ANTHRACITE CAPITAL INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark one)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from: ________ to ________

Commission File 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 28, 2001, 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 $9.65 as reported on the New York Stock
Exchange as of the close of business on March 28, 2001: $287,492,964 (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 28, 2001 was 29,792,017 shares.

ANTHRACITE CAPITAL, INC. AND SUBSIDIARIES
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
-----------------
PAGE
PART I

Item 1. Business 4
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of
Security Holders 19

PART II

Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 20
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 37
Item 8. Financial Statements and Supplementary Data 41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 74

PART III

Item 10. Directors and Executive Officers of the Registrant 75
Item 11. Executive Compensation 75
Item 12. Security Ownership of Certain Beneficial
Owners and Management 75
Item 13. Certain Relationships and Related Transactions 75

PART IV

Item 14. Exhibits 75
Signatures 76

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

All dollar figures expressed herein are expressed in thousands, except per
share amounts.

GENERAL

Anthracite Capital, Inc. (the "Company"), a Maryland corporation is a
real estate finance company that generates income based on the spread
between the interest income on its mortgage loans and securities
investments and the interest expense from borrowings used to finance its
investments. The Company seeks to earn high returns on a risk-adjusted
basis to support a consistent quarterly dividend. The Company has elected
to be taxed as a Real Estate Investment Trust, therefore, its income is
largely exempt from corporate taxation. This allows the Company to
generate a higher level of earnings than otherwise attainable by a
taxable finance company making similar investments. The Company commenced
operations on March 24, 1998.

In the past five years the real estate finance markets have evolved
significantly as the capital markets play a larger role along with the
traditional commercial banking sources of capital. This has created
opportunities for companies that have expertise in both areas. The
Company's external manager, BlackRock Financial Management, Inc. (the
"Manager" or "BlackRock"), provides significant experience in traditional
real estate loan origination and servicing along with capital markets,
investing and risk management expertise.

The Company's three business activities are (i) originating high yield
commercial real estate loans, (ii) investing in below investment grade
commercial mortgage backed securities ("CMBS") where the Company has the
right to control the foreclosure/workout process on the underlying loans,
and (iii) acquiring investment grade real estate related securities.

This represents an integrated strategy where each line of business
supports the others and creates additional value for shareholders over
and above operating each line in isolation. The commercial real estate
loans provide high risk adjusted returns for shorter periods of time, the
CMBS portfolio provides diversification and high loss adjusted returns
over a weighted average life of approximately 10 years, and the
investment grade securities investments is an actively managed portfolio
that supports the liquidity needs of the Company while earning attractive
returns.

These strategies are pursued within an aggregate risk management
framework that seeks to limit the exposure of the Company's equity and
earnings to changes in interest rates and other exogenous factors beyond
the Company's control.

The day-to-day operations of the Company are managed by 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.

Commercial Real Estate Loans

High yield commercial real estate loan originations represent the
Company's efforts to take advantage of opportunities in the real estate
finance markets on a targeted basis. The traditional first lien real
estate lender has shifted its focus to originating loans that can be sold
into a securitization in the capital markets. To achieve the best
execution for this strategy first lien lenders will generally reduce
their loan to value ratios. Borrowers continue to require the same
leverage to achieve their required equity returns, so alternative sources
of capital are needed fill the financing gap between the first lien
lender and the borrower's equity. The Company's high yield commercial
real estate loan originations, also known as mezzanine loans, fill this
gap on a secured basis at very attractive prices and terms. An effective
mezzanine-lending program can achieve superior risk adjusted returns
versus alternative investments.

The type of investments in this class include loans secured by second
mortgages, subordinated participations in first mortgages, loans secured
by partnership interests and preferred equity interests in real estate
limited partnerships. The weighted average life of these investments is
generally two to three years and average leverage is 1:1 debt to capital
generally funded with the debt coterminous with the investment. These
investments have fixed or floating rate coupons, and some provide
additional earnings through an IRR look back or profit participation.

The Company performs significant due diligence before making investments
to evaluate risks and opportunities in this sector. The Company generally
focuses on strong sponsorship, attractive real estate fundamentals,
pricing and structural characteristics that provide significant control
over the underlying asset.

At December 31, 2000 the Company owned eight separate mezzanine
investments with an average investment of $20,000 and is focused on
adding to this on a strategic basis. The real estate underlying each of
the Company's mezzanine investments is performing better than
underwritten expectations. The typical current returns on Company's
equity range from 18% - 20% with additional earning potential from profit
participations and IRR return look back features. This asset class earns
a high yield and allows the Company to maintain flexibility to move
quickly in search of the highest risk adjusted returns.

Commercial Mortgage Backed Securities

The Company owns below investment grade classes of six different CMBS and
has been an active bidder for this asset class. These CMBS investments
are fixed rate securities backed by pools of first mortgage loans on
commercial real estate assets located across the country. Owning
commercial real estate loans in this form allows the company to earn
attractive loss adjusted returns while achieving significant
diversification across geographic areas and property types. The total par
amount of these investments is $605,909, the total fair market value at
year-end was $288,686 representing an average dollar price of 47.65. The
unlevered yield on this portfolio is approximately 10.43% before
adjusting for expected losses and 9.78% on a loss-adjusted basis. The
Company anticipates receiving approximately two-thirds of its stated par
amount with the remainder representing assumed credit losses. Income is
reported to shareholders after taking into account this assumed credit
losses.

The Company uses a sophisticated Intranet based performance monitoring
system to track the credit experience of the loans in the CMBS pools. The
Company receives remittance reports monthly and can closely monitor any
delinquent loans or other issues that may affect the performance of the
loans. The Company also reviews its credit assumptions on quarterly basis
using updated debt service coverage information on each loan in the pools
and reviewing economic trends on both a national and regional level.

Investment Grade Real Estate Related Securities

A key element in managing the risk of a portfolio of mezzanine loans and
below investment grade CMBS is to maintain sufficient liquid assets to
support these investments during periods of reduced liquidity in the
financial markets. This portfolio is generally comprised of government
guaranteed residential fixed rate and adjustable rate mortgages and BBB
or higher rated commercial mortgage backed securities. The portfolio is
typically maintained at 50% of total assets or 20%-25% of the Company's
equity (net of financing) and provides a ready source of cash that can be
used to support the Company's other investment operations, if needed.
This allows the Company to earn attractive returns on equity while still
maintaining significant liquidity. This portfolio is leveraged more than
the mezzanine and CMBS portfolios but significantly lower than a typical
investment grade portfolio.

At December 31, 2000 the Company's assets were allocated among these
three categories as follows:

PERCENT OF DEBT TO
INVESTED CAPITAL
ASSETS LIABILITIES NET CAPITAL RATIO
------ ----------- ---------- ---------- -------

Cash and liquidity portfolio $562,327 $479,070 $83,257 28.2% 5.75

Below investment grade CMBS 288,686 161,608 127,078 43.0% 1.27

Mezzanine loans and Joint
Ventures 163,541 78,664 84,877 28.8% 0.93
--------- --------- ---------- ---------- -------
Total Invested Assets 1,014,554 719,342 295,212 100.0% 2.44
========= ========= ========== ========== =======

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 Loan")

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 on mezzanine financing of mortgage loans 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 improve-ments 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 Internal
Revenue Code of 1986 (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 substan-tially 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
appropri-ate 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.

Pass-Through Certificates. The Company's investments in mortgage assets are
currently and 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 obliga-tions.

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 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 invests, 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 invests in Mortgage Derivatives,
including Interest-Only securities (IOs), Inverse IOs, Sub IOs and floating
rate derivatives, as market conditions warrant. Mortgage Deriva-tives
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 antici-pated, 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.

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.

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 obliga-tions.

HEDGING ACTIVITIES

The Company enters 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 clearinghouse, 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, 2000, the Company's hedging transactions outstanding
consisted of forward currency exchange contracts pursuant to which the
Company agreed to exchange 8,000 (pounds sterling) for $12,137 (U.S.
dollars) on January 18, 2001. On January 18, 2001, the Company agreed to
exchange 8,000 (pounds sterling) for $11,782 on July 18, 2001. As of
December 31, 1999, the Company agreed to exchange 8,000 (pounds
sterling) for $12,702 (U.S. dollars) on January 18, 2000. Upon the maturity
of this contract, the Company entered into a similar forward currency
exchange contract. 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 an asset of $749 and a liability of $(221)
at December 31, 2000 and 1999, respectively, which was recognized as a
addition (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. At December 31, 2000 the Company did
not have outstanding U.S. Treasury future contracts which were considered
hedging instruments.

Interest rate swap agreements as of December 31, 2000 consisted of the
following:

Notional Estimated Unamortized Average
Value Fair Value Cost Remaining
Term
------------------------------------------------------
Interest rate swap $ 226,000 $(12,505) $9,471 19.3 years
agreements

The Company did not have interest rate swap agreements at December 31, 1999.

FINANCING AND LEVERAGE

The Company has financed its assets with the net proceeds of its initial
public and secondary offerings, through the issuance of preferred stock,
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 unsecured and secured borrowings. 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, 2000 and 1999, the Company's debt-to-equity
ratio for at-risk assets was approximately 3.2 to 1 and 3.0 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.

In September 2000, the Company closed a $200,000, one-year term facility
with Merrill Lynch Mortgage Capital Inc. ("Merrill Lynch"), which will be
used to finance the Company's residential loan pools. As of December 31,
2000 outstanding borrowings were $37,253. Outstanding borrowings under
this facility bear interest at a LIBOR based variable rate.

The Company has another agreeme nt with Merrill Lynch, which permits the
Company to borrow up to $200,000. As of December 31, 2000 and December
31, 1999, the outstanding borrowings under this line of credit were
$63,453, and $64,575 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. On January 15, 2001, the facility was renewed for a
twelve-month period.

In June 1999, the Company closed a $17,500, three year term financing
secured by the Company's $35,000 Santa Monica Loan. As of December 31,
2000 and December 31, 1999, the Company had drawn $17,500 and $14,131,
respectively, 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 an $185,000 committed credit
facility with Deutsche Bank, AG (the "Deutsche Bank Facility"). The
Deutsche Bank Facility has a two-year term and provides for a one-year
extension at the Company's option. The Deutsche Bank Facility can be used
to replace existing reverse repurchase agreement borrowings and to
finance the acquisition of mortgage-backed securities, loan investments,
and investments in real estate joint ventures. As of December 31, 2000
and December 31, 1999, the outstanding borrowings under this facility
were $53,810 and $5,022, respectively. Outstanding borrowings under the
Deutsche Bank Facility bear interest at a LIBOR based variable rate.

At the time of the CORE Cap acquisition, CORE Cap was a party to
commercial paper facility agreements with each of ABN Amro and Societe
Generele which were used to finance residential and commercial loans,
which are used to collateralize borrowings under the facilities.
Following the CORE Cap acquisition, the Company has elected to renew the
facility with ABN Amro, which facility is in the amount of $200,000,
matures on June 18, 2001, and bears interest at a variable based LIBOR
rate. As of December 31, 2000, outstanding borrowing under the ABN Amro
facility was $30,115. Following the CORE Cap acquisition, the Company did
not renew the facility with Societe Generale.

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, 2000
the Company was in compliance with all such covenants.

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 $28.50 per
share. If converted, the Preferred Stock would convert into approximately
4,000,000 shares of the Company's common stock.

On February 14, 2001 the Company completed a secondary offering of
4,000,000 shares of its Common Stock in an underwritten public offering.
The aggregate net proceeds to the Company (after deducting underwriting
fees and expenses) were $33,300. The Company had granted the underwriters
an option, exercisable for 30 days, to purchase up to 600,000 additional
shares of Common Stock to cover over-allotments. This option was
exercised on March 13, 2001 and resulted in net proceeds to the Company
of $5,000.

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, 2000 is summarized as follows:

Lines of Reverse Total
Credit and Repurchase Collateralized
Term Loans Agreements Borrowings
-------------------------------------------------

Outstanding borrowings $202,130 $517,212 $719,342
Weighted average borrowing rate 7.68% 6.57% 6.88%
Weighted average remaining maturity 152 Days 22 Days 57 Days
Estimated fair value of assets pledged $354,108 $588,657 $942,765

At December 31, 2000, $23,128 of borrowings outstanding under the line of
credit was denominated in pounds sterling, and interest payable is based on
sterling LIBOR.

At December 31, 2000, the Company's collateralized borrowings had the
following remaining maturities:
Lines of Credit Reverse Total
and Term Loan Repurchase Collateralized
Agreements Borrowings
-----------------------------------------------
Within 30 days $63,453 $376,588 $440,041
31 to 59 days - 140,624 140,624
Over 60 days 138,677 - 138,677
-----------------------------------------------
$202,130 $517,212 $719,342
===============================================

As of December 31, 2000, $131,190 of the Company's $185,000 committed
credit facility with Deutsche Bank, AG was available for future borrowings,
and $162,747 and $136,547 was available under each of the Company's
$200,000 term facilities with Merrill Lynch.

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 or 90% for years ending after 2000.

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 indebted-ness (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 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 Manager primarily engages in
three activities on behalf of the Company: (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 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 material 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 2000, through the solicitation of proxies or
otherwise.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

The Company's Common Stock has been listed and is traded on the New
York Stock Exchange under the symbol "AHR" since the initial public
offering in March 1998. 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 and the distributions
declared by the Company with respect to the periods indicated as were
traded during these respective time periods.

Last Dividends
1999 High Low Sale Declared
- ---- ---- --- ---- --------

First Quarter 7.938 6.38 7.50 .29
Second Quarter 7.689 6.5 6.563 .29
Third Quarter 7.125 6.50 6.875 .29
Fourth Quarter 6.938 6.00 6.375 .29

2000
- ----

First Quarter 7.50 6.25 7.125 .29
Second Quarter 7.625 6.625 7.125 .29
Third Quarter 8.625 6.813 8.125 .29
Fourth Quarter 8.188 7.125 7.750 .30

2001
- ----

First Quarter through March 28, 2001 9.91 7.50 9.65 .30

On March 28, 2001, the closing sale price for the Company's Common
Stock, as reported on the New York Stock Exchange, was $9.65. As of March
28, 2001, there were approximately 193 record holders of the common stock
and 22 record holders of the Preferred Stock. This figure does not reflect
beneficial ownership of shares held in nominee name.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below for the years ended December
31, 2000 and 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 Year For the Year March 24, 1998
(In thousands, except per share data) Ended Ended through
December 31, December 31, December 31,
2000 1999 1998
- ----------------------------------------------------------------------------------------

Operating Data:
- --------------

Total income $97,642 $57,511 $46,055
Expenses 60,839 33,280 29,004
Other gains (losses) 2,523 2,442 (18,440)
Net income (loss) 39,326 26,673 (1,389)
Net income (loss) available to common
shareholders 32,261 26,389 (1,389)

Per Share Data:
- --------------
Net income (loss):
Basic 1.37 1.27 (0.07)
Diluted 1.28 1.26 (0.07)
Dividends declared per common share 1.17 1.16 .92

Balance Sheet Data:
- ------------------
Total assets 1,033,651 679,662 956,395
Total liabilities 760,993 481,379 774,666
Total stockholders' equity 242,254 168,261 181,729
Redeemable convertible preferred stock 30,404 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 (Dollars in thousands, except per share
amounts)

GENERAL:

The Company's primary long-term objective is to produce high risk-adjusted
dividends for shareholders supported by operating earnings determined under
generally accepted accounting principals ("GAAP") before realized gains and
hedging adjustments. Strong GAAP operating earnings are primarily
maintained by consistent credit performance on the Company's investments
and diversification and consistency of the Company's liability structures.
In order to achieve these objectives the Company is focused on increasing
its size and capital base because this should lead to both increased
diversification of credit exposures and improved diversification of
financing sources and structures. Where increased size can be achieved with
limited dilution to common shareholders the Company will pursue it
aggressively.

In 2000 the Company focused on maintaining liquidity, increasing capital
base and reducing risk where feasible. During the year the Company's cash
and liquid assets portfolio increased by 29% and its capital base increased
by 45%, both due primarily to the merger with CORE Cap Inc. An increase in
hedging activity brought the Company's equity duration down from 9.3 years
at December 31, 1999 to 4.5 years at December 31, 2000. Equity duration is
the sensitivity of an assets value to changes in interest rates. This
combination of accomplishments permitted the Company to increase GAAP
earnings despite rising short-term interest rates. After paying out a $0.29
per share dividend for eight consecutive quarters the rising earnings level
was able to support an increased dividend payout declared in the fourth
quarter of $0.30 per share.

On May 15, 2000 the Company completed the acquisition of CORE Cap, Inc. The
merger was a stock for stock acquisition where the Company issued 4,180,000
shares of its common stock and 2,261,000 shares of its series B preferred
stock. This transaction increased the total equity capital of the Company
by $75,407. Immediately before the transaction CORE Cap owned a portfolio
of investment grade real estate related securities. During the remainder of
2000 the Company sold off most of these assets and redeployed the proceeds
into high yielding commercial real estate loans and preferred equity
interests in partnerships that own commercial office properties.

The most significant aspect of the transaction was the issuance of the
Series B 10% perpetual, convertible preferred stock. The conversion price
is $17.09 per share of AHR common stock. This represents permanent fixed
rate capital at terms well below what would otherwise be available in the
capital markets. While the liquidation preference of the stock is $56,525
the low coupon and high conversion price reduces the market value to 76.08%
of that amount, or $43,004. This represents a discount of $13,521, which
accrues to the benefit of the Anthracite common shareholders. The market
value of the assets purchased was determined based on market bids and
validated by significant sales. Therefore, the net asset value of the CORE
Cap portfolio exceeded the value of the consideration paid by the Company.

MARKET CONDITIONS RELEVANT TO COMPANY PERFORMANCE:

Commercial Real Estate Credit: The Company considers delinquency
information from the Lehman Brothers Conduit Guide for 1998 transactions to
be the most relevant measure of market conditions applicable to its below
investment grade CMBS holdings. The broader measure of all transactions
tracked in the Conduit Guide since 1994 also provides relevant comparable
information. The delinquency statistics are shown in the table below:

- ---------------------------------------------------------------------------------------
LEHMAN BROTHERS CONDUIT GUIDE FOR LEHMAN BROTHERS CONDUIT GUIDE FOR ALL
1998 TRANSACTIONS TRANSACTIONS
- ---------------------------------------------------------------------------------------
DATE NUMBER OF COLLATERAL % NUMBER OF COLLATERAL %
SECURITIZATIONS BALANCE DELINQUENT SECURITIZATIONS BALANCE DELINQUENT
- ---------------------------------------------------------------------------------------

12/31/00 41 $52,890,768 0.77% 180 $158,597,044 0.77%
- ---------------------------------------------------------------------------------------
12/31/99 41 54,338,032 0.47% 147 131,892,534 0.51%
- ---------------------------------------------------------------------------------------
12/31/98 38 53,256,049 0.17% 106 94,839,000 0.34%
- ---------------------------------------------------------------------------------------

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, 1999 the MSDW delinquencies
on 117 securitizations was 0.89%. As of December 31, 2000 this same index
tracked 144 securitizations with delinquencies of 1.01%. See the section
titled "Quantitative and Qualitative Disclosures About Market Risks" for a
detailed discussion of how delinquencies and loan losses affect the
Company.

Real Estate: Against the backdrop of a slowing U.S. economy, the majority
of markets remain near equilibrium. During 2000, demand was strong enough
to absorb new supply and cause rent increases. Demand is expected to slow
from the levels seen in 2000 but construction is also projected to slow
for most, but not all, property types. Most market are expected to remain
in balance while selected property types and markets may experience
slower demand and reduced rent growth.

Real Estate Capital Markets: Commercial real estate debt securities
continued to exhibit modest spread tightening. This was due in part to
low CMBS defaults relative to corporate bond defaults and growing use of
CMBS in Collateralized Bond Obligations. Low default experience for CMBS
has also led rating agencies to reduce levels of subordination required
to support a designated credit rating. These lower credit support
requirements have been applied to CMBS transactions issued in 1999 and
2000. Rating agencies have cited several factors to explain the reduction
in credit support levels. CMBS collateral performance has been strong for
the past seven years as measured by the MSDW index; furthermore the
American Council of Life Insurers ("ACLI") data also shows historically
low levels of commercial mortgage defaults. Rating agencies, most
recently Fitch, have also noted the low level of defaults and
delinquencies among CMBS relative to the rising levels of corporate bond
defaults. When default rates are compared across bonds of the same
rating, the conclusion is that ratings in prior years were conservative
relative to the risk.

CMBS credit spreads remain at historically wide levels despite continued
strength in the commercial real estate credit markets. Corporate high
yield spreads widened considerably at the end of 2000. 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, 2000 558 523 35
As of December 31, 1999 550 349 201

B CMBS B Corporate Difference
------ ----------- ----------
As of December 31, 2000 987 978 9
As of December 31, 1999 915 496 419

* Source - Lehman Brothers CMBS High Yield Index & Lehman
Brothers High Yield Index

Interest Rates: During 2000 the yield on the ten-year U.S. Treasury Note
dropped by 133 basis points from 6.44% to 5.11%. Short-term rates
increased, as one month LIBOR increased by 74 basis points from 5.82% to
6.56%. Throughout the first three quarters of 2000 the Federal Reserve
Board's concern about inflation kept upward pressure on short-term rates.
Evidence of a slowing economy began to surface during the fourth quarter.
At the beginning of 2001 the Fed began a dramatic reversal of short-term
policy by reducing rates in 50 basis points increments. By the end of March
2001 the Fed had reduced short-term rates by 150 basis points. This caused
one month LIBOR to drop to 5.05% by March 21, 2001. 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.

EFFECT OF MARKET CONDITIONS ON COMPANY PERFORMANCE:

Commercial Mortgage Backed Securities

The Company's below investment grade CMBS represent approximately $602,759
of par collateralized by underlying pools of first lien commercial
mortgages. The CMBS owned by the Company include 1,765 loans with an
aggregate principal balance of over $9.1 billion as of December 31, 2000.
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 desktop
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.
Earnings are reported net of the assumption that credit losses will occur.
Through December 31, 2000 the Company had expected to incur realized losses
of approximately $1,800 and has actually incurred losses of approximately
$1,600. Over the life of the portfolio the Company expects to realize
principal losses on CMBS collateral of approximately $150,000 and lost
coupon cash flow of approximately $70,000.

The Company maintains diversification of credit exposures through its
underwriting process and can shift its focus in future investments by
adjusting the mix of loans in subsequent acquisitions. During 2000 the
Company did not add CMBS so the change in exposures is not significant. The
comparative profiles of the loans underlying the Company's CMBS by property
type are:

- ------------------------------------------------------------------
12/31/00 12/31/99
EXPOSURE EXPOSURE
- ------------------------------------------------------------------
PROPERTY TYPE LOAN BALANCE % OF TOTAL LOAN BALANCE % OF TOTAL
- ------------------------------------------------------------------
Multifamily $3,176,330 34.7% $3,258,741 34.9%
Retail 2,429,959 26.6% 2,467,237 26.6%
Office 1,724,130 18.9% 1,751,756 18.8%
Lodging 861,094 9.4% 877,945 9.4%
Industrial 547,037 6.0% 561,406 6.0%
Healthcare 367,989 4.2% 376,733 4.0%
Parking 30,608 0.2% 30,937 0.3%
- ------------------------------------------------------------------
TOTAL $9,137,150 100% 9,324,761 100%
- ------------------------------------------------------------------

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 worldwide 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:

- -----------------------------------------------------------------------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------
NUMBER OF % OF NUMBER OF % OF
PRINCIPAL LOANS COLLATERAL PRINCIPAL LOANS COLLATERAL
- -----------------------------------------------------------------------------------------------

Past due 30 days to 60 days $6,319 3 0.07% $2,936 2 0.03%
- -----------------------------------------------------------------------------------------------
Past due 60 days to 90 days 7,963 2 0.09% 13,522 3 0.14%
- -----------------------------------------------------------------------------------------------
Past due 90 days or more 28,526 5 0.31% 34,631 6 0.37%
- -----------------------------------------------------------------------------------------------
Resolved loans 0 0 0.00% 22,296 1 0.24%
- -----------------------------------------------------------------------------------------------
Real Estate owned 10,145 2 0.11% 0 0 0.00%
- -----------------------------------------------------------------------------------------------
TOTAL DELINQUENT $52,953 12 0.58% $73,385 12 0.78%
- -----------------------------------------------------------------------------------------------
TOTAL PRINCIPAL BALANCE $9,137,150 1,765 $9,324,761 1,771
- -----------------------------------------------------------------------------------------------

Of the 12 delinquent loans as of December 31, 2000, three were delinquent
due to technical reasons, two were REO and being marketed for sale, three
were in foreclosure, and the remaining four loans were in some form of
workout negotiations. One of the loans in foreclosure is the subject of
litigation with the loan seller. The matter involves a significant breach
of representations and warranties made when the loan was contributed to the
securitization transaction. The Company caused the loan trust to file a
claim against the seller for representing that a loan secured by a limited
service hotel in Phoenix, AZ was a flagged hotel when, in fact, it was not.
The Company believes strongly in the merits of the breach claim and has
caused the special servicer to institute legal action against the loan
seller.

The Company's delinquency experience of 0.58% is slightly better than the
0.77% for directly comparable collateral experience shown in the Lehman
Brothers Conduit Guide for 1998 Transactions.

During 2000 the Company also experienced early payoffs of $81,695,
representing 0.89% of the year-end 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, 2000, two of the 12 delinquent loans were
brought current. Additionally, three other loans with a total balance of
$38,848 were paid off at par with no loss to the Company.

The unrealized loss on the Company's holdings of CMBS at December 31,
2000 was $87,899. This decline in the value of the investment portfolio
represents market valuation changes and is not due to credit experience
or credit expectations. The adjusted purchase price of the Company's CMBS
portfolio as of December 31, 2000 represents approximately 62% of its par
amount. As the portfolio matures the Company expects to recoup the
unrealized loss, provided that the credit losses experienced are not
greater than the credit losses assumed in the purchase analysis. The
Company performs a detailed review of its loss assumptions on a quarterly
basis and will adjust them when it believes that credit experience or
expectations justify such an adjustment. As of December 31, 2000 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. As the portfolio matures and expected losses
occur subordination levels of the lower rated classes of a CMBS
investment will be reduced. This may cause the lower rated classes to be
downgraded. This would negatively affect the market value and liquidity
of the portfolio.

Investment Grade Real Estate Related Securities

As part of the acquisition of CORE Cap, Inc., in 2000 the Company inherited
three securities backed by franchise loans originated by Franchise Mortgage
Acceptance Corporation ("FMAC"). The Securities were the class B, C and D
securities issued by the FMAC T1998 - BA trust. The respective credit
ratings at the date of acquisition were AA, A and BBB. The Company sold the
BBB rated class D security immediately after the acquisition.

The trust is collateralized by loans on 365 properties to 75 borrowers. The
quality of information provided by the servicer on underlying collateral
has been poor. In October 2000 the Company sold 50% of its position in class C
and recognized a loss of $991. Information on the collateral continues to
be poor and in March 2001 class B was downgraded to A and class C was
downgraded to BB. This will cause the prices of these bonds to be marked
down further at March 31, 2001. The Company's current strategy is to force
the servicer to provide timely and accurate information so the bonds may be
properly evaluated.

Commercial lending

The Company also owns six mezzanine whole loans and two preferred equity
interests in partnerships that own office buildings. The Company's
commercial loan portfolio generally emphasizes larger transactions located
in metropolitan markets as compared to the loans in the CMBS portfolio.
Exposures based on asset type and geography follows:

Principal % Property LTV DSCR
Balance Type
Location
-------------------- --------------------------------------------------
Los Angeles $22,500 13.8% Office 78.0% 1.14
Santa Monica 35,000 21.4 Office 65.0 1.00
San Francisco 18,000 11.0 Hotel 69.0 1.20
London* 32,087 19.6 Hotel 65.0 1.15
New York City 30,600 18.7 Office 73.0 1.10
Chicago 15,000 9.2 Multifamily 90.0 1.10
Suburban Philadelphia 4,943 3.0 Office 90.0 1.21
Tallahassee 5,411 3.3 Office 75.0 1.20
---------------------- ---------------
Total $163,541 100% 72.0 1.11
---------------------- ---------------

Diversification by Asset Type
Office 60.6%
Full Service Lodging 30.2%
Multifamily 9.2%

* The London Loan is translated into US dollars using the December 29, 2000
sterling exchange rate of 0.668762 (pounds/sterling).

The Los Angeles Loan, a $22,500 subordinate class of a $60,850 loan is
secured by the borrower's interest in a 54-story office tower in downtown
Los Angeles, California. The loan matures in two years, which may be
extended at the borrower's option for two additional years. The Company
expects to pay off its balance at maturity.

The Santa Monica Loan is a $35 million second mortgage on an office
construction project in Santa Monica, California. The building was
completed on time in mid 2000. The building is currently 92% leased at
gross rents averaging in the low $40's 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. The borrower sold the property in the
first quarter 2001, at which time the Company's loan was repaid.

The San Francisco Loan is an $18,000 mezzanine loan, secured by a lien on
the borrower's interest in a full service hotel located in San Francisco,
California. The loan matures on May 1, 2003. The Company continues to
expect this loan to pay off its balance at maturity.

The London Loan is a 21,459 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 have exceeded expectations. The
underlying properties have performed well. As of December 31, 2000 the
London Loan was valued at 97.0% of par, an increase from 92.0% of par as of
December 31, 1999. The Company continues to expect this loan to pay off its
balance at its maturity on June 30, 2002.

The New York City Loan is a $30,600 subordinated participation in a first
mortgage secured by a commercial office building located midtown Manhattan.
The building is currently 98% leased. The Loan matures in December 2001.
The Company continues to expect this loan to pay off its balance at
maturity.

The Chicago Loan was a $30,000 mezzanine loan originated in August of 2000.
The loan is secured by a second mortgage on a condominium conversion
project in Chicago, Illinois, and a first mortgage on an adjacent land
parcel, as well as the borrower's partnership interest in the property. The
Company originated this loan in September of 2000, for a 24-month term.
Condominium unit sales at the project currently exceed expectations. Due to
this strong demand the borrower paid off $15,000 of this loan with
prepayment penalties in December of 2000. The Company expects this loan to
pay off its balance on or prior to maturity.

The suburban Philadelphia investment is a $5,121 preferred equity interest
in a partnership that owns two office buildings totaling approximately
190,000 square feet. One property is in the western suburb of Paoli while
the other is in the northern suburb of Newtown. The expected life of the
investment is three years.

The Tallahassee investment is a $5,149 preferred equity interest in a
partnership that owns a 500,000 square foot mixed-use office/retail
building. Primary office tenants include various Florida state government
agencies on long-term leases. The expected life of the investment is four
years.

Interest Rates

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 $137,273 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 and
hedges, 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, 2000 5.12% 6.56% 1.44%
December 31, 1999 6.44% 5.82% 0.62%

The increase in LIBOR from December 31, 1999 to December 31, 2000 had a
negative impact on the Company's financing costs.

RECENT EVENTS:

Beginning on January 3, 2001 the Federal Reserve Board reversed its policy
of increasing short-term interest rates. The Fed reduced rates by 50 basis
points on each of January 3, January 31 and March 20, 2001. Each rate
reduction was accompanied by a continuing bias towards additional rate
eases. The Company benefits from rate reductions because its cost of
financing is generally based on one month LIBOR. The Company has partially
hedged its exposure to changes in short term interest rates using interest
rate swaps. The Company expects earnings to increase as a result of the
reductions in short term interest rates.

On February 15, 2001 the Company completed a secondary offering of 4,000,000
common shares at a price of $8.75 per share. On a net basis this raised
approximately $33,200 for the Company. On March 13, 2001 the Company issued
an additional 600,000 shares of common stock pursuant to the underwriters over
allotment option, raising an additional $5,000 of net capital. The effect
of each issuance was accretive to the per share book value of the Company's
common stock.

In February 2000, 38,300 10% Series B cumulative redeemable convertible
preferred shares with a liquidation preference of $958 were converted at
the shareholder's option into 56,000 shares of the Company's common stock.

In March 2001, the Company entered into an agreement to sell all of its
mortgage loan pools with the settlement to occur in April 2001. There will
be a slight gain to the Company.

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, 2000 and 1999 was
$39,326, and $26,673, respectively, which was the same as its reported GAAP
net income for the periods. The Company reported cash flows provided by in
operating activities of $115,734 and $188,735, cash flows provided by
(used) in investing activities of $883,913 and of $(165,453) and cash flows
used in financing activities of $(909,067) and $(2,104) in its statement of
cash flows for the year ended December 31, 2000 and 1999, respectively.

RESULTS OF OPERATIONS

Net income for the year ended December 31, 2000 was $39,326 or $1.37 per
share ($1.28 diluted). Net income for the year ended December 31, 1999 was
$26,673, 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 2000 from 1999 is primarily due to
the fact that the Company raised additional capital and was able to invest
at high-risk adjusted yields. The increase in income in 1999 from 1998 is
primarily due to significant losses recognized in 1998 resulting from the
sale of securities. 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, 2000
---------------------------------------------
Interest Average Annualized
Income Balance Yield
---------------------------------------------
CMBS $37,619 $372,465 10.10%
Other securities available for sale 37,497 468,177 8.01%
Commercial mortgage loans 14,359 110,287 13.01%
Mortgage loan pools 6,481 85,501 7.58%
Cash and cash equivalents 1,313 22,189 5.92%
---------------------------------------------
Total $97,269 $1,058,619 9.19%
=============================================

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 $25, $3,186 and $1,368 in
interest income from securities held for trading during the years ended
December 31, 2000, 1999 and for the period March 24, 1998 through December
31, 1998, respectively, and $348 in earnings from real estate joint
ventures during the year ended December 31, 2000.

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, 2000
---------------------------------------------
Interest Average Annualized
Expense Balance Rate
---------------------------------------------
Reverse repurchase agreements $34,249 $505,893 6.77%
Lines of credit and term loan 16,849 229,863 7.35%
---------------------------------------------
Total $51,098 $735,756 6.94%
=============================================

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 $14, $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, 2000, 1999 and for the period March 24, 1998 through December
31, 1998, respectively.

NET INTEREST MARGIN AND NET INTEREST SPREAD FROM THE PORTFOLIO: The Company
considers its portfolio to consist of its securities available for sale,
mortgage loan pools, commercial mortgage loans, and 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 For the Year March 24, 1998
Ended Ended Through
December 31, 2000 December 31, 1999 December 31, 1998
-----------------------------------------------------------

Interest Income $97,294 $54,325 $44,687
Interest Expense $51,112 $21,768 $23,477
Net Interest Margin 5.55% 6.02% 3.95%
Net Interest Spread 3.78% 2.59% .73%

OTHER EXPENSES: Expenses other than interest expense consist primarily of
management fees and general and administrative expenses. Management fees of
$7,450 for the year ended December 31, 2000 were comprised of base
management fees of $6,483 and incentive fees of $967. Management fees of
$4,565 and $3,474 for the year ended December 31, 1999 and for the period
March 24, 1998 through December 31, 1998, respectively, 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/income-net of $2,277 for the year ended December 31, 2000, and
$2,839 for the year ended December 31, 1999, and $765 for the period March
24, 1998 through December 31, 1998, respectively, were comprised of
accounting agent fees, custodial agent fees, directors' fees, fees for
professional services, insurance premiums, broken deal expenses, and due
diligence costs. Other expenses/income-net in the year 2000 includes the
amortization of negative goodwill.

OTHER GAINS (LOSSES): During the year ended December 31, 2000, the Company
sold a portion of its securities available for sale for total proceeds of
$3,176,357, resulting in a realized gain of $3,212. 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 (loss) gain on
securities held for trading of $(647), 2,992 and $(231) for the years ended
December 31, 2000, 1999 and for the period March 24, 1998 through December
31, 1998, respectively, 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) gain of $(42), $(34) and $53 for the
years ended December 31, 2000, 1999 and for the period March 24, 1998
through December 31, 1998, respectively, 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, 2000, the Company
declared dividends to shareholders totaling $27,591 or $1.17 per share, of
which $20,050 was paid during the year and $7,541 was paid on January 31,
2001. On March 15, 2001, the Company declared distributions to its
shareholders of $.30 per share, payable on April 30, 2001 to shareholders
of record on March 30, 2001. For U.S. Federal Income Tax purposes, the
dividends are ordinary income to the Company shareholders. 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. 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 $35,942, or $1.22 ($1.16
diluted) per share, for the year ended December 31, 2000, compared to a net
income as calculated in accordance with GAAP of $39,319, or $1.37 ($1.28
diluted) per share.

Tax basis income was $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 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
calculated in accordance with GAAP of $1,389 or $0.07 per share (basic and
diluted).

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 2000, tax basis income for subordinate CMBS is higher
the GAAP income. Additionally, payments made to GMAC Asset Management, Inc.
to terminate its management contract with Core Cap, Inc. were deducted for
tax purposes. 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
For the Year For the Year March 24, 1998
Ended December Ended December Through
31, 2000 31, 1999 December 31, 1998
---------------------------------------------------

GAAP net income $39,326 $26,673 $(1,389)
Net (gain) on securities available (3,516) (2,476) 14,459
for sale
Subordinate CMBS income differences 2,432 3,500 1,230
Contract termination payment (2,300) - -
Other differences - 650 218
---------------------------------------------------
Tax basis net income $35,942 $28,347 $14,518
===================================================

In the reconciliation of GAAP net income to tax basis net income the GAAP
net gain on securities available for sale of $3,516 is deducted from GAAP
income as the Company had a capital loss carry forward of $13,248 at
December 31, 1999.

CHANGES IN FINANCIAL CONDITION

SECURITIES AVAILABLE FOR SALE: At December 31, 2000 and 1999, respectively,
an aggregate of $102,871 and $101,139 in unrealized losses on securities
available for sale was included as a component of accumulated other
comprehensive income (loss) in shareholders' equity.

The Company's securities available for sale, which are carried at estimated
fair value, included the following at December 31, 2000 and 1999:

December December
31, 2000 31, 1999
Estimated Estimated
Fair Fair
Security Description Value Percentage Value Percentage
- ---------------------------------------------------------------------------------------------
Commercial mortgage-backed securities:

CMBS IO's $ 68,844 10.2% - - %
Investment grade CMBS 54,905 8.1 - -
Non-investment grade rated subordinated
securities 261,489 38.5 $243,708 42.7
Non-rated subordinated securities 27,197 4.0 29,025 4.6
------------------------------------------------
412,435 60.8 272,733 47.3
------------------------------------------------

Single-family residential mortgage-backed
securities:
Agency adjustable rate securities 160,928 23.7 58,858 10.2
Agency fixed rate securities 104,759 15.5 165,825 28.7
Privately issued investment grade rated - - 76,821 13.3
------------------------------------------------
265,687 39.2 301,504 52.2
------------------------------------------------
Agency insured project loan - - 2,958 0.5
------------------------------------------------
$678,122 100.0% $577,195 100.0%
================================================

SHORT-TERM BORROWINGS: To date, the Company's debt has consisted of
preferred stock and line-of-credit borrowings, term loans and reverse
repurchase agreements, 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, 2000
---------------------------------------------
December 31,
2000 Maximum Range of
Balance Balance Maturities
---------------------------------------------
Reverse repurchase agreements $517,212 $1,202,696 3 to 55 days
Line of credit and term loan
borrowings 202,130 453,841 15 to 261 days
=============================================

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
=============================================

HEDGING INSTRUMENTS: The Company's hedging policy with regard to its
sterling denominated London Loan is to minimize its exposure to
fluctuations in the sterling exchange rate. As of December 31, 2000 the
Company agreed to exchange