costs on an
interest rate swap transaction. The gain on securities held for trading of
$2,992 for the year ended December 31, 1999 and the loss of $231 for the
period March 24, 1998 to December 31, 1998, consisted primarily of realized
and unrealized gains and losses on U.S. Treasury and agency securities,
forward commitments to purchase or sell Agency RMBS, and financial futures
contracts. The foreign currency loss of $34 for the year ended December 31,
1999 and the gain of $53 for the period March 24, 1998 to December 31, 1998
relates to the Company's net investment in a commercial mortgage loan
denominated in pounds sterling and associated hedging.
DIVIDENDS DECLARED: During the year ended December 31, 1999, the Company
declared dividends to shareholders totaling $24,348 or $1.16 per share, of
which $18,270 was paid during the year and $6,078 was paid on January 17,
2000. On March 16, 2000, the Company declared distributions to its
shareholders of $0.29 per share, payable on April 28, 2000 to stockholders
of record on March 31, 1999. For U.S. Federal income tax purposes, the
dividends are ordinary income to the Company stockholders.
During the period March 24, 1998 through December 31, 1998, the Company
declared dividends to shareholders totaling $18,759, $.092 per share, of
which $12,963 was paid during the period and $5,796 was paid on January 15,
1999. For U.S. Federal income tax purposes, the dividends are ordinary
income to the Company's stockholders.
TAX BASIS NET INCOME AND GAAP NET INCOME: Net income as calculated for tax
purposes (tax basis net income) was estimated at $28,347, or $1.36 ($1.34
diluted) per share, for the year ended December 31, 1999, compared to a net
income as calculated in accordance with generally accepted accounting
principles (GAAP) of $26,673, or $1.27 ($1.26 diluted) per share.
Tax basis income was $14,518, or $0.70 per share (basic and diluted), for
the period March 24, 1998 through December 31, 1998, compared to a net loss
as calculated in accordance with GAAP of $1,389 or $0.07 per share (basic
and diluted).
For tax purposes the fourth quarter 1999 and 1998 dividend of $0.29 each
period is treated as a 2000 and 1999 distribution, respectively. Thus, for
tax purposes the total dividends paid year to date in 1999 and 1998 were
$1.45 and $0.63, respectively.
Differences between tax basis net income and GAAP net income arise for
various reasons. For example, in computing income from its subordinated
CMBS for GAAP purposes, the Company takes into account estimated credit
losses on the underlying loans whereas for tax basis income purposes, only
actual credit losses are taken into account. As there were no actual credit
losses incurred in 1999, tax basis income is higher the GAAP income.
Certain general and administrative expenses may differ due to differing
treatment of the deductibility of such expenses for tax basis income. Also,
differences could arise in the treatment of premium and discount
amortization on the Company's securities available for sale.
A reconciliation of GAAP net loss to tax basis net income is as follows:
For the Period
March 24, 1998
For the Year Through
Ended December December 31,
31, 1999 1998
-------------------------------------
GAAP net income (loss) $26,673 $(1,389)
Net (gain) loss on securities available for sale (2,476) 14,459
Subordinate CMBS income differences 3,500 1,230
Other differences 650 218
-------------------------------------
Tax basis net income $28,347 $14,518
=====================================
CHANGES IN FINANCIAL CONDITION
SECURITIES AVAILABLE FOR SALE: At December 31, 1999 and 1998, respectively
an aggregate of $101,139 and $79,137 in unrealized losses on securities
available for sale was included as a component of accumulated other
comprehensive income (loss) in stockholders' equity.
The Company's securities available for sale, which are carried at estimated
fair value, included the following at December 31, 1999:
Estimated
Fair
Security Description Value Percentage
- -----------------------------------------------------------------------------
Commercial mortgage-backed securities:
Non-investment grade rated subordinated
securities $243,708 42.7%
Non-rated subordinated securities 29,025 4.6
-----------------------
272,733 47.3
Single-family residential mortgage-backed securities:
Agency adjustable rate securities 58,858 10.2
Agency fixed rate securities 165,825 28.7
Privately issued investment grade rated fixed
rate securities 76,821 13.3
----------------------
301,504 52.2
Agency insured project loan 2,958 0.5
----------------------
$577,195 100.0%
======================
During 1999 the fair value of the Company's securities available for sale
increased by $112,127 as a result of purchases of $265,174 and sales and
principal paydowns of $131,045 and changes in market value of $(22,002).
The Company's securities available for sale included the following at
December 31, 1998:
Estimated
Fair
Security Description Value Percentage
- -----------------------------------------------------------------------------
Commercial mortgage-backed securities:
Non-investment grade rated subordinated
securities $248,734 53.5%
Non-rated subordinated securities 24,284 5.2
---------------------
273,018 58.7
Single-family residential mortgage-backed securities:
Agency adjustable rate securities 17,999 3.9
Agency fixed rate securities 13,023 2.8
Privately issued investment grade rated fixed
rate securities 157,753 33.9
---------------------
188,775 40.6
Agency insured project loan 3,275 0.7
---------------------
$465,068 100.0%
=====================
During 1998, the Company sold a substantial portion of its securities
available for sale for total proceeds of $736,744, resulting in a realized
loss of $18,262. Substantially all of the sales occurred during the fourth
quarter of 1998 as part of the Company's efforts to reduce its leverage and
enhance its liquidity in response to reduced liquidity in the financing
markets and spread widening in the credit-sensitive sectors of the debt
markets. The proceeds from these sales were applied primarily to reduce
amounts borrowed under the Company's reverse repurchase agreements and to
increase its cash position. Sales during 1999 resulted in total proceeds of
$47,843 and realized losses of $516.
SHORT-TERM BORROWINGS: To date, the Company's debt has consisted of
line-of-credit borrowings, term loans, reverse repurchase agreements, and
preferred stock, which have been collateralized by a pledge of most of the
Company's securities available for sale, securities held for trading and
its commercial mortgage loans. The Company's financial flexibility is
affected by its ability to renew or replace on a continuous basis its
maturing short-term borrowings. To date, the Company has obtained
short-term financing in amounts and at interest rates consistent with the
Company's financing objectives.
Under the lines of credit, term loans, and the reverse repurchase
agreements, the lender retains the right to mark the underlying collateral
to market value. A reduction in the value of its pledged assets will
require the Company to provide additional collateral or fund margin calls.
From time to time, the Company expects that it will be required to provide
such additional collateral or fund margin calls.
The following tables set forth information regarding the Company's
collateralized borrowings.
For the Year Ended
December 31, 1999
-----------------------------------------
December 31,
1999 Maximum Range of
Balance Balance Maturities
-----------------------------------------
Reverse repurchase agreements $377,498 $404,043 3 to 62 days
Line of credit and term loan
borrowings 94,035 167,599 77 to 931 days
------------------------------------------
For the Period March 24, 1998
Through December 31, 1998
--------------------------------------------
December 31,
1998 Maximum Range of
Balance Balance Maturities
-------------------------------------------
Reverse repurchase agreements $420,143 $841,617 1 to 180 days
Line of credit and term loan
borrowings 65,921 79,309 241 to 360 days
--------------------------------------------
The Company repaid a substantial portion of its borrowings under reverse
repurchase agreements during the fourth quarter of 1998.
HEDGING INSTRUMENTS: The Company's hedging policy with regard to its
sterling denominated commercial mortgage loan is to minimize its exposure
to fluctuations in the sterling exchange rate. At December 31, 1998, the
Company's hedging transactions outstanding consisted of forward currency
exchange contracts pursuant to which the Company agreed to exchange
(pound)8,053 (pounds sterling) for $13,323 (U.S. dollars) on March 31,
1999. Upon the maturity of this contract, the Company entered into a
similar forward currency exchange contract. As of December 31, 1999 the
Company agreed to exchange (pound)8,000 (pounds sterling) for $12,702 (U.S.
dollars) on January 18, 2000. On January 18, 2000 the Company agreed to
exchange (pound)8,000 (pounds sterling) for $13,152 (U.S. dollars) on July
21, 2000. These contracts are intended to hedge currency risk in connection
with the Company's investment in a commercial mortgage loan denominated in
pounds sterling. The estimated fair value of the forward currency exchange
contracts was a liability of $221 and $21 at December 31, 1999, and 1998,
respectively, which was recognized as a reduction of net foreign currency
gains (losses).
From time to time the Company may reduce its exposure to market interest
rates by entering into various financial instruments that shorten portfolio
duration. These financial instruments are intended to mitigate the effect
of interest rates on the value of certain assets in the Company's
portfolio. At December 31, 1999, the Company had outstanding, a short
position of 186 thirty-year U.S. Treasury Bond future contracts and 1,080
five-year and 200 ten-year U.S. Treasury Note future contracts expiring in
March 31, 1999, which represented $18,600 and $128,000 in face amount of
U.S. Treasury Bond and Notes, respectively. The estimated fair value of
these contracts was approximately $1,925 at December 31, 1999.
CAPITAL RESOURCES AND LIQUIDITY: Liquidity is a measurement of the
Company's ability to meet potential cash requirements, including ongoing
commitments to repay borrowings, fund investments, loan acquisition and
lending activities and for other general business purposes. The primary
sources of funds for liquidity consist of collateralized borrowings,
principal and interest payments on and maturities of securities available
for sale, securities held for trading and commercial mortgage loans, and
proceeds from sales thereof.
To the extent that the Company may become unable to maintain its borrowings
at their current level due to changes in the financing markets for the
Company's assets then the Company may be required to sell assets in order
to achieve lower borrowings levels. In this event, the Company's level of
net earnings would decline. The Company's principal strategies for
mitigating this risk are to maintain portfolio leverage at levels it
believes are sustainable and to diversify the sources and types of
available borrowing and capital. The Company has utilized committed bank
facilities, preferred stock, and will consider resecuritization or other
achievable term funding of existing assets.
On March 31, 1999, the Company filed a $200,000 shelf registration
statement with the SEC. The shelf registration statement will permit the
Company to issue a variety of debt and equity securities in the public
markets. There can be no certainty, however, that the Company will be able
to issue, on terms favorable to the Company, or at all, any of the
securities so registered.
On December 2, 1999, the Company authorized and issued 1,200,000 shares of
Series A Preferred Stock for aggregate proceeds of $30,000. The Series A
Preferred Stock carries a 10.5% coupon and is convertible into the
Company's Common Stock at a price of $7.35. The Series A Preferred Stock
has a seven-year maturity at which time, at the option of the holders, the
shares may be converted into Common Stock or liquidated for $27.75 per
share. If converted, the Preferred Stock would convert into approximately 4
million shares of Common Stock.
As of December 31, 1999 $179,978 of the Company's $185,000 committed credit
facility with Deutsche Bank, AG was available for future borrowings,
$41,090 was available under the Company's $50,000 credit facility, and
$3,369 was available under the Company's term financing secured by the
California Loan.
The Company's operating activities provided (used) cash flows of $188,735
and $(141,801) during the year ended December 31, 1999, and the period
March 24, 1998 through December 31, 1998, primarily through sales of
trading securities in excess of purchases and the purchase of securities
held for trading, respectively.
The Company's investing activities used cash flows totaling $165,453 and
$611,175, during the year ended December 31, 1999, and the period March 24,
1998 through December 31, 1998, primarily to purchase securities available
for sale and to fund a commercial mortgage loans.
The Company's financing activities used $2,104 during the year ended
December 31, 1999, primarily to reduce the level of short-term borrowings
related to the Company's trading portfolio. The Company's financing
activities provided $753,863 during the period March 24, 1998 through
December 31, 1998 and consisted primarily of net short-term borrowings and
net proceeds from the issuance of 21,365,198 shares of common stock.
Although the Company's portfolio of securities available for sale was
acquired at a net discount to the face amount of such securities, the
Company has received to date and expects to continue to have sufficient
cash flows from its portfolio to fund distributions to stockholders.
The Company is subject to various covenants in its lines of credit,
including maintaining: a minimum GAAP net worth of $140,000, a
debt-to-equity ratio not to exceed 4.5 to 1, a minimum cash requirement
based upon certain debt to equity ratios, a minimum debt service coverage
ratio of 1.5, and a minimum liquidity reserve of $10,000. Additionally, the
Company's GAAP net worth cannot decline by more than 37% during the course
of any two consecutive fiscal quarters. As of December 31, 1999 and 1998,
the Company was in compliance with all such covenants.
The Company's ability to execute its business strategy depends to a
significant degree on its ability to obtain additional capital. Factors
which could affect the Company's access to the capital markets, or the
costs of such capital, include changes in interest rates, general economic
conditions and perception in the capital markets of the Company's business,
covenants under the Company's current and future credit facilities, results
of operations, leverage, financial conditions and business prospects.
Current conditions in the capital markets for REITS such as the Company
have made permanent financing transactions difficult and more expensive
than at the time of the Company's initial public offering. Consequently,
there can be no assurance that the Company will be able to effectively fund
future growth. Except as discussed herein, management is not aware of any
other trends, events, commitments or uncertainties that may have a
significant effect on liquidity.
REIT STATUS: The Company has elected to be taxed as a REIT and to comply
with the provisions of the Internal Revenue Code of 1986, as amended, with
respect thereto. Accordingly, the Company generally will not be subject to
Federal income tax to the extent of its distributions to stockholders and
as long as certain asset, income and stock ownership tests are met. The
Company may, however, be subject to tax at corporate rates or at excise tax
rates on net income or capital gains not distributed.
INVESTMENT COMPANY ACT: The Company intends to conduct its business so as
not to become regulated as an investment company under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). Under the
Investment Company Act, a non-exempt entity that is an investment company
is required to register with the Securities and Exchange Commission ("SEC")
and is subject to extensive, restrictive and potentially adverse regulation
relating to, among other things, operating methods, management, capital
structure, dividends and transactions with affiliates. The Investment
Company Act exempts entities that are "primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate" ("Qualifying Interests"). Under current
interpretation by the staff of the SEC, to qualify for this exemption, the
Company, among other things, must maintain at least 55% of its assets in
Qualifying Interests. Pursuant to such SEC staff interpretations, certain
of the Company's interests in agency pass-through and mortgage-backed
securities and agency insured project loans are Qualifying Interests. In
general, the Company will acquire subordinated interests in commercial
mortgage-backed securities ("subordinated CMBS") only when such mortgage
securities are collateralized by pools of first mortgage loans, when the
Company can monitor the performance of the underlying mortgage loans
through loan management and servicing rights, and when the Company has
appropriate workout/foreclosure rights with respect to the underlying
mortgage loans. When such arrangements exist, the Company believes that the
related subordinated CMBS constitute Qualifying Interests for purposes of
the Investment Company Act. Therefore, the Company believes that it should
not be required to register as an "investment company" under the Investment
Company Act as long as it continues to invest primarily in such
subordinated CMBS and/or in other Qualifying Interests. However, if the SEC
or its staff were to take a different position with respect to whether the
Company's subordinated CMBS constitute Qualifying Interests, the Company
could be required to modify its business plan so that either (i) it would
not be required to register as an investment company or (ii) it would
comply with the Investment Company Act and be able to register as an
investment company. In such event, (i) modification of the Company's
business plan so that it would not be required to register as an investment
company would likely entail a disposition of a significant portion of the
Company's subordinated CMBS or the acquisition of significant additional
assets, such as agency pass-through and mortgage-backed securities, which
are Qualifying Interests or (ii) modification of the Company's business
plan to register as an investment company would result in significantly
increased operating expenses and would likely entail significantly reducing
the Company's indebtedness (including the possible prepayment of the
Company's short-term borrowings), which could also require it to sell a
significant portion of its assets. No assurances can be given that any such
dispositions or acquisitions of assets, or deleveraging, could be
accomplished on favorable terms. Consequently, any such modification of the
Company's business plan could have a material adverse effect on the
Company. Further, if it were established that the Company were an
unregistered investment company, there would be a risk that the Company
would be subject to monetary penalties and injunctive relief in an action
brought by the SEC, that the Company would be unable to enforce contracts
with third parties and that third parties could seek to obtain recission of
transactions undertaken during the period it was established that the
Company was an unregistered investment company. Any such results would be
likely to have a material adverse effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK: Market risk is the exposure to loss resulting from changes in
interest rates, credit curve spreads, foreign currency exchange rates,
commodity prices and equity prices. The primary market risks to which the
Company is exposed are interest rate risk and credit curve risk. Interest
rate risk is highly sensitive to many factors, including governmental,
monetary and tax policies, domestic and international economic and
political considerations and other factors beyond the control of the
Company. Credit risk is highly sensitive to dynamics of the markets for
commercial mortgage securities and other loans and securities held by the
Company. Excessive supply of these assets combined with reduced demand will
cause the market to require a higher yield. This demand for higher yield
will cause the market to use a higher spread over the U.S. Treasury
securities yield curve, or other benchmark interest rates, to value these
assets. Changes in the general level of the U.S. Treasury yield curve can
have significant effects on the market value of the Company's portfolio.
The majority of the Company's assets are fixed rate securities valued based
on a market credit spread to U.S. Treasuries. As U.S. Treasury securities
are priced to a higher yield and/or the spread to U.S. Treasuries used to
price the Company's assets is increased, the market value of the Company's
portfolio may decline. Conversely, as U.S. Treasury securities are priced
to a lower yield and/or the spread to U.S. Treasuries used to price the
Company's assets is decreased, the market value of the Company's portfolio
may increase. Changes in the market value of the Company's portfolio may
affect the Company's net income or cash flow directly through their impact
on unrealized gains or losses on securities held for trading or indirectly
through their impact on the Company's ability to borrow. Changes in the
level of the U.S. Treasury yield curve can also affect, among other things,
the prepayment assumptions used to value certain of the Company's
securities and the Company's ability to realize gains from the sale of such
assets. In addition, changes in the general level of the LIBOR money market
rates can affect the Company's net interest income. The majority of the
Company's liabilities are floating rate based on a market spread to U.S.
LIBOR. As the level of LIBOR increases or decreases, the Company's interest
expense will move in the same direction.
The Company may utilize a variety of financial instruments, including
interest rate swaps, caps, floors and other interest rate exchange
contracts, in order to limit the effects of fluctuations in interest rates
on its operations. The use of these types of derivatives to hedge
interest-earning assets and/or interest-bearing liabilities carries certain
risks, including the risk that losses on a hedge position will reduce the
funds available for payments to holders of securities and, indeed, that
such losses may exceed the amount invested in such instruments. A hedge may
not perform its intended purpose of offsetting losses or increased costs.
Moreover, with respect to certain of the instruments used as hedges, the
Company is exposed to the risk that the counterparties with which the
Company trades may cease making markets and quoting prices in such
instruments, which may render the Company unable to enter into an
offsetting transaction with respect to an open position. If the Company
anticipates that the income from any such hedging transaction will not be
qualifying income for REIT income test purposes, the Company may conduct
part or all of its hedging activities through a to-be-formed corporate
subsidiary that is fully subject to federal corporate income taxation. The
profitability of the Company may be adversely affected during any period as
a result of changing interest rates.
The following tables quantify the potential changes in the Company's net
portfolio value and net interest income under various interest rate and
credit spread scenarios. Net portfolio value is defined as the value of
interest-earning assets net of the value of interest-bearing liabilities.
It is evaluated using an assumption that interest rates, as defined by the
U.S. Treasury yield curve, increase or decrease up to 300 basis points and
the assumption that the yield curves of the rate shocks will be parallel to
each other.
Net interest income is defined as interest income earned from
interest-earning assets net of the interest expense incurred by the
interest bearing liabilities. It is evaluated using the assumptions that
interest rates, as defined by the U.S. LIBOR curve, increase or decrease by
200 basis points and the assumption that the yield curve of the LIBOR rate
shocks will be parallel to each other. Market value in this scenario is
calculated using the assumption that the U.S. Treasury yield curve remains
constant.
All changes in income and value are measured as percentage changes from the
respective values calculated in the scenario labeled as "Base Case". The
base interest rate scenario assumes interest rates as of December 31, 1999
and 1998. Actual results could differ significantly from these estimates.
PROJECTED PERCENTAGE CHANGE IN PORTFOLIO NET MARKET VALUE
GIVEN U.S. TREASURY YIELD CURVE MOVEMENTS
1999 1998
--------------------------------------------------------------------------
Change in Projected Change in Projected
Treasury Yield Change in Treasury Yield Change in
Curve, Portfolio Curve, Portfolio
+/- Basis Points Net Market Value +/- Basis Points Net Market Value
--------------------------------------------------------------------------
-300 27.1% -300 39.2%
-200 18.3% -200 24.6%
-100 9.3% -100 11.7%
Base Case 0 Base Case 0
+100 (9.6)% +100 (10.5)%
+200 (19.4)% +200 (20.0)%
+300 (29.6)% +300 (28.6)%
PROJECTED PERCENTAGE CHANGE IN PORTFOLIO NET MARKET VALUE
GIVEN CREDIT SPREAD MOVEMENTS
1999 1998
-----------------------------------------------------------------------
Change in Projected Change in Projected
Credit Spreads, Change in Credit Spreads, Change in
+/- Basis Points Portfolio +/- Basis Points Portfolio Net
Net Market Value Market Value
-----------------------------------------------------------------------
-300 36.7% -300 39.0%
-200 23.2% -200 24.4%
-100 11.0% -100 11.5%
Base Case 0 Base Case 0
+100 (9.7)% +100 (10.3)%
+200 (18.6)% +200 (19.5)%
+300 (26.6)% +300 (27.7)%
PROJECTED PERCENTAGE CHANGE IN PORTFOLIO NET INTEREST INCOME
GIVEN LIBOR MOVEMENTS
1999 1998
------------------------------------------------------------------------------
Projected Change Projected Change
Change in LIBOR, in Portfolio Change in LIBOR, in Portfolio
+/- Basis Points Net Interest +/- Basis Points Net Interest
Income Income
------------------------------------------------------------------------------
-200 21.4% -200 10.1%
-100 10.7% -100 5.2%
Base Case 0 Base Case 0
+100 (10.7)% +100 (6.3)%
+200 (21.4)% +200 (13.0)%
CREDIT RISK: Credit risk is the exposure to loss from loan defaults.
Default rates are subject to a wide variety of factors, including, but
not limited to, property performance, property management, supply/demand
factors, construction trends, consumer behavior, regional economics,
interest rates, the strength of the American economy, and other factors
beyond the control of the Company.
All loans are subject to a certain probability of default. The nature of
the CMBS assets owned are such that all losses experienced by a pool of
mortgages will be borne by the Company. Changes in the expected default
rates of the underlying mortgages will significantly affect the value of
the Company, the income it accrues and the cash flow it receives. An
increase in default rates will reduce the book value of the Company's
assets and the Company earnings and cash flow available to fund
operations and pay dividends.
The Company manages credit risk through the underwriting process,
establishing loss assumptions, and careful monitoring of loan
performance. Before acquiring a security that represents a pool of loans,
the company will perform a rigorous analysis of the quality of
substantially all of the loans proposed for that security. As a result of
this analysis, loans with unacceptable risk profiles will be removed from
the proposed security. Information from this review is then used to
establish loss assumptions. The Company will assume that a certain
portion of the loans will default and calculate an expected, or loss
adjusted yield based on that assumption. After the securities have been
acquired the Company monitors the performance of the loans, as well as
external factors that may affect their value. Factors that indicate a
higher loss severity or timing experience is likely to cause a reduction
in the expected yield, and therefore reduce the earnings of the Company
and may require a significant write down of assets.
For purposes of illustration, a doubling of the losses in the Company's
credit sensitive portfolio, without a significant acceleration of those
losses would reduce the expected yield from 9.84% to 8.40%. This would
reduce GAAP income going forward and cause a significant write down in
assets at the time the loss assumption is changed.
ASSET AND LIABILITY MANAGEMENT: Asset and liability management is
concerned with the timing and magnitude of the repricing and/or maturing
of assets and liabilities. It is the objective of the Company to attempt
to control risks associated with interest rate movements. In general,
management's strategy is to match the term of the Company's liabilities
as closely as possible with the expected holding period of the Company's
assets. This is less important for those assets in the Company's
portfolio considered liquid as there is a very stable market for the
financing of these securities.
The Company uses interest rate duration as its primary measure of
interest rate risk. This metric, expressed when considering any existing
leverage, allows the Company's management to approximate changes in the
net market value of the Company's portfolio given potential changes in
the U.S. Treasury yield curve. Interest rate duration considers both
assets and liabilities. As of December 31, 1999, and 1998 the Company's
duration on equity was approximately 9.2 and 11 years, respectively. This
implies that a parallel shift of the U.S. Treasury yield curve of 100
basis points would cause the Company's net asset value to increase or
decrease by approximately 9.2% and 11%, respectively. Because the
Company's assets, and their markets, have other, more complex
sensitivities to interest rates, the Company's management believes that
this metric represents a good approximation of the change in portfolio
net market value in response to changes in interest rates, though actual
performance may vary due to changes in prepayments, credit spreads and
the cost of increased market volatility.
Other methods for evaluating interest rate risk, such as interest rate
sensitivity "gap" (defined as the difference between interest-earning
assets and interest-bearing liabilities maturing or repricing within a
given time period), are used but are considered of lesser significance in
the daily management of the Company's portfolio. The majority of the
Company's assets pay a fixed coupon and the income from such assets are
relatively unaffected by interest rate changes. The majority of the
Company's liabilities are borrowings under its line of credit or reverse
repurchase agreements that bear interest at variable rates that reset
monthly. Given this relationship between assets and liabilities, the
Company's interest rate sensitivity gap is highly negative. This implies
that a period of falling short-term interest rates will tend to increase
the Company's net interest income while a period of rising short-term
interest rates will tend to reduce the Company's net interest income.
Management considers this relationship when reviewing the Company's
hedging strategies. Because different types of assets and liabilities
with the same or similar maturities react differently to changes in
overall market rates or conditions, changes in interest rates may affect
the Company's net interest income positively or negatively even if the
Company were to be perfectly matched in each maturity category.
The Company currently has positions in forward currency exchange
contracts to hedge currency exposure in connection with its commercial
mortgage loan denominated in pounds sterling. The purpose of the
Company's foreign currency hedging activities is to protect the Company
from the risk that the eventual U.S. dollar net cash inflows from the
commercial mortgage loan will be adversely affected by changes in
exchange rates. The Company's current strategy is to roll these contracts
from time to time to hedge the expected cash flows from the loan.
Fluctuations in foreign exchange rates are not expected to have a
material impact on the Company's net portfolio value or net interest
income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
Independent Auditors' Report..............................................43
Financial Statements:
Statements of Financial Condition at December 31, 1999 and 1998...........44
Statements of Operations and Comprehensive Income (Loss)
For the Year Ended December 31, 1999 and
For the Period March 24, 1998 (Commencement of Operations)
Through December 31, 1998 ...............................................45
Statements of Changes in Stockholders' Equity
For the Year Ended December, 31, 1999, and For the Period
March 24, 1998 (Commencement of Operations)
Through December 31, 1998 ................................................46
Statements of Cash Flows
For the Year Ended December 31, 1999 and
For the Period March 24, 1998 (Commencement of Operations)
Through December 31, 1998 ................................................47
Notes to Financial Statements.............................................48
All schedules have been omitted because either the required information is
not applicable or the information is shown in the financial statements or
notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Anthracite Capital, Inc.
We have audited the accompanying statements of financial condition of
Anthracite Capital, Inc. (the "Company") at December 31, 1999 and 1998, and
the related statements of operations and comprehensive income (loss),
changes in stockholders' equity and of cash flows for the year ended
December 31, 1999 and the period March 24, 1998 (commencement of
operations) through December 31, 1998. 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 generally accepted auditing
standards. 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, such financial statements present fairly, in all material
respects, the financial position of Anthracite Capital, Inc. at December
31, 1999 and 1998 and the results of its operations and its cash flows for
the year ended December 31, 1999 and the period March 24, 1998
(commencement of operations) through December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
New York, New York
March 17, 2000
ANTHRACITE CAPITAL, INC.
STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------------
December 31, 1999 December 31, 1998
----------------- -----------------
ASSETS
Cash and cash equivalents $ 22,265 $ 1,087
Securities available for sale, at fair value
Subordinated commercial mortgage-backed
securities (CMBS) $ 272,733 $ 273,018
Investment grade securities 304,462 192,050
----------- -----------
Total securities available for sale 577,195 465,068
Commercial mortgage loans, net 69,611 35,581
Other assets 10,591 7,964
Restricted cash equivalents - 3,243
Deposits with brokers as collateral for
securities sold short - 276,617
Securities held for trading, at fair value - 166,835
----------- -----------
Total Assets $ 679,662 $ 956,395
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term borrowings:
Secured by pledge of subordinated CMBS $ 162,738 $ 160,924
Secured by pledge of other securities
available for sale and cash equivalents 272,289 168,963
Secured by pledge of securities held for
trading - 133,163
Secured by pledge of commercial mortgage
loans 36,506 23,014
----------- -----------
Total short-term borrowings $ 471,533 $ 486,064
Securities sold short, at fair value - 275,085
Distributions payable 6,079 5,796
Other liabilities 3,767 7,721
----------- -----------
Total Liabilities 481,379 774,666
----------- -----------
Redeemable Convertible Preferred Stock 30,022 -
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $0.001 per share;
400,000 shares authorized; 22,378 shares
issued, 20,961 shares outstanding in 1999;
and 21,365 shares issued, 19,985 shares
outstanding in 1998 22 21
Additional paid-in capital 303,562 296,836
Distributions in excess of earnings (18,107) (20,148)
Accumulated other comprehensive loss (101,139) (79,137)
Treasury stock, at cost; 1,417 shares in 1999;
and 1,380 shares in 1998 (16,077) (15,843)
------------ -------------
Total Stockholders' Equity 168,261 181,729
------------ -------------
Total Liabilities and Stockholders' Equity $ 679,662 $ 956,395
=========== ============
The accompanying notes are an integral part of these financial statements.
ANTHRACITE CAPITAL, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------
For the
Period
March
For the Year 24,1998*
Ended Through
December 31, December 31,
1999 1998
------------ ------------
Interest Income:
Securities available for sale $ 48,106 $ 42,576
Commercial mortgage loans 5,549 1,432
Trading securities 3,186 1,368
Cash and cash equivalents 670 679
-------- --------
Total interest income 57,511 46,055
-------- --------
Expenses:
Interest 21,768 23,477
Interest-trading securities 4,108 1,288
Management fee 4,565 3,474
Other 2,839 765
-------- --------
Total expenses 33,280 29,004
-------- --------
Other Gain (Loss):
Loss on sale of securities available
for sale (516) (18,262)
Gain (loss) on securities held for
trading 2,992 (231)
Foreign currency gain (loss) (34) 53
--------- ---------
Total other gain (loss) 2,442 (18,440)
--------- ---------
Net Income (Loss) 26,673 (1,389)
--------- ---------
Dividends and accretion on
redeemable convertible
preferred stock 284 -
-------- ---------
Net Income (Loss) Available to
Common Shareholders 26,389 (1,389)
Other Comprehensive Income (Loss):
Unrealized gain (loss) on securities
available for sale:
Unrealized holding loss arising
during period (22,518) (97,399)
Less: reclassification adjustment
for realized loss included in net
income 516 18,262
--------- ----------
Other Comprehensive Income (Loss) (22,002) (79,137)
--------- ----------
Comprehensive Income (Loss) $ 4,387 $ (80,526)
========= ==========
Net Income (Loss) Per Share:
Basic $ 1.27 $ (0.07)
Diluted 1.26 (0.07)
Weighted average number of shares outstanding:
Basic 20,814 20,658
Diluted 21,150 20,658
*Commencement of operations.
The accompanying notes are an integral part of these financial statements.
ANTHRACITE CAPITAL, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999, AND THE PERIOD MARCH 24, 1998
(COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31, 1998
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------
Common Accumulated
Stock, Additional Distribution Other Treasury Total
Par Paid-In In Excess Comprehensive Stock, Stockholders'
Value Capital Of Earnings Loss At Cost Equity
------ ---------- ------------ ------------- -------- -------------
Balance at March 24, 1998 $200 $200
Issuance of common stock $21 296,867 296,888
Net loss $(1,389) (1,389)
Change in net unrealized
gain (loss) on securities
available for sale, net $(79,137) (79,137)
of reclassification
adjustment
Dividends declared-common
stock (18,759) (18,759)
Cost of Dividend
Reinvestment and Stock (30) (30)
Purchase Plan offering
Redemption of common stock (201) (201)
Purchase of treasury stock (15,843) (15,843)
Balance at December 31, 1998 21 296,836 (20,148) (79,137) (15,843) 181,729
---------------------------------------------------------------------------
Net income 26,673 26,673
Change in net unrealized
gain (loss) on securities
available for sale, net
of reclassification
adjustment (22,002) (22,002)
Dividends declared -
common stock (24,348) (24,348)
Dividends and accretion
on redeemable convertible
preferred stock (284) (284)
Shares issued under
Dividend Reinvestment and
Stock Purchase Plan 1 6,726 6,727
Redemption of treasury
stock (234) (234)
-----------------------------------------------------------------------------
Balance at December 31,
1999 $22 $303,562 $(18,107) $(101,139) $(16,077) $168,261
==============================================================================
The accompanying notes are an integral part of these financial statements.
ANTHRACITE CAPITAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- ------------------------------------------------------------------------------------
For the Year For the Period
Ended March 24, 1998*
December 31, Through
1999 December 31, 1998
------------- -----------------
Cash flows from operating activities:
Net income (loss) $ 26,673 $ (1,389)
Adjustments to reconcile net income to net cash
provided by operating activities:
Net sale (purchase) of trading securities
and securities sold short 168,367 (165,254)
Noncash portion of gain on securities
held for trading - (662)
Premium amortization (discount
accretion), net (274) 7,914
Noncash portion of net foreign currency
loss (gain) 34 (429)
Net gain on sale of securities 516 18,262
Increase in other assets (2,627) (7,964)
(Decrease) increase in other liabilities (3,954) 7,721
---------- ----------
Net cash provided by operating activities 188,735 (141,801)
---------- ----------
Cash flows from investing activities:
Purchase of securities available for sale (265,174) (1,386,724)
Funding of commercial mortgage loan (35,000) (35,131)
Decrease (increase) in restricted cash
equivalents 3,242 (3,242)
Principal payments received on securities
available for sale 79,689 80,982
Proceeds from sales of securities available
for sale 47,843 736,744
Net proceeds from sales of hedging securities 3,947 -
Termination payment on interest rate swap - (3,804)
----------- -----------
Net cash used in investing activities (165,453) (611,175)
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in borrowings (14,531) 486,064
Proceeds from issuance of common stock, net of
offering costs 6,727 296,836
Proceeds from issuance of redeemable
convertible preferred stock 30,000 -
Dividends on common stock (24,066) (12,963)
Purchase of treasury stock (234) (15,843)
Other common stock transactions - (231)
----------- -----------
Net cash provided (used) by financing activities (2,104) 753,863
----------- -----------
Net increase (decrease) in cash and cash
equivalents 21,178 887
Cash and cash equivalents, beginning of period 1,087 200
----------- -----------
Cash and cash equivalents, end of period $ 22,265 $ 1,087
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 24,309 $ 21,354
=========== ==========
Noncash financing activities:
Net change in unrealized loss on securities
available for sale $(22,003) $ (79,137)
========== ===========
Dividends declared, not yet paid $ 6,078 $ 5,796
========== ===========
* Commencement of operations.
The accompanying notes are an integral part of these financial statements.
ANTHRACITE CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Anthracite Capital, Inc. (the "Company") was incorporated in Maryland in
November, 1997 and commenced operations on March 24, 1998. The Company's
principal business activity is to invest in a diversified portfolio of
multifamily, commercial and residential mortgage loans, mortgage-backed
securities and other real estate related assets in the U.S. and non-U.S.
markets. The Company is organized and managed as a single business segment.
In preparing the financial statements in accordance with generally
accepted accounting principles ("GAAP"), management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the statements of financial condition and revenues and expenses
for the periods covered. Actual results could differ from those estimates
and assumptions. Significant estimates in the financial statements
include the valuation of the Company's mortgage-backed securities and
certain other investments.
A summary of the Company's significant accounting policies follows:
CASH AND CASH EQUIVALENTS
All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents.
RESTRICTED CASH EQUIVALENTS
At December 31, 1999, none of the Company's cash equivalents were
pledged. At December 31, 1998, $3,243 of the Company's cash equivalents
were pledged to secure its short-term borrowings and classified as
restricted cash equivalents on the statement of financial condition.
SECURITIES AVAILABLE FOR SALE
The Company has designated its investments in mortgage-backed securities,
mortgage-related securities and certain other securities as assets
available for sale because the Company may dispose of them prior to
maturity. Securities available for sale are carried at estimated fair
value with the net unrealized gains or losses reported as a component of
accumulated other comprehensive income (loss) in stockholders' equity.
Unrealized losses on securities that reflect a decline in value which is
judged by management to be other than temporary, if any, are charged to
earnings. At disposition the realized net gain or loss is included in
income on a specific identification basis. The amortization of premiums
and accretion of discounts are computed using the effective yield method
after considering actual and estimated prepayment rates, if applicable,
and credit losses. Actual prepayment and credit loss experience is
reviewed quarterly and effective yields are recalculated when differences
arise between prepayments and credit losses originally anticipated and
amounts actually received plus anticipated future prepayments and credit
losses.
SECURITIES HELD FOR TRADING
The Company has designated certain securities as assets held for trading
because the Company intends to hold them for short periods of time.
Securities held for trading are carried at estimated fair value with net
unrealized gains or losses included in income.
COMMERCIAL MORTGAGE LOANS
The Company purchases and originates certain commercial mortgage loans to
be held as long-term investments. Loans held for long-term investment are
recorded at cost at the date of purchase. Premiums and discounts related
to these loans are amortized over their estimated lives using the
effective interest method. Any origination fee income, application fee
income and direct costs associated with originating or purchasing
commercial mortgage loans are deferred and the net amount is included in
the basis of the loans on the statement of financial condition. The
Company recognizes impairment on the loans when it is probable that the
Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. The Company measures impairment
based on the present value of expected future cash flows discounted at
the loan's effective interest rate or the fair value of the collateral if
the loan is collateral dependent.
SHORT SALES
As part of its short-term trading strategies (see Note 3), the Company
may sell securities that it does not own ("short sales"). To complete a
short sale, the Company may arrange through a broker to borrow the
securities to be delivered to the buyer. The proceeds received by the
Company from the short sale are retained by the broker until the Company
replaces the borrowed securities, generally within a period of less than
one month. In borrowing the securities to be delivered to the buyer, the
Company becomes obligated to replace the securities borrowed at their
market price at the time of the replacement, whatever that price may be.
A gain, limited to the price at which the Company sold the security
short, or a loss, unlimited as to dollar amount, will be recognized upon
the termination of a short sale if the market price is less than or
greater than the proceeds originally received. The Company's liability
under the short sales is recorded at fair value, with unrealized gains or
losses included in net gain or loss on securities held for trading in the
statement of operations and comprehensive income (loss).
The Company is exposed to credit loss in the event of nonperformance by
any broker that holds a deposit as collateral for securities borrowed.
However, the Company does not anticipate nonperformance by any broker.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's securities available for sale,
securities held for trading, and securities sold short are based on
market prices provided by certain dealers who make markets in these
financial instruments. The fair values reported reflect estimates and may
not necessarily be indicative of the amounts the Company could realize in
a current market exchange.
FORWARD COMMITMENTS
As part of its short-term trading strategies (see Note 3), the Company
may enter into forward commitments to purchase or sell U.S. Treasury or
agency securities, which obligate the Company to purchase or sell such
securities at a specified date at a specified price. When the Company
enters into such a forward commitment, it will, generally within sixty
days or less, enter into a matching forward commitment with the same or a
different counterparty which entitles the Company to sell (in instances
where the original transaction was a commitment to purchase) or purchase
(in instances where the original transaction was a commitment to sell)
the same or similar securities on or about the same specified date as the
original forward commitment. Any difference between the specified price
of the original and matching forward commitments will result in a gain or
loss to the Company. Changes in the fair value of open commitments are
recognized on the statement of financial condition and included among
assets (if there is an unrealized gain) or among liabilities (if there is
an unrealized loss). A corresponding amount is included as a component of
net gain or loss on securities held for trading in the statement of
operations and comprehensive income (loss).
The Company is exposed to interest rate risk on these commitments, as
well as to credit loss in the event of nonperformance by any other party
to the Company's forward commitments. However, the Company does not
anticipate nonperformance by any counterparty.
FINANCIAL FUTURES CONTRACTS - TRADING
As part of its short-term trading strategies (see Note 3), the Company
may enter into financial futures contracts, which are agreements between
two parties to buy or sell a financial instrument for a set price on a
future date. Initial margin deposits are made upon entering into futures
contracts and can be either cash or securities. During the period that
the futures contract is open, changes in the value of the contract are
recognized as gains or losses on securities held for trading by
"marking-to-market" on a daily basis to reflect the market value of the
contract at the end of each day's trading. Variation margin payments are
received or made, depending upon whether gains or losses are incurred.
The Company is exposed to interest rate risk on the contracts, as well as
to credit loss in the event of nonperformance by any other party to the
contract. However, the Company does not anticipate nonperformance by any
counterparty.
HEDGING INSTRUMENTS
As part of its asset/liability management activities, the Company may
enter into interest rate swap agreements, forward currency exchange
contracts and other financial instruments in order to hedge interest rate
and foreign currency exposures or to modify the interest rate or foreign
currency characteristics of related items in its statement of financial
condition.
Income and expenses from interest rate swap agreements that are, for
accounting purposes, designated as hedging securities available for sale
are recognized as a net adjustment to the interest income of the hedged
item. During the term of the interest rate swap agreements, changes in
fair value are recognized on the statement of financial condition and
included among assets (if there is an unrealized gain) or among
liabilities (if there is an unrealized loss). A corresponding amount is
included as a component of accumulated other comprehensive income (loss)
in stockholders' equity. If the underlying hedged securities are sold,
the amount of unrealized gain or loss in accumulated other comprehensive
income (loss) relating to the corresponding interest rate swap agreement
is included in the determination of gain or loss on the sale of the
securities. If interest rate swap agreements are terminated, the
associated gain or loss is deferred over the remaining term of the
agreement, provided that the underlying hedged item still exists. The
Company had no interest rate swap agreements outstanding at December 31,
1999 or 1998.
Revenues and expenses from forward currency exchange contracts are
recognized as a net adjustment to foreign currency gain or loss. During
the term of the forward currency exchange contracts, changes in fair
value are recognized on the statement of financial condition and included
among assets (if there is an unrealized gain) or among liabilities (if
there is an unrealized loss). A corresponding amount is included as a
component of net foreign currency gain or loss in the statement of
operations and comprehensive income (loss).
Financial futures contracts that are, for accounting purposes, designated
as hedging securities available for sale, are carried at fair value, with
changes in fair value included in other comprehensive income (loss).
Realized gains and losses on closed contracts are deferred and recognized
in the basis of the hedged available for sale security, and amortized as
a yield adjustment over the security's remaining term.
The Company monitors its hedging instruments throughout their terms to
ensure that they remain effective at their intended purpose. The Company
is exposed to interest rate and/or currency risk on these hedging
instruments, as well as to credit loss in the event of nonperformance by
any other party to the Company's hedging instruments. However, the
Company does not anticipate nonperformance by any counterparty.
FOREIGN CURRENCIES
Assets and liabilities denominated in foreign currencies are translated
at the exchange rate in effect on the date of the statement of financial
condition. Revenues, costs, and expenses denominated in foreign
currencies are translated at average rates of exchange prevailing during
the period. Foreign currency gains and losses resulting from this process
are recognized in earnings.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share.
Basic income (loss) per share is calculated by dividing net income (loss)
available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted income (loss) per share is
calculated using the weighted average number of common shares outstanding
during the period plus the additional dilutive effect of common stock
equivalents. The dilutive effect of outstanding stock options is
calculated using the treasury stock method, and the dilutive effect of
redeemable convertible preferred stock is calculated using the "if
converted" method.
For the Year Ended December 31, 1999
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------
Net income available to common
shareholders $26,389
Basic net income per share $26,389 20,814 $1.27
Effect of dilutive securities:
10.5% Series A Senior Cumulative
Redeemable Preferred Stock 284 336
------------------------------
Diluted net income per share $26,673 21,150 $1.26
===========================================
The Company's stock options were antidilutive for the year ended December
31, 1999 and the period March 24, 1998 through December 31, 1998, because
their exercise prices exceeded the average market price of the common
stock during the periods.
For the period March 24, 1998 through December 31, 1998, the Company had
no preferred stock outstanding, or other dilutive securities.
INCOME TAXES
The Company intends to elect to be taxed as a Real Estate Investment
Trust ("REIT") and to comply with the provisions of the Internal Revenue
Code of 1986, as amended, with respect thereto. Accordingly, the Company
generally will not be subject to Federal income tax to the extent of its
distributions to stockholders and as long as certain asset, income and
stock ownership tests are met. As of December 31, 1999, the Company has a
capital loss carryover of $13,165 available to offset future capital
gains.
COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, requires the Company to
classify items of "other comprehensive income", such as unrealized gains
and losses on securities available for sale, by their nature in the
financial statements and display the accumulated balance of other
comprehensive income (loss) separately from retained earnings and
additional paid-in capital in the stockholders' equity section of the
statement of financial condition. In accordance with SFAS No. 130,
cumulative unrealized gains and losses on securities available for sale
are classified as accumulated other comprehensive income (loss) in
stockholders' equity and current period unrealized gains and losses are
included as a component of comprehensive income (loss).
RECENT ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that the Company
recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge of the exposure to changes in the fair value of a
recognized asset or liability, or a hedge of the exposure to variable
cash flows. The accounting for changes in the fair value of a derivative
(e.g., through earnings or outside of earnings, through comprehensive
income) depends on the intended use of the derivative and the resulting
designation.
The Company is required to implement SFAS 133 by January 1, 2001. Company
management is evaluating the impact that this statement will have on its
hedging strategies and use of derivative instruments and is currently
unable to predict the effect, if any, it will have on the Company's
financial statements.
RECLASSIFICATIONS
Certain amounts from 1998 have been reclassified to conform to the 1999
presentation.
NOTE 2 SECURITIES AVAILABLE FOR SALE
The Company's securities available for sale are carried at estimated fair
value. The amortized cost and estimated fair value of securities
available for sale as of December 31, 1999 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Security Description Cost Gain Loss Value
---------------------------------------------------------------------------------------------------
Commercial mortgage-backed securities ("CMBS"):
Non-investment grade rated subordinated
securities $334,162 - $(90,454) $243,708
Non-rated subordinated securities 38,882 - (9,857) 29,025
---------------------------------------------------
Total CMBS 373,044 - (100,311) 272,733
Single-family residential mortgage-backed
securities ("RMBS"):
Agency adjustable rate securities 57,826 $1,032 - 58,858
Agency fixed rate securities 166,323 - (498) 165,825
Privately issued investment grade rated
fixed rate securities 78,091 - (1,270) 76,821
----------------------------------------------------
Total RMBS 302,240 1,032 (1,768) 301,504
Agency insured project loan 3,050 - (92) 2,958
----------------------------------------------------
Total securities available for sale $678,334 $1,032 $(102,171) $577,195
====================================================
As of December 31, 1999, an aggregate of $497,542 in estimated fair value
of the Company's securities available for sale was pledged to secure its
short-term borrowings.
The amortized cost and estimated fair value of securities available for
sale as of December 31, 1998 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Security Description Cost Gain Loss Value
---------------------------------------------------------------------------------------------------
Commercial mortgage-backed securities ("CMBS"):
Non-investment grade rated subordinated
securities $314,209 - $ (65,475) $248,734
Non-rated subordinated securities 38,200 - (13,916) 24,284
------------------------------------------------
Total CMBS 352,409 - (79,391) 273,018
Single-family residential mortgage-backed
securities ("RMBS"):
Agency adjustable rate securities 17,977 $22 - 17,999
Agency fixed rate securities 13,022 1 - 13,023
Privately issued investment grade rated
fixed rate securities 157,571 278 (96) 157,753
-------------------------------------------------
Total RMBS 188,570 301 (96) 188,775
Agency insured project loan 3,226 49 - 3,275
-------------------------------------------------
Total securities available for sale $544,205 $350 $ (79,487) $465,068
As of December 31, 1998, an aggregate of $392,831 in estimated fair value
of the Company's securities available for sale was pledged to secure its
collateralized borrowings.
The following CMBS securities were owned by the Company as of December
31, 1998 and December 31, 1999:
Security Decription Cusip Rating Coupon 1999 Face Amount
-------------------------------------------------------------------------
CMAC_98-C1 H 201728DC3 BB- 6.210% $ 8,942
CMAC_98-C1 J 201728DD1 B+ 6.210% 14,905
CMAC_98-C1 K 201728DE9 B 6.210% 8,939
CMAC_98-C1 L 201728DF6 B- 6.210% 11,924
CMAC_98-C1 M 201728DG4 CCC 6.210% 8,940
CMAC_98-C1 N 201728DH2 NR 6.210% 11,926
CMAC_98-C2 H 201728DU3 BB- 5.440% 36,141
CMAC_98-C2 J 201728DV1 B 5.440% 65,054
CMAC_98-C2 K 201728DW9 B- 5.440% 21,684
CMAC_98-C2 L 201728DX7 CCC 5.440% 21,685
CMAC_98-C2 M 201728DY5 NR 5.440% 43,402
DLJCM_98-CG1 C 23322BCT3 NR 6.700% 23,464
DLJCM_98-CG1 B5 23322BCR7 BB- 6.300% 15,642
DLJCM_98-CG1 B6 23322BCS5 B 6.300% 27,374
DLJCM_98-CG1 B7 23322BCW6 B- 6.300% 15,643
GMACC_98-C1 J 361849DP4 BB- 7.155% 9,300
GMACC_98-C1 K 361849DQ2 B 6.700% 16,400
GMACC_98-C1 L 361849DR0 B- 6.700% 9,300
GMACC_98-C1 M 361849DS8 CCC 6.700% 7,000
GMACC_98-C1 N 361849DT6 NR 6.700% 9,300
LBCMT_98-C1 F 501773BG9 BB+ 6.300% 34,834
LBCMT_98-C1 G 501773BH7 BB 6.300% 34,556
LBCMT_98-C1 H 501773BJ3 BB- 6.300% 17,278
LBCMT_98-C1 J 501773BK0 B 6.300% 43,195
LBCMT_98-C1 K 501773BL8 B- 6.300% 11,231
LBCMT_98-C1 L 501773BM6 CCC 6.300% 11,231
LBCMT_98-C1 M 501773BN4 NR 6.300% 19,664
----------------
Total CMBS as of December 31, 1998 $ 558,954
----------------
1999 Purchases
PNCMAC_99-CM1 B6 69348HAM0 B+ 6.850% 10,455
PNCMAC_99-CM1 B7 69348HAN8 B 6.850% 7,604
PNCMAC_99-CM1 B8 69348HAP3 B- 6.850% 5,703
PNCMAC_99-CM1 C 69348HAQ1 CCC 6.850% 7,605
PNCMAC_99-CM1 D 69348HAR9 NR 6.850% 9,505
Midland Conduit III N/A NR 8.030% 1,596
----------------
Total Purchased in 1999 $ 42,468
----------------
Total CMBS as of December 31, 1999 $ 601,422
================
As of December 31, 1999, there were 1,771 loans underlying the
subordinated CMBS held by the Company, with a principal balance of
$9,430,000.
As of December 31, 1999, and 1998, the aggregate estimated fair value by
underlying credit rating of the Company's securities available for sale
are as follows:
December 31, 1999 December 31, 1998
Estimated Estimated
Security Rating Fair Value Percentage Fair Value Percentage
----------------------------------------------------------------------------
Agency and agency insured
securities $227,641 39.5% $ 34,297 7.4%
AAA 76,821 13.3 157,753 33.9
BB+ 23,103 4.0 27,099 5.8
BB 22,051 3.8 24,749 5.3
BB- 50,412 8.7 55,996 12.0
B+ 14,173 2.5 8,317 1.8
B 84,830 14.7 89,244 19.2
B- 32,770 5.7 31,027 6.7
CCC 16,368 2.8 12,302 2.7
Not rated 29,026 5.0 24,284 5.2
----------------------------------------------
Total securities
available for sale $577,195 100.0% $465,068 100.0%
===============================================
As of December 31, 1999 and 1998, the mortgage loans underlying the CMBS
held by the Company were secured by properties of the types and at the
locations identified below:
Percentage (1) Percentage (1)
--------------------------------------------------------------------------
Property Type 1999 1998 Geographic 1999 1998
Location
--------------------------------------------------------------------------
Multifamily 30.6% 28.5% California 12.6% 13.3%
Retail 26.5 27.1 Texas 11.2 10.2
Office New York 9.6 9.6
Lodging 9.4 9.9 Florida 6.4 6.8
Other 17.0 18.0 Illinois 4.8 5.6
----------------------
Total 100.0% 100.0% Other (2) 55.4 54.5
====================== ---------------------
Total 100.0% 100.0%
=====================
(1) Based on a percentage of the total unpaid principal balance of the
underlying loans.
(2) No other individual state comprises more than 5% of the total.
The following table sets forth certain information relating to the
aggregate principal balance and payment status of delinquent mortgage
loans underlying the subordinated CMBS held by the Company as of December
31:
- -----------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------
NUMBER OF % OF NUMBER OF % OF
PRINCIPAL LOANS COLLATERAL PRINCIPAL LOANS COLLATERAL
- -----------------------------------------------------------------------------------------------------
Past due 30 days to 60 days $2,936 2 0.03% $23,800 2 0.28%
Past due 60 days to 90 days $13,522 3 0.14% 0 0 0.0%
Past due 90 days or more $34,631 6 0.37% 0 0 0.0%
Resolved loans $22,296 1 0.24% 0 0 0.0%
TOTAL $73,385 12 0.78% $23,800 2 0.28%
- -----------------------------------------------------------------------------------------------------
During 1999 the Company addressed delinquency issues with regard to 25
different loans including the two outstanding on December 31, 1998.
During 1999 one loan was put back to the originator for documentation
concerns and twelve were brought current without experiencing a loss. One
loan, in the principal amount of $22,296 was resolved in November 1999
with slightly modified payment terms at no loss to the Company. This loan
continues to be carried as a delinquent loan although the borrower is in
compliance with the restructured payment terms. Of the 11 delinquent
loans remaining as of December 31, 1999, 5 are delinquent due to
technical reasons and the remaining six were in foreclosure proceedings
or workout negotiations. Regarding one of the remaining six loans, the
party which originally contributed the loan to the CMBS trust has
indemnified the trust against a loss of up to $1,300. This loan has a
principal balance of $9,065.
The Company's delinquency experience of 0.78% with the resolved loan is
in line with directly comparable collateral experience shown in the
Lehman Brothers 1998 CMBS index at 0.47%. Without the resolved loan the
Company's delinquencies at December 31, 2000 would be 0.54%.
During 1999 the Company also experienced early payoffs of $33,348, 0.36%
of the existing pool balance. These loans paid at par with no loss
experienced. The anticipated losses attributable to these loans will be
reallocated to loans remaining in the pools.
To the extent that realized losses, if any, or such resolutions differ
significantly from the Company's original loss estimates, it may be
necessary to reduce the projected GAAP yield on the applicable CMBS
investment to better reflect such investment's expected earnings net of
expected losses, from the date of purchase. While realized losses on
individual assets may be higher or lower than original estimates, the
Company currently believes its aggregate loss estimates and GAAP yields
are appropriate.
The CMBS held by the Company consist of subordinated securities
collateralized by adjustable and fixed rate commercial and multifamily
mortgage loans. The RMBS held by the Company consist of adjustable rate
and fixed rate residential pass-through or mortgage-backed securities
collateralized by adjustable and fixed rate single-family residential
mortgage loans. Agency RMBS were issued by Federal Home Loan Mortgage
Corporation (FHLMC), Federal National Mortgage Association (FNMA) or
Government National Mortgage Association (GNMA). Privately issued RMBS
were issued by entities other than FHLMC, FNMA or GNMA. The agency
insured project loan held by the Company consists of a participation
interest in a mortgage loan guaranteed by the Federal Housing
Administration (FHA). The Company's securities available for sale are
subject to credit, interest rate and/or prepayment risks.
The CMBS owned by the Company provide credit support to the more senior
classes of the related commercial securitization. Cash flow from the
mortgages underlying the CMBS generally is allocated first to the senior
classes, with the most senior class having a priority entitlement to cash
flow. Then, any remaining cash flow is allocated generally among the
other CMBS classes in order of their relative seniority. To the extent
there are defaults and unrecoverable losses on the underlying mortgages,
resulting in reduced cash flows, the most subordinated CMBS class will
bear this loss first. To the extent there are losses in excess of the
most subordinated class' stated entitlement to principal and interest,
then the remaining CMBS classes will bear such losses in order of their
relative subordination.
As of December 31, 1999 and 1998, the anticipated weighted average
unleveraged yield to maturity based upon adjusted cost of the Company's
subordinated CMBS was 9.90% and 9.69% per annum, respectively, and of the
Company's other securities available for sale was 7.29% and 6.50% per
annum, respectively. The Company's anticipated yields to maturity on its
subordinated CMBS and other securities available for sale are based upon
a number of assumptions that are subject to certain business and economic
uncertainties and contingencies. Examples of these include, among other
things, the rate and timing of principal payments (including prepayments,
repurchases, defaults and liquidations), the pass-through or coupon rate
and interest rate fluctuations. Additional factors that may affect the
Company's anticipated yields to maturity on its subordinated CMBS include
interest payment shortfalls due to delinquencies on the underlying
mortgage loans, and the timing and magnitude of credit losses on the
mortgage loans underlying the subordinated CMBS that are a result of the
general condition of the real estate market (including competition for
tenants and their related credit quality) and changes in market rental
rates. As these uncertainties and contingencies are difficult to predict
and are subject to future events which may alter these assumptions, no
assurance can be given that the anticipated yields to maturity, discussed
above and elsewhere, will be achieved.
The agency adjustable rate RMBS held by the Company are subject to
periodic and lifetime caps that limit the amount such securities'
interest rates can change during any given period and over the life of
the loan.
As of December 31, 1999, the unamortized net discount on securities
available for sale was $231,309, which represented 25.4% of the then
remaining face amount of such securities.
During 1999, the Company sold securities available for sale for total
proceeds of $47,843, resulting in a realized loss of $516. During 1998,
the Company sold securities available for sale for total proceeds of
$736,744, resulting in a realized loss of $18,262.
NOTE 3 SECURITIES HELD FOR TRADING
Securities held for trading reflect short-term trading strategies which
the Company employs from time to time, designed to generate economic and
taxable gains. As part of its trading strategies, the Company may acquire
long or short positions in U.S. Treasury or agency securities, forward
commitments to purchase such securities, financial futures contracts and
other fixed income or fixed income derivative securities. Any taxable
gains from such strategies will be applied as an offset against the tax
basis capital loss carryforward that the Company incurred during 1998 as
a result of the sale of a substantial portion of its securities available
for sale.
The Company's securities held for trading are carried at estimated fair
value. As of December 31, 1999, the Company did not have any long or
short positions in securities held for trading. At December 31, 1998, the
Company's securities held for trading consisted of U.S. Treasury
securities with an estimated fair value of $166,835 and held short
positions consisting of U.S. Treasury securities and an agency fixed rate
note with estimated fair values of $(223,757) and $(51,328),
respectively.
During 1999, and 1998, respectively, aggregate net realized gains
(losses) on securities held for trading were $2,992 and $(231).
The Company's trading strategies are subject to the risk of unanticipated
changes in the relative prices of long and short positions in trading
securities, but are designed to be relatively unaffected by changes in
the overall level of interest rates.
NOTE 4 COMMERCIAL MORTGAGE LOANS
On August 26, 1998, the Company along with a syndicate of other lenders
originated a loan secured by a second lien on five luxury hotels in
London, England and the surrounding vicinity. The loan has a five-year
maturity and may be prepaid at any time. The loan is denominated in
pounds sterling and bears interest at a rate based upon the London
Interbank Offered Rate (LIBOR) for pounds sterling plus approximately 4%.
The Company's investment in the loan is carried at amortized cost and
translated into U.S. dollars at the exchange rate in effect on the
reporting date. The amortized cost and certain additional information
with respect to the Company's investment in the loan as of December 31,
1999, and 1998 (at the exchange rates in effect on such dates) are
summarized as follows:
1999 1998
------------------------------------------------------------------------------------
Interest Principal Unamortized Amortized Interest Principal Unamortized Amortized
Rate Balance Discount Cost Rate Balance Discount Cost
------------------------------------------------------------------------------------
10.11% $34,680 $ 54 $ 34,626 10.30% $35,670 $ 89 $ 35,581
The exchange rate for the British pound at December 31, 1999 was
(pound)0.61908 to US$1.00; at December 31, 1998 the exchange rate was
(pound)0.603318.
The entire principal balance of the Company's investment in the loan is
pledged to secure line of credit borrowings included in collateralized
borrowings. The borrower has made all payments when due.
During 1999, the Company funded its entire commitment, $35,000, under a
floating rate commercial real estate construction loan secured by a
second mortgage. The subject property is an office complex located in
Santa Monica, California. The Company received a $175 commitment fee
relating to the commitment, which is being amortized into income over the
expected two-and-one-half year life of the loan. As of December 31, 1999,
the interest rate on amounts funded under the commitment was 11.90% and
the borrower had made all payments when due.
NOTE 5 COMMON STOCK
The Company was initially capitalized with the sale of 13,333 shares of
common stock on March 5, 1998 for a total of $200. In April and July
1998, the Company redeemed all such shares from its initial stockholder
in two transactions at the then current market price of such shares, or
approximately $201 in the aggregate. The redeemed shares were retired.
The Company received commitments on March 23, 1998 for the purchase, in
private placements, of 1,365,198 shares of common stock at $13.95 per
share for a total of $19,045. The sale of these shares was consummated at
the time of the closing of the Company's initial public offering.
On March 27, 1998, the Company completed its initial public offering of
common stock. The Company issued 20,000,000 shares of common stock at a
price of $15 per share and received proceeds of $279,000, net of
underwriting discounts and commissions. Offering costs in connection with
the public offering amounting to $1,157 have been charged against the
proceeds of the offering.
In June 1998, the Company registered with the Securities and Exchange
Commission up to 2,000,000 shares of common stock in connection with a
Dividend Reinvestment and Stock Purchase Plan ("the Plan"). The Plan
allows investors the opportunity to purchase additional shares of the
Company's common stock through the reinvestment of the Company's
dividends, optional cash payments and initial cash investments. Offering
costs in connection with the establishment of the Plan amounting to $30
have been charged against additional paid-in capital. As of December 31,
1998, no shares had been issued under the Plan. During 1999, the Company
issued 1,013,326 shares under the Plan and received total proceeds of
$6,726.
In July 1998, the Board of Directors of the Company approved the
repurchase of up to 10% of the then outstanding number of shares of the
Company's common stock. In September 1998, the Board of Directors
approved the repurchase of an additional 2,000,000 shares of the
Company's common stock.
During 1999 the Company repurchased 36,800 shares of its common stock for
$234 in open market transactions. Such purchases were made at an average
price of $6.35 per share (including commissions). In 1998 the Company
repurchased 1,380,100 shares of its common stock for $15,843 in open
market transactions. Such purchases were made at an average price of
$11.53 per share (including commissions). On January 5, 2000, the Company
repurchased 6,100 shares of its common stock for $39 in open market
transactions. Such purchase was made at a price of $6.42 per share
(including commissions). The remaining number of shares authorized for
repurchase is 2,713,519.
On March 31, 1999 the Company filed a $200,000 shelf registration
statement with the SEC. The shelf registration statement will permit the
Company to issue a variety of debt and equity securities in the public
markets should appropriate opportunities arise.
During the year ended December 31, 1999, the Company declared dividends
to shareholders totaling $24,348 or $1.16 per share, of which $18,270 was
paid during the year and $6,078 was paid on January 17, 2000. On March
16, 2000, the Company declared distributions to its shareholders of $0.29
per share, payable on April 28, 2000 to stockholders of record on March
31, 1999. For U.S. Federal income tax purposes, the dividends are
ordinary income to the Company's stockholders.
During the period March 24, 1998 through December 31, 1998, the Company
declared dividends to shareholders totaling $18,759, $.092 per share, of
which $12,963 was paid during the period and $5,796 was paid on January
15, 1999. For Federal income tax purposes, the dividends are ordinary
income to the Company's stockholders.
NOTE 6 PREFERRED STOCK
On December 2, 1999 the Company authorized and issued 1,200,000 shares of
10.5% Series A Senior Cumulative Redeemable Preferred Stock ("Preferred
Stock"), $0.001 par value per share, for aggregate proceeds of $30,000.
The new series of private preferred stock carries a 10.5% coupon and is
convertible into the Company's common stock at a price of $7.35. The
Preferred Stock has a seven-year maturity at which time, at the option of
the holders, the shares may be converted into common shares or liquidated
("Liquidation Preference") for $27.75 per share. If converted, the
Preferred Stock would convert into approximately 4 million shares of the
Company's common stock. The difference between the liquidation price and
the proceeds received totals $3,300, and is being accreted to the
carrying value of the Preferred Stock over its seven year life. As of
December 31, 1999, the Company's has authorized and unissued Preferred
Stock of 98,800,000 shares.
The Preferred Stock was privately placed by the Company, and there was no
underwriting discount paid. At the closing of the proposed merger (see
Note 13, Subsequent Events), the Liquidation Preference will be increased
from $27.75 to $28.50 per share.
NOTE 7 TRANSACTIONS WITH AFFILIATES
The Company has a Management Agreement (the "Management Agreement") with
BlackRock Financial Management, Inc. (the "Manager"), a majority owned
indirect subsidiary of PNC Bank Corp. ("PNC") and the employer of certain
directors and officers of the Company, under which the Manager manages
the Company's day-to-day operations, subject to the direction and
oversight of the Company's Board of Directors. The initial two year term
of the Management Agreement was to expire on March 20, 2000; on March 16,
2000, the Management Agreement was extended for an additional two years,
with the approval of a majority of the unaffiliated directors, on terms
similar to the prior agreement. The Company pays the Manager an annual
base management fee equal to a percentage of the average invested assets
of the Company as defined in the Management Agreement. The base
management fee is equal to 1% per annum of the average invested assets
rated less than BB- or not rated, 0.75% of average invested assets rated
BB- to BB+, and 0.35% of average invested assets rated above BB+. The
Company expects to renew its Management Agreement with the Manager on
similar terms.
The Company accrued $4,565 and $3,474 in base management fees in
accordance with the terms of the Management Agreement for the year ended
December 31, 1999, and for the period March 24, 1998 to December 31,
1998, respectively. The amount payable for base management fees included
in other liabilities in the statement of financial condition is $1,392
and $1,230 as of December 31, 1999 and 1998, respectively. In accordance
with the provisions of the Management Agreement, the Company recorded
reimbursements to the Manager of $333 and $250 for certain expenses
incurred on behalf of the Company by the Manager during 1999 and 1998.
The Company will also pay the Manager, as incentive compensation, an
amount equal to 25% of the funds from operations of the Company (as
defined) plus gains (minus losses) from debt restructuring and sales of
property, before incentive compensation, in excess of the amount that
would produce an annualized return on equity equal to 3.5% over the
Ten-Year U.S. Treasury Rate as defined in the Management Agreement. For
purposes of the incentive compensation calculation, equity is generally
defined as proceeds from issuance of common stock before underwriting
discounts and commissions and other costs of issuance. The Company has
not accrued for or paid the Manager any incentive compensation since it
commenced operations.
On March 17, 1999, the Company's Board of Directors approved an
administration agreement with the Manager and the termination of a
previous agreement with an unaffiliated third party. Under the terms of
the administration agreement, the Manager provides financial reporting,
audit coordination and accounting oversight services. The Company pays
the Manager a monthly administrative fee at an annual rate of 0.06% of
the first $125 million of average net assets, 0.04% of the next $125
million of average net assets and 0.03% of average net assets in excess
of $250 million subject to a minimum annual fee of $120. The terms of the
administrative agreement are substantially similar to the terms of the
previous third-party agreement. For the year ended December 31, 1999, the
administration fee was $120.
During 1999, the Company purchased certificates representing 1% interests
in Midland Commercial Mortgage Owner Trust I, Midland Commercial Mortgage
Owner Trust II, and Midland Commercial Mortgage Owner Trust III (the
"Trusts") for a total of $1,377, $2,417 and $1,552, respectively, from
Midland Loan Services, Inc. ("Midland"), a wholly owned indirect
subsidiary of PNC and the depositor to the Trusts. The assets of the
Trusts consist of commercial mortgage loans originated or acquired by
Midland. On June 30 and December 2, 1999, respectively, the Company's
interest in the Midland Commercial Mortgage Owner Trust I and II were
sold for $1,400 and $2,476 resulting in realized gains of $23 and $64,
respectively. In connection with these transactions, the Company entered
into a $4,500 committed line of credit from PNC Funding Corp., a wholly
owned indirect subsidiary of PNC, to borrow up to 90% of the fair market
value of the Company's interest in the Trust. Outstanding borrowings
against this line of credit bear interest at a LIBOR based variable rate.
The Company paid interest of approximately $20 to PNC Funding Corp.
during the year ended December 31, 1999.
PNC Investment Corp., a wholly owned indirect subsidiary of PNC,
purchased, in a private placement, 648,352 shares of the Company's common
stock at $13.95 per share for a total of $9,045. The sale of these shares
was consummated at the time of the closing of the Company's initial
public offering.
During 1998, the Company purchased, in private placements, 11 classes of
subordinated CMBS for a total of $142,855 in two securitization
transactions in which PNC Bank, N.A. ("PNC Bank"), a wholly owned
subsidiary of PNC, and/or Midland Loan Services, Inc. ("Midland"), a
wholly owned indirect subsidiary of PNC, participated as sellers of a
portion of the commercial mortgage loans underlying the CMBS.
The Company reimbursed PNC Bank and Midland for $1,243 in due diligence
costs incurred on behalf of the Company by PNC Bank and Midland during
1998.
NOTE 8 STOCK OPTIONS
The Company has adopted a stock option plan (the "1998 Stock Option
Plan") that provides for the grant of both qualified incentive stock
options that meet the requirements of Section 422 of the Code, and
non-qualified stock options, stock appreciation rights and dividend
equivalent rights. Stock options may be granted to the Manager,
directors, officers and any key employees of the Company, directors,
officers and key employees of the Manager and to any other individual or
entity performing services for the Company.
The exercise price for any stock option granted under the 1998 Stock
Option Plan may not be less than 100% of the fair market value of the
shares of common stock at the time the option is granted. Each option
must terminate no more than ten years from the date it is granted.
Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the 1998 Stock Option Plan authorizes the grant of
options to purchase an aggregate of up to 2,470,453 shares of common
stock.
Pursuant to the 1998 Stock Option Plan, on March 27, 1998 certain
officers, directors and employees of the Company and the Manager were
granted options to purchase 1,163,967 shares of the Company's common
stock and PNC Investment Corp., a wholly owned indirect subsidiary of
PNC, was granted options to purchase 324,176 shares of the Company's
common stock. The exercise price of these options is $15 per share. The
remaining contractual life of each option is approximately 8.3 years at
December 31, 1999. One quarter of these options, representing 372,036
shares, vested on March 27, 1999 and the remaining options vest in three
equal installments on March 27, 2000, March 27, 2001 and March 27, 2002.
25,000 of these options were terminated and none were exercised during
1998.
In addition to the foregoing, on March 17, 1999 pursuant to the 1998
Stock Option Plan, options to purchase 270,000 shares of the Company's
common stock were granted to certain officers of the Company and
employees of the Manager who provide services to the Company. The
exercise price of these options is $8.44 per share. The remaining
contractual life of each option is approximately 9.3 years at December
31, 1999. The options vest in two equal installments on March 31, 2000
and March 31, 2001. 15,000 of these options were terminated and none were
exercised during 1998 or 1999.
The Company considers its officers and directors to be employees for the
purposes of stock option accounting. For the year ended December 31,
1999, and for the period March 24 through December 31, 1998, of the
options issued under the 1998 Stock Option Plan, options covering 245,000
and 1,104,426 shares of the Company's common stock were granted to
employees, respectively. The Company adopted the disclosure-only
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for
options issued to employees. Accordingly, no compensation cost for the
options granted to employees under the 1998 Stock Option Plan has been
recorded in the statement of operations and comprehensive income (loss).
Had compensation cost for the 1998 Stock Option Plan been determined
based on the fair value of the options at the grant date consistent with
the provisions of SFAS No. 123, the Company's net income (loss) and net
income (loss) per share would have changed to the pro forma amounts
indicated below:
1999 1998
----------------------------------
Net income (loss) - as reported $26,673 $(1,389)
Net income (loss) - pro forma 26,348 (1,856)
Basic income (loss) per share - as reported 1.27 (0.07)
Basic income (loss) per share - pro forma 1.25 (0.09)
Diluted income (loss) per share - as reported 1.26 (0.07)
Diluted income (loss) per share - pro forma 1.25 (0.09)
For the Company's pro forma net loss, the compensation cost is amortized
over the vesting period of the options. The fair value of each option
granted to employees in 1999 was estimated to be $0.06 at the date of
grant, using the Black-Scholes option-pricing model with the following
assumptions: average dividend yield of 15.91%; expected volatility of
25%; risk-free interest rate of 5.82%; and expected lives of ten years.
The fair value of each option granted to employees in 1998 was estimated
to be $1.06 on the date of grant, using the Black-Scholes option-pricing
model with the following assumptions: average dividend yield of 12%;
expected volatility of 25%; risk-free interest rate of 5.19%; and
expected lives of ten years.
For the options to purchase 383,717 shares of the Company's common stock
granted to nonemployees under the 1998 Stock Option Plan, compensation
cost is accrued based on the estimated fair value of the options issued,
and amortized over the vesting period. Because vesting of the options is
contingent upon the recipient continuing to provide services to the
Company to the vesting date, the Company estimates the fair value of the
nonemployee options at each period end, up to the vesting date, and
adjusts expensed amounts accordingly. These non-employee options were
deemed to have nominal value at each period end.
Options to purchase 246,544 shares of the Company's common stock that
were granted to certain officers, directors and employees of the Company
and the Manager in connection with the Company's initial public offering
expired unexercised on March 30, 1999.
The estimated fair value of these options on the date of the grant was
$1.57, or $386 in total, which was recorded as a cost of raising capital
in the Company's initial public offering, and therefore had no net effect
on stockholders' equity. The fair value of these options was estimated
using the Black-Scholes option-pricing model with the following
assumptions: average dividend yield of 8.95%; expected volatility of 25%;
risk-free interest rate of 5.19%; and expected lives of one year.
Subsequent to December 31, 1999, the Company's Board of Directors
approved the grant of options to purchase 50,000 shares of the Company's
common stock to an officer of the Company pursuant to the 1998 Stock
Option Plan. The exercise price of these options is the greater of the
Company's GAAP Net Asset Value per share or the closing price of the
Company's common stock on March 31, 2000.
NOTE 9 BORROWINGS
The Company's borrowings consist of lines of credit borrowings and
reverse repurchase agreements.
During 1998, the Company entered into a master assignment agreement, as
amended, and the related Note, which provide financing for the Company's
investments. The agreement, with Merrill Lynch Mortgage Capital Inc.
("Merrill Lynch"), permits the Company to borrow up to $400,000, and was
to terminate on August 20, 1999. In August 1999, Merrill Lynch extended
the termination date of the Master Assignment Agreement to August 20,
2000 and reduced the available funds to $200,000. As of December 31, 1999
and 1998 the outstanding borrowings under this line of credit were
$64,575 and $65,921, respectively. The agreement requires assets to be
pledged as collateral, which may consist of rated CMBS, rated RMBS,
residential and commercial mortgage loans, and certain other assets.
Outstanding borrowings under this line of credit bear interest at a LIBOR
based variable rate.
In June 1999, the Company closed a $17,500, three year term financing
secured by the Company's $35,000 California Loan. As of December 31,
1999, the Company had drawn $14,131 under this loan. Outstanding
borrowings under this term financing bear interest at a LIBOR based
variable rate.
On July 19, 1999, the Company entered into a $185,000 committed credit
facility with Deutsche Bank, AG. The facility has a two-year term and
provides for a one-year extension at the Company's option. The facility
can be used to replace existing reverse repurchase agreement borrowings
and to finance the acquisition of mortgage-backed securities and loan
investments, which will be used to collateralize borrowings under the
facility. As of December 31, 1999, the outstanding borrowings under this
facility were $5,022. Outstanding borrowings under this credit facility
bear interest at a LIBOR based variable rate.
In December, 1999 the Company entered into a two year $50,000 credit
facility with an institutional lender. This facility will be used to
finance the acquisition of mortgage backed securities and loan
investments. As of December 31, 1999, the Company borrowed $8,910 under
this facility. Outstanding borrowings under this term financing bear
interest at a LIBOR based variable rate.
The Company is subject to various covenants in its lines of credit,
including maintaining: a minimum GAAP net worth of $140,000, a
debt-to-equity ratio not to exceed 4.5 to 1, a minimum cash requirement
based upon certain debt to equity ratios, a minimum debt service coverage
ratio of 1.5, and a minimum liquidity reserve of $10,000. Additionally,
the Company's GAAP net worth cannot decline by more than 37% during the
course of any two consecutive fiscal quarters. As of December 31, 1999
and 1998, the Company was in compliance with all such covenants.
The Company has entered into reverse repurchase agreements to finance
most of its securities available for sale that are not financed under its
lines of credit. The reverse repurchase agreements are collateralized by
most of the Company's securities available for sale and bear interest at
a LIBOR based variable rate.
Certain information with respect to the Company's collateralized
borrowings at December 31, 1999 is summarized as follows:
Lines of Reverse Total
Credit and Repurchase Collateralized
Term Loans Agreements Borrowings
--------------------------------------------------
Outstanding borrowings $ 94,035 $ 377,498 $ 471,533
Weighted average borrowing rate 7.25% 6.32% 6.50%
Weighted average remaining maturity 360 Days 36 Days 101 Days
Estimated fair value of assets pledged $ 133,301 $ 412,983 $ 546,284
As of December 31, 1999, $22,375 of borrowings outstanding under the
lines of credit were denominated in pounds sterling and interest payable
is based on sterling LIBOR.
As of December 31, 1999, the Company's collateralized borrowings had the
following remaining maturities:
Lines of Reverse Total
Credit and Repurchase Collateralized
Term Loans Agreements Borrowings
--------------------------------------------------
Within 30 days - $ 157,918 $ 157,918
31 to 59 days - 219,580 219,580
Over 60 days $94,035 - 94,035
----------------------------------------------------
$94,035 $ 377,498 $ 471,533
====================================================
As of December 31, 1999 the Company's borrowings under reverse repurchase
agreements were concentrated with the following individual
counterparties:
Weighted Average
Counterparty Balance Outstanding Remaining Maturity
- -----------------------------------------------------------------------------
Salomon, Smith Barney, Inc. $178,425 14 days
Lehman Brothers, Inc. 164,464 35 days
DLJ Direct, Inc. 19,447 13 days
Morgan Stanley Dean Witter, 15,162 13 days
Inc.
Certain information with respect to the Company's collateralized
borrowings as of December 31, 1998 is summarized as follows:
Reverse
Line of Repurchase Total
Credit Agreements Collateralized
Borrowings
--------------------------------------------------
Outstanding borrowings $ 65,921 $ 420,143 $ 486,064
Weighted average borrowing rate 6.98% 5.57% 5.76%
Weighted average remaining
maturity 232 Days 15 Days 45 Days
Estimated fair value of assets $ 98,331 $ 462,787 $ 561,118
pledged
As of December 31, 1998, $23,014 of borrowings outstanding under the line
of credit were denominated in pounds sterling.
As of December 31, 1998, the Company's collateralized borrowings had the
following remaining maturities:
Reverse Total
Line of Repurchase Collateralized
Credit Agreements Borrowings
----------------------------------------------------
Within 30 days - $ 407,769 $ 407,769
31 to 59 days - - -
Over 60 days $65,921 12,374 78,295
====================================================
$65,921 $ 420,143 $ 486,064
====================================================
As of December 31, 1998 the Company's borrowing under reverse repurchase
agreements were concentrated with the following individual
counterparties:
Weighted Average
Counterparty Balance Outstanding Remaining Maturity
-----------------------------------------------------------------------------
Greenwich, Inc. $ 133,163 4 day
Merrill Lynch 97,093 198 days
Lehman Brothers, Inc. 78,472 28 days
Goldman Sachs, Inc. 59,497 75 days
Morgan Stanley Dean Witter, Inc. 24,436 47 days
Alex Brown 14,343 4 days
DLJ Direct, Inc. 6,847 24 days
Deutsche Bank, AG 6,293 29 days
Under the lines of credit and the reverse repurchase agreements, the
respective lender retains the right to mark the underlying collateral to
estimated market value. A reduction in the value of its pledged assets
will require the Company to provide additional collateral or fund margin
calls. From time to time, the Company expects that it will be required to
provide such additional collateral or fund margin calls.
NOTE 10 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments:
December 31, 1999 December 31, 1998
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------------
Assets:
Securities available for sale $577,195 $577,195 $465,068 $465,068
Securities held for trading - - 166,835 166,835
Commercial mortgage loans 69,611 66,842 35,581 33,263
Liabilities:
Securities sold short - - 275,085 275,085
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
defines the fair value of a financial instrument as the amount at which
the instrument could be exchanged in a current transaction between
willing parties other than in a forced or liquidation sale.
The fair values of the Company's securities available for sale,
securities held for trading, commercial mortgage loan and securities sold
short are based on market prices provided by certain dealers who make
markets in these financial instruments. The fair values reported reflect
estimates and may not necessarily be indicative of the amounts the
Company could realize in a current market exchange. The carrying amounts
of all other asset and liability accounts in the statements of financial
condition approximate fair value because of the short-term nature of
these accounts, or because their interest rates fluctuate with a market
index.
NOTE 11 HEDGING INSTRUMENTS
The Company has entered into forward currency exchange contracts pursuant
to which it has agreed to exchange (pound)8,000 (pounds sterling) for
$12,702 (U.S. dollars) on January 18, 2000. In certain circumstances, the
Company may be required to provide collateral to secure its obligations
under the forward currency exchange contracts, or may be entitled to
receive collateral from the counterparty to the forward currency exchange
contracts. At December 31, 1999, no collateral was required under the
forward currency exchange contracts. The estimated fair value of the
forward currency exchange contracts was $(221) as of December 31, 1999,
which was recognized as part of net foreign currency losses.
As of December 31, 1999, the Company had outstanding a short position of
186 thirty-year U.S. Treasury Bond future contracts and 1,080 five-year
and 200 ten-year U.S. Treasury Note future contracts expiring in March
31, 2000, which represented $18,600 and $128,000 in face amount of U.S.
Treasury Bonds and Notes, respectively. These contracts are designated as
hedging certain of the Company's available for sale securities. The
unrealized gain of these contracts was approximately $1,925 as of
December 31, 1999 and is included in the carrying value of the hedged
available for sale securities. During the year ended December 31, 1999
the Company had $2,534 of realized gains from futures contracts in US
Treasury securities, which reduced the basis of the hedged available for
sale securities.
During 1998, the Company entered into an interest rate swap transaction
that was, for accounting purposes, designated as being intended to modify
the interest rate characteristics of certain of the Company's securities
available for sale from fixed to variable rate. In connection with the
sale of a portion of the Company's portfolio of securities available for
sale, the swap transaction, which had a notional amount of $100,000, was
terminated later in the year at a loss of $(3,804). The portion of the
loss associated with securities available for sale sold by the Company
during 1998, $(2,771), is included in the loss on sale of securities
available for sale in the statement of operations and comprehensive
income (loss). The remaining portion of the loss, $(1,033), which is
associated with certain of the Company's remaining securities available
for sale, was added to the cost basis of such securities and is being
amortized as a yield adjustment over the previously scheduled term of the
swap transaction, which was ten years.
NOTE 12 SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The following is a presentation of quarterly results of operations.
Quarters Ending
March 31 June 30 September 30 December 31
1999 1998* 1999 1998 1999 1998 1999 1998
--------------------------------------------------------------------
Interest $13,958 $215 $13,951 $10,828 $13,418 $19,789 $16,184 $15,222
Income
--------------------------------------------------------------------
Expenses:
Interest 7,123 - 6,011 4,379 5,526 11,708 7,216 8,675
Management
fee and other 1,350 42 1,807 1,068 1,557 1,618 2,690 1,513
--------------------------------------------------------------------
Total Expenses 8,473 42 7,818 5,447 7,083 13,326 9,906 10,188
--------------------------------------------------------------------
Gain (loss) on
sale of securities
available for sale 136 - 7 - (566) 22 (93) (18,284)
Gain (loss) on
securities held for
trading 1,181 - 1,072 - 739 - - (231)
Foreign currency
(loss) gain (67) - (16) - 28 (32) 21 85
--------------------------------------------------------------------
Net income (loss) $6,735 $173 $7,196 $5,381 $6,536 $6,453 $6,206 $(13,396)
--------------------------------------------------------------------
Dividends and
accretion on
redeemable
convertible
preferred stock - - - - - - (284) -
--------------------------------------------------------------------
Net income
(loss) available
to common
shareholders $6,735 $173 $7,196 $5,381 $6,536 $6,453 $5,922 $(13,396)
====================================================================
Net income (loss)
per share:
Basic $0.33 $0.01 $0.34 $0.25 $0.31 $0.31 $0.28 $(0.67)
Diluted $0.33 $0.01 $0.34 $0.25 $0.31 $0.31 $0.28 $(0.67)
Weighted average
number of
shares
outstanding
Basic 20,279 21,379 20,998 21,365 20,998 20,562 20,971 19,985
Diluted 20,279 21,388 20,998 21,370 20,998 20,562 22,302 19,985
*Commencement of operations March 24.
The loss in the fourth quarter of 1998 reflects losses of $18,262
resulting from the sale of a substantial portion of the Company's
available for sale securities and termination of an interest rate swap
agreement.
NOTE 13 SUBSEQUENT EVENTS
On February 8, 2000 the Company entered into a definitive merger
agreement with CORE Cap, Inc. ("CORE Cap"). The merger agreement provides
for the Company to acquire 100% of the outstanding common shares of CORE
Cap for common shares of the Company, using an exchange ratio based upon
the respective net asset values attributable to each company's common
stock. As of December 31, 1999 CORE Cap had equity capital of
approximately $90 million, comprised of common stock and 10% perpetual,
cumulative convertible preferred stock. CORE Cap's preferred stock would
be exchanged for a new series of the Company's preferred stock with
substantially identical terms. As of December 31, 1999 CORE Cap had
assets of approximately $1.4 billion, comprised of investment grade
quality residential loans and mortgage backed securities.
The merger, which is structured as a taxable stock-for-stock transaction,
is expected to close in the first half of 2000, subject to the approval
of CORE Cap shareholders. The board of directors of CORE Cap and the
Company have approved the merger as well as the management of the merged
company by the Manager.
The merged Company will obtain for a $2.15 million payment the right to
require GMAC Mortgage Asset Management, Inc., CORE Cap's current manager,
to assign its management contract with CORE Cap to BlackRock. Under the
terms of such assignment, BlackRock would be primarily obligated to make
all payments required to satisfy the termination provisions of the
management contract. Payments required under the termination provision
would be made over a ten year period. If the Company were to terminate
the Manager without cause within ten years the Company would be obligated
to make any remaining payments to GMAC. CORE Cap's assets, as included in
the merged company would be managed by BlackRock under its existing
agreement with the Company.
On February 11, 2000, the Company closed its short position of 186
thirty-year U.S. Treasury Bond future contracts and 1,080 five-year and
200 ten-year U.S. Treasury Note future contracts which expired in March
31, 2000 for a realized gain of $2,998. Simultaneously, the Company took
a short position of 186 thirty-year U.S. Treasury Bond future contracts
and 1,080 five-year and 200 ten-year U.S. Treasury Note future contracts
which expire on June 30, 2000. Additionally, on March 3, 2000 the Company
increased its short position of ten-year U.S. Treasury Note future
contracts by 250.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
INFORMATION CONCERNING THE DIRECTORS
Information concerning the names, ages, terms, positions with the Company and
business experience of the members of the Board of Directors, is set forth
below. Mr. Fink was elected to the Board of Directors in November 1997. Mr.
Frater was elected in February 1998, and Mr. Rifkin was elected in December
1999. Except for Mr. Rifkin, each other Director has served continuously with
the Company since his first election in March 1998.
DIRECTOR
NAME AGE POSITION TERM
EXPIRES(1)
- -------------------------------------------------------------------------------
INSIDE DIRECTORS:
Laurence D. Fink 47 Chairman of the Board of Directors 2000
Hugh R. Frater 44 President, Chief Executive 2002
Officer and Director
UNAFFILIATED DIRECTORS:
Donald G. Drapkin (3) 52 Director 2001
Carl F. Geuther (2) 53 Director 2001
Jeffrey C. Keil (2)(3) 56 Director 2002
Kendrick R. Wilson, III (2)(3) 53 Director 2000
Andrew P. Rifkin 40 Director 2000
1. The Company's Directors are classified into three groups; each elected
on a staggered basis for three-year terms.
2. Member of Audit Committee.
3. Member of Compensation Committee. Mr. Fink was a member of the
Compensation Committee until December 31, 1998, when he was replaced
by Mr. Wilson.
LAURENCE D. FINK, LAURENCE D. FINK, Chairman, is also Chairman and Chief
Executive Officer of BlackRock Financial Management, Inc. (the "Manager" or
"BlackRock"), Chairman of the Management Committee and Co-Chair of the
Investment Strategy Group. In addition, Mr. Fink serves on the Asset
Liability Committee of PNC Bank. He is also Chairman of the Board and a
Director of BlackRock's family of closed-end mutual funds, and a Director
of BlackRock's offshore funds, BlackRock Asset Investors, BlackRock MQE
Investors and BlackRock Fund Investors I, II and III. Prior to founding
BlackRock in 1988, Mr. Fink was a member of the Management Committee and a
Managing Director of The First Boston Corporation. Mr. Fink joined The
First Boston Corporation in 1976 and served as co-head of its Taxable Fixed
Income Division and head of its Mortgage and Real Estate Products Group.
Mr. Fink is currently a member of the Boards of Trustees of Mount Sinai New
York University Medical Center and Health System, Dwight-Englewood School
in Englewood, New Jersey, the National Outdoor Leadership School (NOLS) and
Phoenix House, and a Director of Nexell Therapeutics, Inc. and Innovir
Laboratories, Inc. Mr. Fink earned a B.A. degree in political science from
the University of California at Los Angeles in 1974 and an M.B.A. degree
with a concentration in real estate from U.C.L.A. in 1976.
HUGH R. FRATER, President and Chief Executive Officer, is a Managing
Director and a member of the Management Committee of the Manager, where he
was co-head of the BlackRock Account Management Group. Mr. Frater's primary
responsibilities included developing investment products and marketing
investment services for BlackRock's Institutional Asset Management clients.
Prior to joining BlackRock in 1988, Mr. Frater was a Vice President in
Investment Banking at Lehman Brothers in the financial institutions
department. Mr. Frater earned a B.A. degree in English from Dartmouth
College in 1978 and an M.B.A. degree in finance from Columbia University in
1985.
DONALD G. DRAPKIN, has been a Director and Vice Chairman of MacAndrews &
Forbes Holdings Inc. and various of its affiliates since 1987. Prior to
joining MacAndrews & Forbes, Mr. Drapkin was a partner in the law firm of
Skadden, Arps, Slate, Meagher & Flom for more than five years. Mr. Drapkin
is also a Director of the following corporations which file reports
pursuant to the Securities Exchange Act: Algos Pharmaceutical Corporation,
BlackRock Asset Investors, The Molson Companies Limited, Nexell
Therapeutics Inc., Playboy Enterprises, Inc., Revlon Consumer Products
Corporation, Revlon, Inc., The Warnaco Group, Inc. and Weider Nutrition
International Inc. (On December 27, 1996, Marvel, Marvel Holdings, Marvel
Parent and Marvel III, of which Mr. Drapkin was a Director on such date,
and several subsidiaries of Marvel filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code.)
CARL F. GEUTHER, is a former Executive Vice President and Chief Financial
Officer of WMC Mortgage Corp., a mortgage banking company. Mr. Geuther had
been Vice Chairman and Chief Financial Officer, and previously Executive
Vice President, of Great Western Financial Corporation and Great Western
Bank since 1987. Mr. Geuther had joined Great Western following its
acquisition of Aristar, Inc., a consumer finance and insurance company in
1983, where he served as Executive Vice President and Chief Financial
Officer and previous financial management positions since 1974. He received
an M.B.A. from Lehigh University in 1968 and a B.A. from Ursinus College in
1967.
JEFFREY C. KEIL, has been Chairman of the Executive Committee of
International Real Returns, LLC, investment advisor to an investment
company organized by Lazard Freres & Co., since January 1998. From 1996 to
January 1998, Mr. Keil was a General Partner of Keil Investment Partners, a
private fund which invested in the financial sector in Israel. From 1984 to
1996, Mr. Keil was President, Director and Chairman of the Finance
Committee of Republic New York Corporation and Vice Chairman and a Member
of the Executive Committee of Republic National Bank of New York. Mr. Keil
earned a B.S. degree in economics at the University of Pennsylvania in
1965, pursued graduate studies in mathematical statistics, operations
research and international economics from the London School of Economics,
and earned an M.B.A. degree with a concentration in Finance from Harvard
Graduate School of Business Administration in 1968.
KENDRICK R. WILSON, III, has been a Managing Director of Goldman Sachs &
Co. in the Financial Institutions Group since 1998. From 1989 to 1998, Mr.
Wilson was Vice Chairman and member of the Management Committee of Lazard
Freres & Co. Mr. Wilson is a director of Celanese AG and American Marine
Holdings Corp. Mr. Wilson is also a Director of the following corporations
which file reports pursuant to the Exchange Act: BlackRock Asset Investors,
BlackRock Fund Investors I, II, and III. He is a Trustee of the Montana
Land Reliance, Middlebury College and the Hospital for Special Surgery. Mr.
Wilson received an M.B.A. from Harvard Business School and a B.A. from
Dartmouth College.
ANDREW P. RIFKIN, Mr. Rifkin is a Managing Director at Donaldson, Lufkin &
Jenrette. Mr. Rifkin is responsible for the acquisition efforts of DLJ's
Real Estate Capital Partners, a $2 billion dollar real estate opportunity
fund sponsored by Donaldson, Lufkin & Jenrette. DLJ Real Estate Capital
Partners has been an active investor in a broad range of real estate
related opportunities including both debt and equity in the domestic and
international markets. Prior to joining DLJ in 1995, Mr. Rifkin was a Vice
President at Goldman, Sachs, & Co. in the Real Estate Principal Investment
Area, where his responsibilities included asset management for various
Whitehall portfolios. Mr. Rifkin graduated with honors from the State
University of New York at Binghamton with a B.S. in Mathematics and
received a M.S. in Computer Science from Cornell University.
COMPENSATION OF DIRECTORS
Directors are elected for a term of three years, and hold office until
their successors are elected and qualified. All officers serve at the
discretion of the Company's Board of Directors. Although the Company may in
the future have salaried employees, it currently has no such employees. The
Company pays an annual director's fee to each unaffiliated Director of $20,
a fee of $1 for each meeting of the Board of Directors attended by each
Unaffiliated Director and reimbursement of costs and expenses of all
Directors for attending such meetings. Affiliated Directors will not be
separately compensated by the Company other than through the Company's
stock option plan.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of the Company who are not also Directors. For
information concerning Hugh R. Frater, see "Information Concerning the
Directors."
NAME AGE POSITION
- ---------------------------------------------------------------------------
Richard M. Shea 40 Chief Operating Officer and Chief
Financial Officer
Edwin O. Bergman 34 Vice President
Robert L. Friedberg 39 Vice President and Secretary
Chris A. Milner 33 Vice President
Mark S. Warner 38 Vice President
Because the Manager maintains principal responsibility for managing the
affairs of the Company, the Company does not employ full-time personnel and
the officers listed above perform only ministerial functions as officers of
the Company, such as executing contracts and filing reports with regulatory
agencies. Notwithstanding the foregoing, the persons listed above, who are
officers of the Manager and will be compensated by the Manager, are
expected in their capacities as officers of the Manager, fulfilling duties
of the Manager under the Management Agreement, to devote a substantial
amount of their time to the affairs of the Company. As officers of the
Manager, such persons will not have fiduciary obligations to the Company
and its stockholders.
RICHARD M. SHEA, ESQ., Chief Operating Officer and Chief Financial Officer,
is a Managing Director of the Manager. Prior to joining BlackRock in 1993,
Mr. Shea was an Associate Vice President and tax counsel at Prudential
Securities, Inc. Mr. Shea joined Prudential in 1988 and was responsible for
corporate tax planning, tax-oriented investment strategies and tax issues
of CMOs and original issue discount obligations. Mr. Shea earned a B.S.
degree, in accounting from the State University of New York at Plattsburgh
in 1981 and a J.D. degree from New York Law School in 1984.
EDWIN O. BERGMAN, Vice President - Risk Management, is also a Director in
BlackRock's Risk Management and Analytics group. Since joining BlackRock in
October 1996, Mr. Bergman has performed a variety of functions throughout
the Risk Management area. Prior to working at BlackRock, Mr. Bergman worked
as an associate in Booz, Allen & Hamilton's Financial Services and
Technology Practice. Prior to working at Booz, Allen & Hamilton, Mr.
Bergman was a Vice President in Goldman, Sachs & Co.'s Mortgage Research
area from December 1992 to February 1995. Mr. Bergman was a Senior
Associate at Morgan Stanley from July 1987 to December 1992. Mr. Bergman
received a B.A. in Economics and the Natural Sciences from The Johns
Hopkins University in May of 1987 with departmental honors in Economics.
ROBERT L. FRIEDBERG, CPA, Vice President and Secretary, is also a Vice
President of the Manager. Prior to joining Blackrock in 1999, Mr. Friedberg
was Treasurer of Vornado Realty Trust, where he was responsible for
corporate and property finance. Mr. Friedberg joined Vornado in 1997. Prior
to working at Vornado Realty Trust, Mr. Friedberg was Managing Director at
Crown Northcorp, Inc. a rated special servicer of Commercial Mortgage
Backed Securities. Prior to working at Crown Northcorp, Inc., Mr. Friedberg
was Vice President at Amresco from 1991 to 1995. Mr. Friedberg earned a BBA
degree in Accounting at George Washington University in 1982 and received
his Certified Public Accountants license in 1994.
CHRIS A. MILNER, is a Director at BlackRock, Inc. and a Vice President of
Anthracite Capital, Inc. Mr. Milner is a member of BlackRock's Mortgage
Investment Strategy Group and an advisor to PNC's Real Estate Executive
Committee, which serves as the management committee for all commercial real
estate activities at PNC and Midland Loan Services. Prior to joining
BlackRock in 1997, Mr. Milner was Vice President & Manager - PNC Real
Estate Capital Markets where he was responsible for origination,
underwriting and securitization of all commercial mortgage conduit
production. Mr. Milner joined PNC in 1990 upon completion of his graduate
work (M.B.A. magna cum laude in Finance with a concentration in Real
Estate) at Indiana University. Mr. Milner earned a liberal arts B.A. degree
from DePauw University in 1988.
MARK S. WARNER, CFA, Vice President, is a Director and portfolio manager of
the Manager, where his primary responsibility is managing client
portfolios, specializing in the commercial mortgage and non-agency
residential mortgage sectors. Prior to joining BlackRock in 1993, Mr.
Warner was a Director in the Capital Markets Unit of the Prudential
Mortgage Capital Company. Mr. Warner joined Prudential in 1987. Mr. Warner
earned a B.A. degree in Political Science from Columbia University in 1983
and an M.B.A. degree in Finance and Marketing from Columbia Business School
in 1987. Mr. Warner received his Chartered Financial Analyst (CFA)
designation in 1993.
ITEM 11. EXECUTIVE COMPENSATION
During 1999 and 1998, the Company did not pay any cash compensation to its
executive officers but may, in the future, pay annual compensation to the
Company's executive officers for their services as executive officers. The
Company may from time to time, at the discretion of the Compensation
Committee of the Board of Directors, grant options to purchase shares of
the Company's Common Stock to the executive officers pursuant to the 1998
Stock Option Plan.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
There was no grant of stock options to the Company's chief executive
officer during the last fiscal year.
EXERCISE OF OPTIONS AND STOCK APPRECIATION RIGHTS
The following table sets forth information concerning the exercise of stock
options during the last fiscal year by the Company's chief executive
officer and the fiscal year-end value of his unexercised options.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARS at
Options/SARs at FY-End (#) FY-End (1) ($)
Shares
Acquired on Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------
Hugh R. Frater 0 0 75,000 225,000 0 0
(1) The fair market value of a share of common stock on December 31, 1999
was 6-3/8, which corresponds to its closing price on the New York Stock
Exchange.
STOCK OPTIONS
On March 23, 1998, the Company adopted a stock option plan (the "1998 Stock
Option Plan") that provides for the grant of both qualified incentive stock
options ("ISOs") that meet the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended, and non-qualified stock options, stocks
appreciation rights and dividend equivalent rights. Stock options may be
granted to the Manager, directors, officers and any key employees of the
Company, directors, officers and key employees of the Manager and to any
other individual or entity performing services for the Company. The
exercise price for any qualified option granted under the 1998 Stock Option
Plan may not be less than 100% of the fair market value of the shares of
Common Stock at the time the option is granted. The purpose of the 1998
Stock Option Plan is to provide a means of performance-based compensation
to the Manager in order to attract and retain qualified personnel and to
provide an incentive to others whose job performance affects the Company.
As of December 31, 1999, net of terminated options, the Company granted
options to purchase up to 1,718,143 shares of Common Stock, predominantly
to Directors and executive officers of the Company.
Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the 1998 Stock Option Plan authorizes the grant of options
to purchase an aggregate of 2,470,453 shares of the Company's Common Stock.
If an option granted under the 1998 Stock Option Plan expires or
terminates, the shares subject to any unexercised portion of that option
will again become available for the issuance of further options under the
1998 Stock Option Plan. Unless previously terminated by the Board of
Directors, the 1998 Stock Option Plan will terminate ten years from its
effective date, and no options may be granted under the 1998 Stock Option
Plan thereafter.
The 1998 Stock Option Plan is administered by a committee of the Board of
Directors comprised entirely of Unaffiliated Directors (the "Compensation
Committee"). Options granted under the 1998 Stock Option Plan become
exercisable in accordance with the terms of the grant made by the
Compensation Committee. The Compensation Committee has discretionary
authority to determine at the time an option is granted whether it is
intended to be an ISO or a non-qualified option, and when and in what
increments shares of Common Stock covered by the option may be purchased.
If stock options are to be granted to the Unaffiliated Directors, then the
full Board of Directors will approve such grants.
Under current law, ISOs may not be granted to any director of the Company
who is not also a full-time employee or to directors, officers and other
employees of entities unrelated to the Company. In addition, no options may
be granted under the 1998 Stock Option Plan to any person who, assuming
exercise of all options held by such person, would own or be deemed to own
more than 9.8% of the outstanding shares of Common Stock of the Company.
Each option must terminate no more than ten years from the date it is
granted. Options may be granted on terms providing that they will be
exercisable in whole or in part at any time or times during their
respective terms, or only in specified percentages at stated time periods
or intervals during the term of the option.
The exercise price of any option granted under the 1998 Stock Option Plan
is payable in full (i) by cash, (ii) by surrender of shares of the
Company's Common Stock having a market value equal to the aggregate
exercise price of all shares to be purchased, (iii) by cancellation of
indebtedness owed by the Company to the option holder, (iv) by any
combination of the foregoing, or (v) by a full recourse promissory note
executed by the option holder. The terms of the promissory note may be
changed from time to time by the Company's Board of Directors to comply
with applicable regulations or other relevant pronouncements of the
Internal Revenue Service or the Securities and Exchange Commission ("SEC").
The Company's Board of Directors may, without affecting any outstanding
options, from time to time revise or amend the 1998 Stock Option Plan, and
may suspend or discontinue it at any time. However, no such revision or
amendment may increase the number of shares of Common Stock subject to the
1998 Stock Option Plan (with the exception of adjustments resulting from
changes in capitalization), change the class of participants eligible to
receive options granted under the 1998 Stock Option Plan or modify the
period within which or the terms stated in the 1998 Stock Option Plan upon
which the options may be exercised without stockholder approval.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
STOCK BENEFICIALLY OWNED BY PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Company's
Common Stock, as of March 31, 1999, by any person (including any "group" as
that term is used in Section 13(d)(3) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) who is known to the Company to be
the beneficial owner of more than five percent of the issued and
outstanding shares of Common Stock.
NUMBER OF SHARES OF
Name & Address COMMON STOCK PERCENT OF CLASS
- -------------------------------------------------------------------------------
Merrill Lynch & Co., Inc. ("ML&Co.") (on 2,113,000 10.08%
behalf of Merrill Lynch Asset Management
Group ("AMG")) (1)
World Financial Center, North Tower
250 Vesey Street
New York, NY 10381
FBR Asset Investment Corporation 1,581,846 7.55%
1001 19th Street North
Arlington, VA 22209-1710
James Grosfeld & Nancy Grosfeld, joint 1,371,800 6.55%
tenants
20500 Civic Center Drive
Suite 3000
Southfield, MI 40876
Oppenheimer Funds, Inc. 912,800 4.36%
Two World Trade Center, Suite 3400
New York, NY 10048-0203
1. Based on information contained in Amendment No. 1 to Schedule 13G,
dated February 4, 2000: (i) ML&Co. through AMG, its wholly owned subsidiary,
and Merrill Lynch Global Allocation Fund, Inc. have beneficial ownership and
shared voting power over 1,972,900 shares; and (ii) ML&Co. has beneficial
ownership over an additional 140,100 shares.
STOCK BENEFICIALLY OWNED BY DIRECTORS AND OFFICERS
The following table sets forth the beneficial ownership of the Company's
Common Stock, as of March 20, 2000, by (i) each Director and Director
nominee of the Company, (ii) each executive officer of the Company, and
(iii) all Directors and executive officers as a group. Unless otherwise
indicated, such shares of Common Stock are owned directly and the indicated
person has sole voting and investment power.
- ----------------------------------------------------------------------------
Number of Shares
of Common Stock
NAME Beneficially Owned (1) Percent of Class
- ----------------------------------------------------------------------------
Laurence D. Fink 57,922 *
- ----------------------------------------------------------------------------
Hugh R. Frater 202,500 *
- ----------------------------------------------------------------------------
Donald G. Drapkin 10,745 *
- ----------------------------------------------------------------------------
Carl F. Geuther 10,745 *
- ----------------------------------------------------------------------------
Jeffrey C. Keil 10,745 *
- ----------------------------------------------------------------------------
Andrew P. Rifkin 0 *
- ----------------------------------------------------------------------------
Kendrick R. Wilson, III 10,745 *
- ----------------------------------------------------------------------------
Richard M. Shea 118,650 *
- ----------------------------------------------------------------------------
Robert L. Friedberg 0 *
- ----------------------------------------------------------------------------
Edwin O. Bergman 61,000 *
- ----------------------------------------------------------------------------
Chris A. Milner 118,000 *
- ----------------------------------------------------------------------------
Mark S. Warner 60,500 *
- ----------------------------------------------------------------------------
All Directors, Director nominees and
executive officers as a group (11 661,552 3.16%
persons)
- ----------------------------------------------------------------------------
* Less than 1%.
1. Includes shares issuable upon the exercise of options that are
currently exercisable or that will become exercisable within 60 days
of March 20, 2000. Such shares are held as follows: Mr. Fink
(17,922); Mr. Frater (150,000); Mr. Drapkin (10,000); Mr. Geuther
(10,000); Mr. Keil (10,000); Mr. Wilson (10,000); Mr. Shea (115,000);
Mr. Bergman (57,500); Mr. Milner (112,500); and Mr. Warner (57,500).
Shares issuable upon the exercise of options that are currently
exercisable or that will become exercisable within 60 days are
treated as outstanding for purposes of computing the percentage of
outstanding shares. To the Company's knowledge, all directors and
executive officers of the Company have sole voting and investment
power with respect to the shares of Common Stock held by them.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP BETWEEN ANTHRACITE AND THE MANAGER
BlackRock Financial Management, Inc. (the "Manager" or "BlackRock") is a
wholly owned subsidiary of BlackRock, Inc. (NYSE: BLK). BlackRock, Inc. is
70% owned by PNC Bank, National Association ("PNC Bank"), which is itself a
wholly owned subsidiary of PNC Bank Corp. The Manager, subject to the
supervision of the Board of Directors, is responsible for the day-to-day
operations of the Company pursuant to a Management Agreement. The following
table summarizes all compensation, fees and other benefits (including
reimbursement of out-of-pocket expenses) that the Manager may earn or
receive under the terms of the Management Agreement.
RECIPIENT PAYOR AMOUNT
- --------------------------------------------------------------------------------
Manager Company Base management fee equal to a percentage of the
average invested assets by rating category of
the Company (1)
Manager Company Incentive compensation based on the amount, if
any, by which the Company's Funds from
Operations and certain net gains exceed a hurdle
rate
Manager Company Out-of-pocket expenses of Manager paid to third
parties (2)
(1) The base management fee is equal to 1% per annum of average invested
assets rated less than BB- or not rated, 0.75% of average invested
assets rated BB- through BB+, and 0.35% of average invested assets
rated above BB+.
(2) The Manager may engage PNC Bank, Midland Loan Services, Inc.
("Midland"), a wholly owned subsidiary of PNC Bank, or unaffiliated
third parties to conduct due diligence with respect to potential
portfolio investments and to provide certain other services.
Accordingly, a portion of the out-of-pocket expenses may be paid to PNC
Bank or Midland in such capacities. The Company's guidelines require
the contract for such engagement to be conducted at arm's length, as
evidenced by documentation provided by the Manager to the Board of
Directors. PNC Bank and Midland are paid fees and out-of-pocket
expenses as would customarily be paid to unaffiliated third parties for
such services.
The base management fee is intended to compensate the Manager for its costs
in providing management services to the Company. The Board of Directors of
the Company may adjust the base management fee with the consent of the
Manager in the future if necessary to align the fee more closely with the
costs of such services.
The Manager will be entitled to receive incentive compensation for each
fiscal quarter in an amount equal to the product of (A) 25% of the dollar
amount by which (1)(a) Funds From Operations of the Company (before the
incentive fee) per share of Common Stock (based on the weighted average
number of shares outstanding) plus (b) gains (or minus losses) from debt
restructuring and sales of property per share of Common Stock (based on the
weighted average number of shares outstanding), exceed (2) an amount equal
to (a) the weighted average of the price per share of the initial offering
and the prices per share of any secondary offerings by the Company
multiplied by (b) the Ten-Year U.S. Treasury Rate plus three and one-half
percent per annum (expressed as a quarterly percentage) multiplied by (B)
the weighted average number of shares of Common Stock outstanding during
such quarter. Notwithstanding the foregoing, accrual and payment of any
portion of the incentive compensation that is attributable to net capital
gains of the Company will be delayed to the extent, if any, required by the
Investment Advisors Act of 1940, as amended. "Funds From Operations" as
defined by the National Association of Real Estate Investment Trusts
("NAREIT") means net income computed in accordance with generally accepted
accounting principles ("GAAP") excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization on
real estate assets, and after adjustments for unconsolidated partnerships
and joint ventures. Funds From Operations does not represent cash generated
from operating activities in accordance with GAAP and should not be
considered as an alternative to net income as an indication of the
Company's performance or to cash flows as a measure of liquidity or ability
to make distributions. As used in calculating the Manager's compensation,
the term "Ten-Year U.S. Treasury Rate" means the arithmetic average of the
weekly average yield to maturity for actively traded current coupon U.S.
Treasury fixed interest rate securities (adjusted to constant maturities of
ten years) published by the Federal Reserve Board during a quarter, or if
such rate is not published by the Federal Reserve Board, any Federal
Reserve Bank or agency or department of the federal government selected by
the Company.
For the years ended December 31, 1999 and December 31, 1998, the Company
paid the Manager $4,565 and $3,474 in base management fees and no incentive
compensation. In accordance with the provisions of the Management
Agreement, the Company recorded reimbursements to the Manager of $333 and
$250 for certain expenses incurred on behalf of the Company by the Manager
during 1999 and 1998.
RELATIONSHIP BETWEEN THE MANAGER AND ANTHRACITE'S DIRECTORS AND EXECUTIVE
OFFICERS
In addition to being Chairman of the Board of Directors of the Company,
Laurence D. Fink is Chairman of the Board and Chief Executive Officer of
the Manager. Hugh R. Frater is Managing Director of the Manager as well as
President and Chief Executive Officer of the Company. Richard M. Shea is a
Managing Director of the Manager in addition to his position as Chief
Operating Officer and Chief Financial Officer of the Company. Similarly,
each of the Company's executive officers also serves as an officer of the
Manager.
OTHER MATERIAL TRANSACTIONS BETWEEN ANTHRACITE AND THE MANAGER
PNC Investment Corp., a wholly owned indirect subsidiary of PNC, purchased,
in a private placement, 648,352 shares of common stock at $13.95 per share
for a total of $9,045. The sale of these shares was consummated at the time
of the closing of the Company's initial public offering on March 27, 1998.
During 1998, the Company purchased, in private placements, 11 classes of
subordinated commercial mortgage-backed security ("CMBS") interests for a
total of $142,855 in two securitization transactions in which PNC Bank
and/or Midland participated as sellers of a portion of the commercial
mortgage loans underlying the CMBS interests.
The Company reimbursed PNC Bank and Midland for $1,243 in due diligence
costs incurred on behalf of the Company by PNC Bank and Midland during
1998.
PERFORMANCE GRAPH
The following graph compares the change in the Company's stockholder
cumulative total return on the Common Stock for the period March 24, 1998,
which was the first day the Company's Common Stock traded on the NYSE,
through December 31, 1999, with the changes in the Standard & Poor's 500
Stock Price Index (the "S&P 500"), the Standard & Poor's 500 REIT Index
(the "S&P REIT") and the Nasdaq Composite Index ("NASDAQ"), for the same
period, assuming an investment of $100 for the Common Stock and each index,
for comparative purposes. Total return equals appreciation in stock price
plus dividends paid, and assumes that all dividends are reinvested. The
information herein has been obtained from sources believed to be reliable,
but neither its accuracy nor its completeness is guaranteed. The
performance graph is not necessarily indicative of future investment
performance.
[GRAPHIC OMITTED]
PART IV
ITEM 14. EXHIBITS
(a) Exhibit Index
3.1 Articles of Amendment and Restatement of the Registrant
**3.2 Bylaws of the Registrant
**10.1 Management Agreement between the Registrant and
BlackRock Financial Management, Inc.
**10.6 Form of 1998 Stock Option Incentive Plan
**21.1 Subsidiaries of the Registrant
23.1 Consent from Deloitte & Touche, LLP
27.0 Financial Data Schedule
**99.1 Consents by person to be named as a director pursuant to Rule 438
--------------
** Previously filed.
2. Reports on Form 8-K. The following reports on Form 8-K were filed with
respect to events occurring during the period for which this report is
filed.
Form 8-K dated December 2, 1999 and filed with the SEC on
December 14, 1999, reporting under Item 5 of such form, the
sale to RECP II Anthracite, LLC, a wholly-owned subsidiary of
DLJ Real Estate Capital Partners II, L.P. of 1,200,000 shares
of its 10.5% Series A Senior Cumulative Convertible Redeemable
Preferred Stock for an aggregate purchase price of $30 million.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
- -------------------------------------------------------------------------------
ANTHRACITE CAPITAL, INC.
Date: March 24, 2000 By: /s/ Hugh R. Frater
-----------------------------------
Hugh R. Frater
President and Chief Executive
Officer and Director
(duly authorized representative)
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
- -------------------------------------------------------------------------------
Date: March 24, 2000 By:/s/ Hugh R. Frater
-----------------------------------
Hugh R. Frater
President and Chief Executive
Officer and Director
- -------------------------------------------------------------------------------
Date: March 24, 2000 By:/s/ Laurence D. Fink
-----------------------------------
Laurence D. Fink
Chairman of the Board of Directors
- -------------------------------------------------------------------------------
Date: March 24, 2000 By: /s/ Donald G. Drapkin
-----------------------------------
Donald G. Drapkin
Director
- -------------------------------------------------------------------------------
Date: March 24, 2000 By: /s/ Carl F. Guether
-----------------------------------
Carl F. Guether
Director
- -------------------------------------------------------------------------------
Date: March 24, 2000 By: /s/ Jeffrey C. Keil
-----------------------------------
Jeffrey C. Keil
Director
- -------------------------------------------------------------------------------
Date: March 24, 2000 By: /s/ Kendrick R. Wilson, III
-----------------------------------
Kendrick R. Wilson, III
Director
- -------------------------------------------------------------------------------
Date: March 24, 2000 By: /s/ Andrew P. Rifkin
-----------------------------------
Andrew P. Rifkin
Director
- -------------------------------------------------------------------------------