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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: ________ to ________
Commission File Number 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.)
40 East 52nd Street, New York, New York 10022
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number including area code): (212) 409-3333
NOT APPLICABLE
(Former name, former address, and for new
fiscal year; if changed since last report)
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.
(1) Yes X No
(2) Yes X No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
(1) Yes X No
As of November 8, 2004, there were 53,288,972 shares of the
registrant's common stock ($.001 par value per share) outstanding.
ANTHRACITE CAPITAL, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
Item 1. Interim Financial Statements........................................................................4
Consolidated Statements of Financial Condition (Unaudited)
At September 30, 2004 and December 31, 2003.........................................................4
Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended September 30, 2004 and 2003.....................................5
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Nine Months Ended September 30, 2004........................................................6
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2004 and 2003...............................................7
Notes to Consolidated Financial Statements (Unaudited)..............................................9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................................................22
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................................44
Item 4. Controls and Procedures............................................................................48
Part II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................49
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities...................49
Item 3. Defaults Upon Senior Securities....................................................................50
Item 4. Submission of Matters to a Vote of Security Holders................................................50
Item 5. Other Information..................................................................................50
Item 6. Exhibits and Reports on Form 8-K...................................................................50
SIGNATURES ...................................................................................................51
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to future financial or business performance, strategies or
expectations. Forward-looking statements are typically identified by words or
phrases such as "trend," "opportunity," "pipeline," "believe," "comfortable,"
"expect," "anticipate," "current," "intention," "estimate," "position,"
"assume," "potential," "outlook," "continue," "remain," "maintain," "sustain,"
"seek," "achieve" and similar expressions, or future or conditional verbs such
as "will," "would," "should," "could," "may" or similar expressions. Anthracite
Capital, Inc. (the "Company") cautions that forward-looking statements are
subject to numerous assumptions, risks and uncertainties, which change over
time. Forward-looking statements speak only as of the date they are made, and
the Company assumes no duty to and does not undertake to update forward-looking
statements. Actual results could differ materially from those anticipated in
forward-looking statements and future results could differ materially from
historical performance.
In addition to factors previously disclosed in the Company's Securities and
Exchange Commission (the "SEC") reports and those identified elsewhere in this
press release, the following factors, among others, could cause actual results
to differ materially from forward-looking statements or historical performance:
(1) the introduction, withdrawal, success and timing of business
initiatives and strategies;
(2) changes in political, economic or industry conditions, the
interest rate environment or financial and capital markets,
which could result in changes in the value of the Company's
assets;
(3) the relative and absolute investment performance and
operations of the Company's manager;
(4) the impact of increased competition;
(5) the impact of capital improvement projects;
(6) the impact of future acquisitions or divestitures;
(7) the unfavorable resolution of legal proceedings;
(8) the extent and timing of any share repurchases;
(9) the impact, extent and timing of technological changes and
the adequacy of intellectual property protection;
(10) the impact of legislative and regulatory actions and reforms
and regulatory, supervisory or enforcement actions of
government agencies relating to the Company, BlackRock
Financial Management, Inc. (the "Manager") or The PNC
Financial Services Group, Inc. ("PNC Bank");
(11) terrorist activities, which may adversely affect the general
economy, real estate, financial and capital markets, specific
industries, and the Company and the Manager;
(12) the ability of the Manager to attract and retain highly
talented professionals;
(13) fluctuations in foreign currency exchange rates; and
(14) the impact of changes to tax legislation and, generally, the
tax position of the Company.
Forward-looking statements speak only as of the date they are made. 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 - FINANCIAL INFORMATION
Item 1. Interim Financial Statements
ANTHRACITE CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30, 2004 December 31, 2003
ASSETS
Cash and cash equivalents $15,263 $20,805
Restricted cash equivalents 27,043 12,845
Securities available-for-sale, at fair value:
Subordinated commercial mortgage-backed securities ("CMBS") $832,533 $703,443
Residential mortgage-backed securities ("RMBS") 147,891 412,990
Investment grade securities 793,602 689,567
--------------- -----------------
Total securities available-for-sale 1,774,026 1,806,000
Commercial mortgage loan pools, at amortized cost 1,316,600 -
Securities held-for-trading, at fair value 256,275 313,727
Commercial mortgage loans, net 197,624 61,668
Equity investment in Carbon Capital, Inc. ("Carbon I") 44,664 28,493
Investments in real estate joint ventures 5,042 7,823
Receivable for investments sold 37,031 99,056
Other assets 45,906 48,429
--------------- -----------------
Total Assets $3,719,474 $2,398,846
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Secured by pledge of subordinated CMBS $77,080 $100,892
Secured by pledge of other securities available-for-sale
and restricted cash equivalents 397,467 710,968
Secured by pledge of commercial mortgage loan pools 1,307,537 -
Secured by pledge of securities held-for-trading 246,279 304,001
Secured by pledge of investments in real estate joint ventures - 513
Secured by pledge of commercial mortgage loans 89,053 22,197
Collateralized debt obligations ("CDOs") 1,068,156 684,970
--------------- -----------------
Total borrowings 3,185,572 1,823,541
Securities sold, not yet settled - 99,551
Payable for investments purchased 15,671 -
Distributions payable 15,806 14,749
Other liabilities 35,889 43,575
--------------- -----------------
Total Liabilities $3,252,938 $1,981,416
--------------- -----------------
Commitments and Contingencies
Stockholders' Equity:
Common Stock, par value $0.001 per share; 400,000 shares
authorized;
53,241 shares issued and outstanding in 2004;
49,464 shares issued and outstanding in 2003 53 49
10% Series B Preferred Stock, liquidation preference $43,942 in 2003 - 33,431
9.375% Series C Preferred Stock, liquidation preference $57,500
in 2004 and 2003 55,435 55,435
Additional paid-in capital 578,599 536,333
Distributions in excess of earnings (124,103) (101,635)
Accumulated other comprehensive loss (43,448) (106,183)
--------------- -----------------
Total Stockholders' Equity 466,536 417,430
--------------- -----------------
Total Liabilities and Stockholders' Equity $3,719,474 $2,398,846
=============== =================
The accompanying notes are an integral part of these consolidated financial statements.
ANTHRACITE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
2004 2003 2004 2003
---------------- ---------------- --------------- ------------------
Income:
Interest from securities available-for-sale $33,611 $34,007 $98,744 $88,695
Interest from commercial mortgage loans 2,979 1,190 6,437 4,480
Interest from commercial mortgage loan pools 13,715 - 26,066 -
Interest from securities held-for-trading 2,738 3,709 9,060 28,660
Earnings from real estate joint ventures 165 221 929 695
Earnings from equity investment 1,979 749 4,970 2,194
Interest from cash and cash equivalents 165 453 356 838
Other income 742 - 742 -
---------------- ---------------- --------------- ------------------
Total income $56,094 $40,329 $147,304 $125,562
---------------- ---------------- --------------- ------------------
Expenses:
Interest 36,343 20,575 88,713 56,863
Interest - securities held-for-trading 1,016 1,039 2,669 6,193
Management fee 2,212 2,115 6,505 7,341
General and administrative expense 886 551 2,120 1,724
---------------- ---------------- --------------- ------------------
Total expenses 40,457 24,280 100,007 72,121
---------------- ---------------- --------------- ------------------
Other gain (loss):
Gain (loss) on sale of securities available-for-sale 2,081 (4,704) 857 (1,269)
Loss on securities held-for-trading (1,103) (28,154) (11,133) (43,273)
Foreign currency loss (114) - (126) -
Loss on impairment of securities - (5,412) - (32,426)
---------------- ---------------- --------------- ------------------
Total other gain (loss) 864 (38,270) (10,402) (76,968)
---------------- ---------------- --------------- ------------------
Net income (loss) 16,501 (22,221) 36,895 (23,527)
---------------- ---------------- --------------- ------------------
Dividends on preferred stock 1,348 2,491 5,568 5,298
Cost to retire preferred stock in excess of carrying
value - - 10,508 -
---------------- ---------------- --------------- ------------------
Net income (loss) available to common stockholders $15,153 $(24,712) $20,819 $(28,825)
================ ================ =============== ==================
Net income (loss) per common share, basic: $0.28 $(0.51) $0.41 $(0.60)
================ ================ =============== ==================
Net income (loss) per common share, diluted: $0.28 $(0.51) $0.41 $(0.60)
================ ================ =============== ==================
Weighted average number of shares outstanding:
Basic 53,212 48,405 51,258 47,956
Diluted 53,221 48,405 51,267 47,956
The accompanying notes are an integral part of these consolidated financial statements.
ANTHRACITE CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------------
Series Series Accumulated
Common B C Additional Distributions Other Total
Stock, Preferred Preferred Paid-In In Excess Comprehensive Comprehensive Stockholders'
Par Value Stock Stock Capital Of Earnings Loss Income Equity
--------------------------------------------------------------------------------------------------
Balance at January 1, 2004 $49 $33,431 $55,435 $536,333 $(101,635) $(106,183) $417,430
Net income 36,895 $36,895 36,895
Unrealized loss
on cash flow hedges (4,696) (4,696) (4,696)
Reclassification
adjustments from
cash flow hedges
included in net income 4,411 4,411 4,411
Change in net income
unrealized gain
(loss) on securities
available-for-sale,
net of reclassification
adjustment 63,020 63,020 63,020
--------------
Other Comprehensive income 62,735
--------------
Comprehensive Income $99,630
==============
Dividends declared-common stock (43,287) (43,287)
Dividends on preferred stock (5,568) (5,568)
Conversion of Series
B preferred stock
to common stock (9) 9 -
Redemption of Series B
preferred stock (33,422) (10,508) (43,930)
Issuance of common stock 4 42,257 42,261
--------------------------------------------------------------------------------------------------
Balance at
September 30, 2004 $53 $- $55,435 $578,599 $(124,103) $(43,448) $466,536
==================================================================================================
DISCLOSURE OF RECLASSIFICATION
ADJUSTMENT:
Unrealized holding gain $62,163
Reclassification for realized gains
previously recorded as unrealized 857
--------------
$63,020
==============
The accompanying notes are an integral part of these consolidated financial statements.
ANTHRACITE CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
For the Nine For the Nine
Months Ended Months Ended
September 30, 2004 September 30, 2003
2003
----------------------- ----------------------
Cash flows from operating activities:
Net income (loss) $36,895 $(23,527)
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Net sale of trading securities 46,319 411,378
Net loss on sale of securities 10,275 44,542
Loss on impairment of securities - 32,426
(Discount accretion) premium amortization (3,530) 500
Non-cash portion of foreign currency loss 79 -
Amortization of CDO issuance costs 1,517 1,202
Distributions (equity) in earnings in excess of equity (distributions) from
Carbon I 1,269 (990)
Decrease (increase) in other assets 13,666 (3,687)
Decrease in other liabilities (8,160) (208)
----------------------- ----------------------
Net cash provided by operating activities 98,330 461,636
----------------------- ----------------------
Cash flows from investing activities:
Purchase of securities available-for-sale (310,526) (1,808,931)
Purchase of commercial loan pools (22,669) -
Sale of commercial loan pools 5,847 -
Funding of commercial mortgage loans (157,997) (11,520)
Repayments received from commercial mortgage loans 23,053 12,413
(Increase) decrease in restricted cash equivalents (14,198) 65,010
Principal payments received on securities available-for-sale 68,083 255,389
Distributions from joint ventures in excess of earnings 2,781 431
Investment in Carbon I (17,440) (7,945)
Proceeds from sales of securities available-for-sale 318,273 1,394,664
Net payments under hedging securities (7,187) (5,643)
----------------------- ----------------------
Net cash used in investing activities (111,980) (106,132)
----------------------- ----------------------
Cash flows from financing activities:
Net increase (decrease) in borrowings 63,046 (353,704)
CDO issuance costs (5,471) -
Proceeds from issuance of common stock, net of offering costs 42,261 16,063
Redemption of Series B Preferred Stock (43,931) (3,874)
Proceeds from issuance of Series C Preferred Stock, net of offering costs - 55,435
Dividends paid on common stock (42,229) (50,146)
Dividends paid on preferred stock (5,568) (4,399)
----------------------- ----------------------
Net cash provided by (used in) financing activities 8,108 (340,625)
----------------------- ----------------------
Net (decrease) increase in cash and cash equivalents (5,542) 14,879
Cash and cash equivalents, beginning of period 20,805 24,698
----------------------- ----------------------
Cash and cash equivalents, end of period $15,263 $39,577
======================= ======================
Supplemental disclosure of cash flow information:
Interest paid $66,157 $63,086
======================= ======================
Investments purchased not settled $15,671 $60,562
======================= ======================
Investments sold not settled $37,031 $37,660
======================= ======================
Supplemental schedule of non-cash investing and financing activities:
The Company purchased the Controlling Class securities of a REMIC trust during
the nine months ended September 30, 2004:
Carrying value of assets acquired $1,329,777
Liabilities assumed 1,306,724
The accompanying notes are an integral part of these consolidated financial statements.
ANTHRACITE CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS GIVEN ARE IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
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 ("REIT") under the Internal Revenue Code of 1986 and,
therefore, its income is largely exempt from corporate taxation. The Company
commenced operations on March 24, 1998.
The Company's core investment activities focus on investing in below investment
grade CMBS where the Company has the right to control the foreclosure/workout
process on the underlying loans, and acquiring and originating high yield
commercial real estate loans. The Company also manages excess liquidity with a
portfolio of investment grade real estate related securities. This portfolio is
being reduced over time.
The accompanying September 30, 2004 unaudited consolidated financial statements
have been prepared in conformity with the instructions to Form 10-Q and Article
10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America ("GAAP") for
complete financial statements. The results for such interim periods are not
necessarily indicative of the results to be expected for the year. In the
opinion of management, all adjustments (consisting of only normal recurring
accruals) considered necessary for a fair presentation of the results for the
respective periods have been reflected. These consolidated financial statements
should be read in conjunction with the annual audited financial statements and
notes thereto included in the Company's annual report on Form 10-K for 2003
filed with the Securities and Exchange Commission.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the statements of financial condition and revenues and expenses for the periods
covered. Actual results could differ from those estimates and assumptions.
Significant estimates in the financial statements include the valuation of
certain of the Company's mortgage-backed securities and certain other
investments.
NOTE 2 NET INCOME (LOSS) PER SHARE
Net income per share is computed in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic income per
share is calculated by dividing net income available to common stockholders by
the weighted average number of common shares outstanding during the period.
Diluted income per share is calculated using the weighted average number of
common shares outstanding during the period plus the additional dilutive
effect, if any, of common stock equivalents. The dilutive effect of outstanding
stock options is calculated using the treasury stock method, and the dilutive
effect of preferred stock is calculated using the "if converted" method.
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
----------------------------------------------------------------
Numerator:
Net income (loss) available to common stockholders $15,153 $(24,712) $20,819 $(28,825)
----------------------------------------------------------------
Numerator for basic earnings per share 15,153 (24,712) 20,819 (28,825)
----------------------------------------------------------------
Numerator for diluted earnings per share $15,153 $(24,712) $20,819 $(28,825)
================================================================
Denominator:
Denominator for basic earnings per share--weighted 53,212,226 48,405,004 51,258,386 47,955,854
average common shares outstanding
Dilutive effect of stock options 8,282 - 8,811 -
----------------------------------------------------------------
Denominator for diluted earnings per share--weighted 53,220,508 48,405,004 51,267,197 47,955,854
average common shares outstanding and common share
equivalents outstanding
================================================================
Basic net income (loss) per weighted average common share: $0.28 $(0.51) $0.41 $(0.60)
----------------------------------------------------------------
Diluted net income (loss) per weighted average common share and
common share equivalents: $0.28 $(0.51) $0.41 $(0.60)
----------------------------------------------------------------
Total anti-dilutive stock options excluded from the calculation of net income
(loss) per share were 1,390,651 for the three and nine months ended September
30, 2004. Total anti-dilutive stock options excluded from the calculation of
net loss per share were 1,407,443 for the three and nine months ended September
30, 2003.
NOTE 3 SECURITIES AVAILABLE-FOR-SALE
The Company's securities available-for-sale are carried at estimated fair
value. The amortized cost and estimated fair value of securities
available-for-sale as of September 30, 2004 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Security Description Cost Gain Loss Value
- ------------------------------------------------------------ ---------------- ---------------- --------------- -----------------
CMBS:
CMBS interest only securities ("IOs") $113,390 $4,098 $(883) $116,605
Investment grade CMBS 350,731 16,150 (4,526) 362,355
Non-investment grade rated subordinated securities 806,706 56,401 (70,589) 792,518
Non-rated subordinated securities 36,842 6,659 (3,486) 40,015
Credit tenant lease 25,641 497 (719) 25,419
Investment grade REIT debt 251,163 15,790 (1,644) 265,309
Project loans 24,281 34 (401) 23,914
---------------- ---------------- --------------- -----------------
Total CMBS 1,608,754 99,629 (82,248) 1,626,135
---------------- ---------------- --------------- -----------------
Single-family RMBS:
Agency adjustable rate securities 119,285 2 (179) 119,108
Residential CMOs 1,584 70 - 1,654
Hybrid adjustable rate mortgages ("ARMs") 27,228 3 (102) 27,129
---------------- ---------------- --------------- -----------------
Total RMBS 148,097 75 (281) 147,891
---------------- ---------------- --------------- -----------------
---------------- ---------------- --------------- -----------------
Total securities available-for-sale $1,756,851 $99,704 $(82,529) $1,774,026
================ ================ =============== =================
As of September 30, 2004, an aggregate of $1,747,930 in estimated fair value of
the Company's securities available-for-sale was pledged to secure its
collateralized borrowings.
On July 1, 2004, the Company reversed its reclassification for $305,785 of RMBS
securities from available-for-sale securities back to held-for-trading
securities.
As of September 30, 2004, the anticipated weighted average yield to maturity
based upon the amortized cost of the subordinated CMBS ("reported yield") was
9.5% per annum. The anticipated reported yield of the Company's investment
grade securities available-for-sale was 5.8%. The Company's reported yields on
its subordinated CMBS and investment grade securities available-for-sale are
based upon a number of assumptions that are subject to certain business and
economic uncertainties and contingencies. Examples of these include, among
other things, the rate and timing of principal payments (including prepayments,
repurchases, defaults, and liquidations), the pass-through or coupon rate, and
interest rate fluctuations. Additional factors that may affect the Company's
anticipated yields to maturity on its subordinated CMBS include interest
payment shortfalls due to delinquencies on the underlying mortgage loans, and
the timing and magnitude of credit losses on the mortgage loans underlying the
subordinated CMBS that are a result of the general condition of the real estate
market (including competition for tenants and their related credit quality) and
changes in market rental rates. As these uncertainties and contingencies are
difficult to predict and are subject to future events which may alter these
assumptions, no assurance can be given that the anticipated yields to maturity,
discussed above and elsewhere, will be achieved.
During the nine months ended September 30, 2004 and 2003, the Company sold a
portion of its securities available-for-sale for total proceeds of $318,273
and $1,394,664 respectively, resulting in a realized gain (loss) of $857 and
$(1,269) for the nine months ended September 30, 2004 and 2003 respectively.
The following table shows the Company's fair value and gross unrealized losses,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at September 30, 2004:
Less than 12 Months 12 Months or More Total
-------------- --------------- ------------------------------ -------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
-------------- --------------- ------------- ---------------- -------------- ----------------
CMBS:
CMBS IOs $19,943 $(308) $3,332 $(575) $23,275 $(883)
Investment grade CMBS 30,633 (171) 99,219 (4,355) 129,852 (4,526)
Non-investment grade rated
subordinated securities 5,765 (1,479) 191,107 (69,110) 196,872 (70,589)
Non-rated subordinated securities 3,718 (26) 3,347 (3,460) 7,065 (3,486)
Credit tenant lease 16,277 (719) - - 16,277 (719)
Investment grade REIT debt 60,039 (1,437) 10,660 (207) 70,699 (1,644)
Project loans 19,444 (401) - - 19,444 (401)
-------------- --------------- ------------- ---------------- -------------- ----------------
Total CMBS 155,819 (4,541) 307,665 (77,707) 463,484 (82,248)
-------------- --------------- ------------- ---------------- -------------- ----------------
Single-family RMBS:
Agency adjustable rate securities 11,856 (179) - - 11,856 (179)
Hybrid ARMs 4,656 (102) - - 4,656 (102)
-------------- --------------- ------------- ---------------- -------------- ----------------
Total RMBS 16,512 (281) - - 16,512 (281)
-------------- --------------- ------------- ---------------- -------------- ----------------
Total temporarily impaired
securities $172,331 $(4,822) $307,665 $(77,707) $479,996 $ (82,529)
============== =============== ============= ================ ============== ================
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
the "recognition" provisions of Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
("EITF No. 03-1"). EITF No. 03-1 requires that a loss be recognized for an
impairment that is other-than-temporary. A three-step impairment model should
be applied to debt securities subject to SFAS No. 115, including those debt
securities subject to EITF No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets." On September 30, 2004, the FASB issued FASB Staff Position
(FSP) EITF No. 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No.
03-1," which delayed the effective date of the recognition provisions of EITF
No. 03-1 until the issuance of the final FSP EITF Issue 03-1-a, "Implementation
Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1." Until the
final FSP is issued, management is not able to evaluate whether the adoption of
the "recognition" provisions under such guidance will have a material effect on
our results of operations or financial position.
The temporary impairment of the available-for-sale securities results from the
fair value of the securities falling below the amortized cost basis. Management
possesses both the intent and the ability to hold the securities until the
forecasted recovery of amortized cost. As such, management does not believe any
of the securities held are other-than-temporarily impaired at September 30,
2004.
As of September 30, 2004, the Company owns 14 different trusts where through
its investment in the lowest or non-rated subordinated CMBS of such trusts is
in the first loss position. The Company considers the CMBS securities where it
maintains the right to control the foreclosure/workout process on the
underlying loans its controlling class CMBS ("Controlling Class"). The
following table sets forth certain information relating to the aggregate
principal balance and payment status of delinquent mortgage loans underlying
the Controlling Class CMBS held by the Company as of September 30, 2004. The
underlying collateral related to the Company's investment in commercial
mortgage loan pools is also included in the table. See Note 4 of the
consolidated financial statements, Commercial Mortgage Loan Pools, for a
further description of the Company's investment in commercial mortgage loan
pools.
- ----------------------------------------------------------------- ------------------------------------------
September 30, 2004
- ------------------------------------------ ---------------------- ------------------- ----------------------
Number of Loans % of
Principal Collateral
- ------------------------------------------ ---------------------- ------------------- ----------------------
Past due 30 days to 60 days $33,264 11 0.20%
- ------------------------------------------ ---------------------- ------------------- ----------------------
Past due 60 days to 90 days 57,510 8 0.34
- ------------------------------------------ ---------------------- ------------------- ----------------------
Past due 90 days or more 112,248 15 0.67
- ------------------------------------------ ---------------------- ------------------- ----------------------
Real estate owned ("REO") 4,083 1 0.03
- ------------------------------------------ ---------------------- ------------------- ----------------------
Total delinquent $207,105 35 1.24%
- ------------------------------------------ ---------------------- ------------------- ----------------------
Total principal balance $16,696,851 2,440
- ------------------------------------------ ---------------------- ------------------- ----------------------
To the extent that the Company's expectation of realized losses on individual
loans supporting the CMBS, if any, or such resolutions differ significantly
from the Company's original loss estimates, it may be necessary to reduce the
projected reported yield on the applicable CMBS investment to better reflect
such investment's expected earnings net of expected losses, and write the
investment down to its fair value. While realized losses on individual loans
may be higher or lower than original estimates, the Company currently believes
its aggregate loss estimates and reported yields are appropriate on all
investments.
NOTE 4 COMMERCIAL MORTGAGE LOAN POOLS
During the second quarter of 2004, the Company acquired subordinated CMBS in a
trust establishing a Controlling Class interest. As the Controlling Class
holder, the Company has the ability to control dispositions or workouts of any
defaulted loans in this trust. The Company negotiated for and obtained a
greater degree of discretion over the disposition of the commercial mortgage
loans than is typically granted to the special servicer. As a result of this
expanded discretion, FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities" (revised December 2003) ("FIN 46R") requires the Company to
consolidate the net assets and results of operations of the trust.
The CMBS securities acquired by the Company have a par value of $41,495 with
$13,890 not rated and the balance rated BBB- to B-. During the third quarter
the Company sold the BBB- rated security, which had the impact of increasing
the borrowings for the commercial loan pool by $5,848. As of September 30,
2004, the CMBS securities owned by the Company have a par value of $35,495.
The debt associated with the REMIC trust is non-recourse to the Company, and is
secured only by the commercial mortgage loan pools. The consolidation of the
REMIC trust results in an increase in the Company's total debt to capital ratio
from 4.0:1 to 6.8:1, but has no effect on the Company's recourse debt to
capital ratio. The Company received authorization from its lenders to permit
debt to capital ratios in excess of existing covenants. For income recognition
purposes, the Company considers the unrated commercial mortgage loans in the
pool as a single asset reflecting the credit assumptions made in establishing
loss adjusted yields for Controlling Class securities.
Approximately 45% of the par amount of the commercial mortgage loan pool is
comprised of loans that are shadow rated A2 or better by Moody's Investors
Service and AA by Standard & Poor's. The Company has taken into account the
credit quality of the underlying loans in formulating its loss assumptions.
Credit losses assumed on the entire pool are 1.40% of the principal balance, or
2.53% of the unrated principal balance. The Company accounts for the unrated
commercial mortgage loans in the pool as a single asset based on this common
credit risk characteristic.
Over the life of the commercial mortgage loan pools, the Company reviews and
updates its loss assumptions to determine the impact on expected cash flows to
be collected. A decrease in estimated cash flows will reduce the amount of
interest income recognized in future periods and may result in a loan loss
reserve depending upon the severity of the cash flow reductions. An increase in
estimated cash flows will first reduce the loan loss reserve and any additional
cash will increase the amount of interest income recorded in future periods.
NOTE 5 SECURITIES HELD-FOR-TRADING
Securities classified as held-for-trading include investments that the Company
intends to hold for a short period of time, usually less than one year. This
classification generally includes highly liquid securities that the Company
acquires on a hedged basis to earn net interest income until the Company
redeploys that capital into credit sensitive commercial real estate
opportunities.
On July 1, 2004, the Company reversed its reclassification for $305,785 of RMBS
securities from available-for-sale securities back to held-for-trading
securities.
For the nine months ended September 30, 2004, losses on securities
held-for-trading in the consolidated statement of operations of $11,133 are
attributable to the Company's repositioning and reduction of its RMBS portfolio
and associated hedges. The Company's longstanding policy has been to maintain
limits on the exposure of the Company's equity to changes in long-term rates as
well as the exposure of earnings to changes in short-term funding rates.
NOTE 6 COMMON STOCK
On March 11, 2004, the Company declared dividends to its common stockholders of
$0.28 per share, payable on April 30, 2004 to stockholders of record on March
31, 2004.
On May 25, 2004, the Company declared dividends to its common stockholders of
$0.28 per share, paid on August 2, 2004 to stockholders of record on June 15,
2004.
On September 15, 2004, the Company declared dividends to its common
stockholders of $0.28 per share paid on November 1, 2004 to stockholders of
record on September 30, 2004.
For the nine months ended September 30, 2004, the Company issued 1,077,102
shares of common stock of the Company, par value $0.001 per share (the "Common
Stock"), under its Dividend Reinvestment and Stock Purchase Plan (the "Dividend
Reinvestment Plan"). Net proceeds to the Company were approximately $12,606.
For the nine months ended September 30, 2003, the Company issued 1,355,006
shares of Common Stock under its Dividend Reinvestment Plan. Net proceeds to
the Company were approximately $15,113.
For the three and nine months ended September 30, 2004, the Company issued
253,800 shares of Common Stock under a sale agency agreement with Brinson
Patrick Securities Corporation. Net proceeds to the Company were approximately
$2,761.
For the three and nine months ended September 30, 2003, the Company issued
45,000 shares of Common Stock under a sale agency agreement with Brinson
Patrick Securities Corporation. Net proceeds to the Company were approximately
$497.
During the first quarter of 2004, the Company suspended its Dividend
Reinvestment Plan for all investments after March 26, 2004, and for all future
investment dates. During the second quarter of 2004, the dividend reinvestment
portion of the Dividend Reinvestment Plan was reinstated for all dividend
payments made after August 2, 2004, and for all future dividend payment dates
with a discount of 2%. The optional cash purchase portion of the Dividend
Reinvestment Plan remains suspended; however, it may be resumed at any time.
On June 30, 2004, the Company completed a follow-on offering of 2,100,000
shares of its Common Stock in an underwritten public offering. The net proceeds
to the Company (after deducting underwriting fees and expenses) were
approximately $23,184. The Company had granted the underwriters an option,
exercisable for 30 days, to purchase up to 315,000 additional shares of Common
Stock to cover over-allotments. This option was exercised on July 6, 2004 and
resulted in net proceeds to the Company of approximately $3,478.
NOTE 7 PREFERRED STOCK
At the end of the first quarter of 2004, the Board of Directors approved the
Company's decision to redeem its Series B Preferred Stock, $0.001 par value per
share ("Series B Preferred Stock"). The second quarter of 2004 earnings
includes a charge of $0.21 per share for the redemption of the Company's Series
B Preferred Stock that was reported as a charge to income in the initial first
quarter 2004 earnings release but was subsequently moved to the second quarter
to coincide with the timing of the actual redemption payment as reported on May
11, 2004. The Series B Preferred Stock was redeemed on May 6, 2004.
NOTE 8 TRANSACTIONS WITH AFFILIATES
The Company is managed pursuant to a management agreement, dated March 27,
1998, between the Company and the Manager (the "Management Agreement"), a
majority owned indirect subsidiary of PNC Bank and the employer of certain
directors and all of the officers of the Company, under 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. On March 25, 2002, the Management Agreement was extended
for one year through March 27, 2003, with the approval of the unaffiliated
directors, on terms similar to the prior agreement with the following changes:
(i) the incentive fee calculation would be based on GAAP earnings instead of
funds from operations, (ii) the removal of the four-year period to value the
Management Agreement in the event of termination and (iii) subsequent renewal
periods of the Management Agreement would be for one year instead of two years.
The Board of Directors of the Company was advised by Houlihan Lokey Howard &
Zukin Financial Advisors, Inc., a national investment banking and financial
advisory firm, in the renewal process.
On March 6, 2003, the unaffiliated directors approved an extension of the
Management Agreement from its expiration of March 27, 2003 for one year through
March 31, 2004. The terms of the renewed agreement were similar to the prior
agreement except for the incentive fee calculation which would provide for a
rolling four-quarter high watermark rather than a quarterly calculation. In
determining the rolling four-quarter high watermark, the Company would
calculate the incentive fee based upon the current and prior three quarters'
net income. The Manager would be paid an incentive fee in the current quarter
if the Yearly Incentive Fee, as defined, was greater than what was paid to the
Manager in the prior three quarters cumulatively. The Company phased in the
rolling four-quarter high watermark commencing with the second quarter of 2003.
Calculation of the incentive fee was based on GAAP and adjusted to exclude
special one-time events pursuant to changes in GAAP accounting pronouncements
after discussion between the Manager and the unaffiliated directors. The
incentive fee threshold did not change. The high watermark provided for the
Manager to be paid 25% of the amount of earnings (calculated in accordance with
GAAP) per share that exceeds the product of the adjusted issue price of the
Company's Common Stock per share and the greater of 9.5% or 350 basis points
over the ten-year Treasury note.
The Management Agreement was further extended for one year from March 31, 2004
through March 31, 2005. The base management fee was revised to equal 2% of the
quarterly average total stockholders' equity for the applicable quarter. The
incentive fee was revised to be 25% of the amount of earnings (calculated in
accordance with GAAP) per share that exceeds the product of the adjusted issue
price of the Company's Common Stock per share ($11.37 as of September 30, 2004)
and the greater of 8.5% or 400 basis points over the ten-year Treasury note.
During the year ended December 31, 2003 and for the three months ended March
31, 2004, the Company paid the Manager an annual base management fee equal to a
percentage of the average invested assets of the Company as defined in the
Management Agreement. The base management fee was equal to 1% per annum of the
average invested assets rated less than BB- or not rated, 0.75% of average
invested assets rated BB- to BB+, and 0.20% of average invested assets rated
above BB+. During the third quarter of 2003, the Manager agreed to reduce the
management fees by 20% from its calculated amount for the third and fourth
quarter of 2003 and the first quarter of 2004. This revision resulted in $1,046
in savings to the Company during 2003 and $532 for the three months ended March
31, 2004, respectively.
The Company incurred $2,212 and $6,505 in base management fees in accordance
with the terms of the Management Agreement for the three and nine months ended
September 30, 2004, respectively, and $2,115 and $7,341 for the three and nine
months ended September 30, 2003, respectively. In accordance with the
provisions of the Management Agreement, the Company recorded reimbursements to
the Manager of $54 for certain expenses incurred on behalf of the Company for
the nine months ended September 30, 2004, and $11 and $29 for the three and
nine months ended September 30, 2003, respectively, which are included in
general and administrative expense on the accompanying consolidated statements
of operations.
Pursuant to the March 25, 2002 one-year Management Agreement extension, the
incentive fee was based on 25% of earnings (calculated in accordance with GAAP)
of the Company. For purposes of calculating the incentive fee during 2002, the
cumulative transition adjustment of $6,327 resulting from the Company's
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" was excluded
from earnings in its entirety and included in the calculation of future
incentive fees using an amortization period of three years. The Company did not
incur incentive fees for the three and nine months ended September 30, 2004 and
2003.
The Company has an administration agreement with the Manager. Under the terms
of the administration agreement, the Manager provides financial reporting,
audit coordination and accounting oversight services to the Company. The
agreement can be cancelled upon 60-day written notice by either party. The
Company pays the Manager a monthly administrative fee at an annual rate of
0.06% of the first $125,000 of average net assets, 0.04% of the next $125,000
of average net assets and 0.03% of average net assets in excess of $250,000
subject to a minimum annual fee of $120. For the three and nine months ended
September 30, 2004, the Company paid administrative fees of $43 and $129,
respectively, and $44 and $130 for the three and nine months ended September
30, 2003, respectively, which are included in general and administrative
expense on the accompanying consolidated statements of operations.
The Company entered into a $50,000 commitment to acquire shares in Carbon I, a
private commercial real estate income opportunity fund managed by the Manager.
The Carbon I investment period ended on July 12, 2004 and the Company's
investment in Carbon I as of September 30, 2004 was $44,664. The Company does
not incur any additional management or incentive fees to the Manager as a
result of its investment in Carbon I. On September 30, 2004, the Company owned
19.8% of the outstanding shares in Carbon I.
On October 13, 2004, the Company entered into a commitment of up to $30,000 to
acquire shares in Carbon Capital II, Inc. ("Carbon II"), a private commercial
real estate income opportunity fund managed by the Manager. The Company may
commit up to the lower of 20% of the total of Carbon II's capital commitments
or $100,000. The Company does not incur any additional management or incentive
fees to the Manager as a result of its investment in Carbon II. The Company's
unaffiliated directors approved this transaction in September of 2004.
It is anticipated that funds with respect to the Company's commitment to Carbon
II will be drawn over time as opportunities are identified. Carbon II will be
managed by the same management team that has been managing the Company's
commercial loan portfolio. The risk profile of Carbon II is substantially
similar to the Company's commercial loan program, and Carbon II is a Real
Estate Investment Trust, therefore the tax and regulatory issues are identical.
During 2000, the Company completed the acquisition of CORE Cap, Inc. At the
time of the CORE Cap, Inc. acquisition, the Manager agreed to pay GMAC (CORE
Cap, Inc.'s external advisor) $12,500 over a ten-year period ("Installment
Payment") to purchase the right to manage the CORE Cap, Inc. assets under the
existing management contract ("GMAC Contract"). The GMAC Contract had to be
terminated in order to allow the Company to complete the merger, as the
Company's management agreement with the Manager did not provide for multiple
managers. As a result the Manager offered to buy-out the GMAC Contract as the
Manager estimated it would receive incremental fees above and beyond the
Installment Payment, and thus was willing to pay for, and separately negotiate,
the termination of the GMAC Contract. Accordingly, the value of the Installment
Payment was not considered in the Company's allocation of its purchase price to
the net assets acquired in the acquisition of CORE Cap, Inc. The Company agreed
that should the Management Agreement with its Manager be terminated, not
renewed or not extended for any reason other than for cause, the Company would
pay to the Manager an amount equal to the Installment Payment less the sum of
all payments made by the Manager to GMAC. As of September 30, 2004, the
Installment Payment would be $6,500 payable over six years. The Company does
not accrue for this contingent liability.
NOTE 9 STOCK OPTIONS
On May 25, 2004, the Company granted stock options to each of its unaffiliated
directors with an exercise price equal to the closing price of the Common Stock
on the New York Stock Exchange on such date (or $11.81). The options vested
immediately upon grant. The fair value of the options granted is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions.
May 25, 2004
------------------
Estimated volatility 22.6%
Expected life 7 years
Risk-free interest rate 1.2%
Expected dividend yield 9.5%
The fair value of the options granted on May 25, 2004 was negligible. There
were no options granted in 2003.
NOTE 10 BORROWINGS
Certain information with respect to the Company's collateralized borrowings at
September 30, 2004 is summarized as follows:
Lines of Reverse Commercial Total
Credit and Repurchase Collateralized Mortgage Loan Collateralized
Term Loans Agreements Debt Obligations Pools Borrowings
-------------- --------------- ------------------ ---------------- -----------------
Outstanding borrowings $134,124* $684,307 $1,068,156 $1,298,985 $3,185,572
Weighted average
borrowing rate 3.19% 1.95% 6.07% 3.76% 4.12%
Weighted average
remaining maturity 315 days 22 days 2,936 days 2,674 days 2,093 days
Estimated fair value of
assets pledged $180,074 $751,501 $1,204,912 $1,316,600 $3,453,087
* $15,504 of the line of credit borrowings are secured by CDO debt of the Company with a par of $23,069 that the
Company chose not to sell at the time of issuance.
At September 30, 2004, the Company's collateralized borrowings had the
following remaining maturities:
Lines of Reverse Commercial Total
Credit and Repurchase Collateralized Mortgage Loan Collateralized
Term Loans Agreements Debt Obligations Pools Borrowings
-------------- --------------- ------------------ ----------------- -----------------
Within 30 days $ - $681,604 $ - $ - $681,604
31 to 59 days - - - - -
Over 60 days 134,124 2,703 1,068,156 1,298,985 2,503,968
============== =============== ================== ================= =================
$134,124 $684,307 $1,068,156 $1,298,985 $3,185,572
============== =============== ================== ================= =================
In July 2004, the Company issued a bond with a par of $12,850 from its CDO II.
Before issuing this security, the Company amended the indenture to reduce the
coupon from 9.0% to 7.6%. As a result of this issuance, the total cost of funds
on a fully hedged basis for CDO II rose from 5.7% to 5.8%.
Under the lines of credit and the reverse repurchase agreements, the respective
lender retains the right to mark the underlying collateral to estimated market
value. A reduction in the value of its pledged assets will require the Company
to provide additional collateral or fund margin calls. From time to time, the
Company expects that it will be required to provide such additional collateral
or fund margin calls.
NOTE 11 DERIVATIVE INSTRUMENTS
The Company accounts for its derivative investments under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended,
which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of change in the fair value of the
derivative are recorded in other comprehensive income ("OCI") and are
recognized in the income statement when the hedged item affects earnings.
Ineffective portions of changes in the fair value of cash flow hedges are
recognized in earnings.
The Company uses interest rate swaps to manage exposure to variable cash flows
on portions of its borrowings under reverse repurchase agreements and as
trading derivatives intended to offset changes in fair value related to
securities held as trading assets. On the date in which the derivative contract
is entered, the Company designates the derivative as either a cash flow hedge
or a trading derivative.
On July 6, 2004, interest rate swaps with a notional of $264,000 that were
classified as trading derivatives were redesignated as cash flow hedges of
borrowings under reverse repurchase agreements. The reclassification was based
on the Company's intent with respect to these derivatives with the principle
objective of generating returns from other than short-term pricing differences.
As of September 30, 2004, the Company had interest rate swaps with notional
amounts aggregating $1,215,092 that were designated as cash flow hedges of
borrowings under reverse repurchase agreements. Cash flow hedges with a fair
value of $8,042 are included in other assets on the consolidated statement of
financial condition, and cash flow hedges with a fair value of $(26,223) are
included in other liabilities on the consolidated statement of financial
condition. For the nine months ended September 30, 2004, the net change in the
fair value of the interest rate swaps was a decrease of $8,683, of which $1,130
was deemed ineffective and is included as an increase to interest expense,
$4,696 was recorded as a decrease of OCI and $2,856 was included as an addition
to loss on trading securities due to a period of ineffectiveness. As of
September 30, 2004, the $1,215,092 notional of swaps that was designated as
cash flow hedges had a weighted average remaining term of 7.57 years.
As of September 30, 2004, the Company had interest rate swaps with notional
amounts aggregating $239,445 designated as trading derivatives. Trading
derivatives with a fair value of $104 are included in other assets on the
consolidated statement of financial condition and trading derivatives with a
fair value of $(69) are included in other liabilities on the consolidated
statement of financial condition. For the nine months ended September 30, 2004,
the change in fair value for the trading derivatives was a decrease of $160 and
is included as an addition to loss on securities held-for-trading in the
consolidated statements of operations. As of September 30, 2004, the $239,445
notional of swaps that was designated as trading derivatives had a weighted
average remaining term of 7.92 years.
Occasionally, counterparties will require the Company or the Company will
require counterparties to provide collateral for the interest rate swap
agreements in the form of margin deposits. Net deposits are recorded as a
component of either other assets or other liabilities. Should the counterparty
fail to return deposits paid, the Company would be at risk for the fair market
value of that asset. At September 30, 2004 and December 31, 2003, the balance
of such net margin deposits owed to counterparties as collateral under these
agreements totaled $8,843 and $10,445, respectively, and are recorded in
restricted cash on the accompanying consolidated statements of financial
condition.
The contracts identified in the remaining portion of this note have been
entered into to limit the Company's mark to market exposure to long-term
interest rates.
Additionally, the Company had a forward London Interbank Offered Rate ("LIBOR")
cap with a notional amount of $85,000 and a fair value at September 30, 2004 of
$739 which is included in other assets, and the change in fair value related to
this derivative is included as a component of loss on securities
held-for-trading in the consolidated statements of operations.
NOTE 12 SUBSEQUENT EVENT
On October 21, 2004, the Company priced a CDO secured by a portfolio of below
investment grade CMBS ("Collateral"). The transaction will be accounted for as
a sale in accordance with SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." The Company will
receive total consideration of $158,032 consisting of net cash of $121,479 and
CDO securities with a fair market value of $36,553 in exchange for the
Collateral. The Collateral was carried at a fair market value of $109,933 on
the Company's September 30, 2004 consolidated statement of financial condition
based on price quotes received from third parties. The Company expects to
recognize a gain of approximately $16,636 when the transaction closes in
November 2004.
The fair market value of the securities received in exchange for the collateral
includes the retention of 100% of the equity of the CDO. The value of the
equity investment was provided by a third party and was established using a
70.5% discount rate on the cash flows computed before adjusting for credit loss
assumptions. Income will be recorded from this equity investment on a
loss-adjusted basis using a yield of 53.1%. The equity investment will be
classified as available for sale on the Company's statement of financial
condition.
The recognition of this gain increases the likelihood that the Company will
incur incentive fee expense commencing in the fourth quarter of 2004. Incentive
fees are computed using net income based on a rolling four-quarter period (see
further discussion in Note 8 of the consolidated financial statements). The
recognition of the gain will increase the income included in the rolling
four-quarter period until the quarter ended December 31, 2005.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All dollar figures expressed herein are expressed in thousands, except share or
per share amounts or as otherwise noted.
I. GENERAL
Anthracite Capital, Inc. (the "Company"), a Maryland corporation, is a real
estate finance company that invests in high yielding commercial real estate
debt. The Company commenced operations on March 24, 1998.
The Company's primary focus is to invest in a diverse portfolio of commercial
real estate loans and commercial mortgage-backed securities ("CMBS"). The CMBS
that the Company purchases are fixed income instruments similar to bonds which
carry an interest coupon and stated principal. The cash flow used to pay the
interest and principal on the CMBS comes from a designated pool of first
mortgage loans on commercial real estate (the "Underlying Loans"). The
Underlying Loans are usually originated by commercial banks or investment banks
and are secured by a first mortgage on office buildings, retail centers,
apartment buildings, hotels and other types of commercial real estate. A
typical loan pool may contain several hundred loans with principal amounts of
as little as $1,000 to over $100,000. The pooling concept also allows for
significant geographic diversification. Converting loans into CMBS in this
fashion allows an investor to purchase these securities in global capital
markets and to participate in the commercial real estate sector with
significant diversification among property types, sizes and locations in one
fixed income investment.
The type of CMBS issued from a typical loan pool is generally broken down by
credit rating. The highest rated CMBS will receive payments of principal first
and is therefore least exposed to the credit performance of the Underlying
Loan. These securities will carry a credit rating of "AAA" and will be issued
with a principal amount that represents some portion of the total principal
amount of the Underlying Loan pool.
The CMBS that receive principal payments last are generally rated below
investment grade (BB+ or lower.) As the last to receive principal these CMBS
are also the first to absorb any credit losses incurred in the Underlying Loan
pool. The principal amount of these below investment grade classes generally
represents 3.0-5.0% of the principal of the Underlying Loan pools. The
investor that owns the lowest rated, or non-rated CMBS class is designated as
the controlling class representative for the underlying loan pool. This
designation allows the holder to assert a significant degree of control over
any workouts or foreclosures of defaulted Underlying Loans. These securities
are generally issued with a high yield to compensate for the credit risk
inherent in owning the CMBS class which is the first to absorb losses.
The Company's high yield commercial real estate loan strategy is based on a
similar concept of investing in a portion of the principal and interest of a
specific loan instead of a pool of loans as in CMBS. In this case the principal
amount of a single loan is separated into a senior interest ("A note") and a
junior interest ("B note"). Prior to a borrower default, the A note and the B
note receive principal and interest pari passu; however after a borrower
default, the A note would receive its principal and interest first and the B
note would absorb the credit losses that occur, if any, up to the full amount
of its principal. The B note holder generally has certain rights to control
workouts or foreclosures. The Company invests in B notes as they provide higher
yields with control of dispositions.
The Company also invests in mezzanine loans on commercial real estate.
Mezzanine loans are secured by the ownership interests in an entity that owns
real estate. These loans are generally subordinated to a first mortgage and
would absorb a credit loss prior to the senior mortgage holder.
The Company believes that the trend toward highly structured investment
products requires significant expertise in traditional real estate
underwriting as well as in the capital markets. Through its external
management contract with BlackRock Financial Management, Inc., the Company can
source and manage more opportunities by taking advantage of a unique platform
that combines these two disciplines.
The Company's common stock is traded on the New York Stock Exchange under the
symbol "AHR." The Company's primary long-term objective is to distribute
consistent dividends supported by earnings. The Company establishes its
dividend by analyzing the long-term sustainability of earnings given existing
market conditions and the current composition of its portfolio. This includes
an analysis of the Company's credit loss assumptions, general level of interest
rates and projected hedging costs.
The Company is managed by BlackRock Financial Management, Inc. (the "Manager"),
a subsidiary of BlackRock, Inc., a publicly traded (NYSE: BLK) asset management
company with approximately $323,500,000 of assets under management as of
September 30, 2004.
During the third quarter of 2004, the Company completed its repositioning into
commercial real estate assets. As of September 30, 2004, CMBS and commercial
real estate loans represent 89% of portfolio assets while residential
mortgage-backed securities ("RMBS") represent 11%. During the quarter, the
Company acquired commercial real estate assets with a market value of $194,641,
comprised of $56,662 of below investment grade CMBS, $10,608 of investment
grade CMBS, $12,968 of investment grade REIT debt and $118,403 of high yield
commercial real estate loans. In October 2004, the Company acquired an
additional $108,509 of commercial real estate assets.
The following table illustrates the mix of the Company's asset types as of
September 30, 2004 and December 31, 2003:
Carrying Value as of
September 30, 2004 December 31, 2003
Amount % Amount %
-------------------------------------------------------
Commercial real estate securities $1,626,135 45.3% $1,393,010 65.8%
Commercial mortgage loan pools 1,316,600 36.6 - -
Commercial real estate loans(1) 247,330 6.9 97,984 4.6
Residential mortgage-backed securities(2) 396,140 11.0 627,166 29.6
Other assets 8,026 0.2 - -
-------------------------------------------------------
Total $3,594,231 100.0% $2,118,160 100.0%
-------------------------------------------------------
(1) Includes real estate joint ventures and equity investments.
(2) Net of RMBS securities sold, not yet settled
As of September 30, 2004, the Company owns 14 different trusts where it is in
the first loss position and is designated as the controlling class
representative by owning the lowest rate or non-rated CMBS class. The Company
considers the CMBS securities where it maintains the right to control the
foreclosure/workout process on the underlying loans its controlling class CMBS
("Controlling Class"). The Company divides its below investment grade CMBS
investment activity into two portfolios; Controlling Class CMBS and other below
investment grade CMBS.
COMMERCIAL MORTGAGE LOANS POOLS AND COMMERCIAL REAL ESTATE SECURITIES
PORTFOLIO ACTIVITY
During the second quarter of 2004, the Company acquired subordinated CMBS in a
trust establishing a Controlling Class interest. As the Controlling Class
holder, the Company has the ability to control dispositions or workouts of any
defaulted loans in this trust. The Company negotiated for and obtained a
greater degree of discretion over the disposition of the commercial mortgage
loans than is typically granted to the special servicer. As a result of this
expanded discretion, FASB interpretation No. 46, "Consolidation of Variable
Interest Entities" (revised December 2003) ("FIN 46R") requires the Company to
consolidate the net assets and results of operations of the trust.
The CMBS securities acquired by the Company have a par value of $41,495 with
$13,890 not rated and the balance rated BBB- to B-. During the third quarter
the Company sold the BBB- rated security, which had the impact of increasing
the borrowings for the commercial loan pool by $5,848. As of September 30,
2004, the CMBS securities owned by the Company have a par value of $35,495.
The debt associated with the REMIC trust is non-recourse to the Company, and is
secured only by the commercial mortgage loan pools. The consolidation of the
REMIC trust results in an increase in the Company's total debt to capital ratio
from 4.0:1 to 6.8:1, but has no effect on the Company's recourse debt to
capital ratio. The Company received authorization from its lenders to permit
debt to capital ratios in excess of existing covenants. For income recognition
purposes, the Company considers the unrated commercial mortgage loans in the
pool as a single asset reflecting the credit assumptions made in establishing
loss adjusted yields for Controlling Class securities.
Approximately 45% of the par amount of the commercial mortgage loan pool is
comprised of loans that are shadow rated A2 or better by Moody's Investors
Service and AA by Standard & Poor's. The Company has taken into account the
credit quality of the underlying loans in formulating its loss assumptions.
Credit losses assumed on the entire pool are 1.40% of the principal balance, or
2.53% of the unrated principal balance. The Company accounts for the unrated
commercial mortgage loans in the pool as a single asset based on this common
credit risk characteristic.
The Company continues to increase its investments in commercial real estate
securities. Commercial real estate securities include CMBS and investment grade
real estate investment trust ("REIT") debt. During the nine months ended
September 30, 2004, the Company increased its commercial real estate securities
portfolio by 17% from $1,393,010 to $1,626,135. This increase was primarily
attributable to the purchase of CMBS and investment grade REIT debt.
The Company's collateralized debt obligation ("CDO") offerings allow the
Company to match fund its commercial real estate portfolio by issuing long-term
debt to finance long-term assets. The CDO debt is non-recourse to the Company;
therefore, the Company's losses are limited to its equity investment in the
CDO. The CDO debt is also fully hedged to protect the Company from an increase
in short-term interest rates. The Company considers all of its CMBS rated BB+
down to B to be financeable in a CDO transaction; as of September 30, 2004,
over 91% of the market value of these assets are match funded in the Company's
CDOs in this manner.
Collateral as of September 30, 2004 Debt as of September 30, 2004
----------------------------------------------------------------------------------
Adjusted Purchase Loss Adjusted Yield Adjusted Issue Price Weighted Average Net Spread
Price Cost of Funds *
----------------------------------------------------------------------------------- --------------
CDO I $446,088 8.90% $405,185 7.21% 1.69%
CDO II** 327,859 7.82 293,255 5.79 2.03
CDO III*** 379,367 7.06 369,716 5.03 2.03
----------------------------------------------------------------------------------- --------------
Total $1,153,314 7.99% $1,068,156 6.07% 1.92%
* Weighted Average Cost of Funds is the current cost of funds plus hedging expenses.
** The Company chose not to sell $10,000 of par of CDO II debt rated BB. CDO II
debt rated BBB- with a par of $12,850 was sold in August 2004.
*** The Company chose not to sell $13,069 of par of CDO III debt rated BB.
The following table details the par, fair market value, adjusted purchase
price, and loss adjusted yield of the Company's commercial real estate
securities outside of the CDOs as of September 30, 2004:
Fair Market Dollar Price Adjusted Loss Adjusted
Par Value Purchase Price Dollar Price Yield
----------------------------------------------------------------------------------------
Investment grade CMBS $115,497 $116,811 101.14 $120,677 104.48 4.2%
Investment grade REIT debt 24,000 23,005 95.85 23,972 99.88 5.9
CMBS rated BB+ to B 92,180 63,748 69.16 72,423 78.57 8.3
CMBS rated B- or lower 352,600 102,500 29.07 126,254 35.81 11.8
CMBS IOs 3,413,412 116,605 3.42 113,390 3.32 7.4
Project loans 23,293 23,915 102.67 24,281 104.24 5.7
----------------------------------------------------------------------------------------
Total $4,020,982 $446,584 11.11 $480,997 11.96 7.7%
The following table details the par, fair market value, adjusted purchase price
and loss adjusted yield of the Company's commercial real estate securities
outside of the CDOs as of December 31, 2003:
Fair Market Dollar Price Adjusted Loss Adjusted
Par Value Purchase Price Dollar Price Yield
----------------------------------------------------------------------------------------
Investment grade CMBS $277,276 $268,593 96.87 $272,853 98.40 4.9%
Investment grade REIT debt 29,000 29,567 101.95 30,210 104.17 5.0
CMBS rated BB+ to B 186,217 133,868 71.89 150,775 80.97 8.9
CMBS rated B- or lower 304,358 80,680 26.51 107,653 35.37 12.6
CMBS IOs 2,623,456 84,493 3.22 83,704 3.19 7.5
Other CMBS 20,266 20,142 99.39 20,264 99.99 5.7
----------------------------------------------------------------------------------------
Total $3,440,573 $617,343 17.94 $665,459 19.34 7.4%
BELOW INVESTMENT GRADE CMBS AND UNDERLYING LOAN PERFORMANCE
During the nine months ended September 30, 2004, the Company acquired $25,386
of par of other below investment grade CMBS and $204,957 of par of new
Controlling Class securities. The total par of the Company's other below
investment grade CMBS at September 30, 2004 was $329,964; the average credit
protection, or subordination level, of this portfolio is 5.81%. The total par
of the Company's subordinated Controlling Class CMBS securities at September
30, 2004 was $910,529 and the total par of the loans underlying these
securities was $15,465,282.
The Company's investment in its Controlling Class CMBS securities by credit
rating category at September 30, 2004 is as follows:
Fair Market Dollar Adjusted Dollar
Par Value Price Purchase Price Price Subordination Level
-------------------------------------------------------------------------------------
BB+ $103,772 $95,591 92.12 $88,700 85.47 6.24%
BB 94,523 86,430 91.44 78,355 82.90 4.93
BB- 113,361 88,747 78.29 87,315 77.02 4.12
B+ 53,478 33,139 61.97 34,978 65.41 2.94
B 194,240 114,991 59.20 141,375 72.78 2.69
B- 95,416 38,589 40.44 56,845 59.58 1.83
CCC+ 11,924 5,764 48.34 7,243 60.75 1.62
CCC 70,273 15,504 22.06 22,680 32.27 0.92
CC 8,940 2,576 28.81 2,602 29.10 0.66
NR 163,002 35,749 21.93 32,918 20.19 n/a
CDO investments 1,600 3,920 2.45 3,597 2.25 n/a
-------------------------------------------------------------------------------------
Total $910,529 $521,000 57.21 $556,608 61.13
The Company's investment in its Controlling Class CMBS securities by credit
rating category at December 31, 2003 is as follows:
Fair Market Dollar Adjusted Dollar
Par Value Price Purchase Price Price Subordination Level
-------------------------------------------------------------------------------------
BB+ $84,503 $73,766 87.29 $72,680 86.01 7.54%
BB 89,945 75,349 83.77 76,842 85.43 6.04
BB- 101,393 71,285 70.31 81,036 79.92 5.12
B+ 44,314 28,904 65.22 31,179 70.36 3.43
B 182,119 105,061 57.69 133,718 73.42 3.06
B- 83,296 34,160 41.01 51,935 62.35 1.54
CCC+ 11,924 5,595 46.92 7,129 59.78 1.53
CCC 70,273 13,375 19.03 22,844 32.51 1.23
C 8,940 2,531 28.31 2,734 30.58 0.62
NR 128,325 20,939 16.32 19,254 15.00 n/a
CDO investments 1,600 4,064 2.54 3,757 2.35 n/a
-------------------------------------------------------------------------------------
Total $806,632 $435,029 53.93 $503,108 62.37
During the nine months ended September 30, 2004, one of the Company's
Controlling Class securities was upgraded from BB+ to BBB and is no longer
included in the chart above.
For the nine months ended September 30, 2004, the par amount of the Company's
Controlling Class CMBS securities was reduced by the servicers in the amount of
$30,485. Further delinquencies and losses may cause par reductions to continue
and cause the Company to conclude that a change in loss-adjusted yield is
required along with a write down of the adjusted purchase price through the
consolidated statement of operations according to Emerging Issue Task Force
standard 99-20, "Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets." Additionally,
for the nine months ended September 30, 2004, $193,528 of the underlying loan
pools was repaid. Pay down proceeds are distributed to the highest rated CMBS
class first and reduce the percent of total underlying collateral represented
by each rating category.
For all of the Company's Controlling Class securities, the Company assumes that
a total of 2.09% of the original loan balance will not be recoverable. This
estimate was developed based on an analysis of individual loan characteristics
and prevailing market conditions at the time of origination. This loss estimate
equates to cumulative expected defaults of approximately 5.2% over the life of
the portfolio and an average assumed loss severity of 40.0% of the defaulted
loan balance. All estimated workout expenses including special servicer fees
are included in these assumptions. Actual results could differ materially from
these estimated results. See Item 3 -"Quantitative and Qualitative Disclosures
About Market Risk" for a discussion of how differences between estimated and
actual losses could affect Company earnings.
The Company monitors credit performance on a monthly basis and debt service
coverage ratios on a quarterly basis. Using these and other statistics, the
Company maintains watch lists for loans that are delinquent thirty days or more
and for loans that are not delinquent but have issues that the Company's
management believes require close monitoring. As part of its ongoing credit
monitoring the Company periodically performs a re-underwriting of a substantial
number of the underlying loans supporting its Controlling Class CMBS. The
Company is currently focusing on 1998 vintage transactions and expects to be
completed with this vintage by the fourth quarter of 2004. As each transaction
review is completed the Company may determine that its yields in accordance
with generally accepted accounting principles in the United States of America
("GAAP") and book values need to be adjusted.
The Company considers delinquency information from the Lehman Brothers Conduit
Guide to be the most relevant benchmark to measure credit performance and
market conditions applicable to its Controlling Class CMBS holdings. The year
of issuance, or vintage year, is important, as older loan pools will tend to
have more delinquencies than newly underwritten loans. The Company owns
Controlling Class CMBS issued in 1998, 1999, 2001, 2003 and 2004. Comparable
delinquency statistics referenced by vintage year as a percentage of current
par as of September 30, 2004 are shown in the table below:
Underlying Delinquencies Lehman Brothers
Vintage Year Collateral Outstanding Conduit Guide
------------------------------------------------------------------------
1998 $7,087,311 2.59% 2.28%
1999 700,648 1.58 2.55
2001 915,013 1.02 1.32
2003 2,160,033 0.00 0.12
2004 5,833,846 0.06 0.05
------------------------------------------------------------
Total $16,696,851 1.24%* 1.18%*
* Weighted average based on the Company's current principal balance.
Morgan Stanley also tracks CMBS loan delinquencies for the specific CMBS
transactions with more than $200,000 of collateral and that have been seasoned
for at least one year. This seasoning criterion will generally adjust for the
lower delinquencies that occur in newly originated collateral. As of September
30, 2004, the Morgan Stanley index indicated that delinquencies on 273
securitizations were 1.89%, and as of December 31, 2003, this same index
indicated that delinquencies on 243 securitizations were 2.47%. See Item 3 -
"Quantitative and Qualitative Disclosures About Market Risks" for a detailed
discussion of how delinquencies and loan losses affect the Company.
Delinquencies on the Company's CMBS collateral as a percent of principal
increased in line with expectations. The Company's aggregate delinquency
experience is consistent with comparable data provided in the Lehman Brothers
Conduit Guide.
Of the 35 delinquent loans shown on the chart in Note 3 of the consolidated
financial statements, 1 loan was real estate owned and being marketed for sale,
zero loans were being foreclosed, and the remaining 34 loans were in some form
of workout negotiations. For the Company's Controlling Class securities where
the Company has experienced losses, aggregate losses of $5,797 were realized
during the nine months ended September 30, 2004, bringing cumulative net losses
realized to $52,028 or 13% of total estimated losses for these securities.
These losses include special servicer and other workout expenses. Experience to
date is in line with the Company's loss expectations. Realized losses and
special servicer expenses are expected to increase on the underlying loans as
the portfolio ages.
The Company manages its credit risk through disciplined underwriting,
diversification, active monitoring of loan performance and exercise of its
right to control the workout process for delinquent loans as early as possible.
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. The comparative profiles of the
loans underlying the Company's CMBS by property type as of September 30, 2004
and December 31, 2003 are as follows:
9/30/04 Exposure 12/31/03 Exposure
- ---------------------------------------------------------------------------------------
Property Type Loan Balance % of Total Loan Balance % of Total
- ---------------------------------------------------------------------------------------
Multifamily $4,996,591 29.9% $3,770,944 33.2%
Retail 5,149,425 30.8 3,446,371 30.4
Office 4,047,431 24.2 2,266,160 20.0
Lodging 901,778 5.4 786,920 6.9
Industrial 1,165,683 7.0 713,942 6.3
Healthcare 328,730 2.0 337,333 3.0
Parking 107,213 0.7 25,611 0.2
----------------------------------------------------------------
Total $16,696,851 100% $11,347,281 100%
================================================================
As of September 30, 2004, the fair market value of the Company's holdings of
Controlling Class CMBS securities is $35,609 lower than the adjusted cost for
these securities. The adjusted purchase price and market value of the Company's
Controlling Class CMBS portfolio as of September 30, 2004 represent
approximately 61.1% and 57.2%, respectively, 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. As of September 30, 2004, the Company
believes there has been no material deterioration in the credit quality of its
portfolio below current expectations.
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 which would negatively affect their market
value and therefore the Company's net asset value. Reduced market value will
negatively affect the Company's ability to finance any such securities that are
not financed through a CDO or similar matched funding vehicle. In some cases,
securities held by the Company may be upgraded to reflect seasoning of the
underlying collateral and thus would increase the market value of the
securities. For the nine months ended September 30, 2004, the Company
experienced seven credit upgrades on five CMBS transactions in the Company's
portfolio.
The Company's income for its CMBS securities is computed based upon a yield in
accordance with GAAP, which assumes credit losses will occur. The yield to
compute the Company's taxable income does not assume there will be credit
losses, as a loss can only be deducted for tax purposes when it has occurred.
As a result, for the period beginning with the year ended December 31, 1998
through the nine months ended September 30, 2004, the Company's GAAP income
accrued on its CMBS assets was approximately $33,505 lower than the taxable
income accrued on its CMBS assets.
COMMERCIAL REAL ESTATE LOAN ACTIVITY
The Company's commercial real estate loan portfolio generally emphasizes larger
transactions located in metropolitan markets, as compared to the typical loan
in the CMBS portfolio. The Company has never suffered a loss in this portfolio.
Because the loan portfolio is relatively small and heterogeneous, the Company
has determined it is not necessary to establish a loan loss reserve.
The following table summarizes the Company's commercial real estate loan
portfolio by property type as of September 30, 2004 and December 31, 2003:
Loan Outstanding Weighted Average Coupon
------------------ ------------------
September 30, 2004 December 31, 2003 September 30, 2004 December 31, 2003
- ------------------ ------------- ----------- ------------ ------------ ------------------ ------------------
Property Type Amount % Amount %
- ------------------ ------------- ----------- ------------ ------------ ------------------ ------------------
Office 116,165 54.7% $57,381 76.4% 8.8% 9.4%
Residential 26,202 12.3 2,794 3.7 12.7 3.8
Retail 193 0.1 - - 13.5 -
Hotel 69,737 32.9 14,951 19.9 6.8 6.6
------------- ----------- ------------ ------------ ------------------ ------------------
Total $212,297 100.0% $75,126 100.0% 8.6% 8.6%
------------- ----------- ------------ ------------ ------------------ ------------------
RECENT EVENTS
On October 21, 2004, the Company priced a CDO secured by a portfolio of below
investment grade CMBS ("Collateral"). The transaction will be accounted for as
a sale in accordance with SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." The Company will
receive total consideration of $158,032 consisting of net cash of $121,479 and
CDO securities with a fair market value of $36,553 in exchange for the
Collateral. The Collateral was carried at a fair market value of $109,933 on
the Company's September 30, 2004 consolidated statement of financial condition
based on price quotes received from third parties. The Company expects to
recognize a gain of approximately $16,636 when the transaction closes in
November 2004. The difference between total consideration received and the
carrying value of the Collateral will increase book value by $48,099, or $0.90
per diluted common share in the fourth quarter of 2004. The following table
illustrates the pro forma impact of this transaction on September 30, 2004
reported book value per share:
Book value at September 30, 2004 $7.72 $411,101
Realized and unrealized gains 0.31 16,636
Increase in other comprehensive income 0.59 31,463
-----------------------------
Net increase in book value 0.90 48,099
-----------------------------
Pro Forma book value at September 30, 2004* $8.62 $459,200
=============================
*Assumes no other changes occur in the market or the Company's portfolio.
The fair market value of the securities received in exchange for the Collateral
includes the retention of 100% of the equity of the CDO. The value of the
equity investment was provided by a third party and was established using a
70.5% discount rate on the cash flows computed before adjusting for credit loss
assumptions. Income will be recorded from this equity investment on a
loss-adjusted basis using a yield of 53.1%. The equity investment will be
classified as available for sale on the Company's statement of financial
condition.
The recognition of this gain increases the likelihood that the Company will
incur incentive fee expense commencing in the fourth quarter of 2004. Incentive
fees are computed using net income based on a rolling four-quarter period (see
further discussion in Note 8 of the consolidated financial statements). The
recognition of the gain will increase the income included in the rolling
four-quarter period until the quarter ended December 31, 2005.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
the "recognition" provisions of Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
("EITF No. 03-1"). EITF No. 03-1 requires that a loss be recognized for an
impairment that is other-than-temporary. A three-step impairment model should
be applied to debt securities subject to SFAS No. 115, including those debt
securities subject to EITF No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets." On September 30, 2004, the FASB issued FASB Staff Position
(FSP) EITF No. 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No.
03-1," which delayed the effective date of the recognition provisions of EITF
No. 03-1 until the issuance of the final FSP EITF Issue 03-1-a, "Implementation
Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1." Until the
final FSP is issued, management is not able to evaluate whether the adoption of
the "recognition" provisions under such guidance will have a material effect on
our results of operations or financial position.
II. RESULTS OF OPERATIONS
Net income for the three and nine months ended September 30, 2004 was $16,501
or $0.28 per share (basic and diluted) and $36,895 or $0.41 per share (basic
and diluted), respectively. Net loss for the three and nine months ended
September 30, 2003 was $(22,221) or $(0.51) per share (basic and diluted) and
$(23,527) or $(0.60) per share (basic and diluted), respectively. Net income
(loss) increased to $0.41 per share for the nine months ended September 30,
2004 as compared to $(0.60) per share for the nine months ended September 30,
2003. Net income (loss) available to common stockholders for the nine months
ended September 30, 2004 includes a charge of $10,508 or $0.21 per share for
the redemption of the Company's Series B Preferred Stock. Net income (loss)
available to common stockholders for the nine months ended September 30, 2003
includes a charge of $32,426 or $0.68 per share for impairment charges on the
Company's Controlling Class CMBS securities and a franchise loan backed
security.
INTEREST INCOME: The following tables set forth information regarding the total
amount of income from certain of the Company's interest-earning assets.
For the Three Months Ended
September 30,
2004 2003
-------------------------- ----------------------
Interest Interest
Income Income
-------------------------- ----------------------
Commercial real estate securities $32,408 $26,125
Commercial mortgage loan pools 13,715 -
Commercial real estate loans 2,979 1,190
RMBS 3,941 11,591
Cash and cash equivalents 165 453
-------------------------- ----------------------
Total $53,208 $39,359
========================== ======================
For the Nine Months Ended
September 30,
2004 2003
-------------------------- ----------------------
Interest Interest
Income Income
-------------------------- ----------------------
Commercial real estate securities $92,073 $71,729
Commercial mortgage loan pools 26,066 -
Commercial real estate loans 6,437 4,480
RMBS 15,731 45,626
Cash and cash equi