Attached files

file filename
EX-32.2 - EX-32.2 - RAIT Financial Trustras-ex322_8.htm
EX-32.1 - EX-32.1 - RAIT Financial Trustras-ex321_10.htm
EX-31.2 - EX-31.2 - RAIT Financial Trustras-ex312_9.htm
EX-31.1 - EX-31.1 - RAIT Financial Trustras-ex311_7.htm
EX-12.1 - EX-12.1 - RAIT Financial Trustras-ex121_6.htm
EX-10.7 - EX-10.7 - RAIT Financial Trustras-ex107_987.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2017

or

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             

Commission File Number 1-14760

 

RAIT FINANCIAL TRUST

(Exact name of registrant as specified in its charter)

 

 

Maryland

23-2919819

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

Two Logan Square, 100 N. 18th Street, 23rd Floor,

Philadelphia, PA

19103

(Address of principal executive offices)

(Zip Code)

(215) 207-2100

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former 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.      Yes       No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes       No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No

A total of 92,691,743 common shares of beneficial interest, par value $0.03 per share, of the registrant were outstanding as of May 3, 2017.

 

 

 

 


 

RAIT FINANCIAL TRUST

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

1

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

 

1

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2017 and 2016

 

3

 

 

 

 

 

 

 

Consolidated Statement of Changes in Equity for the Three Months Ended March 31, 2017

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016

 

5

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

43

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

56

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

57

 

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

58

 

 

 

 

 

Item 1A.

 

Risk Factors

 

58

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

 

 

 

 

 

Item 6.

 

Exhibits

 

58

 

 

 

 

 

 

 

Signatures

 

59

 

 

 

 


 

PART I—FINANCIAL INFORMATION

Item  1.

Financial Statements

RAIT Financial Trust

Consolidated Balance Sheets

(Unaudited and dollars in thousands, except share and per share information)

 

 

 

As of March 31, 2017

 

 

As of December 31, 2016

 

Assets

 

 

 

 

 

 

 

 

Investment in mortgages and loans:

 

 

 

 

 

 

 

 

Commercial mortgages, mezzanine loans, and preferred equity interests

 

$

1,315,539

 

 

$

1,292,639

 

Allowance for loan losses

 

 

(13,531

)

 

 

(12,354

)

Total investment in mortgages and loans, net (including $1,097,905 and $1,184,588 held by consolidated VIEs, respectively)

 

 

1,302,008

 

 

 

1,280,285

 

Investments in real estate, net of accumulated depreciation of $114,179 and $138,214, respectively (including $141,179 and $192,070 held by consolidated VIEs, respectively)

 

 

580,051

 

 

 

716,432

 

Cash and cash equivalents

 

 

96,432

 

 

 

110,531

 

Restricted cash

 

 

141,610

 

 

 

190,179

 

Accrued interest receivable

 

 

36,176

 

 

 

36,271

 

Other assets

 

 

49,080

 

 

 

53,878

 

Intangible assets, net of accumulated amortization of $19,589 and $22,230, respectively

 

 

17,258

 

 

 

19,267

 

Total assets

 

$

2,222,615

 

 

$

2,406,843

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Indebtedness, net of unamortized discounts, premiums and deferred financing costs of $31,273 and $36,892, respectively (including $1,109,403 and $1,288,258 held by consolidated VIEs, respectively)

 

$

1,623,133

 

 

$

1,751,082

 

Accrued interest payable

 

 

9,591

 

 

 

8,347

 

Accounts payable and accrued expenses

 

 

14,033

 

 

 

20,016

 

Deferred taxes, borrowers’ escrows and other liabilities

 

 

145,377

 

 

 

168,047

 

Total liabilities

 

 

1,792,134

 

 

 

1,947,492

 

Series D cumulative redeemable preferred shares, $0.01 par value per share, 4,000,000 shares authorized, 3,536,000 and 3,536,000 shares issued and outstanding, respectively

 

 

83,505

 

 

 

81,581

 

Equity:

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Preferred shares, $0.01 par value per share, 25,000,000 shares authorized;

 

 

 

 

 

 

 

 

7.75% Series A cumulative redeemable preferred shares, liquidation preference $25.00 per share, 8,069,288 shares authorized, 5,344,353 and 5,344,353 shares issued and outstanding, respectively

 

 

53

 

 

 

53

 

8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share, 4,300,000 shares authorized, 2,340,969 and 2,340,969 shares issued and outstanding, respectively

 

 

23

 

 

 

23

 

8.875% Series C cumulative redeemable preferred shares, liquidation preference $25.00 per share, 3,600,000 shares authorized, 1,640,425 and 1,640,425 shares issued and outstanding, respectively

 

 

17

 

 

 

17

 

Series E cumulative redeemable preferred shares, $0.01 par value per share, 4,000,000 shares authorized

 

 

 

 

 

 

Common shares, $0.03 par value per share, 200,000,000 shares authorized 92,691,743 and 92,295,478 issued and outstanding, respectively, including  1,332,292 and 1,079,193 unvested restricted common share awards, respectively

 

 

2,781

 

 

 

2,769

 

Additional paid in capital

 

 

2,092,695

 

 

 

2,093,257

 

Retained earnings (deficit)

 

 

(1,754,099

)

 

 

(1,723,735

)

Total shareholders’ equity

 

 

341,470

 

 

 

372,384

 

Noncontrolling interests

 

 

5,506

 

 

 

5,386

 

Total equity

 

 

346,976

 

 

 

377,770

 

Total liabilities and equity

 

$

2,222,615

 

 

$

2,406,843

 

 

The accompanying notes are an integral part of these consolidated financial statements.

1


 

RAIT Financial Trust

Consolidated Statements of Operations

(Unaudited and dollars in thousands, except share and per share information)

 

 

 

 

For the Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

Investment interest income

 

$

17,650

 

 

$

25,802

 

Investment interest expense

 

 

(9,773

)

 

 

(9,320

)

Net interest margin

 

 

7,877

 

 

 

16,482

 

Property income

 

 

20,065

 

 

 

30,055

 

Fee and other income

 

 

1,661

 

 

 

2,114

 

Total revenue

 

 

29,603

 

 

 

48,651

 

Expenses:

 

 

 

 

 

 

 

 

Interest expense

 

 

10,143

 

 

 

15,870

 

Real estate operating expense

 

 

10,634

 

 

 

14,848

 

Property management expenses

 

 

2,213

 

 

 

2,167

 

General and administrative expenses:

 

 

 

 

 

 

 

 

Compensation expense

 

 

3,487

 

 

 

3,625

 

Other general and administrative expense

 

 

2,705

 

 

 

3,215

 

Total general and administrative expenses

 

 

6,192

 

 

 

6,840

 

Acquisition expense

 

 

172

 

 

 

109

 

Provision for loan losses

 

 

1,535

 

 

 

1,325

 

Depreciation and amortization expense

 

 

9,754

 

 

 

12,673

 

IRT internalization and management transition expenses

 

 

736

 

 

 

-

 

Shareholder activism expenses

 

 

694

 

 

 

-

 

Total expenses

 

 

42,073

 

 

 

53,832

 

Operating (Loss) Income

 

 

(12,470

)

 

 

(5,181

)

Interest and other income (expense), net

 

 

14

 

 

 

61

 

Gains (losses) on assets

 

 

12,006

 

 

 

(195

)

Gains (losses) on deconsolidation of properties

 

 

(15,947

)

 

 

-

 

Gains (losses) on extinguishments of debt

 

 

3,186

 

 

 

344

 

Asset impairment

 

 

(7,424

)

 

 

(3,922

)

Change in fair value of financial instruments

 

 

(1,153

)

 

 

(4,088

)

Income (loss) before taxes

 

 

(21,788

)

 

 

(12,981

)

Income tax benefit (provision)

 

 

249

 

 

 

993

 

Income (loss) from continuing operations

 

 

(21,539

)

 

 

(11,988

)

Discontinued operations:

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

 

-

 

 

 

1,485

 

Net income (loss)

 

 

(21,539

)

 

 

(10,503

)

(Income) loss allocated to preferred shares

 

 

(8,526

)

 

 

(8,520

)

(Income) loss allocated to noncontrolling interests

 

 

(20

)

 

 

1,179

 

Net income (loss) allocable to common shares

 

$

(30,085

)

 

$

(17,844

)

Amount attributable to common shares

 

 

 

 

 

 

 

 

Net income (loss) available to common shares from continuing operations

 

$

(30,085

)

 

$

(19,363

)

Net income (loss) available to common shares from discontinued operations

 

 

-

 

 

 

1,519

 

Net income (loss)

 

$

(30,085

)

 

$

(17,844

)

Earnings (loss) per share-Basic:

 

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations

 

$

(0.33

)

 

$

(0.22

)

Earnings (loss) per share from discontinued operations

 

$

 

 

$

0.02

 

Earnings (loss) per share-Basic

 

$

(0.33

)

 

$

(0.20

)

Weighted-average shares outstanding-Basic

 

 

91,300,812

 

 

 

91,018,160

 

Earnings (loss) per share-Diluted:

 

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations

 

$

(0.33

)

 

$

(0.22

)

Earnings (loss) per share from discontinued operations

 

$

 

 

$

0.02

 

Earnings (loss) per share-Diluted

 

$

(0.33

)

 

$

(0.20

)

Weighted average shares outstanding-Diluted

 

 

91,300,812

 

 

 

91,018,160

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2


 

RAIT Financial Trust

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited and dollars in thousands)

 

 

 

 

For the Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Net income (loss)

 

$

(21,539

)

 

$

(10,503

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Change in fair value of interest rate hedges

 

 

 

 

 

(120

)

Realized (gains) losses on interest rate hedges reclassified to earnings

 

 

 

 

 

2,403

 

Total other comprehensive income from continuing operations

 

 

 

 

 

2,283

 

Discontinued operations:

 

 

 

 

 

 

 

 

   Other comprehensive income (loss) from discontinued operations

 

 

 

 

 

(18

)

Total other comprehensive income

 

 

 

 

 

2,265

 

Comprehensive income (loss) before allocation to noncontrolling interests

 

 

(21,539

)

 

 

(8,238

)

Allocation to noncontrolling interests

 

 

(20

)

 

 

1,179

 

Comprehensive income (loss) allocable to common shares

 

$

(21,559

)

 

$

(7,059

)

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

3


 

RAIT Financial Trust

Consolidated Statement of Changes in Equity

(Unaudited and dollars in thousands, except share information)

 

 

 

Preferred

Shares—

Series A

 

 

Par Value

Preferred

Shares—

Series A

 

 

Preferred

Shares—

Series B

 

 

Par Value

Preferred

Shares—

Series B

 

 

Preferred

Shares—

Series C

 

 

Par Value

Preferred

Shares—

Series C

 

 

Common

Shares

 

 

Par

Value

Common

Shares

 

 

Additional

Paid In

Capital

 

 

Retained

Earnings

(Deficit)

 

 

Total

Shareholders’

Equity

 

 

Non-controlling

Interests

 

 

Total

Equity

 

Balance, December 31, 2016

 

 

5,344,353

 

 

$

53

 

 

 

2,340,969

 

 

$

23

 

 

 

1,640,425

 

 

$

17

 

 

 

92,295,478

 

 

$

2,769

 

 

$

2,093,257

 

 

$

(1,723,735

)

 

$

372,384

 

 

$

5,386

 

 

$

377,770

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21,559

)

 

 

(21,559

)

 

 

20

 

 

 

(21,539

)

Preferred shares issued, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,602

)

 

 

(6,602

)

 

 

 

 

(6,602

)

Preferred Series D discount amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,924

)

 

 

(1,924

)

 

 

 

 

(1,924

)

Common dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(279

)

 

 

(279

)

 

 

 

 

(279

)

Other comprehensive income (loss), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

536,784

 

 

 

16

 

 

 

344

 

 

 

 

 

360

 

 

 

 

 

360

 

Issuance of noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

66

 

 

 

66

 

Distribution to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20

)

 

 

(20

)

Derecognition of noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54

 

 

 

54

 

Common shares activity related to equity compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(142,658

)

 

 

(4

)

 

 

(906

)

 

 

 

 

(910

)

 

 

 

 

(910

)

Common shares issued, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March  31, 2017

 

 

5,344,353

 

 

$

53

 

 

 

2,340,969

 

 

$

23

 

 

 

1,640,425

 

 

$

17

 

 

 

92,691,743

 

 

$

2,781

 

 

$

2,092,695

 

 

$

(1,754,099

)

 

$

341,470

 

 

$

5,506

 

 

$

346,976

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

4


 

RAIT Financial Trust

Consolidated Statements of Cash Flows

(Unaudited and dollars in thousands) 

 

 

For the Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(21,539

)

 

$

(10,503

)

Adjustments to reconcile net income (loss) to cash flow from operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

1,535

 

 

 

1,325

 

Share-based compensation expense

 

 

344

 

 

 

1,273

 

Depreciation and amortization expense

 

 

9,754

 

 

 

24,276

 

Amortization of deferred financing costs and debt discounts

 

 

4,018

 

 

 

6,076

 

Deferral of loan origination fee and costs, net

 

 

272

 

 

 

(1,457

)

Amortization of above/below market leases

 

 

(327

)

 

 

(424

)

(Gains) losses on assets

 

 

(12,006

)

 

 

(2,258

)

(Gains) losses on extinguishments of debt

 

 

(3,186

)

 

 

(344

)

Losses on deconsolidation of properties

 

 

15,947

 

 

 

 

(Gains) on IRT merger with TSRE

 

 

 

 

 

(91

)

Asset impairment

 

 

7,424

 

 

 

3,922

 

Change in fair value of financial instruments

 

 

1,153

 

 

 

4,088

 

Provision (benefit) for deferred taxes

 

 

 

 

 

(1,108

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Decrease (increase) in accrued interest receivable

 

 

97

 

 

 

(2,653

)

Decrease (increase) in other assets

 

 

1,911

 

 

 

(3,701

)

Increase in accrued interest payable

 

 

2,202

 

 

 

3,486

 

(Decrease) in accounts payable and accrued expenses

 

 

(5,210

)

 

 

(9,453

)

Increase in borrowers' escrows and other liabilities

 

 

504

 

 

 

4,907

 

Origination of conduit loans

 

 

 

 

 

(8,800

)

Cash flows provided by operating activities

 

 

2,893

 

 

 

8,561

 

Investing activities:

 

 

 

 

 

 

 

 

Origination of loans for investment

 

 

(115,000

)

 

 

(35,591

)

Principal repayments on loans

 

 

90,238

 

 

 

55,052

 

Investments in real estate

 

 

(2,002

)

 

 

(7,521

)

IRT's acquisition of TSRE, net of cash acquired

 

 

 

 

 

91

 

Proceeds from the disposition of real estate

 

 

71,808

 

 

 

23,286

 

(Increase) decrease in restricted cash

 

 

41,317

 

 

 

7,265

 

Cash flows provided by investing activities

 

 

86,361

 

 

 

42,582

 

Financing activities:

 

 

 

 

 

 

 

 

Repayments on secured credit facilities and loans payable on real estate

 

 

(402

)

 

 

(74,266

)

Proceeds from secured credit facilities, term loans and loans payable on real estate

 

 

 

 

 

53,476

 

Repayments and repurchase of CDO notes payable and floating rate securitizations

 

 

(170,123

)

 

 

(84,065

)

Repayments of senior secured notes

 

 

(32,000

)

 

 

(2,000

)

Net proceeds related to conduit loan repurchase agreements

 

 

 

 

 

4,049

 

Net proceeds related to floating rate loan repurchase agreements

 

 

102,896

 

 

 

21,685

 

Proceeds from issuance of other indebtedness

 

 

17,022

 

 

 

24,796

 

Distribution to noncontrolling interests

 

 

(20

)

 

 

(7,774

)

Issuance of noncontrolling interests

 

 

66

 

 

 

68

 

Payments for deferred costs

 

 

(91

)

 

 

(467

)

Common share issuance, net of costs incurred

 

 

(894

)

 

 

(489

)

Distributions paid to preferred shareholders

 

 

(11,326

)

 

 

(8,955

)

Distributions paid to common shareholders

 

 

(8,481

)

 

 

(8,518

)

Cash flows (used in) financing activities

 

 

(103,353

)

 

 

(82,460

)

Net change in cash and cash equivalents

 

 

(14,099

)

 

 

(31,317

)

   Net change in cash and cash equivalents from discontinued operations

 

 

 

 

 

(16,161

)

   Net change in cash and cash equivalents from continuing operations

 

 

(14,099

)

 

 

(15,156

)

Cash and cash equivalents at the beginning of the period

 

 

110,531

 

 

 

87,581

 

Cash and cash equivalents at the end of the period

 

$

96,432

 

 

$

72,425

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

5


 

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

 

NOTE 1: THE COMPANY

 

RAIT Financial Trust is an internally-managed real estate investment trust focused on providing commercial real estate financing throughout the United States. References to “RAIT”, “we”, “us”, and “our” refer to RAIT Financial Trust and its subsidiaries, unless the context otherwise requires. RAIT is a self-managed and self-advised Maryland real estate investment trust, or REIT.

 

We finance a substantial portion of our investments through borrowing and securitization strategies seeking to match the maturities and terms of our financings with the maturities and terms of those investments.

 

On December 20, 2016, the management internalization of one of our previously consolidated variable interest entities, Independence Realty Trust, Inc., or IRT, was completed pursuant to the September 27, 2016 securities and asset purchase agreement, or the IRT internalization agreement.  The IRT management internalization consisted of two parts: (i) the acquisition of Independence Realty Advisors, LLC, or the IRT advisor, which was our subsidiary and IRT’s external advisor, and (ii) the acquisition of certain assets and the assumption of certain liabilities relating to our multifamily property management business which we referred to as RAIT Residential, including property management contracts relating to apartment properties owned by ourselves, IRT, and third parties.  The purchase price paid by IRT for the IRT management internalization was $43,000, subject to certain pro rations at closing.  As part of the same agreement, we sold all of the 7,269,719 shares of IRT’s common stock owned by certain of our subsidiaries on October 5, 2016.  See Note 16: Discontinued Operations for further information regarding the IRT management internalization and its effects on our financial statements.

 

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

a. Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles, or GAAP. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the included disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 2016 included in our Annual Report on Form 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position and consolidated results of operations and cash flows are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year.

 

The Consolidated Statement of Operations for the three-month period ended March 31, 2016 includes the impact of correcting the reporting of certain activity that occurred in the three-month period ended March 31, 2016. Specifically, the correction adjusts a clerical error made in the determination of the amount of investment interest expense by increasing investment interest expense and decreasing interest expense by $1,424 for the three-month period ended March 31, 2016. This correction had no impact to any other periods. We evaluated this correction and determined, based on quantitative and qualitative factors, that the change was not material to the consolidated financial statements taken as a whole for any previously filed consolidated financial statements.

 

For the three months ended March 31, 2016, certain entities or distinguishable components of RAIT have been presented as discontinued operations. As of December 31, 2016, these discontinued operations were disposed of. See Note 16: Discontinued Operations for further information.

 

b. Principles of Consolidation

 

The consolidated financial statements reflect our accounts and the accounts of our majority-owned and/or controlled subsidiaries. We also consolidate entities that are variable interest entities, or VIEs, where we have determined that we are the primary beneficiary of such entities. The portions of these entities that we do not own are presented as noncontrolling interests as of the dates and for the periods presented in the consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation.

6


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

 

Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810, “Consolidation”, the determination of whether to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. We define the power to direct the activities that most significantly impact the VIE’s economic performance as the ability to buy, sell, refinance, or recapitalize assets or entities, and solely control other material operating events or items of the entity. For our commercial mortgages, mezzanine loans, and preferred equity investments, certain rights we hold are protective in nature and would preclude us from having the power to direct the activities that most significantly impact the VIE’s economic performance. Assuming both criteria are met, we would be considered the primary beneficiary and would consolidate the VIE. We will continually assess our involvement with VIEs and consolidate the VIEs when we are the primary beneficiary. See Note 8: Variable Interest Entities for additional disclosures pertaining to VIEs.

 

For entities that we do not consolidate, we account for our investment in them either under the equity method pursuant to ASC Topic 323, “Investments-Equity Method and Joint Ventures” or cost method pursuant to ASC Topic 325, “Investments – Other”.

 

c. Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The items that include significant estimates are fair value of financial instruments and allowance for loan losses. Actual results could differ from those estimates.

 

d. Cash and Cash Equivalents

 

Cash and cash equivalents include cash held in banks and highly liquid investments with maturities of three months or less when purchased.  Cash, including amounts restricted, may at times exceed the Federal Deposit Insurance Corporation deposit insurance limit of $250 per institution.  We mitigate credit risk by placing cash and cash equivalents with major financial institutions.  To date, we have not experienced any losses on cash and cash equivalents.

 

e. Restricted Cash

 

Restricted cash consists primarily of tenant escrows and borrowers’ funds held by us to fund certain expenditures or to be released at our discretion upon the occurrence of certain pre-specified events, and to serve as additional collateral for borrowers’ loans.  As of March 31, 2017 and December 31, 2016, we had $109,941 and $121,395, respectively, of tenant escrows and borrowers’ funds.

 

Restricted cash also includes proceeds from the issuance of CDO notes payable by securitizations that are restricted for the purpose of funding additional investments in securities subsequent to the balance sheet date.  As of March 31, 2017 and December 31, 2016, we had $31,669 and $68,784, respectively, of restricted cash held by securitizations.

 

f. Investments in Commercial Mortgage Loans, Mezzanine Loans and Preferred Equity Interests

 

We invest in commercial mortgage loans, mezzanine loans and preferred equity interests. We account for our investments in commercial mortgage loans, mezzanine loans and preferred equity interests at amortized cost. The carrying value of these investments is adjusted for origination discounts/premiums, nonrefundable fees and direct costs for originating loans which are amortized into income on a level yield basis over the terms of the loans.

 

g. Allowance for Loan Losses, Impaired Loans and Non-accrual Status

 

We maintain an allowance for loan losses on our investments in commercial mortgages, mezzanine loans and preferred equity interests. Management’s periodic evaluation of the adequacy of the allowance is based upon expected and inherent risks in the portfolio, the estimated value of underlying collateral, and current economic conditions. The credit quality of our loans is monitored via quantitative and qualitative metrics.  Quantitatively we evaluate items such as the current debt service coverage ratio and annual net operating income of the underlying property.  Qualitatively we evaluate items such as recent operating performance of the

7


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

underlying property and history of the borrower’s ability to provide financial support.  These items together are considered in developing our view of each loan’s risk rating which are categorized as either impaired or satisfactory. Management reviews loans for impairment and establishes specific reserves when a loss is probable under the provisions of FASB ASC Topic 310, “Receivables.” A loan is impaired when it is probable that we may not collect all principal and interest payments according to the contractual terms. As part of the detailed loan review, we consider many factors about the specific loan, including payment history, asset performance, borrower’s financial capability and other characteristics. Management evaluates loans for non-accrual status each reporting period. A loan is placed on non-accrual status when the loan payment deficiencies exceed 90 days unless it is well secured and in the process of collection, or if the collection of principal and interest in full is not probable. Payments received for non-accrual loans are applied to principal until the loan is removed from non-accrual status. Loans are generally removed from non-accrual status when they are making current interest payments. The allowance for loan losses is increased by the provision for loan losses and decreased by charge-offs (net of recoveries). We charge off a loan when we determine that all commercially reasonable means of recovering the loan balance have been exhausted.  This may occur at a variety of times, including when we receive cash or other assets in a pre-foreclosure sale or take control of the underlying collateral in full satisfaction of the loan upon foreclosure.  We consider circumstances such as these to indicate that the loan collection process has ceased and that a loan is uncollectible.

 

h. Investments in Real Estate

 

Investments in real estate are shown net of accumulated depreciation. We capitalize those costs that have been determined to improve the real property and depreciate those costs on a straight-line basis over the useful life of the asset. We depreciate real property using the following useful lives: buildings and improvements—30 to 40 years; furniture, fixtures, and equipment—5 to 10 years; and tenant improvements—shorter of the lease term or the life of the asset. Costs for ordinary maintenance and repairs are charged to expense as incurred.

 

Acquisitions of real estate assets and any related intangible assets are recorded initially at fair value under FASB ASC Topic 805, “Business Combinations.” Fair value is determined by management based on market conditions and inputs at the time the asset is acquired. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their fair values. Purchase accounting is applied to assets and liabilities associated with the real estate acquired. Transaction costs and fees incurred related to acquisitions are expensed as incurred.

 

Upon the acquisition of properties, we estimate the fair value of acquired tangible assets (consisting of land, building and improvements) and identified intangible assets and liabilities (consisting of above and below-market leases, in-place leases and tenant relationships), and assumed debt at the date of acquisition, based on the evaluation of information and estimates available at that date. In determining the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the differences between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to property income over the lease term.

 

The aggregate value of in-place leases is determined by evaluating various factors, including an estimate of carrying costs during the expected lease-up periods, current market conditions and similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs. The value assigned to this intangible asset is amortized over the assumed lease up period.

 

Management reviews our investments in real estate for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property.

 

8


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

i. Revenue Recognition

 

 

1)

Interest incomeWe recognize interest income from investments in commercial mortgage loans, mezzanine loans, and preferred equity interests on a yield to maturity basis. Certain of our commercial mortgage loans, mezzanine loans and preferred equity interests provide for the accrual of interest at specified rates which differ from current payment terms. Interest income is recognized on such loans, the majority of which were originated prior to 2011, at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible. Management will cease accruing interest on these loans when it determines that collection of the interest income is not probable based on the value of the underlying collateral using discounted cash flow models and market based assumptions.  The accrued interest receivable associated with these loans as of March 31, 2017 and December 31, 2016 was $30,352 and $29,845, respectively.  These loans are considered to be impaired when the total contractual amount owed exceeds the estimated value of the underlying collateral.  One of these loans, with an unpaid principal balance of $12,869, was considered to be impaired as of March 31, 2017 and December 31, 2016.

 

For investments that we do not elect to record at fair value under FASB ASC Topic 825, “Financial Instruments”, origination fees and direct loan origination costs are deferred and amortized to net investment income, using the effective interest method, over the contractual life of the underlying loan security or loan, in accordance with FASB ASC Topic 310, “Receivables.”

 

For investments that we elect to record at fair value under FASB ASC Topic 825, origination fees and direct loan costs are recorded in income and are not deferred.

 

 

2)

Property income—We generate property income from tenant rent and other tenant-related activities at our consolidated real estate properties. For multi-family real estate properties, property income is recorded when due from residents and recognized monthly as it is earned and realizable, under lease terms which are generally for periods of one year or less. For retail and office real estate properties, property income is recognized on a straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. For retail and office real estate properties, leases also typically provide for tenant reimbursement of a portion of common area maintenance and other operating expenses to the extent that a tenant’s pro rata share of expenses exceeds a base year level set in the lease.

 

 

3)

Fee and other income—We generate fee and other income through our various subsidiaries by (a) funding conduit loans for sale into unaffiliated commercial mortgage-backed securities, or CMBS, securitizations, (b) providing or arranging to provide financing to our borrowers, (c) providing ongoing asset management services to investment portfolios under cancelable management agreements, and (d) providing property management services to third parties. We recognize revenue for these activities when the fees are fixed or determinable, are evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided. While we may receive asset management fees when they are earned, we eliminate earned asset management fee income from securitizations while such securitizations are consolidated. During the three months ended March 31, 2017 and 2016, we earned $273 and $402, respectively, of asset management fees, which were eliminated as they were associated with consolidated securitizations.

9


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

 

j. Fair Value of Financial Instruments

 

In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in FASB ASC Topic 820, “Fair Value Measurements and Disclosures” and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows:

 

 

Level 1: Valuations are based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at Level 1 fair value generally are equity securities listed in active markets. As such, valuations of these investments do not entail a significant degree of judgment.

 

 

Level 2: Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Fair value assets and liabilities that are generally included in this category are derivatives where the fair value is based on observable market inputs.

 

 

Level 3: Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.  

 

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of investment, whether the investment is new, whether the investment is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3.

 

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that management believes are current as of the measurement

date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be transferred from Level 1 to Level 2 or Level 2 to Level 3.

 

Many financial instruments have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that buyers in the market are willing to pay for an asset. Ask prices represent the lowest price that sellers in the market are willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, we do not require that fair value always be a predetermined point in the bid-ask range. Our policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that results in our best estimate of fair value.

 

10


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

Fair value for certain of our Level 3 financial instruments is derived using internal valuation models. These internal valuation models include discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular instrument, specific issuer information and other market data for securities without an active market. In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, the impact of our own credit spreads is also considered when measuring the fair value of financial assets or liabilities, including derivative contracts. Where appropriate, valuation adjustments are made to account for various factors, including bid-ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based on observable inputs where available. Management’s estimate of fair value requires significant management judgment and is subject to a high degree of variability based upon market conditions, the availability of specific issuer information and management’s assumptions.

 

k. Transfers of Financial Assets

 

We account for transfers of financial assets under FASB ASC Topic 860, “Transfers and Servicing”, as either sales or financings.  Transfers of financial assets that result in sales accounting are those in which (1) the transfer legally isolates the transferred assets from the transferor, (2) the transferee has the right to pledge or exchange the transferred assets and no condition both constrains the transferee’s right to pledge or exchange the assets and provides more than a trivial benefit to the transferor, and (3) the transferor does not maintain effective control over the transferred assets.  If the transfer does not meet these criteria, the transfer is accounted for as a financing.  Financial assets that are treated as sales are removed from our accounts with any realized gain (loss) reflected in earnings during the period of sale.  Financial assets that are treated as financings are maintained on the balance sheet with proceeds received from the legal transfer reflected as securitized borrowings or security-related receivables.

 

l. Deferred Financing Costs

 

Costs incurred in connection with debt financing are deferred and classified within indebtedness and charged to interest expense over the terms of the related debt agreements, under the effective interest method.

 

m. Intangible Assets

 

Intangible assets on our consolidated balance sheets represent identifiable intangible assets acquired in business acquisitions. We amortize identified intangible assets to expense over their estimated lives using the straight-line method. We evaluate intangible assets for impairment as events and circumstances change, in accordance with FASB ASC Topic 360, “Property, Plant, and Equipment.” The gross carrying amount for our customer relationships was $11,514 and $12,276 as of March 31, 2017 and December 31, 2016, respectively. The gross carrying amount for our in-place leases and above market leases was $23,833 and $26,122 as of March 31, 2017 and December 31, 2016, respectively. The gross carrying amount for Urban Retail’s trade name was $1,500 as of March 30, 2017 and December 31, 2016. The accumulated amortization for our intangible assets was $19,589 and $22,230 as of March 31, 2017 and December 31, 2016, respectively. We recorded amortization expense of $2,647 and $2,322 for the three months ended March 31, 2017 and 2016, respectively. Based on the intangible assets identified above, we expect to record amortization expense of intangible assets of $3,273 for the remainder of 2017, $3,220 for 2018, $2,685 for 2019, $2,133 for 2020, $1,840 for 2021 and $4,106 thereafter.  As of March 31, 2017, we have determined that no triggering events occurred that would indicate an impairment to our intangible assets.

 

n. Derivative Instruments

 

In accordance with FASB ASC Topic 815, “Derivatives and Hedging”, we measure each derivative instrument at fair value and record such amounts in our consolidated balance sheet as either an asset or liability. For derivatives designated as fair value hedges, derivatives not designated as hedges, or for derivatives designated as cash flow hedges associated with debt for which we elected the fair value option under FASB ASC Topic 825, “Financial Instruments”, the changes in fair value of the derivative instrument are recorded in earnings. For derivatives designated as cash flow hedges, the changes in the fair value of the effective portions of the derivative are reported in other comprehensive income. Changes in the ineffective portions of cash flow hedges, if any, are recognized in earnings.  

 

The Chicago Mercantile Exchange (“CME”) and the London Clearing House (“LCH”) recently made amendments to their respective rules that resulted in the prospective accounting treatment of variation margin payments (certain daily payments that were

11


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

historically accounted for as collateral) being considered settlements of their related derivatives. While the CME rule, which became effective in January 2017, is mandatory, the LCH rule allows a clearing member institution the option to adopt the rule changes on an individual contract or portfolio basis.  As of March 31, 2017, $2,525 of notional of our derivative contracts were cleared on the CME and $12,650 were cleared on the LCH.  The fair value of our CME derivative contract was inconsequential as of March 31, 2017. As of March 31, 2017, our LCH clearing member institution has not adopted the new rule change. Therefore, there has been no change to the accounting for the derivatives cleared through the LCH, and variation margin payments related to these derivatives remain accounted for as collateral.  

 

o. Goodwill

 

Goodwill on our consolidated balance sheet represented the amounts paid in excess of the fair value of the net assets acquired from business acquisitions accounted for under FASB ASC Topic 805, “Business Combinations.” Pursuant to FASB ASC Topic 350, “Intangibles-Goodwill and Other”, goodwill is not amortized to expense but rather is analyzed for impairment. We evaluate goodwill for impairment on an annual basis and as events and circumstances change, in accordance with FASB ASC Topic 350. As of March 31, 2017 and December 31, 2016, we have $8,342 of goodwill that is included in Other Assets in the accompanying consolidated balance sheets. As of March 31, 2017, we have determined that no triggering events occurred that would indicate an impairment on our goodwill.

 

p. Income Taxes

 

RAIT, Taberna Realty Finance Trust, or TRFT, the RAIT Venture REITs, and IRT have each elected to be taxed as a REIT and to comply with the related provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. As of October 5, 2016, IRT was no longer consolidated by RAIT.  Refer to Note 16: Discontinued Operations for further discussion. In February 2016 and January 2017, in conjunction with the ventures described in Note 5: Indebtedness and Note 8: Variable Interest Entities, we created two new entities that elected to be taxed as REITs, which we refer to as the RAIT Venture VIEs.  These entities hold the FL-5 and FL-6 junior notes for the aforementioned ventures.  Accordingly, we generally will not be subject to U.S. federal income tax to the extent of our dividends to shareholders and as long as certain asset, income and share ownership tests are met. If we were to fail to meet these requirements, we would be subject to U.S. federal income tax, which could have a material adverse impact on our results of operations and amounts available for dividends to our shareholders. Management believes that all of the criteria to maintain RAIT’s, TRFT’s, the RAIT Venture VIEs and, in the relevant period, IRT’s REIT qualification have been met for the applicable periods, but there can be no assurance that these criteria will continue to be met in subsequent periods.  

 

We maintain various taxable REIT subsidiaries, or TRSs, which may be subject to U.S. federal, state and local income taxes and foreign taxes. Current and deferred taxes are provided on the portion of earnings (losses) recognized by us with respect to our interest in domestic TRSs. Deferred income tax assets and liabilities are computed based on temporary differences between our GAAP consolidated financial statements and the federal and state income tax basis of assets and liabilities as of the consolidated balance sheet date. We evaluate the realizability of our deferred tax assets (e.g., net operating loss and capital loss carryforwards) and recognize a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of our deferred tax assets will not be realized. When evaluating the realizability of our deferred tax assets, we consider estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available, and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires management to forecast our business and general economic environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in income tax expense on the consolidated statements of operations.

 

In prior years, our TRS entities generated taxable revenue primarily from (i) advisory fees for services provided to IRT, (ii) property management fees for services provided to RAIT properties, IRT properties and third-party properties, and (iii) fees and other income from our CMBS lending business.  In the current year, our TRS entities generate taxable revenue primarily from (i) property management fees for services provided to RAIT properties and third-party properties, and (ii) fees and other income from our CMBS lending business. In consolidation, the advisory fees and property management fees related to IRT were eliminated through October 5, 2016 and property management fees related to RAIT properties were eliminated in their entirety. Nonetheless, all income taxes are expensed and are paid by the TRSs in the year in which the revenue is received. These income taxes are not eliminated when the related revenue is eliminated in consolidation.

 

12


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

The TRS entities may be subject to tax laws that are complex and potentially subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. We review the tax balances of our TRS entities quarterly and, as new information becomes available, the balances are adjusted as appropriate.

 

As part of our change in strategic direction and to decrease administrative processes, during the year ended December 31, 2016, we moved our active TRS entities under a single holding company. We elected a November 30th taxable year end for the TRS holding company. We estimated the effective tax rate and current income tax liability as of December 31, 2016 by projecting activity for the full taxable year ended November 30, 2017. As we projected ordinary taxable income for the TRS holding company for its taxable year ended November 30, 2017, we recognized a current income tax liability as of December 31, 2016. As of March 31, 2017, we updated our projections for 2017 and are now projecting an ordinary loss position for taxable year 2017 for the TRS holding company. As a result, we reversed the current income tax liability accrued as of December 31, 2016, which generated a current income tax benefit of $249 for the three months ended March 31, 2017.

 

q. Shareholder Activism Expenses

 

During the three months ended March 31, 2017, we incurred additional expenses beyond those normally associated with soliciting proxies for our annual meeting of shareholders as a result of responding to an unsolicited and nonbinding externalization of management proposal as well as an activist campaign threatened by an activist investor. These expenses totaled $694 and are presented as shareholder activism expenses in our consolidated statements of operations.

 

r. Recent Accounting Pronouncements

 

Adopted within these Financial Statements

 

In March 2016, the FASB issued an accounting standard classified under FASB ASC Topic 815, “Derivatives and Hedging”.  This accounting standard clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met.  This standard was effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those fiscal years.  This standard did not have an impact on our consolidated financial statements.

 

In March 2016, the FASB issued an accounting standard classified under FASB ASC Topic 815, “Derivatives and Hedging”. This accounting standard clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts.  This accounting standard clarifies what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative.  Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks.  This standard was effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those fiscal years.  This standard did not have an impact on our consolidated financial statements.

 

In March 2016, the FASB issued an accounting standard classified under FASB ASC Topic 718, “Compensation – Stock Compensation”.  This accounting standard simplifies several aspects of the accounting for share-based payment award transactions, including: (i) income tax consequences; (ii) classification of awards as either equity or liabilities; and (iii) classification on the statement of cash flows.  This standard was effective for annual periods beginning after December 15, 2016, and interim period within those annual periods.  This standard did not have a material impact on our consolidated financial statements.

 

In October 2016, the FASB issued an accounting standard classified under FASB ASC Topic 810, “Consolidation”.  The amendments in this accounting standard provide guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE.  The amendments in this accounting standard do not change the

13


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

characteristics of a primary beneficiary in current GAAP.  A primary beneficiary of a VIE has both of the following characteristics: (i) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.  If a reporting entity satisfies the first characteristic of a primary beneficiary (such that it is the single decision maker of a VIE), the amendments in this accounting standard require that the reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interest in a VIE and, on a proportionate basis, its indirect variable interest in a VIE held through related parties, including related parties that are under common control with the reporting entity.  If after performing that assessment, a reporting entity that is the single decision maker of a VIE concludes that it does not have the characteristics of a primary beneficiary, the amendments continue to require that the reporting entity evaluate whether it and one or more of its related parties under common control, as a group, have the characteristics of a primary beneficiary.  The amendments in this accounting standard were effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  This standard did not have an impact on our consolidated financial statements.

 

Not Yet Adopted Within These Financial Statements

 

In May 2014, the FASB issued an accounting standard classified under FASB ASC Topic 606, “Revenue from Contracts with Customers”. This accounting standard generally replaces existing guidance by requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This accounting standard applies to all contracts with customers, except those that are within the scope of other Topics in the FASB ASC. During 2016 and 2017, the FASB issued multiple amendments to this accounting standard which provide further clarification to this accounting standard. These standards amending FASB ASC Topic 606 are currently effective for annual reporting periods beginning after December 15, 2017. Management is currently evaluating the impact that these standards may have on our consolidated financial statements.

 

In January 2016, the FASB issued an accounting standard classified under FASB ASC Topic 825, “Financial Instruments”. This accounting standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  Among other things, the amendment (i) eliminates certain disclosure requirements for financial instruments measured at amortized cost; (ii) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) requires separate presentation, in other comprehensive income, of the change in fair value of a liability, when the fair value option has been elected, resulting from a change in the instrument-specific credit risk; and (iv) requires separate presentation of financial instruments by measurement category and form.  This standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years.  Early adoption is permitted for the separate presentation of changes in fair value due to changes in instrument-specific credit risk. Management is currently evaluating the impact that this standard may have on our consolidated financial statements.

 

In February 2016, the FASB issued an accounting standard classified under FASB ASC Topic 842, “Leases”.  This accounting standard amends lease accounting by requiring the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases on the balance sheet and disclosing key information about leasing arrangements.  This standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years.  Early application of the amendments in this standard is permitted. Management is currently evaluating the impact that this standard may have on our consolidated financial statements.

 

In June 2016, the FASB issued an accounting standard classified under FASB ASC Topic 326, “Financial Instruments-Credit Losses”.  The amendments in this standard provide an approach based on expected losses to estimate credit losses on certain types of financial instruments.  The amendments also modify the impairment model for available for sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination.  The amendments in this standard expand the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses.  In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination.  This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Management is currently evaluating the impact that this standard will have on our consolidated financial statements.

 

In August 2016, the FASB issued an accounting standard classified under FASB ASC Topic 230, “Statement of Cash Flows”.  This accounting standard provides guidance on eight specific cash flow issues; (i) debt prepayment or debt extinguishment costs; (ii)

14


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies; including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions; and (viii) separately identifiable cash flows and application of the predominance principle.  The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period.  Management is currently evaluating the impact that this standard may have on our consolidated statement of cash flows.

 

In October 2016, the FASB issued an accounting standard classified under FASB ASC Topic 740, “Income Taxes”.  The amendments in this accounting standard provide that the current and deferred income tax consequences of an intra-entity transfer of an asset other than inventory should be recognized when the transfer occurs rather than when the asset has been sold to an outside party.   Two common examples of assets included in the scope of this accounting standard are intellectual property and property, plant, and equipment.  The amendments in this standard are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods.  Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued.  The amendments in this accounting standard should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.  Management is currently evaluating the impact that this standard may have on our consolidated financial statements.

 

In November 2016, the FASB issued an accounting standard classified under FASB ASC Topic 230, “Statement of Cash Flows”.  The amendments in this accounting standard require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.  Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.  The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period.  Management is currently evaluating the impact that this standard may have on our consolidated financial statements.

 

In January 2017, the FASB issued an accounting standard classified under FASB ASC Topic 805, “Business Combinations’. The amendments in this accounting standard clarify the definition of a business by more clearly outlining the requirements for an integrated set of assets and activities to be considered a business and by establishing a practical framework to determine when the integrated set of assets and activities is a business. The amendments in this accounting standard are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for transactions not yet reflected in the financial statements. Management expects that this standard will result in fewer acquisitions of real estate meeting the definition of a business and fewer acquisition-related costs being expensed in the period incurred.

 

In January 2017, the FASB issued an accounting standard classified under FASB ASC Topic 350, “Intangibles – Goodwill and Other”. The amendments in this accounting standard removes step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. As a result, a goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The amendments in this accounting standard are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the amendments in this standard is permitted.  Management is currently evaluating the impact that these standards may have on our consolidated financial statements.

 

In February 2017, the FASB issued an accounting standard classified under FASB ASC Subtopic 610-20, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets”. The amendments in this accounting standard clarifies what constitutes an “in substance nonfinancial asset” and changes the accounting for partial sales of nonfinancial assets to be more consistent with the accounting for a sale of a business. The amendments in this accounting standard are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption of the amendments in this standard is permitted. Management is currently evaluating the impact that these standards may have on our consolidated financial statements.

 

 

15


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

NOTE 3: INVESTMENTS IN COMMERCIAL MORTGAGE LOANS, MEZZANINE LOANS AND PREFERRED EQUITY INTERESTS

 

The following table summarizes our investments in commercial mortgage loans, mezzanine loans and preferred equity interests as of March 31, 2017:

 

 

 

Unpaid

Principal

Balance

 

 

Unamortized

(Discounts)

Premiums

 

 

Carrying

Amount

 

 

Number of

Loans

 

 

Weighted-

Average

Coupon (1)

 

 

Range of Maturity Dates

Commercial Real Estate (CRE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage loans (2)

 

$

1,189,646

 

 

$

(801

)

 

$

1,188,845

 

 

 

93

 

 

 

5.9

%

 

Apr. 2017 - Dec. 2025

Mezzanine loans

 

 

88,070

 

 

 

45

 

 

 

88,115

 

 

 

21

 

 

 

9.9

%

 

Apr. 2017 - May 2025

Preferred equity interests

 

 

40,329

 

 

 

(1

)

 

 

40,328

 

 

 

16

 

 

 

8.7

%

 

Nov. 2018 - Jan. 2029

Total CRE

 

 

1,318,045

 

 

 

(757

)

 

 

1,317,288

 

 

 

130

 

 

 

6.3

%

 

 

Deferred fees and costs, net (3)

 

 

(1,749

)

 

 

-

 

 

 

(1,749

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,316,296

 

 

$

(757

)

 

$

1,315,539

 

 

 

 

 

 

 

 

 

 

 

(1)

Weighted-average coupon is calculated on the unpaid principal balance, which does not necessarily correspond to the carrying amount.

(2)

Commercial mortgage loans include two conduit loans with unpaid principal balances and carrying amounts totaling $20,088, a weighted-average coupon of 4.8%, and maturity dates ranging from June 2025 through December 2025. These commercial mortgage loans are accounted for as loans held for sale.

(3)

Includes $6,600 of deferred fees, net of $4,851 of deferred costs.

 

The following table summarizes our investments in commercial mortgage loans, mezzanine loans and preferred equity interests as of December 31, 2016:

 

 

 

Unpaid

Principal

Balance

 

 

Unamortized

(Discounts)

Premiums

 

 

Carrying

Amount

 

 

Number of

Loans

 

 

Weighted-

Average

Coupon (1)

 

 

Range of Maturity Dates

Commercial Real Estate (CRE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage loans (2)

 

$

1,162,233

 

 

$

(852

)

 

$

1,161,381

 

 

 

94

 

 

 

5.8

%

 

Jan. 2017 to Dec. 2025

Mezzanine loans

 

 

89,811

 

 

 

45

 

 

 

89,856

 

 

 

23

 

 

 

9.9

%

 

Feb. 2017 to Jun. 2027

Preferred equity interests

 

 

42,830

 

 

 

(1

)

 

 

42,829

 

 

 

17

 

 

 

8.2

%

 

Jan. 2017 to Jan. 2029

Total CRE

 

 

1,294,874

 

 

 

(808

)

 

 

1,294,066

 

 

 

134

 

 

 

6.1

%

 

 

Deferred fees and costs, net (3)

 

 

(1,427

)

 

 

 

 

 

(1,427

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,293,447

 

 

$

(808

)

 

$

1,292,639

 

 

 

 

 

 

 

 

 

 

 

(1)

Weighted-average coupon is calculated on the unpaid principal balance, which does not necessarily correspond to the carrying amount.

(2)

Commercial mortgage loans include two conduit loans with unpaid principal balances and carrying amounts totaling $20,181, a weighted-average coupon of 4.8%, and maturity dates ranging from June 2025 through December 2025. These commercial mortgage loans are accounted for as loans held for sale.

(3)

Includes $5,978 of deferred fees, net of $4,551 of deferred costs.

 

16


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

A loan is placed on non-accrual status if it is delinquent for 90 days or more or if there is uncertainty over full collection of principal and interest, which generally includes our impaired loans that have reserves. The following table summarizes the delinquency statistics of our commercial real estate loans as of March 31, 2017 and December 31, 2016:

 

 

 

As of March 31, 2017

 

Delinquency Status

 

Current

 

 

30 to 59 days

 

 

60 to 89 days

 

 

90 days or more

 

 

In foreclosure or bankruptcy proceedings

 

 

Total

 

 

Non-accrual (1)

 

Commercial mortgage loans

 

$

1,143,919

 

 

$

45,727

 

 

$

 

 

$

 

 

$

 

 

$

1,189,646

 

 

$

106,737

 

Mezzanine loans

 

 

86,691

 

 

 

 

 

 

 

 

 

1,379

 

 

 

 

 

 

88,070

 

 

 

5,379

 

Preferred equity interests

 

 

40,329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,329

 

 

 

3,650

 

Total

 

$

1,270,939

 

 

$

45,727

 

 

$

 

 

$

1,379

 

 

$

 

 

$

1,318,045

 

 

$

115,766

 

(1)

Includes four loans that were current and one loan that is 30 to 59 days past due in accordance with their terms, but are on non-accrual due to uncertainty over whether we will fully collect principal and interest.

 

 

 

As of December 31, 2016

 

Delinquency Status

 

Current

 

 

30 to 59 days

 

 

60 to 89 days

 

 

90 days or more

 

 

In foreclosure or bankruptcy proceedings

 

 

Total

 

 

Non-Accrual (1)

 

Commercial mortgage loans

 

$

1,111,898

 

 

$

50,335

 

 

$

 

 

$

 

 

$

 

 

$

1,162,233

 

 

$

113,509

 

Mezzanine loans

 

 

88,432

 

 

 

 

 

 

 

 

 

1,379

 

 

 

 

 

 

89,811

 

 

 

1,379

 

Preferred equity interests

 

 

42,830

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42,830

 

 

 

6,150

 

Total

 

$

1,243,160

 

 

$

50,335

 

 

$

 

 

$

1,379

 

 

$

 

 

$

1,294,874

 

 

$

121,038

 

(1)      Includes five loans that are current and one loan that is 30 to 59 days past due in accordance with their terms, but are on non-accrual due to uncertainty over whether we will fully collect principal and interest.

 

As of March 31, 2017 and December 31, 2016, all of our commercial mortgage loans, mezzanine loans and preferred equity interests that were 90 days or more past due or in foreclosure were on non-accrual status.  As of March 31, 2017 and December 31, 2016, $115,766 and $121,038, respectively, of our commercial real estate loans were on non-accrual status and had a weighted-average interest rate of 6.2% and 5.8%, respectively. Also, as of March 31, 2017 and December 31, 2016, four loans with an unpaid principal balance of $28,930 and a weighted average interest rate of 12.6%were recognizing interest on the cash basis. Additionally, as of March 31, 2017 and December 31, 2016, one loan, with an unpaid principal balance of $18,500, which had previously been restructured in a troubled debt restructuring, or TDR, did not accrue interest in accordance with its restructured terms as it has the option to be prepaid at par.

 

Allowance For Loan Losses And Impaired Loans

 

We closely monitor our loans which require evaluation for loan loss in two categories: satisfactory and watchlist. Loans classified as satisfactory are loans which are performing consistent with our expectations. Loans classified as watchlist are generally loans which have performed below our expectations, have credit weaknesses or in which the credit quality of the collateral has deteriorated. This is determined by evaluating quantitative factors including debt service coverage ratios, net operating income of the underlying collateral and qualitative factors such as current performance of the underlying collateral. We have classified our investment in loans by credit risk category as of March 31, 2017 and December 31, 2016 as follows:

 

 

 

As of March 31, 2017

 

Credit Status

 

Commercial

Mortgage Loans

 

 

Mezzanine

Loans

 

 

Preferred

Equity

 

 

Total

 

Satisfactory

 

$

1,068,409

 

 

$

51,322

 

 

$

36,679

 

 

$

1,156,410

 

Watchlist (1)

 

 

121,237

 

 

 

36,748

 

 

 

3,650

 

 

 

161,635

 

Total

 

$

1,189,646

 

 

$

88,070

 

 

$

40,329

 

 

$

1,318,045

 

17


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

 

(1)

Includes $147,135 of loans that are considered to be impaired and $14,500 of loans that are not impaired.  

 

 

 

As of December 31, 2016

 

Credit Status

 

Commercial

Mortgage Loans

 

 

Mezzanine

Loans

 

 

Preferred

Equity

 

 

Total

 

Satisfactory

 

$

1,048,724

 

 

$

57,063

 

 

$

36,680

 

 

$

1,142,467

 

Watchlist (1)

 

 

113,509

 

 

 

32,748

 

 

 

6,150

 

 

 

152,407

 

Total

 

$

1,162,233

 

 

$

89,811

 

 

$

42,830

 

 

$

1,294,874

 

 

 

(1)

Includes $152,407 of loans that are considered to be impaired.

 

The following tables provide a roll-forward of our allowance for loan losses for our commercial mortgage loans, mezzanine loans and preferred equity interests for the three months ended March 31, 2017 and 2016:

 

 

 

For the Three Months Ended March 31, 2017

 

 

 

Commercial

Mortgage Loans

 

 

Mezzanine

Loans

 

 

Preferred

Equity

 

 

Total

 

Beginning balance

 

$

10,640

 

 

$

 

 

$

1,714

 

 

$

12,354

 

Provision (benefit) for loan losses

 

 

699

 

 

 

850

 

 

 

(14

)

 

 

1,535

 

Charge-offs, net of recoveries

 

 

(360

)

 

 

2

 

 

 

 

 

 

(358

)

Ending balance

 

$

10,979

 

 

$

852

 

 

$

1,700

 

 

$

13,531

 

 

 

 

For the Three Months Ended March 31, 2016

 

 

 

Commercial

Mortgage Loans

 

 

Mezzanine

Loans

 

 

Preferred

Equity

 

 

Total

 

Beginning balance

 

$

3,154

 

 

$

12,139

 

 

$

1,804

 

 

$

17,097

 

Provision for loan losses

 

 

174

 

 

 

158

 

 

 

993

 

 

 

1,325

 

Charge-offs, net of recoveries

 

 

 

 

 

(257

)

 

 

 

 

 

(257

)

Ending balance

 

$

3,328

 

 

$

12,040

 

 

$

2,797

 

 

$

18,165

 

 

Information on those loans considered to be impaired as of March 31, 2017 and December 31, 2016 was as follows:

 

 

 

As of March 31, 2017

 

Impaired Loans

 

Commercial

Mortgage Loans

 

 

Mezzanine

Loans

 

 

Preferred

Equity

 

 

Total

 

Impaired loans expecting full recovery

 

$

45,727

 

 

$

32,748

 

 

$

 

 

$

78,475

 

Impaired loans with reserves

 

 

61,010

 

 

 

4,000

 

 

 

3,650

 

 

 

68,660

 

Total Impaired Loans (1)

 

$

106,737

 

 

$

36,748

 

 

$

3,650

 

 

$

147,135

 

Allowance for loan losses

 

$

10,979

 

 

$

852

 

 

$

1,700

 

 

$

13,531

 

(1)

As of March 31, 2017, there was no unpaid principal relating to previously identified TDRs that are on accrual status.

 

 

 

As of December 31, 2016

 

Impaired Loans

 

Commercial

Mortgage Loans

 

 

Mezzanine

Loans

 

 

Preferred

Equity

 

 

Total

 

Impaired loans expecting full recovery

 

$

 

 

$

32,748

 

 

$

 

 

$

32,748

 

Impaired loans with reserves

 

 

113,509

 

 

 

 

 

 

6,150

 

 

 

119,659

 

Total Impaired Loans (1)

 

$

113,509

 

 

$

32,748

 

 

$

6,150

 

 

$

152,407

 

Allowance for loan losses

 

$

10,640

 

 

$

 

 

$

1,714

 

 

$

12,354

 

(1)

As of December 31, 2016, there was no unpaid principal relating to previously identified TDRs that are on accrual status.

 

The average unpaid principal balance and recorded investment of total impaired loans was $149,771 and $132,113 during the three months ended March 31, 2017 and 2016, respectively. We recorded interest income from impaired loans of $311 and $1,262 for the three months ended March 31, 2017 and 2016, respectively.

 

18


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

We have evaluated modifications to our commercial real estate loans to determine if the modification constitutes a troubled debt restructuring, or TDR, under FASB ASC Topic 310, “Receivables”.  During the three months ended March 31, 2017, there were no restructurings of our commercial real estate loans that constituted a TDR. During the three months ended March 31, 2016, we have determined that a restructuring of one commercial real estate loan with an unpaid principal balance of $15,645 constituted a TDR as the interest payment rate was decreased, although interest will continue to accrue on the original contractual rate, subject to management’s determination that it is collectible, and will be owed upon maturity. During the three months ended March 31, 2017 and March 31, 2016, there were no TDRs that subsequently defaulted for restructurings that had been entered into within the previous 12 months.

 

Loan-to-Real Estate Conversion

 

During the three months ended March 31, 2017, we completed the conversion of one commercial mortgage loan with a carrying value of $1,590 to real estate owned property. See Note 4: Investments in Real Estate for further information. We recognized a charge off of $360 upon conversion.

 

NOTE 4: INVESTMENTS IN REAL ESTATE

 

The table below summarizes our investments in real estate:

 

 

Book Value

 

 

 

As of March 31, 2017

 

 

As of December 31, 2016

 

Multi-family real estate properties

 

$

63,158

 

 

$

147,201

 

Office real estate properties

 

 

365,206

 

 

 

397,769

 

Industrial real estate properties

 

 

48,377

 

 

 

93,423

 

Retail real estate properties

 

 

165,327

 

 

 

164,019

 

Parcels of land

 

 

52,162

 

 

 

52,234

 

Subtotal

 

 

694,230

 

 

 

854,646

 

Less: Accumulated depreciation and amortization

 

 

(114,179

)

 

 

(138,214

)

Investments in real estate (1)

 

$

580,051

 

 

$

716,432

 

 

(1)

As of March 31, 2017, one of our office properties, with a carrying amount of $4,627, and two of our parcels of land, with a carrying amount of $14,586, were considered held-for-sale. As of December 31, 2016, three of our multifamily properties, with a carrying amount of $62,428, and two of our parcels of land, with a carrying amount of $14,233, were considered held-for-sale.

 

As of March 31, 2017 and December 31, 2016, our investments in real estate were comprised of land of $141,597 and $169,133, respectively, and buildings and improvements of $552,633 and $685,513, respectively.

 

As of March 31, 2017, our investments in real estate of $694,230 were financed through $135,388 of mortgage loans or other debt held by third parties and $564,191 of mortgage loans held by our RAIT I and RAIT II CDO securitizations. As of December 31, 2016, our investments in real estate of $854,646 were financed through $186,237 of mortgage loans or other debt held by third parties and $642,824 of mortgage loans held by our RAIT I and RAIT II CDO securitizations. Together, along with commercial real estate loans held by RAIT I and RAIT II, these mortgage loans serve as collateral for the CDO notes payable issued by the RAIT I and RAIT II CDO securitizations. All intercompany balances and interest charges are eliminated in consolidation.

19


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

 

Acquisitions:

 

During the three months ended March 31, 2017, we completed the conversion of one commercial loan with a carrying value of $1,590 to real estate.

 

The following table summarizes the aggregate estimated fair value of the assets and liabilities associated with the property acquired during the three months ended March 31, 2017, on the date of acquisition, for the real estate accounted for under FASB ASC Topic 805:

 

Description

 

Fair Value

of Assets Acquired

During the Three Months Ended March 31, 2017

 

Assets acquired:

 

 

 

 

Investments in real estate

 

$

1,118

 

Cash and cash equivalents

 

 

84

 

Restricted cash

 

 

-

 

Accounts receivable and other assets

 

 

14

 

Intangible assets

 

 

1,231

 

Total assets acquired

 

 

2,447

 

Liabilities assumed:

 

 

 

 

Indebtedness, net

 

 

-

 

Accounts payable and accrued expenses

 

 

139

 

Other liabilities

 

 

718

 

Total liabilities assumed

 

 

857

 

Estimated fair value of net assets acquired

 

$

1,590

 

 

The following table summarizes the consideration transferred to acquire the real estate properties and the amounts of identified assets acquired and liabilities assumed at the respective acquisition date:

 

Description

Total Estimated

Fair Value

 

Fair value of consideration transferred:

 

 

 

Investments in loans, accrued interest receivable and other assets

$

1,590

 

 Total

$

1,590

 

 

The table below presents the revenue and net income (loss) for the properties acquired during the three months ended March 31, 2017 as reported in our consolidated financial statements:

 

 

 

For the Three Months Ended March 31, 2017

 

Property

 

Total Revenue

 

 

Net income (loss) allocable to common shares

 

Erieview Galleria

 

$

26

 

 

$

(39

)

Total

 

$

26

 

 

$

(39

)

20


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

 

The table below presents the revenue, net income and earnings per share effect of the acquired properties on a pro forma basis as if the acquisitions occurred on January 1, 2016. These pro forma results are not necessarily indicative of the results which actually would have occurred if the acquisition had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods.

 

 

 

For the Three Months ended March 31,

 

Description

 

2017

 

 

2016

 

Pro forma total revenue (unaudited)

 

$

29,855

 

 

$

48,963

 

Pro forma net income (loss) allocable to common shares (unaudited)

 

 

(30,356

)

 

 

(16,800

)

Earnings (loss) per share attributable to common shareholders:

 

 

 

 

 

 

 

 

Basic-as pro forma (unaudited)

 

 

(0.33

)

 

 

(0.18

)

Diluted-as pro forma (unaudited)

 

 

(0.33

)

 

 

(0.18

)

 

Property Sales:

 

During the three months ended March 31, 2017, we disposed of three multifamily real estate properties, two office properties and one parcel of land.  We also recognized $13 of loss on sales related to properties sold in the prior year as we settled remaining amounts with the buyers.  The below table summarizes the current year dispositions and also presents each property’s contribution to net income (loss) allocable to common shares, excluding the impact of the gain (loss) on sale:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) allocable to common shares

 

Property Name

 

Property Type

 

Date of Sale

 

Sale Price

 

 

Gain (loss) on sale

 

 

For the Three Months Ended March 31, 2017

 

Tuscany Bay

 

Multifamily

 

1/6/2017

 

$

36,650

 

 

$

7,657

 

 

$

7

 

Emerald Bay

 

Multifamily

 

3/8/2017

 

 

23,750

 

 

 

772

 

 

 

181

 

Tiffany Square

 

Office

 

3/9/2017

 

 

12,175

 

 

 

113

 

 

 

67

 

Oyster Point

 

Multifamily

 

3/28/2017

 

 

11,500

 

 

 

(82

)

 

 

2

 

Executive Center

 

Office

 

3/31/2017

 

 

10,600

 

 

 

437

 

 

 

137

 

MGS

 

Land

 

3/31/2017

 

 

300

 

 

 

-

 

 

 

-

 

Total

 

 

 

 

 

$

94,975

 

 

$

8,897

 

 

$

394

 

During the three months ended March 31, 2017, we also recognized a gain of $3,122 related to a sale of a multifamily property that occurred during second quarter of 2015.  This gain was deferred as the buyer’s initial investment was insufficient.  As our loan, which financed the buyer’s acquisition of this property, was paid off during the three months ended March 31, 2017, we recognized the deferred gain.

In April 2017, we disposed of an office property for $4,575.  We expect to recognize a gain of the sale of this asset.

 

Other Dispositions:

 

During the three months ended March 31, 2017, we incurred a non-cash loss on deconsolidation of properties of $15,947 relating to an industrial real estate portfolio containing ten properties with carrying value of $82,501 of investments in real estate and $81,941 of related cross-collateralized non-recourse debt as of December 31, 2016. During the three months ended March 31, 2017, the senior lender foreclosed on the mortgage liens encumbering five of these industrial properties and disposed of the properties through auction processes.  These five properties, including other assets, net of related liabilities, had an aggregate carrying value of $43,414. Upon foreclosure, we derecognized these net assets and extinguished related debt of $27,467 based on the proceeds received by the senior lender at the auctions. The difference between the net carrying value and the debt extinguished resulted in the non-cash loss noted above as full release of the remaining cross-collateralized non-recourse debt has not yet been received. The remaining five of these industrial properties have a carrying value of $38,833 of investments in real estate and $54,475 of related cross-collateralized non-recourse debt as of March 31, 2017.

 

21


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

Impairment:

 

During the three months ended March 31, 2017, we recognized impairment of real estate assets of $7,424 as it was more likely than not we would dispose of the assets before the end of their previously estimated useful lives and a portion of our recorded investment in these assets was determined to not be recoverable.

 

 

NOTE 5: INDEBTEDNESS

 

We maintain various forms of short-term and long-term financing arrangements. Generally, these financing agreements are collateralized by assets within securitizations.

 

The following table summarizes our total recourse and non-recourse indebtedness as of March 31, 2017:

 

Description

 

Unpaid

Principal

Balance

 

 

Unamortized Discount/Premium and Deferred Financing Costs

 

 

Carrying

Amount

 

 

Weighted-

Average

Interest Rate

 

 

Contractual Maturity

 

Recourse indebtedness:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7.0% convertible senior notes (1)

 

$

871

 

 

$

(40

)

 

$

831

 

 

 

7.0

%

 

Apr. 2031

 

4.0% convertible senior notes (2)

 

 

126,098

 

 

 

(5,429

)

 

 

120,669

 

 

 

4.0

%

 

Oct. 2033

 

7.625% senior notes

 

 

57,287

 

 

 

(1,659

)

 

 

55,628

 

 

 

7.6

%

 

Apr. 2024

 

7.125% senior notes

 

 

70,731

 

 

 

(1,399

)

 

 

69,332

 

 

 

7.1

%

 

Aug. 2019

 

Senior secured notes

 

 

30,000

 

 

 

(2,408

)

 

 

27,592

 

 

 

7.2

%

 

Oct. 2018 to Apr. 2019

 

Junior subordinated notes, at fair value (3)

 

 

18,671

 

 

 

(6,189

)

 

 

12,482

 

 

 

5.0

%

 

Mar. 2035

 

Junior subordinated notes, at amortized cost

 

 

25,100

 

 

 

 

 

 

25,100

 

 

 

3.5

%

 

Apr. 2037

 

Secured warehouse facilities

 

 

129,317

 

 

 

(1,218

)

 

 

128,099

 

 

 

3.1

%

 

Nov. 2017 to Jul. 2018

 

Total recourse indebtedness

 

 

458,075

 

 

 

(18,342

)

 

 

439,733

 

 

 

4.9

%

 

 

 

 

Non-recourse indebtedness:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CDO notes payable, at amortized cost (4)(5)

 

 

428,258

 

 

 

(6,861

)

 

 

421,397

 

 

 

1.6

%

 

Jun. 2045 to Nov. 2046

 

CMBS securitizations (6)

 

 

591,859

 

 

 

(5,358

)

 

 

586,501

 

 

 

3.4

%

 

Jan. 2031 to Dec. 2031

 

Loans payable on real estate (7)

 

 

135,384

 

 

 

(467

)

 

 

134,917

 

 

 

5.6

%

 

Jun. 2016 to Dec. 2021

 

Total non-recourse indebtedness

 

 

1,155,501

 

 

 

(12,686

)

 

 

1,142,815

 

 

 

3.0

%

 

 

 

 

Other indebtedness (8)

 

 

40,830

 

 

 

(245

)

 

 

40,585

 

 

 

 

 

 

 

Total indebtedness

 

$

1,654,406

 

 

$

(31,273

)

 

$

1,623,133

 

 

 

3.5

%

 

 

 

 

 

(1)

Our 7.0% convertible senior notes are redeemable at par, at the option of the holder, in April 2021, and April 2026.

(2)

Our 4.0% convertible senior notes are redeemable at par, at the option of the holder, in October 2018, October 2023, and October 2028.

(3)

Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825.

(4)     Excludes CDO notes payable purchased by us which are eliminated in consolidation.

(5)

Collateralized by $824,059 principal amount of commercial mortgage loans, mezzanine loans, other loans and preferred equity interests, $456,441 of which eliminates in consolidation.  These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(6)

Collateralized by $739,709 principal amount of commercial mortgage loans and participation interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(7)     One loan payable on real estate had a maturity date of June 2016. This loan is currently in default and is in the process of foreclosure.

22


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

(8)

Represents two 40% interests issued to an unaffiliated third party in two ventures to which we contributed the junior notes and equity of two floating rate securitizations. Together these ventures are referred to as the RAIT Venture VIEs.  The first of these ventures, the 2016 RAIT Venture VIE, was formed in 2016.  The second, the 2017 RAIT Venture VIE, was formed in 2017. We retained a 60% interest in these ventures, and, as a result of our controlling financial interest, we consolidated the ventures. We received approximately $41,689 of proceeds as a result of issuing these 40% interests, which have an unpaid principal balance of $40,830. These 40% interests have no stated maturity date and do not provide for mandatory redemption or any required return or interest payment. These interests of the ventures allocate the distributions on such junior notes and equity when made between the parties to the ventures.     

 

The following table summarizes our total recourse and non-recourse indebtedness as of December 31, 2016:

 

Description

 

Unpaid

Principal

Balance

 

 

Unamortized Discount and Deferred Finance Costs

 

 

Carrying

Amount

 

 

Weighted-

Average

Interest Rate

 

 

Contractual Maturity

 

Recourse indebtedness:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7.0% convertible senior notes (1)

 

$

871

 

 

$

(40

)

 

$

831

 

 

 

7.0

%

 

Apr. 2031

 

4.0% convertible senior notes (2)

 

 

126,098

 

 

 

(5,827

)

 

 

120,271

 

 

 

4.0

%

 

Oct. 2033

 

7.625% senior notes

 

 

57,287

 

 

 

(1,719

)

 

 

55,568

 

 

 

7.6

%

 

Apr. 2024

 

7.125% senior notes

 

 

70,731

 

 

 

(1,543

)

 

 

69,188

 

 

 

7.1

%

 

Aug. 2019

 

Senior secured notes

 

 

62,000

 

 

 

(3,767

)

 

 

58,233

 

 

 

7.0

%

 

Apr. 2017 to Apr. 2019

 

Junior subordinated notes, at fair value (3)

 

 

18,671

 

 

 

(6,849

)

 

 

11,822

 

 

 

4.8

%

 

Mar. 2035

 

Junior subordinated notes, at amortized cost

 

 

25,100

 

 

 

 

 

 

25,100

 

 

 

3.4

%

 

Apr. 2037

 

Secured warehouse facilities

 

 

26,421

 

 

 

(1,513

)

 

 

24,908

 

 

 

3.1

%

 

Nov. 2017 to Jul. 2018

 

Total recourse indebtedness

 

 

387,179

 

 

 

(21,258

)

 

 

365,921

 

 

 

5.5

%

 

 

 

 

Non-recourse indebtedness:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CDO notes payable, at amortized cost (4)(5)

 

 

542,316

 

 

 

(7,815

)

 

 

534,501

 

 

 

1.7

%

 

Jun. 2045 to Nov. 2046

 

CMBS securitizations (6)

 

 

647,921

 

 

 

(6,844

)

 

 

641,077

 

 

 

3.1

%

 

Jan. 2031 to Dec. 2031

 

Loans payable on real estate (7)

 

 

186,237

 

 

 

(569

)

 

 

185,668

 

 

 

5.7

%

 

Jun. 2016 to Dec. 2021

 

Total non-recourse indebtedness

 

 

1,376,474

 

 

 

(15,228

)

 

 

1,361,246

 

 

 

2.9

%

 

 

 

 

Other indebtedness (8)

 

 

24,321

 

 

 

(406

)

 

 

23,915

 

 

 

 

 

 

 

Total indebtedness

 

$

1,787,974

 

 

$

(36,892

)

 

$

1,751,082

 

 

 

3.5

%

 

 

 

 

 

(1)

Our 7.0% convertible senior notes are redeemable at par, at the option of the holder, in April 2021, and April 2026.

(2)

Our 4.0% convertible senior notes are redeemable at par, at the option of the holder, in October 2018, October 2023, and October 2028.

(3)

Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825.

(4)   

Excludes CDO notes payable purchased by us which are eliminated in consolidation.

(5)

Collateralized by $950,554 principal amount of commercial mortgage loans, mezzanine loans, other loans and preferred equity interests, $535,041 of which eliminates in consolidation. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(6)

Collateralized by $789,421 principal amount of commercial mortgage loans and participation interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(7)

One loan payable on real estate had a maturity date of June 2016. This loan is currently in default and is in the process of foreclosure.

(8)

Represents a 40% interest issued to an unaffiliated third party in a venture to which we contributed the junior notes and equity of a floating rate securitization. This venture is referred to as the 2016 RAIT Venture VIE. We retained a 60% interest in this venture, and, as a result of our controlling financial interest, we consolidated the venture. We received approximately $24,796 of proceeds as a result of issuing this 40% interest, which has an unpaid principal balance of $24,321. This 40% interest has no stated maturity date and does not provide for its mandatory redemption or any required return or interest payment. The venture interests allocate the distributions on such junior notes and equity when made between the parties to the venture.

 

23


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

Recourse indebtedness refers to indebtedness that is recourse to our general assets, including the loans payable on real estate that are guaranteed by us. Non-recourse indebtedness consists of indebtedness of consolidated securitizations and loans payable on real estate which is recourse only to specific assets pledged as collateral to the lenders. The creditors of each consolidated securitization have no recourse to our general credit.

 

The current status or activity in our financing arrangements occurring as of or during the three months ended March 31, 2017 is as follows:

 

Recourse Indebtedness

 

7.0% convertible senior notes. The 7.0% convertible senior notes are convertible at the option of the holder at a current conversion rate of 195.0060 common shares per $1 principal amount of 7.0% convertible senior notes (equivalent to a current conversion price of $5.13 per common share). As of March 31, 2017, $871 of the 7.0% convertible notes remain outstanding. During the three months ended March 31, 2017, there was no activity other than recurring interest during the current period.  

 

4.0% convertible senior notes. The 4.0% convertible senior notes are convertible at the option of the holder at a current conversion rate of 108.5803 common shares per $1 principal amount of 4.0% convertible senior notes (equivalent to a current conversion price of $9.21 per common share). As of March 31, 2017, $126,098 of the 4.0% convertible senior notes remain outstanding. During the three months ended March 31, 2017, there was no activity other than recurring interest during the current period.

 

    

 

    

7.625% senior notes.  As of March 31, 2017, $57,287 of the 7.625% senior notes remain outstanding. During the three months ended March 31, 2017, there was no activity other than recurring interest during the current period.

 

7.125% senior notes.  As of March 31, 2017, $70,731 of the 7.125% senior notes remain outstanding. During the three months ended March 31, 2017, there was no activity other than recurring interest during the current period.

 

Senior secured notes. During the three months ended March 31, 2017, we repaid $1,500 of the senior secured notes.  We also redeemed $15,500 in principal amount of the 6.75% senior notes and $15,000 in principal amount of the 6.85% senior notes at a redemption price equal to the principal amount plus accrued and unpaid interest.  

 

In April 2017, we redeemed $10,000 in principal amount of the 7.15% senior notes at a redemption price equal to the principal amount plus accrued and unpaid interest.

 

Junior subordinated notes, at fair value. At issuance, we elected to record the $18,671 junior subordinated notes at fair value under FASB ASC Topic 825, with all subsequent changes in fair value recorded in earnings. As of March 31, 2017, the fair value, or carrying amount, of this indebtedness was $12,482.

 

Junior subordinated notes, at amortized cost.  During the three months ended March 31, 2017, there was no activity other than recurring interest during the current period.

 

Secured warehouse facilities. As of March 31, 2017, we had $0 of outstanding secured warehouse borrowings and $52,952 of outstanding commercial mortgage borrowings under the amended and restated master repurchase agreement, or the Amended MRA.  The Amended MRA had a capacity of $200,000 with a limit of $100,000 for floating rate loans.  In July of 2016, this facility was amended decreasing the capacity to $150,000 and extending the maturity date to July of 2018.  As of March 31, 2017, we were in compliance with all financial covenants contained in the Amended MRA.

 

 

 

 As of March 31, 2017, we had $0 of outstanding borrowings under the $150,000 secured warehouse facility. As of March 31, 2017, we were in compliance with all financial covenants contained in the $150,000 secured warehouse facility.

 

As of March 31, 2017, we had $10,800 of outstanding borrowings under the $75,000 commercial mortgage facility. As of March 31, 2017, we were in compliance with all financial covenants contained in the $75,000 commercial mortgage facility.

 

24


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

As of March 31, 2017, we had $65,565 of outstanding borrowings under the $150,000 commercial mortgage facility. As of March 31, 2017, we were in compliance with all financial covenants contained in the $150,000 commercial mortgage facility.

 

Non-Recourse Indebtedness

 

CDO notes payable, at amortized cost. CDO notes payable at amortized cost represent notes issued by consolidated CDO securitizations which are used to finance the acquisition of unsecured REIT notes, CMBS securities, commercial mortgage loans and  mezzanine loans in our commercial real estate portfolio. Generally, CDO notes payable are comprised of various classes of notes payable, with each class bearing interest at variable or fixed rates. Both RAIT I and RAIT II are meeting all of their over collateralization, or OC, and interest coverage, or IC, trigger tests as of March 31, 2017.

 

CMBS securitizations. As of March 31, 2017, our subsidiary, RAIT 2014-FL3 Trust, or RAIT FL3, had $85,655 of total collateral at par value, none of which was defaulted. RAIT FL3 had classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $48,268 to investors. As of March 31, 2017, we owned the unrated classes of junior notes, including a class with an aggregate principal balance of $37,387, and the equity, or the retained interests, of RAIT FL3. RAIT FL3 did not have OC triggers or IC triggers.

 

In April 2017, RAIT exercised its right to unwind RAIT FL3, thereby satisfying all of the outstanding notes.

 

As of March 31, 2017, our subsidiary, RAIT 2015-FL4 Trust, or RAIT FL4, had $134,834 of total collateral at par value, none of which was defaulted.  RAIT FL4 had classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $93,444 to investors. We currently own the unrated classes of junior notes, including a class with an aggregate principal balance of $41,390, and the equity, or the retained interests, of RAIT FL4. RAIT FL4 does not have OC triggers or IC triggers.

 

As of March 31, 2017, our subsidiary, RAIT 2015-FL5 Trust, or RAIT FL5, had $299,420 of total collateral at par value, none of which was defaulted. RAIT FL5 had classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $238,617 to investors. We formed a venture, the 2016 RAIT Venture VIE, which currently owns the unrated classes of junior notes with an aggregate principal balance of $60,803, and the equity of RAIT FL5. We retained a 60% interest in the venture.  RAIT FL5 does not have OC triggers or IC triggers.  

 

As of March 31, 2017, our subsidiary, RAIT 2016-FL6 Trust, or RAIT FL6, had $252,799 of total collateral at par value, none of which was defaulted. RAIT FL6 had classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $211,527 to investors. Upon closing, we retained $41,272 of the unrated classes of junior notes and equity of the FL6 issuer. In January 2017, we contributed the $41,272 junior notes and the equity of RAIT FL6 to a venture, the 2017 RAIT Venture VIE. We retained a 60% interest in the venture, and, as a result of our controlling financial interest, we consolidated the venture. We received approximately $16,893 of proceeds as a result of this contribution. RAIT FL6 does not have OC triggers or IC triggers.  

 

Loans payable on real estate. As of March 31, 2017 and December 31, 2016, we had $135,384 and $186,237, respectively, of other indebtedness outstanding relating to loans payable on consolidated real estate. These loans are secured by specific consolidated real estate and commercial loans included in our consolidated balance sheets.

 

During the three months ended March 31, 2017, we repaid $22,981 of mortgage indebtedness as part of three property dispositions.  We recognized $3,813 gains on extinguishments of debt related to two of these three dispositions as the properties were sold for less than their outstanding indebtedness and the outstanding indebtedness was deemed satisfied in full as a result of such sales.

  

During the three months ended March 31, 2017, we incurred a non-cash loss on deconsolidation of properties of $15,947 relating to an industrial real estate portfolio containing ten properties with a carrying value of $82,501 and $81,941 of related cross-collateralized non-recourse debt as of December 31, 2016. During the three months ended March 31, 2017, the senior lender foreclosed on the mortgage liens encumbering five of these industrial properties and disposed of the properties through auction processes.  These five properties, including other assets, net of related liabilities, had an aggregate carrying value of $43,414. Upon foreclosure, we derecognized these net assets and extinguished related debt of $27,467 based on the proceeds received by the senior lender at the auctions. The difference between the net carrying value and the debt extinguished resulted in the non-cash loss noted above as full release of the remaining cross-collateralized non-recourse debt has not yet been received. The remaining five of these

25


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

industrial properties have a carrying value of $38,833 and $54,475 of related cross-collateralized non-recourse debt as of March 31, 2017.

 

Maturity of Indebtedness

 

Generally, the majority of our indebtedness is payable in full upon the maturity or termination date of the underlying indebtedness. The following table displays the aggregate contractual maturities of our indebtedness on or before December 31 by year:

 

 

 

Recourse indebtedness

 

 

Non-recourse indebtedness

 

2017 (1) (2)

 

$

65,565

 

 

$

73,088

 

2018

 

 

78,752

 

 

 

1,315

 

2019

 

 

85,731

 

 

 

1,387

 

2020

 

 

-

 

 

 

1,455

 

2021

 

 

-

 

 

 

25,980

 

Thereafter (3)

 

 

228,027

 

 

 

1,052,276

 

Total

 

$

458,075

 

 

$

1,155,501

 

 

(1)

Recourse indebtedness includes $65,565 of secured warehouse facility borrowings whose facility matures in 2017.

(2)

Non-recourse indebtedness includes $54,474 of indebtedness that had a maturity date of June 2016.  This indebtedness was collateralized by ten industrial properties as of December 31, 2016.  In February and March of 2017, the senior lender foreclosed on the mortgage liens encumbering five of these properties and is in the process of foreclosing on the remaining properties.

(3)

Includes $871 of our 7.0% convertible senior notes which are redeemable, at par at the option of the holder in April 2021 and April 2026. Includes $126,098 of our 4.0% convertible senior notes which are redeemable, at par at the option of the holder in October 2018, October 2023, and October 2028.

 

 

NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS

 

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.  While these instruments may impact our periodic cash flows, they benefit us by minimizing the risks and/or costs previously described.  The counterparties to these contractual arrangements are major financial institutions with which we and our affiliates may also have other financial relationships. In the event of nonperformance by the counterparties, we are potentially exposed to credit loss. However, because of the high credit ratings of the counterparties, we do not anticipate that any of the counterparties will fail to meet their obligations.

 

Interest Rate Derivatives

 

We have entered into various interest rate swap contracts to hedge interest rate exposure on floating rate indebtedness.

 

We designate interest rate hedge agreements at inception and determine whether or not the interest rate hedge agreement is highly effective in offsetting interest rate fluctuations associated with the identified indebtedness. At designation, certain of these interest rate swaps had a fair value not equal to zero. However, we concluded, at designation, that these hedging arrangements were highly effective during their term using regression analysis and determined that the hypothetical derivative method would be used in measuring any ineffectiveness. At each reporting period, we update our regression analysis and, as of March 31, 2017, we concluded that these hedging arrangements were highly effective during their remaining term and used the hypothetical derivative method in measuring the ineffective portions of these hedging arrangements. As of March 31, 2017, all of our cash flow hedge interest rate swaps had reached maturity. As of March 31, 2017, no new cash flow hedge interest rate swaps have been entered into.    

26


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

 

The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments as of March 31, 2017 and December 31, 2016:

 

 

As of March 31, 2017

 

 

As of December 31, 2016

 

 

 

Notional

 

 

Fair Value of

Assets

 

 

Fair Value of

Liabilities

 

 

Notional

 

 

Fair Value of

Assets

 

 

Fair Value of

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate caps

 

$

28,960

 

 

$

133

 

 

$

-

 

 

$

28,960

 

 

$

135

 

 

$

-

 

Other interest rate swaps

 

 

15,175

 

 

 

124

 

 

 

-

 

 

 

15,175

 

 

 

71

 

 

 

-

 

Net fair value

 

$

44,135

 

 

$

257

 

 

$

-

 

 

$

44,135

 

 

$

206

 

 

$

-

 

 

 

Effective interest rate hedges are reported in accumulated other comprehensive income and the fair value of these hedge agreements is included in other assets or derivative liabilities.

 

For interest rate swaps that were considered effective hedges, we reclassified realized losses of $0 and $2,403 to earnings, within investment interest expense, for the three months ended March 31, 2017, and 2016, respectively.

 

Changes in fair value on our other interest rate derivatives are reported in change in fair value of financial instruments in the Consolidated Statements of Operations.  

 

27


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair Value of Financial Instruments

 

FASB ASC Topic 825, “Financial Instruments” requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of investments in mortgages, loans, preferred equity interests, CDO notes payable, convertible senior notes, junior subordinated notes, warrants and investor share appreciations rights, or SARs, and derivative assets and liabilities is based on significant observable and unobservable inputs. The fair value of cash and cash equivalents, restricted cash, CMBS facilities, and other indebtedness approximates their carrying amount or unpaid principal balance due to the nature of these instruments.

 

The following table summarizes the carrying amount and the fair value of our financial instruments as of March 31, 2017:

 

Financial Instrument

 

Carrying

Amount

 

 

Estimated

Fair Value

 

Assets

 

 

 

 

 

 

 

 

Total investment in mortgages and loans, net

 

$

1,302,008

 

 

$

1,250,954

 

Cash and cash equivalents

 

 

96,432

 

 

 

96,432

 

Restricted cash

 

 

141,610

 

 

 

141,610

 

Derivative assets

 

 

257

 

 

 

257

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Recourse indebtedness:

 

 

 

 

 

 

 

 

7.0% convertible senior notes

 

 

831

 

 

 

700

 

4.0% convertible senior notes

 

 

120,669

 

 

 

120,688

 

7.625% senior notes

 

 

55,628

 

 

 

55,454

 

7.125% senior notes

 

 

69,332

 

 

 

71,127

 

Senior secured notes

 

 

27,592

 

 

 

30,822

 

Junior subordinated notes, at fair value

 

 

12,482

 

 

 

12,482

 

Junior subordinated notes, at amortized cost

 

 

25,100

 

 

 

13,919

 

CMBS facilities

 

 

128,099

 

 

 

129,317

 

Non-recourse indebtedness:

 

 

 

 

 

 

 

 

CDO notes payable, at amortized cost

 

 

421,397

 

 

 

372,804

 

CMBS securitizations

 

 

586,501

 

 

 

592,117

 

Loans payable on real estate

 

 

134,917

 

 

 

137,712

 

Other indebtedness

 

 

40,585

 

 

 

40,830

 

Warrants and investor SARs

 

 

30,900

 

 

 

30,900

 

28


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

The following table summarizes the carrying amount and the fair value of our financial instruments as of December 31, 2016:

 

Financial Instrument

 

Carrying

Amount

 

 

Estimated

Fair Value

 

Assets

 

 

 

 

 

 

 

 

Total investment in mortgages and loans, net

 

$

1,280,285

 

 

$

1,256,342

 

Cash and cash equivalents

 

 

110,531

 

 

 

110,531

 

Restricted cash

 

 

190,179

 

 

 

190,179

 

Derivative assets

 

 

206

 

 

 

206

 

Liabilities

 

 

 

 

 

 

 

 

Recourse indebtedness:

 

 

 

 

 

 

 

 

7.0% convertible senior notes

 

 

831

 

 

 

890

 

4.0% convertible senior notes

 

 

120,271

 

 

 

116,861

 

7.625% senior notes

 

 

55,568

 

 

 

53,231

 

7.125% senior notes

 

 

69,188

 

 

 

69,118

 

Senior secured notes

 

 

58,233

 

 

 

62,620

 

Junior subordinated notes, at fair value

 

 

11,822

 

 

 

11,822

 

Junior subordinated notes, at amortized cost

 

 

25,100

 

 

 

13,099

 

CMBS facilities

 

 

24,908

 

 

 

26,421

 

Non-recourse indebtedness:

 

 

 

 

 

 

 

 

CDO notes payable, at amortized cost

 

 

534,501

 

 

 

477,032

 

CMBS securitizations

 

 

641,077

 

 

 

646,642

 

Loans payable on real estate

 

 

185,668

 

 

 

188,525

 

Other indebtedness

 

 

23,915

 

 

 

24,321

 

Derivative liabilities

 

 

-

 

 

 

-

 

Warrants and investor SARs

 

 

30,400

 

 

 

30,400

 

 

Fair Value Measurements

 

The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of March 31, 2017, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:

 

Assets:

 

Quoted Prices in

Active Markets for

Identical Assets

(Level 1) (a)

 

 

Significant Other

Observable Inputs

(Level 2) (a)

 

 

Significant

Unobservable Inputs

(Level 3) (a)

 

 

Balance as of March 31, 2017

 

Derivative assets

 

$

 

 

$

257

 

 

$

 

 

$

257

 

Total assets

 

$

 

 

$

257

 

 

$

 

 

$

257

 

 

Liabilities:

 

Quoted Prices in

Active Markets for

Identical Assets

(Level 1) (a)

 

 

Significant Other

Observable Inputs

(Level 2) (a)

 

 

Significant

Unobservable Inputs

(Level 3) (a)

 

 

Balance as of March 31, 2017

 

Junior subordinated notes, at fair value

 

$

 

 

$

 

 

$

12,482

 

 

$

12,482

 

Warrants and investor SARs

 

 

 

 

 

 

 

 

30,900

 

 

 

30,900

 

Total liabilities

 

$

 

 

$

 

 

$

43,382

 

 

$

43,382

 

 

(a)

During the three months ended March 31, 2017, there were no transfers between Level 1 and Level 2, and there were no transfers into and/or out of Level 3.

29


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

 

The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of December 31, 2016, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:

 

Assets:

 

Quoted Prices in

Active Markets for

Identical Assets

(Level 1) (a)

 

 

Significant Other

Observable Inputs

(Level 2) (a)

 

 

Significant

Unobservable Inputs

(Level 3) (a)

 

 

Balance as of December 31, 2016

 

Derivative assets

 

$

 

 

$

206

 

 

$

 

 

$

206

 

Total assets

 

$

 

 

$

206

 

 

$

 

 

$

206

 

 

 

Liabilities:

 

Quoted Prices in

Active Markets for

Identical Assets

(Level 1) (a)

 

 

Significant Other

Observable Inputs

(Level 2) (a)

 

 

Significant

Unobservable Inputs

(Level 3) (a)

 

 

Balance as of December 31, 2016

 

Junior subordinated notes, at fair value

 

$

 

 

$

 

 

$

11,822

 

 

$

11,822

 

Warrants and investor SARs

 

 

 

 

 

 

 

 

30,400

 

 

 

30,400

 

Total liabilities

 

$

 

 

$

-

 

 

$

42,222

 

 

$

42,222

 

 

(a)

During the year ended December 31, 2016, there were no transfers between Level 1 and Level 2, and there were no transfers into and/or out of Level 3.

 

When estimating the fair value of our Level 3 financial instruments, management uses various observable and unobservable inputs. These inputs include yields, credit spreads, duration, effective dollar prices and overall market conditions on not only the exact financial instrument for which management is estimating the fair value, but also financial instruments that are similar or issued by the same issuer when such inputs are unavailable. Generally, an increase in the yields, credit spreads or estimated duration will decrease the fair value of our financial instruments. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value, as determined by management, may fluctuate from period to period and any ultimate liquidation or sale of the investment may result in proceeds that may be significantly different than fair value.  

 

For the fair value of our junior subordinated notes, at fair value, and warrant and investor SARs classified as Level 3 liabilities, we estimate the fair value of these financial instruments using significant unobservable inputs.  For the junior subordinated notes, at fair value, we use a discounted cash flow model as the valuation technique and the significant unobservable inputs as of March 31, 2017 include discount rates ranging from 10.9% to 11.3% and as of December 31, 2016 include discount rates ranging from 11.5% to 11.8%.  For the warrants and investor SARs, we utilized a third party valuation firm who used a binomial model as the valuation technique and the significant unobservable inputs as of March 31, 2017 and December 31, 2016 include 51.0% and 51.0%, respectively, for the annual volatility of our common shares of beneficial interest over the term of the warrants and investor SARs, 9.0% and 10.0%, respectively, for the credit adjusted discount rate on our unsecured debt issued that may be issued in satisfaction of the warrants and investor SARs, and 10.4% and 10.0%, respectively, for the dividend rate and future dividend rate on our common shares of beneficial interest.

 

The following table summarizes additional information about assets and liabilities that are measured at fair value on a recurring basis for which we have utilized level 3 inputs to determine fair value for the three months ended March 31, 2017:

 

Liabilities

 

Warrants and investor SARS

 

 

Junior Subordinated Notes, at Fair Value

 

 

Total

Level 3

Liabilities

 

Balance, as of December 31, 2016

 

$

30,400

 

 

$

11,822

 

 

$

42,222

 

Change in fair value of financial instruments

 

 

500

 

 

 

660

 

 

 

1,160

 

Purchases

 

 

 

 

 

 

 

 

 

Principal Repayments

 

 

 

 

 

 

 

 

 

Balance, as of March 31, 2017

 

$

30,900

 

 

$

12,482

 

 

$

43,382

 

 

30


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

Non-Recurring Fair Value Measurements

 

As of March 31, 2017, we measured two real estate assets at a fair value of $10,525 in our consolidated balance sheets as they were impaired.  The fair values were based on executed purchase and sale agreements for the real estate assets and were classified within Level 2 of the fair value hierarchy.  The significant input was the purchase price agreed to with the potential buyer.  As of March 31, 2017, we measured one real estate asset at a fair value of $55,000 in our consolidated balance sheets as it was impaired.  The fair value was based on an income capitalization valuation approach and was classified within Level 3 of the fair value hierarchy.  The significant input was the capitalization rate of 7.8%.

 

Our other non-recurring fair value measurements relate primarily to our commercial real estate loans that are considered impaired and for which we maintain an allowance for loss. In determining the allowance for losses, we estimate the fair value of the respective commercial real estate loan and compare that fair value to our total investment in the loan. When estimating the fair value of the commercial real estate loan, management uses discounted cash flow analyses and capitalization rates on the underlying property’s net operating income. The discounted cash flow analyses and capitalization rates are based on market information and comparable sales of similar properties.  These methodologies are classified in Level 3 of the fair value hierarchy.

 

Fair Value of Financial Instruments

 

The following tables summarize the valuation technique and the level of the fair value hierarchy for financial instruments that are not fair valued in the accompanying consolidated balance sheets but for which fair value is required to be disclosed. The fair value of cash and cash equivalents, restricted cash, secured credit facilities, CMBS facilities, commercial mortgage facilities and other indebtedness approximates cost due to the nature of these instruments and are not included in the tables below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying Amount

as of March 31, 2017

 

 

Estimated Fair

Value as of March 31, 2017

 

 

Valuation

Technique

 

Level in Fair Value Hierarchy

Total investment in mortgages and loans, net

 

$

1,302,008

 

 

$

1,250,954

 

 

Discounted cash flows

 

Three

7.0% convertible senior notes

 

 

831

 

 

 

700

 

 

Trading price

 

Two

4.0% convertible senior notes

 

 

120,669

 

 

 

120,688

 

 

Trading price

 

Two

7.625% senior notes

 

 

55,628

 

 

 

55,454

 

 

Trading price

 

Two

7.125% senior notes

 

 

69,332

 

 

 

71,127

 

 

Trading price

 

Two

Senior secured notes

 

 

27,592

 

 

 

30,822

 

 

Discounted cash flows

 

Three

Junior subordinated notes, at amortized cost

 

 

25,100

 

 

 

13,919

 

 

Discounted cash flows

 

Three

CDO notes payable, at amortized cost

 

 

421,397

 

 

 

372,804

 

 

Discounted cash flows

 

Three

CMBS securitizations

 

 

586,501

 

 

 

589,271

 

 

Discounted cash flows

 

Three

Loans payable on real estate

 

 

134,917

 

 

 

137,712

 

 

Discounted cash flows

 

Three

31


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

 

 

 

 

Carrying Amount

as of December 31, 2016

 

 

Estimated Fair

Value as of December 31, 2016

 

 

Valuation

Technique

 

Level in Fair Value Hierarchy

Total investment in mortgages and loans, net

 

$

1,280,285

 

 

$

1,256,342

 

 

Discounted cash flows

 

Three

7.0% convertible senior notes

 

 

831

 

 

 

890

 

 

Trading price

 

One

4.0% convertible senior notes

 

 

120,271

 

 

 

116,861

 

 

Trading price

 

One

7.625% senior notes

 

 

55,568

 

 

 

53,231

 

 

Trading price

 

One

7.125% senior notes

 

 

69,188

 

 

 

69,118

 

 

Trading price

 

One

Senior secured notes

 

 

58,233

 

 

 

62,620

 

 

Discounted cash flows

 

Three

Junior subordinated notes, at amortized cost

 

 

25,100

 

 

 

13,099

 

 

Discounted cash flows

 

Three

CDO notes payable, at amortized cost

 

 

534,501

 

 

 

477,032

 

 

Discounted cash flows

 

Three

CMBS securitization

 

 

641,077

 

 

 

646,642

 

 

Discounted cash flows

 

Three

Loans payable on real estate

 

 

185,668

 

 

 

188,525

 

 

Discounted cash flows

 

Three

Other indebtedness

 

 

23,915

 

 

 

24,321

 

 

Discounted cash flows

 

Three

 

The following table summarizes realized and unrealized gains and losses on assets and liabilities for which we elected the fair value option of FASB ASC Topic 825, “Financial Instruments” and derivatives as reported in change in fair value of financial instruments in the accompanying consolidated statements of operations:

 

 

 

For the Three Months Ended March 31,

 

Description

 

2017

 

 

2016

 

Change in fair value of junior subordinated notes

 

$

(660

)

 

$

719

 

Change in fair value of derivatives

 

 

7

 

 

 

(1,907

)

Change in fair value of warrants and investors SARs

 

 

(500

)

 

 

(2,900

)

Change in fair value of financial instruments

 

$

(1,153

)

 

$

(4,088

)

 

The changes in the fair value for the junior subordinated notes for which the fair value option was elected for the three months ended March 31, 2017 and 2016 was primarily attributable to changes in interest rates and instrument specific credit risks. The changes in the fair value of derivatives for the three and months ended March 31, 2017 and 2016 was primarily attributable to changes in interest rates. The changes in fair value of the warrants and investor SARs for the three months ended March 31, 2017 and 2016 was primarily attributable to changes in the reference stock price and volatility.

 

 

NOTE 8: VARIABLE INTEREST ENTITIES

 

The determination of when to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. We evaluated our investments and determined that, as of March 31, 2017 and December 31, 2016, our consolidated VIEs were: RAIT I, RAIT II, our floating rate securitizations, RAIT VIE Properties (Willow Grove, Cherry Hill, South Terrace, McDowell, and five of our industrial properties) and the two ventures described in Note 5: Indebtedness (RAIT Venture VIEs).

 

We consolidate the securitizations that we sponsor as we have retained interests in these entities and control the significant decisions regarding the collateral in these entities, such as the approval of loan workouts.  As of March 31, 2017, we consolidate the VIE properties as we own a majority of these entities and control the significant capital and operating decisions regarding the properties.  As of March 31, 2017, we consolidate our two RAIT Venture VIEs (each of which consolidates a floating rate securitization) as we own a majority of these entities and control a majority of the significant decisions regarding the collateral in these entities, such as the approval of loan workouts.

 

32


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

The following tables present the assets and liabilities of our consolidated VIEs as of each respective date. Certain amounts included in the tables below are eliminated upon consolidation with our other subsidiaries that maintain investments in the debt or equity securities issued by these entities.

 

 

As of March 31, 2017

 

 

 

RAIT Securitizations

 

 

RAIT VIE Properties

 

 

RAIT Venture VIEs

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in mortgages and loans, at amortized cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgages, mezzanine loans, other loans and

   preferred equity interests

 

$

1,018,535

 

 

$

 

 

$

551,719

 

 

$

1,570,254

 

Allowance for losses

 

 

 

 

 

 

 

 

 

 

 

0

 

Total investments in mortgages and loans

 

 

1,018,535

 

 

 

 

 

 

551,719

 

 

 

1,570,254

 

Investments in real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in real estate

 

 

 

 

 

172,722

 

 

 

 

 

 

172,722

 

Accumulated depreciation

 

 

 

 

 

(31,543

)

 

 

 

 

 

(31,543

)

Total investments in real estate

 

 

 

 

 

141,179

 

 

 

 

 

 

141,179

 

Cash and cash equivalents

 

 

 

 

 

1,046

 

 

 

92

 

 

 

1,138

 

Restricted cash

 

 

6,187

 

 

 

1,451

 

 

 

31

 

 

 

7,669

 

Accrued interest receivable

 

 

53,661

 

 

 

 

 

 

3,575

 

 

 

57,236

 

Other assets

 

 

122

 

 

 

9,174

 

 

 

 

 

 

9,296

 

Intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets

 

 

 

 

 

2,095

 

 

 

 

 

 

2,095

 

Accumulated amortization

 

 

 

 

 

(1,498

)

 

 

 

 

 

(1,498

)

Total intangible assets

 

 

 

 

 

597

 

 

 

 

 

 

597

 

Total assets

 

$

1,078,505

 

 

$

153,447

 

 

$

555,417

 

 

$

1,787,369

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indebtedness, net

 

$

851,729

 

 

$

203,036

 

 

$

546,858

 

 

$

1,601,623

 

Accrued interest payable

 

 

896

 

 

 

15,689

 

 

 

1,581

 

 

 

18,166

 

Accounts payable and accrued expenses

 

 

29

 

 

 

5,172

 

 

 

 

 

 

5,201

 

Derivative liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Deferred taxes, borrowers’ escrows and other liabilities

 

 

 

 

 

951

 

 

 

1,210

 

 

 

2,161

 

Total liabilities

 

 

852,654

 

 

 

224,848

 

 

 

549,649

 

 

 

1,627,151

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid in capital

 

 

 

 

 

 

 

 

55

 

 

 

55

 

RAIT investment

 

 

26,234

 

 

 

40,494

 

 

 

7,791

 

 

 

74,519

 

Retained earnings (deficit)

 

 

199,617

 

 

 

(113,754

)

 

 

(2,078

)

 

 

83,785

 

Total shareholders’ equity

 

 

225,851

 

 

 

(73,260

)

 

 

5,768

 

 

 

158,359

 

Noncontrolling Interests

 

 

 

 

 

1,859

 

 

 

 

 

 

1,859

 

Total liabilities and equity

 

$

1,078,505

 

 

$

153,447

 

 

$

555,417

 

 

$

1,787,369

 

33


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

 

 

 

As of December 31, 2016

 

 

 

RAIT Securitizations

 

 

RAIT VIE Properties

 

 

RAIT Venture VIE

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in mortgages and loans, at amortized cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgages, mezzanine loans, other loans and

   preferred equity interests

 

$

1,409,758

 

 

$

 

 

$

324,709

 

 

$

1,734,467

 

Allowance for losses

 

 

 

 

 

 

 

 

 

 

 

 

Total investments in mortgages and loans

 

 

1,409,758

 

 

 

 

 

 

324,709

 

 

 

1,734,467

 

Investments in real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in real estate

 

 

 

 

 

223,722

 

 

 

 

 

 

223,722

 

Accumulated depreciation

 

 

 

 

 

(31,652

)

 

 

 

 

 

(31,652

)

Total investments in real estate

 

 

 

 

 

192,070

 

 

 

 

 

 

192,070

 

Cash and cash equivalents

 

 

 

 

 

2,145

 

 

 

1

 

 

 

2,146

 

Restricted cash

 

 

6,986

 

 

 

1,167

 

 

 

723

 

 

 

8,876

 

Accrued interest receivable

 

 

56,974

 

 

 

 

 

 

1,513

 

 

 

58,487

 

Other assets

 

 

480

 

 

 

9,591

 

 

 

 

 

 

10,071

 

Intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets

 

 

 

 

 

5,616

 

 

 

 

 

 

5,616

 

Accumulated amortization

 

 

 

 

 

(3,740

)

 

 

 

 

 

(3,740

)

Total intangible assets

 

 

 

 

 

1,876

 

 

 

 

 

 

1,876

 

Total assets

 

$

1,474,198

 

 

$

206,849

 

 

$

326,946

 

 

$

2,007,993

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indebtedness, net

 

$

1,244,507

 

 

$

230,510

 

 

$

323,485

 

 

$

1,798,502

 

Accrued interest payable

 

 

1,903

 

 

 

14,306

 

 

 

854

 

 

 

17,063

 

Accounts payable and accrued expenses

 

 

19

 

 

 

5,443

 

 

 

1

 

 

 

5,463

 

Derivative liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Deferred taxes, borrowers’ escrows and other liabilities

 

 

 

 

 

2,051

 

 

 

920

 

 

 

2,971

 

Total liabilities

 

 

1,246,429

 

 

 

252,310

 

 

 

325,260

 

 

 

1,823,999

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

RAIT investment

 

 

41,790

 

 

 

40,962

 

 

 

2,885

 

 

 

85,637

 

Retained earnings (deficit)

 

 

185,979

 

 

 

(88,282

)

 

 

(1,199

)

 

 

96,498

 

Total shareholders’ equity

 

 

227,769

 

 

 

(47,320

)

 

 

1,686

 

 

 

182,135

 

Noncontrolling Interests

 

 

 

 

 

1,859

 

 

 

 

 

 

1,859

 

Total liabilities and equity

 

$

1,474,198

 

 

$

206,849

 

 

$

326,946

 

 

$

2,007,993

 

 

The assets of the VIEs can only be used to settle obligations of the VIEs and are not available to our creditors. The amounts that eliminate in consolidation include $472,349 of total investments in mortgage loans and $492,220 of indebtedness as of March 31, 2017 and $549,879 of total investments in mortgage loans and $510,244 of indebtedness as of December 31, 2016. We do not have any contractual obligation to provide the VIEs listed above with any financial support. We have not and do not intend to provide financial support to these VIEs that we were not previously contractually required to provide.

 

NOTE 9: SERIES D PREFERRED SHARES

 

On October 1, 2012, we entered into a Securities Purchase Agreement, or the purchase agreement, with ARS VI Investor I, LLC, or the investor, an affiliate of Almanac Realty Investors, LLC, or Almanac. During the period from the effective date of the purchase agreement through March 2014, we sold to the investor on a private placement basis in four separate sales between October 2012 and March 2014 for an aggregate purchase price of $100,000, or the total commitment, the following securities were issued: (i) 4,000,000 of our Series D Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share, or the Series

34


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

D preferred shares, (ii) common share purchase warrants, or the warrants, exercisable for 9,931,000 of our common shares, or the common shares (which have subsequently adjusted to 11,035,875 shares), and (iii) common share appreciation rights, or the investor SARs, with respect to up to 6,735,667 common shares (which have subsequently adjusted to 7,485,045 shares).

 

On December 7, 2016, we entered into a securities repurchase agreement with Almanac whereby we agreed to repurchase and cancel 464,000 Series D preferred shares at par for a purchase price of $11,600 which resulted in a decrease from 4,000,000 Series D preferred shares issued to 3,536,000 Series D preferred shares issued and outstanding.

 

In September 2015, we amended the purchase agreement with Almanac related to the Series D preferred shares.  This amendment changed two of the covenants therein.  As consideration for this amendment, we paid Almanac $450. We accounted for this amendment as a modification of the Series D preferred shares.

 

The warrants and investor SARs had an initial strike price of $6.00 per common share, subject to adjustment. As of the filing of this report, the strike price has adjusted to $5.40.

 

The warrants and investor SARs were both determined to be classified as liabilities and had a combined fair value of $30,900 as of March 31, 2017. The initial fair value of the warrants and investor SARs are recorded as a liability and re-measured at each reporting period until the warrants and investor SARs are settled. Changes in fair value will be recorded in earnings as a component of the change in fair value of financial instruments in the consolidated statement of operations.

 

The following table summarizes the sales activity of the Series D preferred shares from the effective date of the agreement through March 31, 2017:

 

Aggregate purchase price

 

 

 

 

 

$

100,000

 

Repurchase

 

 

 

 

 

$

(11,600

)

Initial value of warrants and investor SARs issued to-date

 

 

(21,805

)

 

 

 

 

Costs incurred

 

 

(6,834

)

 

 

 

 

Total discount

 

 

 

 

 

 

(28,639

)

Discount amortization to-date

 

 

 

 

 

 

23,744

 

Carrying amount of Series D Preferred Shares

 

 

 

 

 

$

83,505

 

 

 

35


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

NOTE 10: SHAREHOLDERS’ EQUITY

 

Preferred Shares

 

Dividends:

 

The following table summarizes the dividends we declared and paid on the preferred shares for the three months ended March 31, 2017:

 

 

 

March 31, 2017

 

Series A Preferred Shares

 

 

 

 

Date declared

 

2/15/2017

 

Record date

 

3/1/2017

 

Date paid

 

3/31/2017

 

Total dividend amount

 

$

2,589

 

Series B Preferred Shares

 

 

 

 

Date declared

 

2/15/2017

 

Record date

 

3/1/2017

 

Date paid

 

3/31/2017

 

Total dividend amount

 

$

1,225

 

Series C Preferred Shares

 

 

 

 

Date declared

 

2/15/2017

 

Record date

 

3/1/2017

 

Date paid

 

3/31/2017

 

Total dividend amount

 

$

910

 

Series D Preferred Shares

 

 

 

 

Date declared

 

2/15/2017

 

Record date

 

3/1/2017

 

Date paid

 

3/31/2017

 

Total dividend amount

 

$

1,878

 

 

At Market Issuance Sales Agreement (ATM):

 

On June 13, 2014, we entered into an At Market Issuance Sales Agreement, or the 2014 Preferred ATM agreement, with MLV & Co. LLC, or MLV, providing that, from time to time during the term of the 2014 Preferred ATM agreement, on the terms and subject to the conditions set forth therein, we may issue and sell through MLV up to $150,000 aggregate amount of preferred shares.

With respect to each series of preferred shares, the maximum amount issuable is as follows: 4,000,000 Series A Preferred Shares, 1,000,000 Series B Preferred Shares, and 1,000,000 Series C Preferred Shares. Unless the 2014 Preferred ATM agreement is earlier terminated by MLV or us, the 2014 Preferred ATM agreement automatically terminates upon the issuance and sale of all of the Series A Preferred Shares, Series B Preferred Shares, and Series C Preferred Shares.

 

As of March 31, 2017, 2,724,935 Series A Preferred Shares, 947,496 Series B Preferred Shares, and 999,675 Series C Preferred Shares remain available for issuance under the 2014 Preferred ATM agreement.

 

Common Shares

 

Dividends:

 

During the three months ended March 31, 2017, we paid $279 of dividends on restricted common share awards that vested in this period.

 

36


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

On May 2, 2017, the board of trustees declared a $0.09 dividend on our common shares to holders of record as of May 26, 2017. The dividend is payable on June 15, 2017.  

 

Equity Compensation:

 

On January 9, 2017, the compensation committee awarded 344,042 unvested restricted common share awards to one of our executive officers in order to satisfy the remaining portion of the 600,000 awards to be granted to the executive officer under a Binding Memorandum of Understanding dated September 26, 2016, or the MOU, contingent on the closing of the IRT internalization transaction.  While a portion of the awards issued with respect to the MOU were granted on December 23, 2016 and this final portion on January 9, 2017, stock compensation expense of $2,068 related to all 600,000 awards was recorded in 2016 since the awards were authorized as of the December 20, 2016 IRT internalization transaction and no future service would be required after the grant date.  

 

On February 14, 2017, the compensation committee awarded 332,500 unvested restricted common share awards, valued at $1,257 using our closing price of $3.78, to our non-executive officer employees. These awards vest over a three-year period.

 

On February 14, 2017, the compensation committee awarded 832,500 SARs, valued at $574 based on a Black-Scholes option pricing model at the date of grant, to our non-executive officer employees.  The SARs vest over a three-year period and may be exercised between the date of vesting and February 14, 2022, the expiration date of the SARs.

 

On March 31, 2015, the compensation committee adopted a 2015 Annual Incentive Compensation Plan, or the annual cash bonus plan, setting forth the basis on which target cash bonus awards are earned.  In addition, on March 31, 2015, the compensation committee adopted a 2015 Long Term Incentive Plan, or the 2015 LTIP, setting forth the basis on which the eligible officers could earn equity compensation that was directly linked to long-term performance. Pursuant to the 2015 LTIP, equity awards to eligible officers will consist of performance share unit (PSU) awards issued at the conclusion of a three year performance period based on RAIT’s performance relative to three long-term performance metrics established by the compensation committee. See Note 13: Shared-Based Compensation and Employee Benefits in the 2016 Annual Report on Form 10-K for further details regarding these awards.  For the three months ended March 31, 2017, we recorded $344 of stock compensation expense.

 

On April 26, 2017, the compensation committee made 2017 awards, or the 2017 awards, to the eligible executives pursuant to the annual cash bonus plan and the LTIP.  The LTIP awards consist of both a performance share unit award for a three year performance period commencing January 1, 2017 and ending December 31, 2019 and an annual restricted share award vesting over a four year period.

 

Dividend Reinvestment and Share Purchase Plan (DRSPP):

 

We have a dividend reinvestment and share purchase plan, or DRSPP, under which we registered and reserved for issuance, in the aggregate, 10,500,000 common shares. During the three months ended March 31, 2017, we issued a total of 2,139 common shares pursuant to the DRSPP at a weighted-average price of $3.51 per share and we received $8 of net proceeds. As of March 31, 2017, 7,750,340 common shares, in the aggregate, remain available for issuance under the DRSPP.

 

Capital on Demand™ Sales Agreement (COD):

 

On November 21, 2012, we entered into a Capital on Demand™ Sales Agreement, or the COD sales agreement, with JonesTrading Institutional Services LLC, or JonesTrading, pursuant to which we may issue and sell up to 10,000,000 of our common shares from time to time through JonesTrading acting as agent and/or principal, subject to the terms and conditions of the COD sales agreement. Unless the COD sales agreement is earlier terminated by JonesTrading or us, the COD sales agreement automatically terminates upon the issuance and sale of all of the common shares subject to the COD sales agreement. During the three months ended March 31, 2017, we did not issue any common shares pursuant to this agreement. As of March 31, 2017, 7,918,919 common shares, in the aggregate, remain available for issuance under the COD sales agreement.

 

37


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

Non-Controlling Interests

 

RAIT Venture VIE:

 

During the three months ended March 31, 2017, the 2016 RAIT Venture VIE, which elected to be taxed as a REIT and that was formed in 2016 to hold the junior subordinated notes of FL-5, issued 125 Series A Preferred Shares at a public offering.  The price was $1,000 per share and the 2016 RAIT Venture VIE received $66 of net proceeds.  Refer to Note 2: Summary of Significant Accounting Policies – Income Taxes and Note 5: Indebtedness for further discussion about this entity.

 

NOTE 11: EARNINGS (LOSS) PER SHARE

 

The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three months ended March 31, 2017 and 2016:

 

 

 

 

 

 

For the Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Income (loss) from continuing operations

 

$

(21,539

)

 

$

(11,988

)

(Income) loss allocated to preferred shares

 

 

(8,526

)

 

 

(8,520

)

(Income) loss allocated to noncontrolling interests

 

 

(20

)

 

 

1,145

 

Income (loss) from continuing operations allocable to common shares

 

 

(30,085

)

 

 

(19,363

)

Total Income (loss) from discontinued operations

 

 

 

 

 

1,485

 

(Income) loss from discontinued operations allocated to noncontrolling interests

 

 

 

 

 

34

 

Income (loss) from discontinued operations allocable to common shares

 

 

 

 

 

1,519

 

Net income (loss) allocable to common shares

 

$

(30,085

)

 

$

(17,844

)

Weighted-average shares outstanding—Basic

 

 

91,300,812

 

 

 

91,018,160

 

Dilutive securities

 

 

 

 

 

 

Weighted-average shares outstanding—Diluted

 

 

91,300,812

 

 

 

91,018,160

 

Earnings (loss) per share—Basic:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.33

)

 

$

(0.22

)

Discontinued operations

 

 

-

 

 

 

0.02

 

Earnings (loss) per share—Basic

 

$

(0.33

)

 

$

(0.20

)

Earnings (loss) per share—Diluted:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.33

)

 

$

(0.22

)

Discontinued operations

 

 

-

 

 

 

0.02

 

Earnings (loss) per share—Diluted

 

$

(0.33

)

 

$

(0.20

)

 

For the three months ended March 31, 2017, securities convertible into 26,935,378 common shares, were excluded from the earnings (loss) per share computations because their effect would have been anti-dilutive. For the three months ended March 31, 2016, securities convertible into 32,325,109 common shares, were excluded from the earnings (loss) per share computations because their effect would have been anti-dilutive.

 

 

NOTE 12: RELATED PARTY TRANSACTIONS

 

In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with the related entities described below. All of these relationships and transactions were approved or ratified by our audit committee as being on terms comparable to those available from an unaffiliated third party or otherwise not creating a conflict of interest.

 

38


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

Almanac

 

Andrew M. Silberstein serves as a trustee on our board of trustees, as designated pursuant to the purchase agreement. Mr. Silberstein is an equity owner of Almanac and an officer of the investor and holds indirect equity interests in the investor. The transactions pursuant to the purchase agreement are described above in Note 9: Series D Preferred Shares.

 

IRT

 

As described in Note 16: Discontinued Operations, we deconsolidated IRT as of October 5, 2016.  While IRT was consolidated by RAIT, IRT was not considered a related party.  Subsequent to deconsolidation, IRT became a related party.  RAIT’s relationships with IRT are discussed below.

 

Fees and Expenses Received as IRT’s Former External Advisor

 

On December 20, 2016, in connection with IRT’s management internalization, we sold IRT’s Advisor and, therefore, these fees and expenses are no longer earned.

 

On September 25, 2015, we entered into the Second Amendment to the Second Amended and Restated Advisory Agreement.  The Second Amendment amended the advisory agreement to extend its term to October 1, 2020, and to provide for compensation to us for periods subsequent to October 1, 2015, as follows:

 

 

Quarterly base management fee of 0.375% of IRT’s cumulative equity raised; and

 

 

Quarterly incentive fee equal to 20% of IRT’s core funds from operations, or Core FFO, as defined in the advisory agreement, in excess of $0.20 per share.

 

For the three months ended March 31, 2016, we earned $1,631 of asset management fees and $65 of incentive fees, which were eliminated in consolidation.  As of March 31, 2017 and December 31, 2016, we had no amounts due from IRT related to the advisory agreement.

 

Property Management Fees Paid to Our Property Manager

 

On December 20, 2016, in connection with our management internalization, we sold our multifamily property management business to IRT, which included all of the property management agreements for IRT’s properties.

 

We had entered into property management agreements with IRT with respect to each of IRT’s properties.  Pursuant to these property management agreements, IRT paid our multifamily property manager property management and construction management fees on a monthly basis up to 4.0% of the gross revenues from a property for each month. For the three months ended March 31, 2016, we earned $1,262 of property management and construction management fees, which were eliminated in consolidation.  As of March 31, 2017 and December 31, 2016, we had no amounts due from IRT related to these property management agreements.

 

IRT Dividends and IRT Repurchase of its Common Stock

 

On October 5, 2016, we sold all 7,269,719 shares of IRT’s common stock that we owned to IRT.

 

For the three months ended March 31, 2016, we earned and subsequently received dividends of $1,309, which were eliminated in consolidation. As of March 31, 2017 and December 31, 2016, we had no amounts due from IRT related to our previous ownership of shares of IRT’s common stock.

39


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

 

Indebtedness

 

During the three months ended March 31, 2016, we earned $265 of interest from IRT related to $38,075 of mortgage indebtedness held by us.  As of March 31, 2017 and December 31, 2016, we had no amounts due from IRT related to this mortgage indebtedness.

 

Other Transactions with IRT

 

Pursuant to a shared services agreement, IRT reimbursed RAIT $387 for general and administrative services for the three months ended March 31, 2017.  In addition, during the three months ended March 31, 2017, IRT reimbursed RAIT for $155 of general and administrative items that were paid on IRT’s behalf.

 

Pursuant to property management agreements with IRT with respect to RAIT’s multifamily properties, RAIT paid IRT $137 of property management fees for the three months ended March 31, 2017.  This is reflected within real estate operating expense in our consolidated statements of operations.

 

Other

 

On December 20, 2016, Scott F. Schaeffer resigned from his position as Chief Executive Officer of RAIT and became the full-time Chief Executive Officer of IRT.  On the same date, Scott F. Schaeffer entered into a one year consulting agreement with RAIT for which he will receive compensation of $375.  For the three months ended March 31, 2017, $94 was earned and paid related to this consulting agreement, which is reflected in general and administrative expenses in our consolidated statements of operations. In accordance with the Memorandum of Understanding dated September 26, 2016, which memorialized the terms of Scott F. Schaeffer’s resignation, RAIT granted Scott F. Schaeffer 150,000 unvested shares of common stock on December 23, 2016, and made a $500 cash payment in January 2017.  The shares vest 50% on the six month anniversary and 50% on the one year anniversary of the grant date.

 

In accordance with the Memorandum of Understanding dated September 26, 2016, which memorialized the terms of James J. Sebra’s resignation, he was owed a cash bonus, payable in 2017, equal to 25% of his cash bonus for the year ended December 31, 2016.  As of March 31, 2017, $110 has been accrued as a payable for this cash bonus.

 

 

NOTE 13: SUPPLEMENTAL DISCLOSURE TO STATEMENT OF CASH FLOWS

 

The following are supplemental disclosures to the statements of cash flows for the three months ended March 31, 2017 and 2016:

 

 

 

For the  March 31,

 

 

 

2017

 

 

2016

 

Cash paid for interest

 

$

16,247

 

 

$

22,766

 

Cash paid for taxes

 

 

24

 

 

 

120

 

Non-cash increase in investments in real estate, intangible assets, and other liabilities from conversion of loans

 

 

1,590

 

 

 

1,499

 

Non-cash (decrease) in investments in real estate, restricted cash, other assets, intangible assets, accounts payable and accrued expenses, and other liabilities from deconsolidation of properties

 

 

(43,025

)

 

 

 

Non-cash increase (decrease) in indebtedness from debt extinguishments

 

 

(3,813

)

 

 

 

Non-cash increase (decrease) in indebtedness from deconsolidation of properties

 

 

(27,467

)

 

 

 

 

For a discussion of the non-cash changes in indebtedness and investments in real estate, restricted cash, other assets, intangible assets, accounts payable and accrued expenses, and other liabilities that occurred during the three months ended March 31, 2017, see Note 4: Investments in Real Estate and Note 5: Indebtedness.

 

 

40


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

NOTE 14: SEGMENT REPORTING

 

As a group, our executive officers act as the Chief Operating Decision Maker (“CODM”). The CODM reviews operating results of our reportable segments to make decisions about investments and resources and to assess performance for each of these reportable segments.

 

Historically, we have conducted our business through the following reportable segments:

 

 

Our real estate lending, owning and managing segment concentrates on lending, owning and managing commercial real estate assets throughout the United States. The form of our investment may range from first mortgage loans to equity ownership of a commercial real estate property. We manage our investments internally through our asset management and property management professionals.

 

Prior to the deconsolidation of IRT in October 2016, our IRT segment concentrated on the ownership of apartment properties in opportunistic markets throughout the United States.

 

As discussed in Note 16: Discontinued Operations, IRT is a discontinued operation.  As a result, we only have one reportable segment that relates to our continuing operations.

 

 

NOTE 15: COMMITMENTS AND CONTINGENCIES

 

We are involved from time to time in litigation on various matters, including disputes with tenants of owned properties, disputes arising out of agreements to purchase or sell properties, disputes arising out of our loan portfolio, negligence, and similar tort claims related to owned properties or employment related disputes. Given the nature of our business activities, these lawsuits are considered routine to the conduct of our business. The result of any particular lawsuit cannot be predicted, because of the very nature of litigation, the litigation process and its adversarial nature, and the jury system. We do not expect that the liabilities, if any, that may ultimately result from such routine legal actions will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

During the three months ended March 31, 2017, we reached an agreement in principle to settle a matter with a former employee for $175.  This amount has been accrued as a liability as of March 31, 2017.

 

 

NOTE 16: DISCONTINUED OPERATIONS

 

As discussed in Note 1: The Company, on December 20, 2016, the management internalization of one of our previously consolidated variable interest entities Independence Realty Trust, Inc., or IRT, was completed pursuant to the September 27, 2016 securities and asset purchase agreement, or the IRT internalization agreement.  The IRT management internalization consisted of two parts: (i) the sale of Independence Realty Advisors, LLC, or the IRT advisor, which was our subsidiary and IRT’s external advisor, and (ii) the sale of certain assets and the assumption of certain liabilities relating to our multifamily property management business which we referred to as RAIT Residential, including property management contracts relating to apartment properties owned by ourselves, IRT, and third parties.  The purchase price paid by IRT for the IRT management internalization was $43,000, subject to certain pro rations at closing.  As part of the same agreement, we sold all of the 7,269,719 shares of IRT’s common stock owned by certain of our subsidiaries on October 5, 2016.

 

As the IRT internalization agreement resulted in our disposal of our investment in IRT, our advisory agreement with IRT and our multifamily property management business as well as a strategic shift in our operations and financial results, we concluded that these entities or distinguishable components of RAIT should be reported as discontinued operations as of September 30, 2016.  As discussed in Note 14: Segment Reporting, IRT was part of our IRT segment.  The IRT advisor and our multifamily property management business were part of our real estate lending, owning and managing segment.

 

Provided below are the statements of operations and summarized cash flow statement classified as discontinued operations. A balance sheet will not be included as there were no discontinued operations presented as of the balance sheet dates.

 

41


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2017

(Unaudited and dollars in thousands, except share and per share amounts)

 

The table below presents the statements of operations of these entities or distinguishable components of RAIT that are discontinued operations for the three months ended March 31, 2017 and 2016:

 

 

For the Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

Property income

 

$

 

 

$

38,667

 

Fee and other income

 

 

 

 

 

738

 

Total revenue

 

 

 

 

 

39,405

 

Expenses:

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

9,712

 

Real estate operating expense

 

 

 

 

 

15,858

 

Compensation expense

 

 

 

 

 

1,874

 

General and administrative expense

 

 

 

 

 

1,257

 

Acquisition expense

 

 

 

 

 

160

 

Depreciation and amortization expense

 

 

 

 

 

11,603

 

Total expenses

 

 

 

 

 

40,464

 

Operating (Loss) Income

 

 

 

 

 

(1,059

)

Interest and other income (expense), net

 

 

 

 

 

 

Gains (losses) on assets

 

 

 

 

 

2,453

 

Gain (loss) on IRT merger with TSRE

 

 

 

 

 

91

 

TSRE financing extinguishment and employee separation expenses

 

 

 

 

 

 

Gains (losses) on extinguishments of debt

 

 

 

 

 

 

Net income (loss) from discontinued operations

 

$

 

 

$

1,485

 

 

The table below summarizes the cash flows provided by operating, financing and investing activities of these entities or distinguishable components of RAIT that are discontinued operations for the three months ended March 31, 2017 and 2016:

 

 

 

For the Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Cash flow from operating activities from discontinued operations

 

$

 

 

$

7,673

 

Cash flow from investing activities from discontinued operations

 

 

 

 

 

5,900

 

Cash flow from financing activities from discontinued operations

 

 

 

 

 

(29,734

)

Net change in cash and cash equivalents from discontinued operations

 

 

 

 

 

(16,161

)

Cash and cash equivalents at beginning of period - discontinued operations

 

 

 

 

 

38,305

 

Cash and cash equivalents at end of period - discontinued operations

 

$

 

 

$

22,144

 

 

 

NOTE 17: SUBSEQUENT EVENTS

 

We have evaluated subsequent events or transactions that have occurred after the consolidated balance sheet date of March 31, 2017, but prior to the filing of the consolidated financial statements with the SEC on this Quarterly Report on Form 10-Q. We have determined that, except as disclosed within this Note and other Notes, there are no subsequent events that require disclosure in this Annual Report on Form 10-Q.

 

 

 

42


 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

In addition to historical information, this discussion and analysis contains forward-looking statements. These statements can be identified by the use of forward-looking terminology including “may,” “believe,” “will,” “expect,” “anticipate,” “estimate,”  “seek,” “continue” or similar words. Our forward-looking statements include, but are not limited to, statements regarding RAIT’s plans and initiatives and 2017 expectations to (i) simplify its business model, (ii) focus on its core commercial real estate lending business, (iii) increase loan origination levels, when compared to 2016, as capital from non-lending related asset sales is re-deployed, (iv) deleverage by using cash generated by asset sales to repay debt, (v) opportunistically divest and maximize the value of RAIT’s legacy REO portfolio and existing property management operations and, ultimately, minimize REO holdings, (vi) significantly reduce its total expense base, (vii) continue to sell non-lending assets, (viii) achieve significant annual expense savings in connection with the internalization of IRT, (ix) sell in whole or substantial part its Urban Retail property management business and achieve costs savings in connection with such sale,  (x) enhance its long-term prospects and create value for its shareholders and (xi) whether and when RAIT will be able to recognize a gain, which will offset the non-cash loss on deconsolidation of properties reported for the quarter ended March 31, 2017. Such forward-looking statements are based upon RAIT’s historical performance and its current plans, estimates, predictions and expectations and are not a representation that such plans, estimates, predictions or expectations will be achieved. Because such statements include risks, uncertainties and contingencies, actual results may differ materially from the expectations, intentions, beliefs, plans or predictions of the future expressed or implied by such forward-looking statements.

 

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These risks and uncertainties include, without limitation, (i) whether RAIT will be able to continue to implement its strategy to transition RAIT to a more lender focused, simpler, and more cost-efficient business model, to deleverage and to generate enhanced returns for its shareholders; (ii) whether RAIT will be able to continue to opportunistically divest  RAIT’s legacy REO portfolio and existing property management operations and the majority of RAIT’s non-lending assets; (iii) whether anticipated cost savings from the internalization of IRT will be achieved; (iv) whether the divestiture of RAIT’s commercial real estate portfolio and other non-lending assets will lead to lower asset management costs and lower expenses; (v) whether RAIT will be able to reduce compensation and G&A expenses and indebtedness; (vi) whether RAIT’s changes to its Board composition and  leadership and to its executive management team will lead to enhanced value for shareholders; (vii) whether RAIT will be able to create sustainable earnings and grow book value; (viii) whether RAIT will be able to redeploy capital from non-lending related asset sales; (ix) whether RAIT will be able to increase loan origination levels; (x) whether the disposition of non-core assets, reductions in debt levels and expected loan repayments will impact RAIT’s earning and CAD; (xi) whether RAIT will continue to pay dividends and the amount of such dividends; (xii) whether RAIT will be able to organically increase reliance on match-funded asset-level debt; (xiii) overall conditions in commercial real estate and the economy generally; (xiv) whether market conditions will enable us to continue to implement our capital recycling and debt reduction plan involving selling properties and repurchasing or paying down our debt; (xv) whether we will be able to originate sufficient bridge loans; (xvi) changes in the expected yield of our investments; (xvii) changes in financial markets and interest rates, or to the business or financial condition of RAIT or its business; (xviii) whether RAIT will generate any CMBS gain on sale profits; (xix) whether our management changes will be successfully implemented; (xx) whether RAIT will be able to aggregate sufficient loans or whether market conditions will permit RAIT to complete future securitizations of floating rate loans; (xxi) whether and when RAIT will be able to recognize a gain, which will offset the non-cash loss on deconsolidation of properties reported for the quarter ended March 31, 2017; (xxii) whether RAIT will have any legal obligations on the non-recourse debt on its industrial real estate portfolio; (xxiii) RAIT may not be able to recognize a gain, which will offset the non-cash loss on deconsolidation of properties reported for the quarter ended March 31, 2017, until all the properties in the industrial portfolio are sold and the timing of such sales is controlled by the lender referenced above and RAIT may recognize additional similar non-cash losses on future sales of less than all of the remaining properties until all of such properties are sold; (xxiv) the availability of financing and capital, including through the capital and securitization markets; (xxv) risks, disruption, costs and uncertainty caused by or related to the actions of activist shareholders, including that if individuals are elected to our Board with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create value for our shareholders and  perceived uncertainties as to our future direction as a result of potential changes to the composition of our Board may lead to the perception of a change in the direction of our business, instability or a lack of continuity which may be exploited by our competitors, cause concern to our current or potential customers, may result in the loss of potential business opportunities and make it more difficult to attract and retain qualified personnel and business partners, and changes to the composition of our board resulting from such actions may trigger put rights or otherwise permit acceleration of some of our indebtedness; and (xxvi) other factors described in RAIT’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and in other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report, except as may be required by applicable law.

43


 

 

Overview

 

We are an internally-managed Maryland real estate investment trust, or REIT, focused on providing commercial real estate financing throughout the United States. As explained below, we plan to continue to opportunistically divest our non-lending businesses and assets, however, presently, we also own and manage a portfolio of commercial real estate properties and manage real estate assets for third parties.

 

During the three months ended March 31, 2017, we continued making significant progress executing on our comprehensive strategy to drive long-term revenue growth and enhance shareholder value by transforming into a more focused, cost-efficient and lower leverage business concentrated on its core commercial real estate, or CRE, lending business.  We began executing this strategy in 2016 and will continue this pursuit throughout 2017.   Our transformational strategy remains focused on:

 

 

concentrating RAIT’s business on our core middle-market CRE lending business;

 

opportunistically divesting, while maximizing the value of, our legacy real estate owned, or REO, portfolio and ultimately minimizing our REO holdings;

 

opportunistically divesting and maximizing the value of our commercial property management operations, including our Urban Retail property management business;

 

optimizing our capital structure and reducing our outstanding indebtedness;

 

reducing our total expense base;  and

 

most importantly, reallocating capital into and growing our core middle market CRE lending activities.

 

Our transition is ongoing and, once completed, will result in a simpler, more cost efficient and lower leveraged business model that is focused on the core CRE business.  We believe that we will be able to enhance shareholder value by delivering stable and repeatable risk-adjusted returns.  We expect to accomplish that with a significantly lower expense base that matches our lending focused strategy with an appropriate capital structure and lower levels of debt.  

 

We believe we made progress executing our strategy to return to our focus on CRE lending as follows:

 

 

Commercial Real Estate Loan Originations

 

 

o

We originated $120.0 million of senior CRE loans during the three months ended March 31, 2017 up from $40.5 million in loans originated during the three months ended March 31, 2016.

 

 

Reductions in Property Portfolio

 

 

o

We sold six properties which generated gross proceeds of $95.0 million and $8.9 million in GAAP gains related to these sales during three months ended March 31, 2017.

 

o

We were divested of five properties with a carrying amount of $43.4 million.

 

o

Since the beginning of 2016 through March 31, 2017, consistent with our strategy of divesting non-lending assets, we have reduced our property portfolio and related indebtedness, in the aggregate, by $476.3 million and $409.5 million, respectively.

 

o

As of December 31, 2016, we had identified 36 properties for disposition, which aggregated $540.2 million of gross cost.  As of March 31, 2017, 25 properties remain identified for disposition, which aggregate to $377.8 million of gross cost.  One of these properties was sold in April 2017 for $4.6 million.  We expect to sell or dispose of the remainder of the $377.8 million of properties during 2017.

 

 

Reductions in Compensation & General and Administrative, or G&A, Expenses

 

 

o

Our compensation and G&A expense declined 35.4% to $6.2 million for the three months ended March 31, 2017 from $9.6 million in the three months ended December 31, 2016, and declined 8.8% from $6.8 million in the three months ended March 31, 2016.  

 

o

We are currently on track to meet our 2017 annual compensation and G&A expense goal to not exceed $25.0 million.  

 

44


 

 

Debt Reductions and Corporate Leverage

 

 

o

Our total indebtedness, based on principal amount, declined by $133.6 million during the three months ended March 31, 2017, and $798.2 million, from January 1, 2016 through March 31, 2017.

 

o

Our total recourse debt, excluding our secured warehouse facilities, declined by $32.0 million, or 8.9%, during the three months ended March 31, 2017 and $88.7 million, or 21.3%, from January 1, 2016 through March 31, 2017.  

 

o

In April 2017, we repaid an additional $10.0 million recourse debt obligation.

 

o

We have no remaining scheduled recourse debt maturities in 2017, excluding our secured warehouse facilities.

 

o

Our corporate leverage ratio, calculated by dividing our total liabilities by our total gross assets, remained consistent at 76% as of March 31, 2017 when compared to December 31, 2016.  

 

During the three months ended March 31, 2017, we generated GAAP net income (loss) allocable to common shares of $(30.1) million, or $(0.33) per common share-diluted, as compared to $(17.8) million, or $(0.20) per common share-diluted, during the three months ended March 31, 2016.  During the three months ended March 31, 2017, our cash available for distribution, or CAD, decreased to $5.2 million, or $0.06 per common share from $12.9 million, or $0.14 per common share for the three months ended March 31, 2016.  CAD is a non-GAAP financial measure.  For management’s respective definitions and discussion of the usefulness of CAD to investors, analysts and management and a reconciliation of our reported net income (loss) to our CAD, see Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures.”

 

Trends That May Affect our Business

 

Investors should read Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, or the Annual Report, for a detailed discussion of the following items:

 

Trends relating to capital markets.

 

Trends relating to CRE debt market maturities.

 

Trends relating to originating and financing conduit loans and bridge loans.

 

Trends relating to investments in real estate.

 

Interest rate environment.

 

Prepayment rates.

 

Transitional impact of strategy.

 

CRE Lending

 

We originate and own senior long-term conduit mortgage loans, short-term bridge loans, subordinated, or “mezzanine,” financing and preferred equity interests. These assets are in most cases “non-recourse” or limited recourse loans secured by commercial real estate assets or real estate entities. This means that we look primarily to the assets securing the loan for repayment, subject to certain standard exceptions. We originate loans that are eligible to be sold to securitizations issuing CMBS, which we refer to as conduit loans. We may from time to time acquire existing commercial real estate loans from third parties who have originated such loans, including banks, other institutional lenders or third-party investors. Where possible, we seek to maintain direct lending relationships with borrowers, as opposed to investing in loans controlled by third party lenders.

 

During the three months ended March 31, 2017, we originated $120.0 million of CRE loans and received CRE loan repayments of $90.2 million, contributing to a net increase in our loan portfolio of $22.9 million. The tables below describe certain characteristics of our commercial mortgage loans, mezzanine loans, and preferred equity interests as of March 31, 2017 (dollars in thousands):

 

 

 

Carrying Value

 

 

Weighted-

Average

Coupon

 

 

Range of Maturities

 

Number

of Loans

 

Commercial Real Estate (CRE) Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgages

 

$

1,188,845

 

 

 

5.9%

 

 

Apr. 2017 - Dec. 2025

 

 

93

 

Mezzanine loans

 

 

88,115

 

 

 

9.9%

 

 

Apr. 2017 - May. 2025

 

 

21

 

Preferred equity interests

 

 

40,328

 

 

 

8.7%

 

 

Nov. 2018 - Jan. 2029

 

 

16

 

Total investments in loans

 

$

1,317,288

 

 

 

6.3%

 

 

 

 

 

130

 

 

Certain of our commercial mortgage loans, mezzanine loans and preferred equity interests provide for the accrual of interest at specified rates which differ from current payment terms.  We refer to these loans as cash flow loans, the vast majority of which were originated prior to 2011.  Although a cash flow loan accrues interest at a stated rate, pursuant to forbearance or other agreements, the

45


 

borrower is only required to pay interest each month at a minimum rate plus additional interest up to the stated rate to the extent of all cash flow from the property underlying the loan after the payment of property operating expenses.  Please see Part I, Item 1, “Financial Statements —Note 2: Summary of Significant Accounting Policies—Revenue Recognition” for further information on these loans.  As of March 31, 2017, we held investments we characterized as cash flow loans, with a recorded investment (including accrued interest) of $186.3 million comprised of preferred equity interests totaling $50.1 million, bridge loans totaling $100.6 million and mezzanine loans totaling $35.6 million.  Of these cash flow loans, $179.5 million were originated prior to 2011 and $6.8 million were originated in 2013.

 

As of March 31, 2017, our nonaccrual loans total $115.8 million and represent six loans originated prior to 2008, down from $121.0 million as of December 31, 2016.  We remain focused on working with our borrowers on these loans to either sell or refinance the underlying properties as expeditiously as possible.  As of March 31, 2017, we have a loan loss reserve of $13.5 million, representing approximately 12% of our nonaccrual loans and 1% of our total CRE loan portfolio.

 

We finance our consolidated CRE loans on a long-term basis through securitizations. See Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Securitization Summary” for more information about our securitizations.

 

The charts below describe the property types and the geographic breakdown of our commercial mortgage loans, mezzanine loans, other loans, and preferred equity interests as of March 31, 2017:

 

 

 

(a)

Based on carrying amount.

 

REO Portfolio

 

As described above, we continue to execute on our strategy of opportunistically divesting, while maximizing the value of our legacy REO portfolio and ultimately minimizing our REO holdings over time.  During the three months ended March 31, 2017, we sold 6 properties for $95.0 million which generated an $8.9 million GAAP gain.  The proceeds from the sales were used to reduce debt, and the sales generated $5.9 million of net proceeds to us.  We are expecting to dispose of additional REO properties with an

46


 

aggregate gross cost (carrying value), as of March 31, 2017, of approximately $377.8 million ($317.0 million) during the remainder of 2017.  As of March 31, 2017, our real estate portfolio had an aggregate gross cost (carrying value) of $694.2 million ($580.1 million), comprised of $294.8 million ($219.6 million) of office properties, $63.1 million ($53.3 million) of multifamily properties, $152.8 million ($133.4 million) of retail properties, $48.4 million ($46.2 million) of industrial properties, $82.9 million ($75.4 million) of properties in redevelopment and $52.2 million ($52.2 million) of land.  We reported a $7.4 million asset impairment for the three months ended March 31, 2017 related to four properties in varying stages of the sales process.  We have financed our portfolio of investments in commercial real estate through secured mortgages held by either third-party lenders or our commercial real estate securitizations.

 

During the three months ended March 31, 2017, we recognized a non-cash loss on deconsolidation totaling $15.9 million due to being divested of five properties relating to an industrial real estate portfolio that we owned.  At December 31, 2016, this portfolio contained ten properties with a carrying value of $82.5 million and $81.9 million of related cross-collateralized non-recourse debt. In future periods as the lender of this debt divests the remaining assets in this portfolio, we expect to recognize a gain which will offset this loss. We do not believe we will have any further legal obligations under the non-recourse debt secured by this entire portfolio once these divestitures are completed.  We became the owner of the portfolio in 2015 as a result of exercising our remedies under an $11.0 million subordinated mezzanine loan acquired in 2006.  In 2016, we determined that this portfolio was not consistent with our new strategic direction and took a $10.0 million asset impairment charge against this portfolio.  During the quarter ended March 31, 2017, five of the properties from this industrial portfolio were divested through auction processes organized by the senior lender. These five properties had a carrying value of $43.4 million.  Upon divestment of these properties, we derecognized these net assets and extinguished related debt of $27.5 million based on the proceeds received by the senior lender at the auctions.  The difference between these amounts resulted in the non-cash loss described above.  The remaining five industrial properties have a carrying value of $38.8 million and $54.5 million of related non-recourse debt at March 31, 2017.

 

The table below describes certain characteristics of our REO Portfolio as of March 31, 2017 (dollars in thousands).  We invest in real estate properties, primarily multi-family properties, throughout the United States.  

 

 

 

Investments in

Real Estate (1)

 

 

Average

Physical

Occupancy

 

 

Units/

Square Feet/

Acres

 

 

Number of

Properties

 

Multi-family real estate properties

 

$

63,158

 

 

 

92.5%

 

 

 

692

 

 

 

3

 

Office real estate properties

 

 

294,842

 

 

 

78.3%

 

 

 

1,967,328

 

 

 

17

 

Industrial real estate properties

 

 

48,377

 

 

 

100.0%

 

 

 

1,009,586

 

 

 

8

 

Retail real estate properties

 

 

152,770

 

 

 

76.3%

 

 

 

1,493,073

 

 

 

6

 

Redevelopment real estate properties

 

 

82,921

 

 

 

41.1%

 

 

 

1,300,177

 

 

 

3

 

Parcels of land

 

 

52,162

 

 

N/A

 

 

 

12.7

 

 

 

6

 

Total

 

$

694,230

 

 

 

 

 

 

 

 

 

 

43

 

(1)

Based on properties owned as of March 31, 2017.

47


 

The charts below describe the property types and the geographic breakdown of our investments in real estate as of March 31, 2017:

 

 

 

(a)

Based on gross cost.

 

Securitization Summary

 

Overview. We have used securitizations to match fund the interest rates and maturities of our assets with the interest rates and maturities of the related financing. This strategy has helped us reduce interest rate and funding risks on our portfolios for the long-term. A securitization is a structure in which multiple classes of debt and equity are issued by a special purpose entity to finance a portfolio of assets. Cash flow from the portfolio of assets is used to repay the securitization liabilities sequentially, in order of seniority. The most senior classes of debt typically have credit ratings of “AAA” through “BBB–” and therefore can be issued at yields that are lower than the average yield of the loans collateralizing the securitization. The debt tranches are typically rated based on portfolio quality, diversification and structural subordination. The equity securities issued by the securitization are the “first loss” piece of the capital structure, but they are entitled to all residual amounts available for payment after the obligations to the debt holders have been satisfied. Our retained interests described below included in our investments in our consolidated securitizations are typically in such “first loss” position. Historically, the stated maturity of the debt issued by a securitization we have sponsored and consolidated has been between 15 and 17 years. However, we expect the weighted average life of such debt to be shorter than the stated maturity due to the financial condition of the borrowers on the underlying loans and the characteristics of such loans, including the existence and frequency of exercise of any permitted prepayment, the prevailing level of interest rates, the actual default rate and the actual level of any recoveries on any defaulted loans. Debt issued by these securitizations is non-recourse to RAIT and payable solely from the payments by the borrowers on the loans collateralizing these securitizations. These assets are in most cases “non-recourse” or limited recourse loans secured by commercial real estate assets or real estate entities. This means that we look primarily to the assets securing the loan for repayment, subject to certain standard exceptions.

 

As of March 31, 2017, we had sponsored six securitizations with varying amounts of retained or residual interests held by us which we consolidate in our financial statements as follows: RAIT I, RAIT II, RAIT 2014-FL3 Trust, or RAIT FL3, RAIT 2015-FL4 Trust, or RAIT FL4, RAIT 2015-FL5 Trust, or RAIT FL5 and RAIT 2016-FL6 Trust, or RAIT-FL6. We refer to RAIT FL3, RAIT FL4, RAIT FL5 and RAIT FL6 as the FL securitizations. We previously exercised our rights and unwound two other securitizations we had sponsored, RAIT 2013-FL1 Trust, or RAIT FL1, in 2015 and RAIT 2014-FL2 Trust, or RAIT FL2, in 2016. In addition, we have exercised our rights and unwound RAIT FL3 in April 2017. The assets and liabilities of these securitizations are presented at amortized cost in our consolidated financial statements. We originated substantially all of the loans collateralizing RAIT I, RAIT II

48


 

and the FL securitizations. We serve as the collateral manager, servicer and special servicer on RAIT I and RAIT II and as servicer and special servicer for each of the FL securitizations.

 

Over time, our returns on and cash flows from our retained interests in our securitizations generally decrease as the senior classes of debt bearing relatively lower interest rates are paid down by collateral pool payments and other proceeds leaving more junior classes of debt bearing relatively higher interest rates on the smaller collateral pool.  As a result, we continue to evaluate strategies to manage the returns on our capital allocated to our retained interests in each of our securitizations consistent with our rights and obligations under our securitizations and relevant market conditions, which may include, without limitation, unwinding a securitization and rolling the remaining collateral over to a new securitization and may involve, where applicable, selling our properties securing loans included in the collateral pool and repaying such loans.  With respect to our floating rate CMBS securitizations described below, we have implemented a process of unwinding the FL securitizations when, because of loan repayments, the securitizations become inefficient.

 

Securitization Performance. RAIT I and RAIT II contain interest coverage triggers, or IC triggers, and over collateralization triggers, or OC triggers, that must be met in order for us to receive our subordinated management fees and our lower-rated debt or residual equity returns. If the IC triggers or OC triggers are not met in a given period, then the cash flows are redirected from lower rated tranches and used to repay the principal amounts to the senior tranches of CDO notes payable. These conditions and the re-direction of cash flow continue until the triggers are met by curing the underlying payment defaults, paying down the CDO notes payable, or other actions permitted under the relevant securitization indenture. As of the most recent payment information, all applicable IC triggers and OC triggers continue to be met for RAIT I and RAIT II, and we continue to receive all of our management fees, interest and residual returns from these securitizations. The FL securitizations do not have IC triggers and OC triggers.

 

Repayment of the loans collateralizing RAIT I and RAIT II outside their contractual maturities are expected to remain consistent with 2016 levels in the foreseeable future. In addition, we have 25 properties held for disposition with an aggregate gross cost of $377.8 million, and carrying value of $317.0 million, as of March 31, 2017.  The related indebtedness of these properties is expected to be repaid with the proceeds of any sales, which primarily includes paying down the most senior notes outstanding issued by RAIT I and RAIT II, as applicable. We continue to evaluate our real estate portfolio with regards to identifying other possible properties to sell as part of our previously disclosed capital recycling and debt reduction plan.  Because we own properties that are financed, in part, by loans collateralizing RAIT I and RAIT II, sales of our properties could result in a significant reduction of our securitization notes payable. These repayments have reduced our returns from these securitizations and we expect future repayments to continue to reduce these returns.  We currently expect the remaining loans collateralizing RAIT II to be substantially repaid or otherwise disposed of by the end of 2017.  We continue to implement our new strategic direction in order to seek to replace these returns.

 

If the CDO notes issued by RAIT I and RAIT II have not been redeemed in full prior to the distribution date occurring in May 2017, in the case of RAIT I, and June 2017, in the case of RAIT II, then an auction of the collateral assets of RAIT I or RAIT II, as relevant, will be conducted by the relevant trustee periodically thereafter and, if certain conditions set forth in the relevant indenture are satisfied, such collateral assets will be sold at the auction and the relevant CDO notes will be redeemed, in whole, but not in part, on such distribution date. Two auctions for RAIT I have been held but no sale occurred as not all of the conditions precedent were satisfied.

 

A summary of the investments in our consolidated securitizations as of the most recent payment information is as follows:

Our Legacy Securitizations

 

RAIT I—RAIT I has $555.3 million of total collateral at par value, of which $38.0 million is defaulted. The current overcollateralization, or OC, test is passing at 138.6% with an OC trigger of 116.2%. We currently own $46.1 million of the securities that were originally rated investment grade and $200.0 million of the non-investment grade securities issued by this securitization. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our collateral management fees. We pledged $26.6 million of the securities we own issued by RAIT I as collateral for a senior secured note we issued.

 

 

RAIT II—RAIT II has $305.3 million of total collateral at par value, of which $18.5 million is defaulted. The current OC test is passing at 151.3% with an OC trigger of 111.7%. We currently own $91.9 million of the securities that were originally rated investment grade and $140.7 million of the non-investment grade securities issued by this securitization. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our collateral management fees. We pledged $27.8 million of the securities we own issued by RAIT II as collateral for a senior secured note we issued.

 

Our Floating Rate CMBS Securitizations

49


 

 

 

RAIT FL3— During the second quarter of 2017, RAIT exercised its right to unwind RAIT 2014-FL3 Trust, or RAIT FL3, and satisfied the outstanding notes. We refinanced a majority of the $85.7 million of remaining loans through our warehouse financing arrangement. Loan repayments in RAIT FL3 decreased the efficiency of the securitization and by unwinding this securitization, we increased our returns on our remaining assets.

 

 

RAIT FL4—RAIT FL4 has $134.8 million of total collateral at par value, of which there is no collateral that is in default. RAIT FL4 does not have OC triggers or IC triggers. RAIT FL4, has classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $93.4 million to investors. We currently own the unrated classes of junior notes, including a class with an aggregate principal balance of $41.4 million, and the equity, or the retained interests, of RAIT FL4.

 

 

RAIT FL5—RAIT FL5 has $299.4 million of total collateral at par value, of which there is no collateral that is in default.  RAIT FL5 does not have OC triggers or IC triggers. RAIT FL5, has classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $238.6 million to investors.  A venture, in which we have retained a 60% interest, owns the unrated classes of junior notes and the equity, or the retained interests, of RAIT FL5.  The unrated classes of junior notes have an aggregate principal balance of $60.8 million.

 

 

RAIT FL6—RAIT FL6 has $252.8 million of total collateral at par value, none of which is in default. RAIT FL6 has classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $211.5 million to investors. In January 2017, we contributed our junior notes and equity of RAIT FL6 to a venture. The venture, in which we have retained a 60% interest, owns the unrated classes of junior notes and the equity, or the retained interests, of RAIT FL6.  We received approximately $17.0 million of capital as a result of this contribution. The unrated classes of junior notes have an aggregate principal balance of $41.3 million.

 

Assets Under Management

 

Assets under management, or AUM, is an operating measure representing the total assets that we own or are managing for third parties. While not all AUM generates fee income, it is an important operating measure to gauge our asset growth, volume of originations, size and scale of our operations and our performance.

 

The table below summarizes our AUM as of March 31, 2017 and December 31, 2016 (dollars in thousands):

 

 

 

AUM as of March 31, 2017

 

 

AUM as of December 31, 2016

 

Commercial real estate loan portfolio (1)

 

$

2,012,276

 

 

$

2,159,152

 

Property management (2)

 

 

1,378,609

 

 

 

1,416,072

 

Total

 

$

3,390,885

 

 

$

3,575,224

 

(1)

As of March 31, 2017 and December 31, 2016, our commercial real estate portfolio was comprised of $367.6 million and $411.7 million, respectively, of assets collateralizing RAIT I and RAIT II; $739.7 million and $789.4 million, respectively, of assets collateralizing our floating rate securitizations; $694.2 million and $854.6 million, respectively, of investments in real estate; and $210.7 million and $103.4 million, respectively, of commercial mortgage loans, mezzanine loans and preferred equity interests that were not securitized.

(2)

Urban Retail provides management and/or leasing services to 58 properties with 12,864,388 square feet in 22 states as of March 31, 2017.

 

50


 

Results of Operations

Three Months Ended March 31, 2017 Compared to the Three Months Ended March 31, 2016

The following table sets forth information regarding our consolidated results of operations for the three months ended March 31, 2017 and 2016.

 

 

For the Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

$ Variance

 

 

% Variance

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment interest income

 

$

17,650

 

 

$

25,802

 

 

$

(8,152

)

 

 

-32

%

Investment interest expense

 

 

(9,773

)

 

 

(9,320

)

 

 

(453

)

 

 

5

%

Net interest margin

 

 

7,877

 

 

 

16,482

 

 

 

(8,605

)

 

 

-52

%

Property income

 

 

20,065

 

 

 

30,055

 

 

 

(9,990

)

 

 

-33

%

Fee and other income

 

 

1,661

 

 

 

2,114

 

 

 

(453

)

 

 

-21

%

Total revenue

 

 

29,603

 

 

 

48,651

 

 

 

(19,048

)

 

 

-39

%

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

10,143

 

 

 

15,870

 

 

 

(5,727

)

 

 

-36

%

Real estate operating expense

 

 

10,634

 

 

 

14,848

 

 

 

(4,214

)

 

 

-28

%

Property management expenses

 

 

2,213

 

 

 

2,167

 

 

 

46

 

 

 

2

%

General and administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation expense

 

 

3,487

 

 

 

3,625

 

 

 

(138

)

 

 

-4

%

General and administrative expense

 

 

2,705

 

 

 

3,215

 

 

 

(510

)

 

 

-16

%

Total general and administrative expenses

 

 

6,192

 

 

 

6,840

 

 

 

(648

)

 

 

-9

%

Acquisition and integration expenses

 

 

172

 

 

 

109

 

 

 

63

 

 

 

58

%

Provision for loan losses

 

 

1,535

 

 

 

1,325

 

 

 

210

 

 

 

16

%

Depreciation and amortization expense

 

 

9,754

 

 

 

12,673

 

 

 

(2,919

)

 

 

-23

%

IRT internalization and management transition expenses

 

 

736

 

 

 

-

 

 

 

736

 

 

N/M

 

Shareholder activism expenses

 

 

694

 

 

 

-

 

 

 

694

 

 

N/M

 

Total expenses

 

 

42,073

 

 

 

53,832

 

 

 

(11,759

)

 

 

-22

%

Operating (Loss) Income

 

 

(12,470

)

 

 

(5,181

)

 

 

(7,289

)

 

 

141

%

Interest and other income (expense), net

 

 

14

 

 

 

61

 

 

 

(47

)

 

 

-77

%

Gains (losses) on assets

 

 

12,006

 

 

 

(195

)

 

 

12,201

 

 

 

-6257

%

Gains (losses) on deconsolidation of properties

 

 

(15,947

)

 

 

-

 

 

 

(15,947

)

 

N/M

 

Gains (losses) on extinguishments of debt

 

 

3,186

 

 

 

344

 

 

 

2,842

 

 

 

826

%

Asset impairment

 

 

(7,424

)

 

 

(3,922

)

 

 

(3,502

)

 

 

89

%

Change in fair value of financial instruments

 

 

(1,153

)

 

 

(4,088

)

 

 

2,935

 

 

 

-72

%

Income (loss) before taxes

 

 

(21,788

)

 

 

(12,981

)

 

 

(8,807

)

 

 

68

%

Income tax benefit (provision)

 

 

249

 

 

 

993

 

 

 

(744

)

 

 

-75

%

Income from continuing operations

 

 

(21,539

)

 

 

(11,988

)

 

 

(9,551

)

 

 

80

%

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

 

-

 

 

 

1,485

 

 

 

(1,485

)

 

 

-100

%

Net income (loss)

 

 

(21,539

)

 

 

(10,503

)

 

 

(11,036

)

 

 

105

%

(Income) loss allocated to preferred shares

 

 

(8,526

)

 

 

(8,520

)

 

 

(6

)

 

 

0

%

(Income) loss allocated to noncontrolling interests

 

 

(20

)

 

 

1,179

 

 

 

(1,199

)

 

 

-102

%

Net income (loss) allocable to common shares

 

$

(30,085

)

 

$

(17,844

)

 

$

(12,241

)

 

 

69

%

Revenue

Net interest margin. Net interest margin decreased $8.6 million, or 52%, to $7.9 million for the three months ended March 31, 2017 from $16.5 million for the three months ended March 31, 2016. Investment interest income decreased due to the $425.0 million of loan repayments that occurred during 2016, partially offset by the $156.8 million of loan originations during 2016.  Investment interest expense slightly increased due to the issuances of $40.8 million of other indebtedness related to our ventures which hold the junior notes of two of our floating rate securitizations and the issuance of $211.5 million of indebtedness in FL-6, partially offset by repayment of indebtedness secured by our loans.

 

51


 

Property income. Property income decreased $10.0 million to $20.1 million for the three months ended March 31, 2017 from $30.1 million for the three months ended March 31, 2016. The decrease is primarily attributable to a $10.6 million decrease in property income related to the sale of 22 properties since March 31, 2016 and a $0.5 million decrease in property income in our same store portfolio. The decrease is partially offset by a $1.1 million increase in property income related to 6 properties that have been acquired since March 31, 2016.

Fee and other income. Fee and other income decreased $0.4 million to $1.7 million for the three months ended March 31, 2017 from $2.1 million for the three months ended March 31, 2016. The decrease is primarily attributable to lower property management fees earned by our retail property management subsidiary.

Expenses

Interest expense. Interest expense decreased $5.7 million, or 36%, to $10.1 million for the three months ended March 31, 2017 from $15.9 million for the three months ended March 31, 2016. The decrease is attributable to $56.7 million of recourse debt reductions in 2016 and $90.2 million of repayments of indebtedness related to property dispositions.

Real estate operating expense. Real estate operating expense decreased $4.2 million, or 28%, to $10.6 million for the three months ended March 31, 2017 from $14.8 million for the three months ended March 31, 2016. The decrease is primarily attributable to a $5.3 million decrease in real estate operating expense related to the sale of 22 properties since March 31, 2016. This is partially offset by a $0.4 million increase in real estate operating expense related to 6 properties that have been acquired since March 31, 2016 and $0.7 million increase in our same store portfolio.

Property management expense. Property management expense remained consistent at $2.2 million for the three months ended March 31, 2017 and 2016.

Compensation expense. Compensation expense decreased $0.1 million to $3.5 million for the three months ended March 31, 2017 from $3.6 million for the three months ended March 31, 2016.  The primary driver of the decrease was a decrease in the number of employees partially offset by less compensation expense being deferred as direct loan origination costs for the three months ended March 31, 2017, which was $1.0 million, as compared to the three months ended March 31, 2016, which was $1.2 million.  

General and administrative expense. General and administrative expense decreased $0.5 million to $2.7 million for the three months ended March 31, 2017 from $3.2 million for the three months ended March 31, 2016. This is primarily due to decreases across multiple types of general and administrative expenses as part of our strategic transformation and simpler business model.

Acquisition expense. Acquisition expense increased $0.1 million to $0.2 million for the three months ended March 31, 2017 from $0.1 million for the three months ended March 31, 2016.

Provision for loan losses. Provision for loan losses increased $0.2 million to $1.5 million for the three months ended March 31, 2017 from $1.3 million for the three months ended March 31, 2016.

Depreciation and amortization expense. Depreciation and amortization expense decreased $2.9 million, or 23%, to $9.8 million for the three months ended March 31, 2017 from $12.7 million for the three months ended March 31, 2016. The decrease is primarily attributable to a $3.4 million decrease in depreciation and amortization expense related to the sale of 22 properties since March 31, 2016. This decrease in partially offset by a $0.7 million increase in depreciation and amortization expense related to 6 properties that have been acquired since March 31, 2016.

IRT internalization and management transition expenses. During the three months ended March 31, 2017, we incurred $736 of advisory and consulting expenses directly related to impacts of the IRT internalization and our management transition.

Shareholder activism expenses. During the three months ended March 31, 2017, we incurred $694 of additional expenses beyond those normally associated with soliciting proxies for our annual meeting of shareholders as a result of responding to shareholder activism.  

Other income (expense)

Gains (losses) on assets. During the three months ended March 31, 2017 three multi-family properties, two office properties and one parcel of land were sold resulting in gains of $8.9 million. A $3.1 million dollar gain was also recognized during the three months ended March 31, 2017 relating to the sale of a multifamily property that occurred during the second quarter of 2015. The gain was

52


 

deferred as the buyer’s initial investment was insufficient. As our loan, which financed the buyer’s acquisition of this property, was paid off during the three months ended March 31, 2017, we recognized the $3.1 million deferred gain.

Gains (losses) on deconsolidation of properties. During the three months ended March 31, 2017, we incurred a non-cash loss on deconsolidation of properties of $15.9 million relating to an industrial real estate portfolio which contained ten properties with a carrying value of $82.5 million and $81.9 million of related non-recourse debt as of December 31, 2016. During the quarter ended March 31, 2017, the senior lender foreclosed on the mortgage liens encumbering five of these industrial properties that had an aggregate carrying value of $43.1 million as well as $0.3 million of intangible and other assets, net of accrued expenses and other liabilities, and $27.5 million of related non-recourse indebtedness as well as certain other assets and other liabilities.  

Gains (losses) on extinguishment of debt. During the three months ended March 31, 2017, we recognized a gain on extinguishment of debt of $3.2 million. This includes a $4.1 million gain on the extinguishment of the mortgage indebtedness of two of our multi-family properties upon their sale as they were sold for less than their outstanding indebtedness and the outstanding indebtedness has been satisfied. This was offset by a loss on the extinguishment of debt of $0.9 million related to repurchases of our indebtedness, primarily driven by the write-off of the unamortized deferred financing costs associated with the indebtedness.

Asset impairment. During the three months ended March 31, 2017, we recognized impairment of real estate assets of $7.4 million as it was more likely than not we would dispose of the assets before the end of their previously estimated useful lives and a portion of our recorded investment in these assets was determined to not be recoverable.

Change in fair value of financial instruments. During the three months ended March 31, 2017, the change in fair value of financial instruments decreased our net income by $1.2 million. The fair value adjustments we recorded were as follows (dollars in thousands):

 

Description

 

For the Three Months Ended March 31, 2017

 

 

For the Three Months Ended March 31, 2016

 

Change in fair value of junior subordinated notes

 

$

(660

)

 

$

719

 

Change in fair value of derivatives

 

 

7

 

 

 

(1,907

)

Change in fair value of warrants and investor SARs

 

 

(500

)

 

 

(2,900

)

Change in fair value of financial instruments

 

$

(1,153

)

 

$

(4,088

)

The changes in the fair value for the junior subordinated notes for which the fair value option was elected for the three months ended March 31, 2017 and 2016 was primarily attributable to changes in interest rates and instrument specific credit risks. The changes in the fair value of derivatives for the three months ended March 31, 2017 and 2016 was primarily attributable to changes in interest rates. The changes in fair value of the warrants and investor SARs for the three months ended March 31, 2017 and 2016 was primarily attributable to changes in the reference stock price and volatility.

Income tax benefit (provision). During the three months ended Mach 31, 2017, the income tax benefit was driven by a reversal of the current income tax liability accrued as of December 31, 2016 as result of updating our projections for 2017. We are now projecting an ordinary loss position for taxable year 2017 for our TRS holding company. The reversal of the accrual generated a current income tax benefit of $249 for the three months ended March 31, 2017.

Income (loss) from discontinued operations. During the three months ended March 31, 2016, income (loss) from discontinued operations reflected recurring activity from our discontinued operations.

Non-GAAP Financial Measures

Cash Available for Distribution

Cash available for distribution, or CAD, is a non-GAAP financial measure. We believe that CAD provides investors and management with a meaningful indicator of operating performance. Management also uses CAD, among other measures, to evaluate profitability and our board of trustees considers CAD in determining our quarterly cash distributions. We also believe that CAD is useful because it adjusts for a variety of noncash items (such as depreciation and amortization, equity-based compensation, provision for loan losses and non-cash interest income and expense items). In addition, the compensation committee of our board of trustees has used CAD as a metric in establishing quantitative performance-based awards for certain of our executive officers since 2015

 

We calculate CAD by subtracting from or adding to net income (loss) attributable to common shareholders the following items: depreciation and amortization items including depreciation and amortization expense, straight-line rental income or expense, amortization of deferred financing costs, and amortization of discounts on financings; origination fees; equity-based compensation; changes in the fair value of our financial instruments; realized gains (losses) on assets; provision for loan losses; asset impairments;

53


 

acquisition gains or losses and transaction costs; deferred income tax benefit (provision); certain fee income eliminated in consolidation that is attributable to third parties; and one-time events pursuant to changes in U.S. GAAP and certain other non-routine items.

 

CAD should not be considered as an alternative to net income (loss) or cash generated from operating activities, determined in accordance with U.S. GAAP, as an indicator of operating performance. For example, CAD does not adjust for the accrual of income and expenses that may not be received or paid in cash during the associated periods. Please refer to our consolidated financial statements prepared in accordance with U.S. GAAP in our most recent report on Form 10-K or Form 10-Q filed with the Securities and Exchange Commission. In addition, our methodology for calculating CAD may differ from the methodologies used by other comparable companies, including other REITs, when calculating the same or similar supplemental financial measures and may not be comparable with these companies.

Set forth below is a reconciliation of CAD to net income (loss) allocable to common shares for the three months ended March 31, 2017 and 2016 (dollars in thousands, except share information):

 

 

 

For the Three Months Ended March 31, 2017

 

 

For the Three Months Ended March 31, 2016

 

 

 

Amount

 

 

Per Share (1)

 

 

Amount

 

 

Per Share (2)

 

Cash Available for Distribution:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) allocable to common shares

 

$

(30,085

)

 

$

(0.33

)

 

$

(17,844

)

 

$

(0.20

)

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

9,754

 

 

 

0.11

 

 

 

12,673

 

 

 

0.14

 

Change in fair value of financial instruments

 

 

1,153

 

 

 

0.01

 

 

 

4,088

 

 

 

0.04

 

(Gains) losses on assets

 

 

(12,006

)

 

 

(0.13

)

 

 

195

 

 

 

 

(Gains) losses on deconsolidation of properties

 

 

15,947

 

 

 

0.17

 

 

 

 

 

 

 

(Gains) losses on extinguishments of debt

 

 

(3,186

)

 

 

(0.03

)

 

 

(344

)

 

 

 

Deferred income tax (benefit) provision

 

 

 

 

 

 

 

 

(1,108

)

 

 

(0.01

)

Straight-line rental adjustments

 

 

119

 

 

 

 

 

 

(418

)

 

 

 

Share-based compensation

 

 

344

 

 

 

 

 

 

1,068

 

 

 

0.01

 

Acquisition and integration expenses

 

 

172

 

 

 

 

 

 

109

 

 

 

 

Origination fees and other deferred items

 

 

11,688

 

 

 

0.13

 

 

 

6,931

 

 

 

0.08

 

Provision for losses

 

 

1,535

 

 

 

0.02

 

 

 

1,325

 

 

 

0.01

 

IRT internalization and management transition expense

 

 

736

 

 

 

0.01

 

 

 

 

 

 

 

Shareholder activism expenses

 

 

694

 

 

 

0.01

 

 

 

 

 

 

 

Asset impairment

 

 

7,424

 

 

 

0.08

 

 

 

3,922

 

 

 

0.04

 

Net expenses associated with deconsolidation of properties

 

 

873

 

 

 

0.01

 

 

 

 

 

 

 

Discontinued operations and noncontrolling interest effect of certain adjustments

 

 

 

 

 

 

 

 

2,282

 

 

 

0.03

 

Cash Available for Distribution

 

$

5,162

 

 

$

0.06

 

 

$

12,879

 

 

$

0.14

 

(1)

Based on 91,300,812 weighted-average shares outstanding for the three months ended March 31, 2017.

(2)

Based on 91,018,160 weighted-average shares outstanding for the three months ended March 31, 2016.

 

Funds from Operations

We believe that funds from operations, or FFO, which is a non-GAAP measure, is an additional appropriate measure of the operating performance of a REIT. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT, as net income or loss allocated to common shares (computed in accordance with GAAP), excluding real estate-related depreciation expense, gains or losses on sales of real estate and the cumulative effect of changes in accounting principles. Our management utilizes FFO as a measure of our operating performance. FFO is not an equivalent to net income or cash generated from operating activities determined in accordance with GAAP. Furthermore, FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. FFO should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.

54


 

Set forth below is a reconciliation of FFO to net income (loss) allocable to common shares for the three months ended March 31, 2017 and 2016 (dollars in thousands, except share information):

 

 

 

For the Three Months Ended March 31, 2017

 

 

For the Three Months Ended March 31, 2016

 

 

 

Amount

 

 

Per Share (1)

 

 

Amount

 

 

Per Share (2)

 

Funds From Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) allocable to common shares

 

$

(30,085

)

 

$

(0.33

)

 

$

(17,844

)

 

$

(0.20

)

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate depreciation and amortization

 

 

6,884

 

 

 

0.08

 

 

 

10,171

 

 

 

0.11

 

(Gains) losses on the sale of real estate

 

 

(12,006

)

 

 

(0.13

)

 

 

195

 

 

 

-

 

Asset impairment

 

 

7,424

 

 

0.08

 

 

 

3,922

 

 

 

0.05

 

Adjustments related to discontinued operations

 

 

 

 

 

 

 

 

825

 

 

 

0.01

 

Funds From Operations allocable to common shares

 

$

(27,783

)

 

$

(0.30

)

 

$

(2,731

)

 

$

(0.03

)

(1)

Based on 91,300,812 weighted-average shares outstanding for the three months ended March 31, 2017.

(2)

Based on 91,018,160 weighted-average shares outstanding for the three months ended March 31, 2016.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, pay dividends and other general business needs.

We believe our available cash and restricted cash balances, other financing arrangements, and cash flows from operations will be sufficient to fund our liquidity requirements for the next 12 months and the foreseeable future.

Our primary cash requirements are as follows:

 

to make investments and fund the associated costs;

 

to repay, repurchase or redeem our indebtedness;

 

to pay our expenses, including compensation to our employees;

 

to pay U.S. federal, state, and local taxes of our taxable REIT subsidiaries; and

 

to distribute a minimum of 90% of our REIT taxable income and to make investments in a manner that enables us to maintain our qualification as a REIT.

We intend to meet these liquidity requirements primarily through the following:

 

the use of our cash and cash equivalent balances of $96.4 million as of March 31, 2017;

 

cash generated from operating activities, including net investment income from our investment portfolio, and fee income generated by our commercial real estate platform;

 

proceeds from the sales of assets;

 

proceeds from future borrowings, including our CMBS facilities and loan participations;

 

proceeds from alternative sources of financing, such as joint ventures or sales of our retained interests in securitizations we sponsor; and

 

proceeds from future offerings of our securities, which may include those through our DRSPP and ATM programs.

55


 

Cash Flows

As of March 31, 2017 and 2016, we maintained cash and cash equivalents of approximately $96.4 million and $56.3 million, respectively. Our cash and cash equivalents were generated from the following activities (dollars in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Cash flow from operating activities

 

$

2,893

 

 

$

8,561

 

Cash flow from investing activities

 

 

86,361

 

 

 

42,582

 

Cash flow from financing activities

 

 

(103,353

)

 

 

(82,460

)

Net change in cash and cash equivalents

 

 

(14,099

)

 

 

(31,317

)

Net change in cash and cash equivalents from discontinued operations

 

 

 

 

 

16,161

 

Cash and cash equivalents at beginning of period

 

 

110,531

 

 

 

87,581

 

Cash and cash equivalents at end of period

 

$

96,432

 

 

$

72,425

 

 

Cash flow from operating activities for the three months ended March 31, 2017, as compared to the same period in 2016, decreased $5.7 million primarily due to lower earnings as a result of lower loan volumes and the timing of payments for various accounts payable, accrued expenses and other liabilities.

The cash inflow for investing activities for the three months ended March 31, 2017 was substantially due to $90.2 million of loan repayments and $71.8 million of proceeds from real estate sales outpacing new investments in loans of $115.0 million.  The cash inflow for investing activities for the three months ended March 31, 2016 was substantially due to proceeds from property dispositions of $23.3 million as well as loan repayments of $55.1 million outpacing new investments in loans of $35.6 million.

The cash outflow from our financing activities during the three months ended March 31, 2017 was primarily due to repayments of indebtedness of $202.5 million offset by proceeds from the issuance of other indebtedness and of $17.0 million and net proceeds from the issuance of indebtedness on our warehouse facilities of $102.9 million.  The cash outflow from our financing activities during the three months ended March 31, 2016 was primarily due to repayments of indebtedness of $160.3 million exceeding proceeds from the issuance of indebtedness $104.0 million. 

As a REIT, we evaluate our dividend coverage based on our cash flow from operating activities, excluding acquisition and integration expenses, the origination and sale of conduit loans, and changes in assets and liabilities. During the three months ended March 31, 2017, we paid distributions to our preferred shareholders, common shareholders, and non-controlling interests of $19.8 million and generated cash flows from operating activities, before acquisition expenses, origination and sale of conduit loans, and changes in assets and liabilities of $3.6 million.  The excess distributions were funded through cash flow from previously available cash and the disposition of real estate assets, which is included in cash flows from investing activities in the consolidated statement of cash flows and totaled $72.9 million for the three months ended March 31, 2017.

Capitalization

Refer to Note 5: Indebtedness, Note 9: Series D Preferred Shares, and Note 10: Shareholders’ Equity in the Notes to Consolidated Financial Statements, for information regarding our capitalization.

Off-Balance Sheet Arrangements and Commitments

There have been no material changes in off-balance sheet arrangements or commitments during the three months ended March 31, 2017 from the disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2016.

Critical Accounting Estimates and Policies

Our Annual Report on Form 10-K for the year ended December 31, 2016 contains a discussion of our critical accounting policies. On January 1, 2017 we adopted four new accounting pronouncements and revised our accounting policies. See Note 2 in the Notes to Consolidated Financial Statements. Management discusses our critical accounting policies and management’s judgments and estimates with the audit committee of our board of trustees.

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in quantitative and qualitative market risks during the three months ended March 31, 2017 from the disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2016.

56


 

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our chief executive officer and chief financial officer and with the participation of our disclosure committee, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting or in other factors during the quarter ended March 31, 2017, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

 

 

57


 

Part II. OTHER INFORMATION

Item 1.

Legal Proceedings

General

We are involved from time to time in litigation on various matters, including disputes with tenants of owned properties, disputes arising out of agreements to purchase or sell properties, disputes arising out of our loan portfolio, negligence, and similar tort claims related to owned properties or employment related disputes. Given the nature of our business activities, these lawsuits are considered routine to the conduct of our business. The result of any particular lawsuit cannot be predicted, because of the very nature of litigation, the litigation process and its adversarial nature, and the jury system. We do not expect that the liabilities, if any, that may ultimately result from such routine legal actions will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Item 1A.

Risk Factors

There have not been any material changes from the risk factors previously disclosed in Item 1A—“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

We withheld the following common shares to satisfy tax withholding during the quarter ending March 31, 2017 arising from the vesting of restricted share awards made pursuant to the RAIT Financial Trust 2012 Incentive Award Plan. These common shares may be deemed to be “issuer purchases” of common shares that are required to be disclosed pursuant to the item.

Period

 

Total Number of Shares Purchased

 

 

Price Paid per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs

 

01/01/2017 to 01/31/2017

 

 

20,769

 

(1)

$

3.55

 

(1)

 

20,769

 

 

 

-

 

02/01/2017 to 02/28/2017

 

 

73,354

 

(2)

 

3.62

 

(2)

 

73,354

 

 

 

-

 

03/01/2017 to 03/31/2017

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

 

94,123

 

(1)

$

3.60

 

(1)

 

94,123

 

 

 

-

 

(1)

The price reported is the average price paid per share using our closing stock price on the New York Stock Exchange on the vesting date of the relevant award.

(2)

The price reported is the weighted average price paid per share using our closing stock price on the New York Stock Exchange on the vesting date of the relevant awards.

Item 6.

Exhibits

(a)

Exhibits

The exhibits filed as part of this quarterly report on Form 10-Q are identified in the exhibit index immediately following the signature page of this Report. Such Exhibit Index is incorporated herein by reference.

 

 

58


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

RAIT FINANCIAL TRUST

(Registrant)

 

 

 

 

Date: May 5, 2017

 

By:

/s/ Scott L.N. Davidson

 

 

 

Scott L.N. Davidson, Chief Executive Officer and President

 

 

 

(On behalf of the registrant and as its Principal Executive Officer)

 

 

 

 

Date: May 5, 2017

 

By:

/s/ Paul W. Kopsky, Jr.

 

 

 

Paul W. Kopsky, Jr., Chief Financial Officer and Treasurer

 

 

 

(On behalf of the registrant and as its Principal Financial Officer)

 

Date: May 5, 2017

 

By:

/s/ Alfred J. Dilmore

 

 

 

Alfred J. Dilmore, Chief Accounting Officer

 

 

 

(On behalf of the registrant and as its Principal Accounting Officer)


59


 

EXHIBIT INDEX

 

Exhibit

Number

 

Description of Documents

 

 

 

3.1.1

  

Amended and Restated Declaration of Trust of RAIT Financial Trust (“RAIT”). Incorporated by reference to RAIT’s Registration Statement on Form S-11 (Registration No. 333-35077).

 

 

 

3.1.2

  

Articles of Amendment to Amended and Restated Declaration of Trust of RAIT. Incorporated by reference to RAIT’s Registration Statement on Form S-11 (Registration No. 333-53067).

 

 

 

3.1.3

  

Articles of Amendment to Amended and Restated Declaration of Trust of RAIT. Incorporated by reference to RAIT’s Registration Statement on Form S-2 (Registration No. 333-55518).

 

 

 

3.1.4

  

Certificate of Correction to the Amended and Restated Declaration of Trust of RAIT. Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2002 (File No. 1-14760).

 

 

 

3.1.5

  

Articles of Amendment to Amended and Restated Declaration of Trust of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the Securities and Exchange Commission (“SEC”) on December 15, 2006 (File No. 1-14760).

 

 

 

3.1.6

  

Articles of Amendment to Amended and Restated Declaration of Trust of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on July, 1 2011 (File No. 1-14760).

 

 

 

3.1.7

  

Articles Supplementary (the “Series A Articles Supplementary”) relating to the 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series A Preferred Shares”) of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 18, 2004 (File No. 1-14760).

 

 

 

3.1.8

  

Certificate of Correction to the Series A Articles Supplementary. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 18, 2004 (File No. 1-14760).

 

 

 

3.1.9

  

Articles Supplementary relating to the 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, (the “Series B Preferred Shares”) of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 1, 2004 (File No. 1-14760).

 

 

 

3.1.10

  

Articles Supplementary relating to the 8.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, (the “Series C Preferred Shares”) of RAIT. Incorporated by reference to RAIT’s Form 8-A as filed with the SEC on June 29, 2007 (File No. 1-14760).

 

 

 

3.1.11

  

Articles Supplementary relating to Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on May 25, 2012 (File No. 1-14760).

 

 

 

3.1.12

  

Certificate of Correction relating to Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended June 30, 2012 (File No. 1-14760).

 

 

 

3.1.13

  

Articles Supplementary (the “Series D Articles Supplementary”) relating to the Series D Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series D Preferred Shares”) of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 4, 2012 (File No. 1-14760).

 

 

 

3.1.14

  

Articles Supplementary relating to the Series E Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series E Preferred Shares”) of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 4, 2012 (File No.1-14760).

 

 

 

3.1.15

  

Amendment dated November 30, 2012 to the Series D Articles Supplementary. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 4, 2012 (File No.1-14760).

 

 

 

3.1.16

  

Articles Supplementary relating to the Series A Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on June 13, 2014 (File No. 1-14760).

 

 

 

3.2

 

Amended and Restated Bylaws of RAIT Financial Trust, as adopted on November 16, 2016. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on November 17, 2016 (File No. 1-14760).

 

 

 

4.1.1

  

Form of Certificate for Common Shares of Beneficial Interest. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on July 1, 2011 (File No. 1-14760).

 

60


 

Exhibit

Number

 

Description of Documents

 

 

 

4.1.2

  

Form of Certificate for the Series A Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 22, 2004 (File No. 1-14760).

 

 

 

4.1.3

  

Form of Certificate for the Series B Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 1, 2004 (File No. 1-14760).

 

 

 

4.1.4

  

Form of Certificate for the Series C Preferred Shares. Incorporated by reference to RAIT’s Form 8-A as filed with the SEC on June 29, 2007 (File No. 1-14760).

 

 

 

4.1.5

  

Form of Certificate for the Series D Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 23, 2012 (File No. 1-14760).

 

 

 

4.1.6

  

Form of Certificate for the Series E Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 23, 2012 (File No. 1-14760).

 

 

 

4.2.1

  

Base Indenture dated as of December 10, 2013 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760).

 

 

 

4.2.2

  

Supplemental Indenture dated as of December 10, 2013 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760).

 

 

 

4.2.3

  

Form of RAIT 4.00% Convertible Senior Note due 2033 (included in Exhibit 4.2.2). Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760).

 

 

 

4.3.1

  

Base Indenture dated as of March 21, 2011 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 22, 2011 (File No. 1-14760).

 

 

 

4.3.2

  

Supplemental Indenture dated as of March 21, 2011 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 22, 2011 (File No. 1-14760).

 

 

 

4.4

  

Indenture dated as of October 5, 2011 between RAIT and Wilmington Trust, National Association, as trustee. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended September 30, 2011 (File No. 1-14760).

 

 

 

4.5.1

  

Registration Rights Agreement dated as of October 1, 2012 by and among RAIT and ARS VI Investor I, LLC (“ARS VI”). Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 4, 2012 (File No. 1-14760).

 

 

 

4.5.2

  

Amendment No. 1 to Registration Rights Agreement dated as of April 25, 2014 by and among RAIT and ARS VI. Incorporated by reference to RAIT’s Registration Statement on Form S-3 (Registration No. 333-195547).

 

 

 

4.5.3

  

Common Share Purchase Warrant No.1 dated October 17, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 23, 2012 (File No. 1-14760).

 

 

 

4.5.4

  

Common Share Appreciation Right No.1 dated October 17, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 23, 2012 (File No. 1-14760).

 

 

 

4.5.5

  

Common Share Purchase Warrant No. 2 dated November 15, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on November 21, 2012 (File No.1-14760).

 

 

 

4.5.6

  

Common Share Appreciation Right No. 2 dated November 15, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on November 21, 2012 (File No.1-14760).

 

 

 

4.5.7

  

Common Share Purchase Warrant No. 3 dated December 18, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 18, 2012 (File No.1-14760).

 

 

 

4.5.8

  

Common Share Appreciation Right No. 3 dated December 18, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 18, 2012 (File No.1-14760).

 

 

 

4.5.9

  

Common Share Purchase Warrant No. 4 dated March 27, 2014 issued by RAIT Financial Trust to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 27, 2014 (File No. 1-14760).

 

 

 

4.5.10

  

Common Share Appreciation Right No. 4 dated March 27, 2014 issued by RAIT Financial Trust to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 27, 2014 (File No. 1-14760).

 

61


 

Exhibit

Number

 

Description of Documents

 

 

 

4.6.1

  

Base Indenture dated as of December 10, 2013 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760).

 

 

 

4.6.2

  

Supplemental Indenture dated as of December 10, 2013 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760).

 

 

 

4.6.3

  

Form of RAIT 4.00% Convertible Senior Note due 2033 (included in Exhibit 4.6.2). Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760).

 

 

 

4.6.4

  

Second Supplemental Indenture, dated as of April 14, 2014, between RAIT Financial Trust, as issuer, and Wells Fargo Bank, National Association, as trustee. Incorporated by reference to RAIT’s Form 8-A as filed with the SEC on April 14, 2014. (File No. 1-14760).

 

 

 

4.6.5

  

Form of 7.625% Senior Notes due 2024 (included as Exhibit A to Exhibit 4.6.4 hereto).

 

 

 

4.6.6

  

Third Supplemental Indenture, dated as of August 14, 2014, between RAIT, as Issuer, and Wells Fargo Bank, National Association, as trustee. Incorporated by reference to RAIT’s Form 8-A as filed with the SEC on August 14, 2014.

 

 

 

4.6.7

  

Form of 7.125% Senior Notes due 2019 (included as Exhibit A to Exhibit 4.6.6 hereto).

 

 

 

 

  

Certain Instruments defining the rights of holders of long-term debt securities of the Registrant and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.

10.1

 

Share Award Grant Agreement, dated January 9, 2017, by and between RAIT Financial Trust and Scott L. N. Davidson. Incorporated by reference to RAIT’s Form 10-K for the fiscal year ended December 31, 2016 (File No. 1-14760).

 

 

 

10.2

 

Form of Share Appreciation Rights Award Agreement adopted under the RAIT 2012 Incentive Award Plan (“IAP”) on February 14, 2017. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on February 21, 2017. (File No. 1-14760).

 

 

 

10.3

 

Form of Share Award Grant Agreement for participants other than non-management trustees adopted under the IAP on February 14, 2017. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on February 21, 2017. (File No. 1-14760).

 

 

 

10.4

 

Offer Letter dated February 17, 2017 between RAIT Financial Trust and Paul W. Kopsky, Jr.  Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on February 21, 2017. (File No. 1-14760).

 

 

 

10.5

 

Employment Agreement dated February 17, 2017 between RAIT Financial Trust and Paul W. Kopsky, Jr. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on February 21, 2017. (File No. 1-14760).

 

 

 

10.6

 

Employment Agreement dated April 21, 2017 between RAIT Financial Trust and John J. Reyle. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on April 21, 2017.

 

 

 

10.7

 

Employment Agreement dated April 21, 2017 between RAIT Financial Trust and Glenn Riis. Filed herewith.

 

 

 

12.1

 

Statements regarding computation of ratios as of March 31, 2017, filed herewith.

 

 

 

31.1

 

Rule 13a-14(a) Certification by the Chief Executive Officer of RAIT, filed herewith.

 

 

 

31.2

 

Rule 13a-14(a) Certification by the Chief Financial Officer of RAIT, filed herewith.

 

 

 

32.1

 

Section 1350 Certification by the Chief Executive Officer of RAIT, filed herewith.

 

 

 

32.2

 

Section 1350 Certification by the Chief Financial Officer of RAIT, filed herewith.

 

 

 

62


 

Exhibit

Number

 

Description of Documents

101

 

Pursuant to Rule 405 of Regulation S-T, the following financial information from RAIT’s Quarterly Report on Form 10-Q for the period ended March 31, 2017 is formatted in XBRL interactive data files: (i) Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016; (ii) Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016; (iii) Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2017 and 2016; (iv) Consolidated Statement of Changes in Equity for the three months ended March 31, 2017; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016; and (vi) Notes to Unaudited Consolidated Financial Statements, filed herewith.

 

 

63