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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_________ to__________
Commission file Number 1-14760
RESOURCE ASSET INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 23-2919819
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o RAIT Partnership, L.P.
1845 WALNUT STREET, 10TH FLOOR
PHILADELPHIA, PA 19103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 861-7900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON SHARES OF BENEFICIAL INTEREST AMEX
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting shares held by non-affiliates
of the registrant, based upon the closing price of such shares on March 28,
2000 was approximately $58.3 million.
DOCUMENTS INCORPORTATED BY REFERENCE
Portions of the proxy statement for registrant's Annual Meeting of Shareholders
are incorporated by reference in Part III of this Form 10-K.
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PART I
Item 1. Business
General
Resource Asset Investment Trust ("RAIT"), together with its
wholly-owned subsidiaries, RAIT General, Inc. (the "General Partner"), RAIT
Limited, Inc. (the "Initial Limited Partner"), and RAIT Partnership, L.P. (the
"Operating Partnership"), in which the General Partner currently owns a 1%
interest and the Initial Limited Partner currently owns a 99% interest
(collectively, the "Company"), is a Maryland real estate investment trust
("REIT") that has elected to be taxed as a REIT under the Internal Revenue Code
(the "Code") beginning with its taxable year ending December 31, 1998. The
Company's principal business activity is to provide or acquire loans (or
participation interests in such loans) secured by mortgages on commercial real
property or similar instruments (each a "Loan") in situations that, generally,
do not conform to the underwriting standards of institutional lenders or sources
that provide financing through securitization. The Company emphasizes
subordinated (or "mezzanine") financing, including wraparound financing, with
principal amounts generally between $1.0 million and $10.0 million. The Company
also provides short-term bridge financing in excess of the targeted size range
where the borrower has committed to obtain take-out financing (or the Company
believes that it can arrange such financing) to reduce the Company's investment
to an amount within the targeted size range. The Company also acquires real
properties, or interests therein ("Property Interests").
The Company was formed in August 1997. The Company commenced operations
upon completion of its initial public offering in January 1998, which resulted
in net proceeds to the Company of $44.4 million. The Company made a second
public offering in June 1998, which resulted in an additional $41.1 million of
net proceeds to the Company. At December 31, 1999, the Company had total assets
of $269.8 million including 23 Loans with a book value of $160.5 million (less
senior debt of $78.5 million) and four Property Interests with a book value of
$89.9 million (less senior debt of $82.7 million). At December 31, 1998 the
company had total assets of $201.3 million including 25 Loans with a book value
of $126.3 million (less senior debt of $46.9 million) and two Property Interests
with a book value of $68.2 million (less senior debt of $67.3 million).
Investment Objectives and Policies
The Company originates and acquires Loans secured by mortgages on real
property or similar instruments in situations that do not conform to the
underwriting standards of institutional lenders or sources that provide
financing through securitization. The Company's Loans consist of direct Loans to
borrowers and the acquisition of existing Loans (or interests in either such
kinds of Loans). In acquiring Loans the Company focuses on Loans that can be
acquired at a discount to their outstanding balance and the appraised value of
the underlying property. The Company also acquires Property Interests. The
Company's investment in a Loan or a Property Interest will generally be between
$1.0 million and $10.0 million. The Company is not, however, limited in the
amount of any investment and may invest amounts that are larger or smaller than
its targeted size range. The Company also provides short-term bridge financing
in excess of the targeted size range where the borrower has committed to obtain
take-out financing (or the Company believes that it or the borrower can arrange
such financing) to reduce the Company's investment to an amount within the
targeted size range. The Company seeks to generate income for distribution to
its shareholders from a combination of interest, rents, distributions in respect
of rents (where the Company owns an equity interest in a real property),
proceeds from Appreciation Interests (as discussed below, see "Business - Types
of Financing") and proceeds from the sale of portfolio investments.
Types of Financing
The Company emphasizes subordinated (or "mezzanine") financing,
including wraparound Loans. The Company also provides short-term bridge
financing. The Company is not, however, limited as to the types of financing it
may provide, and it may acquire or provide first lien financing. In originating
new Loans, the Company endeavors to adapt the terms of its financing to the
needs of its borrowers, utilizing a variety of financing techniques such as
staged payments, event specific loan advances, different rates of interest
payment and interest accrual, deferred (or "balloon") principal payments and
similar techniques. The Company's Loans typically are not insured by the Federal
Housing Administration or guaranteed by the Veterans Administration or otherwise
guaranteed (except by borrowers or their affiliates, in certain cases) or
insured.
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Generally, mezzanine Loans, including wraparound Loans, will be secured
by mortgages on properties already subject to the liens of other mortgage loans.
A wraparound Loan is a junior lien Loan having a principal amount equal to the
sum of the outstanding principal balances of senior loans plus the net amount
advanced by the wraparound lender. From payments it receives on the wraparound
Loan, the wraparound lender pays principal and interest to the holders of the
senior loans, but ordinarily only to the extent that payments are received from
the borrower. Mezzanine Loans (including wraparound Loans) offer the potential
for higher yields than those ordinarily obtained in senior lien financing (and,
in the case of wraparound Loans, the possibility of increasing yields as the
principal amounts of senior loans are amortized). However, such Loans carry
greater credit risk, including substantially greater risk of non-payment of
interest or principal, than senior lien financing.
The Company may acquire Loans that are not secured by recorded or
perfected liens. Of the 23 Loans in the Company's portfolio as of December 31,
1999, five loans (6.9% by book value of the Company's portfolio at December 31,
1999) were not so secured. Of the 25 Loans in the Company's portfolio as of
December 31, 1998, five loans (8.7% by book value of the Company's portfolio at
December 31, 1998) were not so secured. Management believes that, with respect
to any such Loans (including existing Loans), the following matters serve to
mitigate the Company's risks where no recorded perfected lien exists. First,
rents and other cash flow from the underlying properties generally will be
deposited directly to a bank account controlled by the Company. Second, future
liens encumbering the underlying properties are generally prohibited by the
senior lenders. Finally, the Company generally will hold a deed-in-lieu of
foreclosure that may enable it to enforce its rights against the underlying
property in an expedited fashion. However, none of these factors will assure
that these Loans are collected. Moreover, filing a deed-in-lieu of foreclosure
with respect to these Loans may (and, with respect to the existing Loans, will)
constitute an event of default under related senior debt. Any such default would
require the Company to acquire or pay off the senior debt in order to protect
its investment.
The Company seeks to originate or acquire Loans that not only have
current cash returns higher than those obtained in typical first lien
institutional financing but that also have various features designed to increase
the return over the term of the Loans. In particular, the Company seeks to
include provisions allowing it to participate in any appreciation of the value
of properties underlying the Loans or in any increase in property revenues from
rents ("Appreciation Interests"). The Company typically seeks an Appreciation
Interest at a rate of not less than 25%, and may seek to obtain either or both
types of Appreciation Interests. The Company believes that obtaining
Appreciation Interests may be advantageous to it because the Company will thus
have the opportunity of participating in the growth in value of the real
property being financed (and, therefore, the opportunity of gaining additional
compensation). However, obtaining Appreciation Interests may limit or, possibly,
reduce the amount of current interest that the Company might otherwise be able
to obtain on a Loan. There can be no assurance that the Company will be able to
obtain an Appreciation Interest in any Loan, or as to the final terms (including
rate) under which it may be obtained. Moreover, because Appreciation Interests
are more usually associated with subordinated loans in order to compensate the
lender for its subordinated position, the Company may not be able to find
borrowers willing to give Appreciation Interests in first mortgage loans (to the
extent originated by the Company) on terms acceptable to the Company. Fifteen
and seventeen of the Loans in the Company's portfolio as of December 31, 1999
and 1998, respectively, had Appreciation Interests.
Loan Origination Sources
To generate loan originations, the Company relies primarily upon the
relationships senior management has developed as a result of their experience in
the mortgage lending, real estate and real estate finance industries with
developers, commercial real estate brokers, mortgage bankers, real estate
investors and other direct borrowers or referral sources, including lenders
providing financing through securitization (with respect to financing not
meeting their standard criteria). With respect to Loan acquisition, the Company
also relies on senior management's existing knowledge of and relationships with
institutional holders (primarily banks and insurance companies) who may wish to
dispose of under-performing loans in their existing portfolios that meet the
Company's financing criteria. These institutional lenders may also refer to the
Company loan opportunities presented to them that they do not wish to
underwrite.
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Certain Financial Guidelines
The Company has established financial guidelines for use in evaluating
financing proposals. The Company may depart from one or more of the guidelines
in underwriting any particular Loan, provided that the Company's Loan portfolio,
in the aggregate, is in compliance. The guidelines provide as follows: (i) the
property underlying the Loan will have a current appraised value of not less
than 25% below the property's estimated replacement cost, (ii) the size of the
Loan will be between $1.0 million and $10.0 million, (iii) the ratio of current
cash flow to debt service on senior lien loans with respect to the underlying
property will be at least 1.25 to 1, (iv) the ratio of current cash flow to debt
service on both senior loans and the Company's Loan will be at least 1.1 to 1,
(v) the cash flow from the underlying property will be sufficient to yield a
current return on the Company's investment of no less than 10% per year, (vi)
the aggregate of all outstanding senior debt may not exceed 75% of the appraised
value of the underlying property, and (vii) the aggregate of outstanding senior
debt plus the amount of the Company's Loan may not exceed 90% of the appraised
value of the underlying property. The "appraised value" of a property for
purposes of the guidelines is the estimate by an independent real estate
appraiser of the fair market value of the property, taking into account standard
valuation methodologies. The Company's estimate as to replacement cost is
generally based upon information developed by the Company from developers,
contractors and other persons regarding construction costs both generally and
with respect to similar properties in the area. Except for seven Loans at
December 31, 1999 that exceeded a loan-to-value ratio of 90% (constituting 4.5%
of the Company's total assets, by book value at December 31, 1999) and six loans
at December 31, 1998 that exceeded a loan-to-value ratio of 90% (constituting
5.6% of the Company's total assets, by book value at December 31, 1998) each of
the Company's other Loans at December 31, 1999 and 1998 conformed to the
guidelines. The Company's Loan portfolio, in the aggregate, conforms to the
guidelines.
In departing from a particular guideline for any Loan, the Company
typically considers factors that would cause the underlying property to be in
compliance with the guidelines within a reasonable time following initial
funding of the Loan. For example, the Company may depart from the cash flow
guidelines where the borrower can demonstrate (through new lease placements or
otherwise) that historical cash flow will not be representative of cash flow
during the term of the Loan, and may depart from loan-to-value guidelines where
the borrower can demonstrate that the application of the Loan proceeds will
result in an increase in property value. Notwithstanding the foregoing, these
guidelines may be changed by the Board of Trustees without notice to or approval
by the shareholders.
Location of Properties Relating to Loans
The Company generally finances properties located in metropolitan areas
of the United States where there is a significant amount of small, multi-family
residential, office and other commercial properties. Initially, the Company has
focused its financing activities in Philadelphia, Pennsylvania and the
Baltimore/Washington corridor, with a particular emphasis on the Philadelphia
metropolitan area as a result of senior management's existing experience and
relationships. Of the 23 Loans in the Company's portfolio as of December 31,
1999, fourteen related to properties located in the Philadelphia metropolitan
area, and five were located in the Baltimore/Washington corridor. Of the 25
Loans in the Company's portfolio as of December 31, 1998, eighteen related to
properties located in the Philadelphia metropolitan area, and four were located
in the Baltimore/Washington corridor. The Company is not, however, limited as to
the geographic areas in which it may provide Loans and, accordingly, it may
provide Loans in metropolitan areas other than Philadelphia and the
Baltimore/Washington corridor, in metropolitan areas that do not readily fit the
Company's targeted characteristics, or in geographic areas that are outside of
metropolitan areas, as appropriate opportunities are identified, and such Loans
may (although it is not currently anticipated that they will) constitute a
material portion of the Company's investment portfolio.
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Types of Properties Relating to Loans
The Company will focus its financing activities on multi-family
residential, office and other commercial properties with property values
generally between $2.0 million and $30.0 million. The Company may, in
appropriate circumstances as determined by the Board of Trustees, provide
financing to properties with values outside this range, as was the case with
eight (constituting 30.6% of the Company's total assets at December 31, 1999)
Loans in the Company's portfolio as of December 31, 1999 and seven (constituting
17.0% of the Company's total assets at December 31, 1998) Loans in the Company's
portfolio as of December 31, 1998. The Company does not normally finance
undeveloped property or make loans in situations where construction is involved
except where the underlying property (and any additional real property
collateral which the Company may require as security), as it exists at the time
of the Company's financing, meets the Company's loan-to-value guidelines. In
situations where a loan is made with respect to a property that does not meet
the Company's cash flow guidelines, the Company will typically require that the
developers and their controlling persons personally guarantee the Loan, and that
some or all of such persons, individually or in the aggregate, have net worth
sufficient to repay the Loan in the event of default. Any such Loan may also
condition funding upon the satisfaction of certain property income or occupancy
criteria. The Company is not limited in the amount or percentage of its assets
it may lend against any category of property. The Company generally seeks to
make loans or investments (including Property Interests) the amount of which
(together with all other loans or investments by the Company) do not exceed (i)
with respect to any one property, 5% of the Company's total assets, or (ii) with
respect to any one person or its affiliates, 10% of the Company's total assets.
Certain Loans the Company acquired from its sponsor, Resource America, Inc.
("RAI") as its initial investments in connection with its initial public
offering (the "Initial Investments") were specifically excluded from these
guidelines. The Company is not limited, however, in the amount it may invest in
any one property and may exceed the guidelines where the Board of Trustees
determines that the investment characteristics of the Loan are otherwise
appropriate for the Company. At December 31, 1999, two of the Company's Loans
(constituting 22.4% of the Company's total assets at December 31, 1999),
exceeded the guideline amount. At December 31, 1998, five of the Company's Loans
(constituting 35.0% of the Company's total assets at December 31, 1998),
exceeded the guideline amount.
Acquisition of Loans at Discount
In acquiring Loans from third parties, the Company focuses on Loans
that, because of one or more past defaults under the original loan terms (due to
lack of a strong operating history for the underlying property, historical
credit or cash flow problems of the borrower or with respect to the underlying
property, or other factors), can be acquired at a discount to their outstanding
balances and the appraised value of their underlying properties. The Company
will not acquire any such loan, however, unless the prior loan holder, property
owner or some other party or parties, have taken material steps to resolve the
problems to which the loan and its underlying property have been subject and
where completion of the resolution process will not involve active intervention
by the Company. The Company seeks to acquire loans for which completion of the
resolution process will enhance the Company's total return through increased
yields or realization of some portion or all of the discount at which they were
acquired.
The Company has historically obtained some portion of the Loans it
acquires from RAI. The Company may seek to acquire additional Loans from RAI in
the future. However, the investments that may be acquired from RAI are limited
to a maximum of 30% of the Company's investments based upon the Company's cost,
excluding the Initial Investments (6.1% and 17.0% of the Company's total assets
at December 31, 1999 and 1998, respectively). During 1999, the Company had
participated with RAI in one Loan, repurchased a junior loan interest from RAI,
sold a first mortgage to RAI and purchased two Loans from RAI. During 1998,
aside from the Initial Investments, the Company had purchased three loan
participations from RAI, participated with RAI in two Loans, and sold one loan
participation to RAI. At December 31, 1999, the Loans the Company acquired from
or originated with RAI constituted 26.9% of total assets (16.8% of total assets
at December 31, 1998) on a cost basis, excluding the Initial Investments.
Lending Procedures
Prior to making or acquiring any Loan, the Company conducts an
acquisition review. The value of the underlying property is estimated by the
Company based upon a recent independent appraisal obtained by the borrower, an
independent appraisal obtained by the Company, or valuation information obtained
by the Company and thereafter confirmed by an independent appraisal. The Company
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makes an on-site inspection of the property and, where appropriate, the Company
requires further inspections by engineers, architects or property management
consultants. The Company may also retain environmental consultants to review
potential environmental issues. The Company obtains and reviews available
rental, expense, maintenance and other operational information regarding the
property and prepares cash flow and debt service analyses. For acquired loans,
the Company also evaluates the adequacy of the loan documentation (for example,
the existence and adequacy of notes, mortgages, collateral assignments of rents
and leases, and title policies insuring lien positions) and other available
information (such as credit and collateral files), and evaluates the status and
efficacy of programs to resolve problems to which the loan or its underlying
property may have been subject. The amount that the Company is willing to lend,
or the amount of the Company's offer to purchase, is based upon the foregoing
evaluations and analyses. The Company may modify these procedures as it deems
appropriate in particular situations.
After originating or acquiring any Loan, the Company follows specified
procedures to monitor Loan performance and compliance. The Company generally
requires that all revenues from the underlying property be deposited into an
operating account on which the Company is the sole signatory. On a monthly
basis, the Company pays the senior debt service (if any), collects its debt
service payments and all required reserves, and then transfers the balance of
the funds to the borrower. In some situations, all expenditures with respect to
a property (including debt service, taxes, operational expenses and maintenance
costs) are required to be paid from that account and are subject to review and
approval by the Company prior to payment. The borrower is required to supply
monthly operating statements and yearly certification of compliance with the
terms of the Loan. The Company may also require that its approval be obtained
before any material contract or commercial lease with respect to the property is
executed and that the borrower prepare a budget for the property not less than
60 days prior to the beginning of a year, which must be reviewed and approved by
the Company.
Acquisition of Property Interests
As appropriate, either as part of the Company's investment strategy or
for tax planning purposes, the Company also acquires Property Interests. The
Company believes that acquiring Property Interests is advantageous for three
primary reasons. First, it gives the Company flexibility in addressing the
financial needs and tax situations of borrowers in situations where debt
financing may not be appropriate. Second, it provides the Company with the
possibility of capital appreciation in addition to the current income realized
from its loan portfolio. Third, it assists the Company in its tax planning.
Certain of the Company's current Loans (and, it is anticipated, some of its
future Loans) may result in timing differences between (i) the actual receipt of
income and the actual payment of deductible expenses and (ii) the inclusion of
that income and deduction of such expenses in arriving at its REIT taxable
income. This would increase the amount that the Company must distribute to its
shareholders to avoid corporate income tax in such year, although there may be
no contemporaneous corresponding receipt of cash by the Company. Depreciation
deductions associated with the Company's investments in Property Interests,
however, should help offset such adverse tax effects.
The Company is not limited in the amount it may invest in Property
Interests; however, the Company's acquisition of Property Interests is generally
subject to (and included within) the asset concentration guidelines regarding
Loans.
The Company conducts an acquisition review with respect to Property
Interests similar to the review the Company conducts in acquiring or originating
Loans. The Company also requires satisfactory evidence (generally in the form of
title insurance) that the Company (if the Company is acquiring the Property
Interest directly), or the entity owning the property in which the Company is
acquiring an interest, has or will acquire good and marketable title to the
property subject only to such encumbrances as are acceptable to the Company.
The Company's current Property Interests are located in the same
geographic area, and are of the same type, as the properties underlying its
Loans. Two of the Company's Property Interests at December 31, 1999 were located
in the Philadelphia metropolitan area and one of the Company's Property
Interests at December 31, 1999 was located in the Baltimore/Washington corridor.
One of the Company's Property Interests at December 31, 1998 was located in the
Philadelphia metropolitan area. The Company is not limited, however, as to the
geographic areas in which it may acquire Property Interests. The Property
Interests will involve the same types of properties as those for which the
Company intends to provide financing. The Company does not manage any Property
Interests, but retains the services of third-party management companies,
including (subject to approval by a majority of the Independent Trustees)
Brandywine Construction & Management ("Brandywine"), an affiliate of RAI.
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In addition to acquiring a property directly, the Company may also
acquire interests in a property, typically in the form of an interest in a
partnership, joint venture or limited liability company owning the property.
These interests will be acquired either to provide financing in situations where
further debt financing cannot be used, where further debt financing is
inappropriate (as, for example, where senior lienors have imposed covenants
against further borrowing or against the imposition of junior liens), or where
the Company is seeking an equity interest in a property (similar to an
Appreciation Interest) as part of a financing package. Where the Company does
not own substantially all of the interest, it will typically require that its
interests be preferred over the interests of other owners both as to current
distributions and repayment of invested capital. The Company also typically
requires that the owners incur no further debt and issue no equity interest of
equal rank with or senior to the Company's interest without the Company's
consent. However, the Company is not limited in the kinds of equity interests
that it may acquire and can, accordingly, acquire interests that are not
preferred or permit co-owners of the properties to incur further debt without
the Company's consent. The Company endeavors to structure these investments so
that they qualify as real estate assets within the meaning of the Code and so
that the income therefrom qualifies as income from interests in real estate
within the meaning of the Code. The Company will closely monitor any such
investment that does not qualify as a real estate asset so that the Company's
qualification as a REIT will not be jeopardized. The Company also closely
monitors any such investments so that the Company will not jeopardize its
exemption from the registration requirements of the Investment Company Act. One
of the Company's current Property Interests is in the form of an 89% partnership
interest in a partnership that owns a property and another is a 25% membership
in a limited liability corporation that owns a property.
Leverage
Although the Company is permitted to incur recourse debt to fund its
investment in Loans or Property Interests, the Company generally will not do so
unless it does not have immediately available capital sufficient to enable it to
acquire a particular investment. The Company may also incur recourse debt in
order to prevent default under loans senior to the Company's Loan or to
discharge senior loans entirely if this becomes necessary to protect the
Company's Loan. This may occur if foreclosure proceedings are instituted by the
holder of a mortgage interest which is senior to the Company's Loan or if filing
a deed-in-lieu of foreclosure upon default of the Company's Loan would
constitute a default under a related senior loan. The Company may incur recourse
indebtedness in order to assist in the operation of any property financed by the
Company and as to which the Company has subsequently taken over operations as a
result of default, or to protect its Loan. The Company may also borrow to the
extent the Company deems it necessary to meet REIT distribution requirements
imposed by the Code. Some or all of the Company's assets may collateralize debt
incurred by the Company. The Company anticipates that, in normal operations, it
will not exceed a debt to equity ratio of 0.5 to 1.0. For purposes of
calculating this ratio, the Company's indebtedness will be equal to all recourse
indebtedness of the Company, and equity will be equal to the fair market value
of the Company's net assets based upon the most recent appraised value of the
properties underlying the portfolio. However, where the Company's Loan is in the
form of wraparound financing, the stated principal amount of the Loan for book
purposes is increased by the amount of the senior debt to which the underlying
property is subject, and the Company records a corresponding liability, even
where the sole recourse for the senior debt is to the underlying property. Any
such senior debt is not included in calculating the Company's debt to equity
ratio. The Company is not limited as to the amount of debt that it may incur,
and may have a debt to equity ratio that may from time to time vary
substantially from 0.5 to 1.0, if appropriate investment opportunities are
presented. At December 31, 1999, the Company had a debt to equity ratio of .16
to 1.0. At December 31, 1998, the Company had no debt for purposes of the above
calculation.
In addition to indebtedness that may be incurred by the Company, the
properties underlying financing provided by the Company (or the Property
Interests acquired by the Company) may be subject to indebtedness existing at
the time of the Company's financing or created in connection with the Company's
financing. Provided that such indebtedness is without recourse to the Company
(but subject to the Company's financial guidelines; see "Investment Objectives
and Policies - Certain Financial Guidelines"), the Company is not subject to
limitations in connection with the amount of non-recourse debt financing
pertaining to properties underlying its Loans or Property Interests.
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Portfolio Turnover
The Company does not purchase investments with the intention of
engaging in short-term trading. The Company may, however, sell any particular
investment and reinvest proceeds (subject to distribution requirements and
limitations on asset sales imposed on a REIT by the Code), when it is deemed
prudent by the Company's management, regardless of the length of the holding
period. In addition, the Company may provide bridge loan financing requiring
repayment within a substantially shorter period of time than the Company's other
Loans. The Company may reinvest the proceeds of such Loans into new loans or may
roll over such bridge loans to permanent financing. For the year ended December
31, 1999, the Company sold one loan to RAI for $2.5 million. For the year ended
December 31, 1998, the Company sold a junior participation in one Loan to RAIT
for $4.0 million.
Existing Investments
At December 31, 1999, the Company's investments consisted of four
Property Interests and 23 Loans or Loan participations. At December 31, 1998 the
Company's investments consisted of two Property Interests and 25 Loans or Loan
participations.
Property Interests
On November 26, 1999, the Company converted its interests in two Loans
with a combined book value of $19.5 million into a 100% equity interest in a
partnership that owns the underlying property: a 500-unit apartment building in
Philadelphia, Pennsylvania with an appraised value of $20.1 million. Subsequent
to its purchase of the property, the Company obtained non-recourse, third party
financing for the property in the original principal amount of $15.0 million
($15.0 million at December 31, 1999) bearing interest at 7.73%. The mortgage is
payable on a 30-year amortization schedule (requiring monthly debt service
payments of $100,255) and becomes due on December 1, 2009.
On June 30, 1999, a wholly owned subsidiary of the Company purchased a
168-unit apartment complex in Baltimore, Maryland for $4.5 million which
consisted of $1.9 million paid in cash and the assumption of a first mortgage in
the amount of $2.6 million. In November 1999, the Company sold 75% of its
interest in the subsidiary to a third party, and converted the remainder of its
interest into a preferred equity interest. This transaction reduced the
Company's investment in the subsidiary to $1.5 million. The Company receives a
preferred return of 11.0% on $1.2 million of its equity (9% payable currently,
2% accruing and payable from cash flow (as defined) after November 30, 2001) as
well as a preferred participation in additional cash flow (as defined) after
November 30, 2001. Simultaneously, the first mortgage was refinanced with
non-recourse, third party financing in the amount of $3.9 million ($3.9 million
at December 31, 1999), bearing interest at 7.88%, amortizing on a 30-year
schedule, requiring monthly debt service payments of $28,153, and due November,
2009.
On July 21, 1998, the Company purchased an 89% interest in a
partnership that owns a property in Philadelphia, Pennsylvania for $750,000. The
property is subject to senior lien interests existing at the time of the
Company's acquisition of its interest aggregating approximately $65 million. The
property consists of 456,000 square feet of retail/office space that was 100%
and 97% occupied as of December 31, 1999 and 1998, respectively at an average
rental of $20.44 per square foot and $19.39 per square foot at December 31, 1999
and 1998, respectively, plus certain expenses. The property's long-term debt is
made up of the following loans: (1) a first mortgage with a balance of $43.4
million at December 31, 1999 ($43.9 million at December 31, 1998), bearing
interest at 6.85%, amortizing on a 30-year schedule, requiring monthly debt
service payments of $288,314, and due August 1, 2008; (2) a second mortgage with
a balance of $4.9 million at December 31, 1999 ($4.4 million at December 31,
1998), bearing interest at 10%, with interest payments due monthly from the net
cash flow (as defined) of the property, which is due August 1, 2008; and (3) a
promissory note with a balance of $18.3 million at December 31, 1999 ($17.9
million at December 31, 1998), bearing interest at 12%, with a pay rate of a
minimum of 8.19%, which is due on September 1, 2008. The Company receives
certain payments, after payments due on the first mortgage, which are equivalent
to a 12% return on the Company's investment.
8
<PAGE>
On March 17, 1998, the Company purchased a property in Rohrerstown,
Pennsylvania for $1,655,000. The property, which consists of a 12,630 square
foot building on 2.193 acres, is currently being used as a diagnostic imaging
center by a subsidiary of a large health care provider. The tenant has occupied
the property since December 1997 and pays rent of approximately $169,000 per
year (approximately $13.40 per square foot) under a "triple net" lease that
terminates on February 28, 2008. Subsequent to its purchase of the property, the
Company obtained non-recourse, third party financing for the property with a
mortgage loan in the original principal amount of $1.1 million ($1.08 million
and $1.09 million at December 31, 1999 and 1998, respectively) bearing interest
at 7.33%. The mortgage is payable on a 25-year amortization schedule (requiring
monthly debt service payments of $8,008) and becomes due on August 1, 2008.
Loans. The following table sets forth certain information regarding the
Loans as of December 31, 1999:
<TABLE>
<CAPTION>
Average
Investments in Real Number of Loan-to- Yield Range of
Type of Loan Estate Loans Loans Value Range Maturities
------------ ------------ ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term first mortgages and senior loan
participations............................ $ 11,030,530 6 44% 10-15% 3/28/01-7/14/09
Mezzanine (including wraparound) loans.... $115,762,704(1) 12 86% 11-18% 2/1/02-1/31/09
Short term bridge loans................... $ 33,860,161(2) 5 78% 15-30% 5/31/00-12/2/00
</TABLE>
(1) Includes $66,478,730 of senior financing.
(2) Includes $12,000,000 of senior financing.
Long Term First Mortgages and Senior Loan Participations
Description of Long Term First Mortgages and Senior Loan Participations
(the "First Mortgage Loans") and the Collateral. Each of the First Mortgage
Loans bears interest at a fixed rate per annum and requires specified debt
service payments either on an interest only basis (five and eight Loans at
December 31, 1999 and 1998, respectively) or on the basis of a specified
principal amortization schedule plus interest (one Loan at December 31, 1999 and
1998). At December 31, 1999, five (seven at December 31, 1998) of the First
Mortgages were cash flow mortgages; however in one such situation (in two
situations at December 31, 1998), the Company owned a participation in the first
mortgage and is therefore only entitled to a specified monthly payment. At
December 31, 1999 the First Mortgage Loans were secured by multi-family
apartment buildings and a commercial building in the greater Philadelphia area.
At December 31, 1998 the First Mortgage Loans were secured by multi-family
apartment buildings in the greater Philadelphia area, Chicago, Illinois, and
Pittsburgh, Pennsylvania.
Prepayment Terms. At December 31, 1999 and 1998 all First Mortgage
Loans except one (in the amount of $2.0 million) were prepayable without
penalty.
Appreciation Interests. At December 31, 1999, five First Mortgage Loans
(in the aggregate amount of $5.4 million, including four cash flow mortgages)
included Appreciation Interests based on cash flow and property appreciation. At
December 31, 1998, six First Mortgage Loans (in the aggregate amount of $16.8
million, including five cash flow mortgages) included Appreciation Interests
based on cash flow and property appreciation.
Limited Non-Recourse. The First Mortgage Loans are generally
nonrecourse loans as to which, in the event of a default under such loans,
recourse generally may be had only against the collateral, subject to certain
standard carve-outs relating to defaults involving fraud, misappropriation of
rents, environmental obligations, interference with the lender's rights upon a
default, and similar matters.
9
<PAGE>
Prohibition on Sale, Encumbrance and Transfer. The First Mortgage Loans
prohibit the transfer, sale or encumbrance of the real properties or interests
in the borrowers related to such First Mortgage Loans, with certain specified
exceptions.
Mezzanine (Including Wraparound) Loans
Description of Mezzanine (including wraparound) Loans (the "Mezzanine
Loans") and the Collateral. Each of the Mezzanine Loans bears interest at a
fixed rate per annum and requires specified debt service payments either on an
interest only basis (ten and nine Loans at December 31, 1999 and 1998,
respectively) or on the basis of a specified principal amortization schedule
plus interest (two Loans at December 31, 1999 and 1998). At December 31, 1999,
eight (six at December 31, 1998) of the Mezzanine Loans were cash flow
mortgages, however in two (three at December 31, 1998) of such situations, the
Company owned a participation in the Mezzanine Loan and is therefore only
entitled to a specified monthly payment. At December 31, 1999 the Mezzanine
Loans were secured by multi-family apartment buildings in Philadelphia,
Pennsylvania, Forrestville, Maryland, and Baltimore, Maryland, and commercial
buildings in Philadelphia, Pennsylvania, Alexandria, Virginia, Washington, D.C.,
Atlanta, Georgia, Indianapolis, Indiana and Centreville, Virginia. At December
31, 1998, the Mezzanine Loans were secured by multi-family apartment buildings
in Philadelphia, Pennsylvania, Forrestville, Maryland, Baltimore, Maryland, and
New London, Connecticut, and commercial buildings in Philadelphia, Pennsylvania,
Alexandria, Virginia, Washington, D.C., and Atlanta, Georgia.
Prepayment Terms. At December 31, 1999, four (three at December 31,
1998) of the Mezzanine Loans (in the aggregate amount of $37.8 million and $34.6
million at December 31,1999 and 1998, respectively) were subject to prepayment
lockout periods during which time such loans may not be prepaid. Subsequent to
the lockout period these Loans are prepayable subject to prepayment penalties
based on specified yield maintenance formulas and/or other required costs.
Appreciation Interests. At December 31, 1999, nine (eight at December
31, 1998) Mezzanine Loans (in the aggregate amount of $69.0 million and $73.2
million at December 31, 1999 and 1998, respectively, including three cash flow
Loans at December 31, 1999 and 1998) included Appreciation Interests based on
cash flow and property appreciation.
Limited Non-Recourse. The Mezzanine Loans are generally nonrecourse
loans as to which, in the event of a default under such loans, recourse
generally may be had only against the collateral, subject to certain standard
carve-outs relating to defaults involving fraud, misappropriation of rents,
environmental obligations, interference with the lender's rights upon a default,
and other similar matters.
Prohibition on Sale, Encumbrance and Transfer. The Mezzanine Loans
generally prohibit the transfer, sale or encumbrance of the real properties or
interests in the borrowers related to such Mezzanine Loans, with certain
specified exceptions.
Short Term Bridge Loans
Description of Short Term Bridge Loans (the "Bridge Loans") and the
Collateral. Each of the Bridge Loans bears interest at a fixed rate per annum.
At December 31, 1999 the Bridge Loans were secured by multi-family apartment
buildings in Philadelphia, Pennsylvania, a retail power center in Albany, New
York and a commercial building in Philadelphia, Pennsylvania. At December 31,
1998 the Bridge Loans were secured by multi-family apartment buildings and a
commercial building in Philadelphia, Pennsylvania.
Prepayment Terms. At December 31, 1999, none (three Loans in the
aggregate amount of $4.8 million at December 31, 1998) of the Bridge Loans had
prepayment lockout periods during which time the Loans may not be prepaid. At
December 31, 1999, all (one Loan in the amount of $1.2 million at December 31,
1998) of the Bridge Loans were prepayable subject to prepayment penalties based
on specified yield maintenance formulas and/or other required costs.
10
<PAGE>
Limited Non-Recourse. At December 31, 1999 and 1998, four Bridge Loans
were generally nonrecourse loans as to which, in the event of a default under
such loans, recourse generally may be had only against the collateral, subject
to certain standard carve-outs relating to defaults involving fraud,
misappropriation of rents, environmental obligations, interference with the
lender's rights upon a default, and similar matters. At December 31, 1999 and
1998, one Bridge Loan (in the amounts of $12.2 million and $1.2 million at
December 31, 1999 and 1998, respectively) was recourse to the borrower and its
principals.
Prohibition on Sale, Encumbrance and Transfer. The Bridge Loans
generally prohibit the transfer, sale or encumbrance of the real properties or
interests in the borrowers related to such Bridge Loans, with certain specified
exceptions.
Guaranties. At December 31, 1998 and 1998, one of the Bridge Loans (in
the amounts of $12.2 million and $1.2 million at December 31, 1999 and 1998,
respectively) was supported by a guaranty of payment and performance from the
principals of the borrower.
Competition
Although the commercial mortgage loan origination and acquisition
business is generally competitive in virtually all of its aspects, the Company's
focus on the origination or acquisition of loans in situations that, generally,
do not conform to the underwriting standards of institutional lenders or sources
that provide financing through securitization is a niche in which the Company
believes there are relatively few specialized investors. In the overall market
for the origination and acquisition of real estate obligations, however, there
are a substantial number of competitors (including investment partnerships,
financial institutions, investment companies, public and private mortgage funds
and other entities).
Many of the Company's competitors possess greater financial and other
resources than the Company. As a result, there can be no assurance that the
Company will be able to effect origination or acquisition of loans in the same
manner and on the same terms as in the past or that there will not be
significant variations in the profitability of the Company's commercial mortgage
loan origination and acquisition business. In this regard, the Company will also
have to compete for capital necessary to fund its operations based largely upon
the performance of its loan portfolio.
Cautionary Statements for Purposes of the Safe Harbor
Statements made by the Company in written or oral form to various
persons, including statements made in filings with the U.S. Securities and
Exchange Commission, that are not strictly historical facts are
"forward-looking" statements that are based on current expectations about the
Company's business and assumptions made by management. Such statements should be
considered as subject to risks and uncertainties that exist in the Company's
operations and business environment and could render actual outcomes and results
materially different than predicted. The following includes some, but not all,
of the factors or uncertainties that could cause the Company to miss its
projections:
The real property underlying the Company's Loans is the primary or sole
source of any recovery for the Company on its Loans. Accordingly, the Company is
materially dependent upon the value of the real property underlying its Loans,
which value may be affected by numerous factors outside the control of the
Company. The Company's Loans typically provide payment structures other than
self-amortization, including structures that defer payment of some portion of
accruing interest, or defer repayment of principal, until loan maturity. Where a
borrower has an obligation to pay a Loan balance in a large lump sum payment,
its ability to satisfy this obligation may be dependent upon its ability to
obtain suitable refinancing or otherwise to raise a substantial cash amount.
The Company's Loans generally will have maturities between four and ten
years, typically will not conform to standard underwriting criteria and may
often be subordinate loans. As a result, the Loans in the Company's portfolio
will be relatively illiquid investments and the Company will be unable to vary
its portfolio promptly in response to changing economic, financial and
investment conditions. Although the Company will attempt to obtain Appreciation
interests in its Loans to provide it with additional compensation, there can be
no assurance that it will be able to do so.
11
<PAGE>
The Company emphasizes the origination and acquisition of mezzanine
(including wraparound) financing, which are junior lien loans. Because of their
subordinate position, junior lien loans carry a greater credit risk, including a
substantially greater risk of non-payment of interest or principal, than senior
lien financing. Where, as part of a financing structure, the Company has an
equity or other unsecured position, the risk of loss may be materially
increased. A decline in the real estate market where the property underlying the
Loan is located could adversely affect the value of the property such that the
aggregate outstanding balances of senior liens and the Company's Loan may exceed
the value of the underlying property. In the event of a default on a senior
loan, the Company may elect to make payments, if it has the right to do so, in
order to prevent foreclosure on the senior loan. In the event of foreclosure,
the Company will only be entitled to share in the proceeds after satisfaction of
the amounts due to senior lienors, which may result in the Company not being
able to recover the full amount or, indeed, any of its investment.
The Company has acquired, and may in the future acquire, loans not
collateralized by recorded or perfected liens. These loans generally will be
subject and subordinate not only to existing prior liens encumbering the
underlying property, but also to future liens that may arise. Furthermore, in a
bankruptcy, the holder of an unsecured loan has materially fewer rights than
secured creditors and the holder's rights are subordinate to the lien-like
rights of the bankruptcy trustee.
The Company's Loans typically will not conform to conventional loan
criteria due to past defaults by borrowers resulting from lack of a strong
operating history for the properties underlying the Loans, historical credit or
cash flow problems of the borrowers or with respect to the underlying
properties, or other factors. As a result, the Company's Loans (and,
particularly, loans that the Company acquires at a discount) may be subject to a
higher risk of default than conventional loans.
The Company's Loans often have loan-to-value ratios in excess of 80%.
By reducing the margin available to cover fluctuations in property value (or
differences between appraised value and the amount actually obtainable upon
foreclosure and sale), a Loan with a high loan-to-value ratio may involve
increased risk that, upon default, the amount obtainable from sale of the
underlying property may be insufficient to repay the financing.
The market value of the Company's Loans will be affected by changes in
interest rates. In general, the market value of a loan will change in inverse
relation to an interest rate change where a loan has a fixed interest rate or
only limited interest rate adjustments. Accordingly, in a period of rising
interest rates, the market value of such a loan will decrease. Moreover, in a
period of declining interest rates, real estate loans may benefit less than
other fixed income securities due to prepayments. Interest rate changes will
also affect the Company's return on new Loans that it makes. In particular,
during a period of declining rates, the amounts becoming available to the
Company for investment due to repayment of its Loans may be invested at lower
rates than the Company had been able to obtain in prior investments, or than the
rates on the repaid Loans. Also, increases in interest on debt, if any, incurred
by the Company in originating or acquiring Loans or Property Interests may not
be reflected in increased rates of return on the Loans or Property Interests
funded or acquired through such debt, thereby adversely affecting the Company's
return on such investments. Accordingly, interest rate changes may materially
adversely affect the total return on the Company's investment portfolio.
The Company's Loans are, and the Company anticipates that they will
continue to be, concentrated in the Philadelphia region and the
Baltimore/Washington corridor for the foreseeable future. Such a lack of
geographic diversification may result in the Company's investment portfolio
being more sensitive to, and the Company being less able to respond to, economic
developments of a primarily regional nature, which may result in reduced rates
of return, or higher rates of default, on the Company's Loans than might be
incurred with a more geographically diverse investment portfolio.
The Company may not be able to obtain Appreciation Interests in
connection with its Loans and, even if obtained, an Appreciation Interest may
result in a lower stated interest on a Loan. Even if the Company obtains an
Appreciation Interest in connection with a particular Loan, the rate may be less
than that sought by the Company.
12
<PAGE>
The Company's Loans may be secured by interests in entities owning real
property, rather than the property itself. In that event, the Company will be
subject to the risk that the interests pledged as security will be illiquid, or
otherwise have features that may make it difficult for the Company to obtain a
return of its investment in the event of a default on its Loan. These interests
typically will be subject and subordinate to the rights of creditors of the
entity and the property owned by that entity.
Interest charged on Loans owned by the Company (which may include
amounts received in connection with Appreciation Interests) may be subject to
state usury laws imposing maximum interest rates and penalties for violation,
including restitution of excess interest and unenforceability of debt.
Although the Company does not seek to originate construction loans, the
Company may make loans in situations where construction is involved, generally
either (i) as financing that repays a third party's construction loan, or (ii)
where the loan is secured by property with a pre-construction value that is
within the Company's investment guidelines. The Company may depart from its
guidelines, typically where there are other assurances of payment such as
personal guarantees from the developers. Loans in construction situations may
involve a higher degree of risk than other lending, to the extent that repayment
is dependent upon successful completion of the project, or as a result of the
lack of an operating history on the project as constructed or rehabilitated upon
which to base a loan's underwriting, difficulties in estimating construction
costs and timing, the financial strength of guarantors and other reasons.
Income from and the value of the Company's Property Interests (as well
as the real properties underlying the Company's Loans) may be adversely affected
by general and local economic conditions, neighborhood values, competitive
overbuilding, casualty losses and other factors beyond the Company's control.
Revenues from and values of real properties are also affected by such factors as
the cost of compliance with regulations and the potential for liability under
applicable environmental laws, changes in interest rates and the availability of
financing. Income from a property will be adversely affected if a significant
number of tenants are unable to pay rent or if available space cannot be rented
on favorable terms. Certain significant expenditures associated with real
property (such as mortgage payments, real estate taxes and maintenance costs)
generally are not reduced when circumstances cause a reduction in income from
the property.
Real estate investments are relatively illiquid and, therefore, the
Company may be limited in its ability to vary its portfolio of Property
Interests quickly in response to changes in economic or other conditions.
To the extent that the Company acquires equity interests in an entity
owning a property, or lends against the security of such interests in whole or
in part, the Company's interests will be subordinate to both general and secured
creditors of the entity. This subordination could increase the Company's risk of
loss. Moreover, acquisition of equity interests provides certain risks not
present in real property loans or direct property ownership. For example, there
is the possibility that the other equity owners in the entity holding the
property might have economic or business interests or goals which are
inconsistent with the business interests or goals of the Company or be in a
position to take action contrary to the instructions or requests of the Company
or contrary to its policies or objectives. Moreover, in limited partnerships,
even if the Company is a limited partner, if its rights under the partnership
agreement allow it sufficient control over the partnership or its property, it
might be deemed to be a general partner and, in such a case, could incur
liability for the debts of the partnership beyond the amount of its investment.
Item 2. Properties
RAIT Partnership, L.P.'s (the Operating Partnership) office is located
in Philadelphia, and is sub-leased from Hudson United Bancorp, as successor in
interest to JeffBanks, Inc. under an agreement providing for rents of $24,000
per year through May 2008. The Chairman and Chief Executive Officer of the
Company is a director of Hudson United Bancorp and the Chairman of the Jefferson
Bank Division of Hudson United Bank (Hudson United Bancorp's banking
subsidiary). For a description of Property Interests owned, see Item 1.
"Business-Existing Investments: Property Interests."
13
<PAGE>
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
14
<PAGE>
PART II
Item 5. Market for the Company's Common Equity and Related Shareholder Matters
The Company had approximately 2,000 common shareholders as of March 6,
2000. The shares are traded on the American Stock Exchange under the symbol
"RAS".
The following table sets forth the high and low sales prices of the
Company's common shares, together with quarterly dividend payment information
for such period.
<TABLE>
<CAPTION>
Cash
Dividends
Per
Quarter Ended High Low Share
------------- ---- --- -----
<S> <C> <C> <C> <C> <C>
December 31, 1999................................ $ 11.13 $ 9.94 $.51
September 30, 1999............................... $ 13.44 $ 11.50 $.51
June 30, 1999.................................... $ 12.88 $ 11.13 $.51
March, 31, 1999.................................. $ 13.13 $ 10.00 $.51
December 31, 1998 ............................... $ 14.13 $ 8.63 $.51
September 30, 1998 .............................. $ 19.00 $ 11.00 $.51
June 30, 1998 ................................... $ 19.13 $ 15.25 $.48
March 31, 1998 (from inception of trading on
January 14, 1998) ...................... $ 19.50 $ 15.00 $.27
</TABLE>
For the first quarter of 2000 (through March 15, 2000) the high and low sales
prices of the Company's Common Shares as reported by the American Stock Exchange
were $11.00 and $10.06.
Item 6. Selected Financial Data
The following selected financial and operating information of the
Company should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
of the Company, including the notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
For the period
August 20, 1997
As of and for the year ended (date of inception)
December 31, through
1999 1998(1) December 31, 1997(3)
---- ------- --------------------
(dollars in thousands except per share data)
<S> <C> <C>
Total revenues......................... $34,122 $17,177 ---
Total costs and expenses............... 21,178 8,778 $ 46
Funds from operations ("FFO"(2))....... 14,849 9,238 ---
FFO(2) per share-basic................. 2.41 1.98 ---
FFO(2) per share-diluted............... 2.40 1.97 ---
Net Income (loss)...................... 12,962 8,474 (46)
Net Income per share-basic............. 2.10 1.82 ---
Net Income per share-diluted........... 2.09 1.81 ---
Dividends per share.................... 2.04 1.77 ---
Total assets........................... 269,829 201,259 2,192
Indebtedness secured by real estate.... 161,164 114,204 ---
Shareholders' equity(deficiency)....... 86,238 85,518 (45)
Shareholders' equity per share......... 13.91 13.87 ---
</TABLE>
(1) Operations commenced January 14, 1998.
15
<PAGE>
(2) FFO adjusts net income (including realized gains) for non-cash charges such
as real property depreciation and certain amortization expenses.
(3) Per share amounts would be based on the pre-offering amount of 100 shares
outstanding, and accordingly, would not be comparable to amounts shown after the
Company's two public offerings.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company commenced investment operations in January 1998. Its
principal business objective is to generate income for distribution to its
shareholders from a combination of interest, rents and distributions from loans
that the Company originates and funds, loans or property interests acquired and
other investments. The Company completed two public offerings of its common
shares during 1998 and utilized these proceeds, combined with repayment and
refinancing of its Loans and Property Interests, and its line of credit to build
its investment portfolio.
Liquidity and Capital Resources
Since commencement of investment operations in January 1998, the
principal source of the Company's capital resources has been the two offerings
of its Common Shares, which, after offering costs and underwriting discounts and
commissions, resulted in net proceeds to the Company of $86.0 million.
Secondarily, the Company has obtained capital resources from the repayment,
refinancing, and sale of loans in its portfolio (or principal payments on those
loans), aggregating $59.1 million for the year ended December 31, 1999 and $43.5
million for the year ended December 31, 1998. In addition, during 1999, the
Company utilized $14.0 million of its $20.0 million secured line of credit.
The principal use of these funds has been the origination and purchase
of Loans and acquisition of Property Interests. For the year ended December 31,
1999, nine Loans in the amount of $95.7 million (including senior debt
underlying wraparound Loans) were purchased or originated as compared to 30
Loans (including the twelve loans which constituted the Company's Initial
Investments) in the amount of $120.4 million (including senior debt underlying
wraparound Loans) for the year ended December 31, 1998. For the year ended
December 31, 1999, one Property Interest was acquired for $1.5 million, two
Loans totaling $19.5 million were converted to a Property Interest worth $20.1
million, and improvements totaling $2.5 million were made to two Property
Interests. For the year ended December 31, 1998, two Property interests were
acquired for $68.9 million (including senior debt of $66.5 million).
The Company also receives funds from interest payments on its loans and
operating income from its property interests. As required by the Internal
Revenue Code of 1986, the Company utilizes these funds (to the extent of not
less than 95% of its taxable income) to pay dividends to its shareholders. For
the year ended December 31, 1999, the Company declared dividends of $12.6
million of which $12.2 million was paid in cash and $342,000 paid in additional
Common Shares issued through the Company's Dividend Reinvestment Plan ("DRIP").
For the year ended December 31, 1998, the Company declared and paid dividends of
$8.8 million.
In order to maintain liquidity, the Company continues to pursue a
strategy of providing shorter-term financing to its borrowers (generally in the
form of bridge financing) to increase the turnover of its investments, and
pursuing borrower refinancing of the Company's loans through senior lenders,
with the Company retaining junior interests. The Company is not currently
experiencing material difficulties in originating shorter-term financings or
obtaining senior lien refinancings on acceptable terms. However, there can be no
assurance that difficulties will not be encountered in the future, depending
upon the development of conditions in the credit markets
At December 31, 1999, the Company had approximately $11.3 million in
funds available for investment. All cash was temporarily invested in a
money-market account that the Company believes has a high degree of liquidity
and safety. It is expected that during 2000, all of the Company's short-term
bridge loans (totaling $33.9 million at December 31, 1999) will be repaid or
refinanced, providing additional funds available for investment in the
approximate amount of $27.9 million.
16
<PAGE>
Results of Operations
The Company had average earning assets for the years ended December 31,
1999 and 1998 of $92.9 million and $68.3 million, respectively, including $8.1
million and $22.0 million of average earning assets invested in a money-market
account for the years ended December 31, 1999 and 1998, respectively. The
increase in total average earning assets and the decrease in average earning
assets invested in a money-market account from the year ended December 31, 1998
to the corresponding period in 1999 was due to the origination of Loans and the
acquisition of Loans and Property Interests, in part utilizing non-recourse debt
financing.
Interest income derived from loans was $20.0 million for the year ended
December 31, 1999 compared to $10.5 million in the corresponding period in 1998.
Interest income from the money market account was $312,000 for the year ended
December 31, 1999 compared to $928,000 for the corresponding period in 1998. The
increase in interest income derived from loans and the decrease in interest
income from the money market account were due to the Company's investment of the
proceeds of its two public offerings in 1998. The yield on average earning
non-money market assets was 19.3% for the year ended December 31, 1999 compared
to 20.4% for the year ended December 31, 1998. The yield on average earning
money market account assets was 4.3% and 5.2% for the years ended December 31,
1999 and 1998, respectively. The decrease in yield on average earning money
market account assets was due to a decrease in amounts paid by banks on money
market funds. Included in interest income is accretion of loan discount relating
to loans the Company acquired at a discount to the appraised value of the
underlying properties of $3.2 million and $250,000 in 1999 and 1998,
respectively. $3.4 million of this accretion was realized in 1999 when two loans
with a combined book value of $19.5 million were converted to an 100% Property
Interest worth $20.1 million. The Company derived $12.4 million from rents from
its Property Interests for the year ended December 31, 1999 compared to $4.6
million for the year ended December 31, 1998. The increase in rents from the
Company's Property Interests from 1998 to 1999 was due to the acquisition of a
total of four property interests during the first and third quarters of 1998 and
the second and fourth quarters of 1999.
The Company earned fee and other income of $684,000 for the year ended
December 31, 1999 as compared to $153,000 for the year ended December 31, 1998.
Included in the 1999 fee and other income was $325,000 earned for restructuring
the ownership and financing of one of the Company's Property Interests, $250,000
earned for subordinating to additional senior debt on one of the Company's
Loans, and $90,000 earned for services provided to a commercial building in
which the Company has an interest. Included in the 1998 fee and other income was
$50,000 earned for subordinating to additional senior debt on one of the
Company's Loans, $45,000 earned for services provided to a commercial building
in which the Company has an interest, and $45,000 earned in referral fees.
The Company recognized a gain on the sale of a loan of $131,000 in 1999
and a gain on the sale of a loan participation of $940,000 in 1998. In 1999 the
Company also recognized income from loan satisfaction of $598,000 which related
to the Company's conversion of two Loans with a combined book value of $19.5
million to an 100% Property Interest worth $20.1 million.
During 1997 (the year the Company was formed), the Company engaged in
organizational activities including preparation for its initial public offering,
and consequently had no revenues.
Ten of the Company's purchased loans remained subject to forbearance
agreements or other contractual restructurings that existed at the time the
Company acquired the loans. During the year ending December 31, 1999, all
payments under the agreements were timely made and all borrowers were otherwise
in full compliance with the terms of the agreements. The remaining thirteen
loans in the Company's portfolio are performing in accordance with their terms
as originally underwritten by the Company and were current as to payments as of
December 31, 1999.
17
<PAGE>
During the year ended December 31, 1999, the Company incurred expenses
of $21.2 million compared to $8.8 million for the same period in 1998. The
expenses consisted of interest expense, operating expenses relating to the
Company's Property Interests, salaries and related benefits, general and
administrative expenses and depreciation and amortization. Interest expense was
$11.1 million for the year ended December 31, 1999 as compared to $4.3 million
for the corresponding period in 1998. Interest expense relates to interest
payments made on senior indebtedness encumbering properties underlying the
Company's investments in wraparound Loans and the Company's Property Interests,
and interest payments made on the Company's secured line of credit, all of which
increased as a result of the increase in the Company's loan portfolio and
Property Interests. Property operating expenses were $6.3 million for the year
ended December 31, 1999, compared to $2.3 million for the year ended December
31, 1998. Depreciation and amortization was $1.9 million for the year ended
December 31, 1999 compared to $796,000 for the corresponding period in 1998. The
increases in property operating expenses, depreciation and amortization were due
to the Company's acquisition of a total of four property interests in the first
and third quarters of 1998 and the second and fourth quarters of 1999. Salaries
and related benefits were $1.4 million for the year ended December 31, 1999
compared to $865,000 for the corresponding period in 1998. General and
administrative expenses were $433,000 for the year ended December 31, 1999 as
compared to $233,000 for the corresponding period in 1998. Salaries and related
benefits and general and administrative expenses increased due to salary
increases and 1998 amounts not reflecting a full year of operations.
During 1998 the Company initiated a reserve for loan losses of
$226,000. This reserve is a general reserve and is not related to any individual
loan or to an anticipated loss. In accordance with its policy, the Company
determined that this reserve was adequate as of December 31, 1999. The Company
will continue to analyze the adequacy of this reserve on an annual basis. During
1997, the Company had no operations, and its sponsor, RAI, paid for
approximately $1.6 million of its offering expenses which was recorded as
"Reimbursement due Affiliate". The Company reimbursed RAI for these expenses
from the proceeds of its initial public offering in January 1998.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following table sets forth certain information regarding the cash
held in a money market account, Loans held in the Company's portfolio, long term
debt underlying the Company's Loans and Property Interests and the Company's
secured line of credit as of December 31, 1999. The presentation, for each
category of information, aggregates the assets and liabilities by their maturity
dates for maturities occurring in each of the years 2000 through 2004 and
separately aggregates the information for all maturities arising after 2004.
<TABLE>
<CAPTION>
Interest Earning Assets and Interest Bearing Liabilities, Aggregated by Maturity Date
As of December 31, 1999
Fair Market
2000 2001 2002 2003 2004 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----------
<S> <C> <C> <C>
Interest Earning Assets:
Money market accounts $11,323,301 --- --- --- --- --- $11,323,301 $ 11,323,301
First mortgages and
senior loan
participations $279,656 2,909,895 355,089 2,383,426 450,868 4,651,596 $11,030,530 $ 12,127,973
Average interest rate 12.0% 13.7% 12.0% 11.4% 12.0% 11.8% 12.2% 9.0%
Mezzanine (including
wraparound) loans --- --- 3,243,750 --- --- 112,518,954 $115,762,704 $137,153,418
Average interest rate --- --- 15.0% --- --- 16.0% 16.3% 11.5%
Bridge loans $27,718,161 --- --- --- --- 6,142,000 $33,860,161 $ 36,233,126
Average interest rate 15.3% --- --- --- --- 16.0% 15.4% 11.0%
Interest Bearing Liabilities:
Senior Indebtedness
Secured by real estate
underlying the Company's
wraparound loans 12,765,476 823,871 886,730 954,396 1,027,235 62,021,023 $78,478,731 $ 72,421,984
Average interest rate 8.2% 7.4% 7.4% 7.4% 7.4% 7.4% 7.8% 8.4%
Long term debt secured
by real estate owned $607,095 651,809 699,823 751,382 806,748 79,168,217 $82,685,074 $ 74,253,733
Average interest rate 7.1% 7.1% 7.1% 7.1% 7.1% 8.4% 8.3% 9.3%
Secured line of credit --- 14,000,000 --- --- --- --- $14,000,000 $ 14,000,000
Average interest rate 8.8% --- 8.8% 8.8%
</TABLE>
18
<PAGE>
Market Risk
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, equity prices, and real estate values. The
Company's primary market risk exposure is to changes in interest rates, which
can affect the value of the Company's investments, and the rates at which it
reinvests funds it obtains from loan repayments. As interest rates increase,
although the interest rates the Company obtains from reinvested funds will
generally increase, the value of its existing loans at fixed rates will
generally tend to decrease. As interest rates decrease, the amounts becoming
available to the Company for investment due to repayment of its Loans may be
invested at lower rates than the Company had been able to obtain in prior
investments, or than the rates on the repaid Loans. These relationships between
interest rate and value may be diminished or not applicable to those of the
Company's Loans (principally Loans acquired at a discount) that (while normally
at fixed rates of interest) have a substantial amount of interest outstanding
and are payable to the extent of a property's cash flow. The Company does not
hedge or otherwise seek to manage interest rate risk, and does not enter into
risk sensitive instruments for trading purposes.
19
<PAGE>
Item 8. Financial Statements
Resource Asset Investment Trust and Subsidiaries
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants ............................................................. 21
Consolidated Balance Sheets at December 31, 1999 and 1998....................................................... 22
Consolidated Statements of Operations for the years ended December 31,1999 and 1998 and for the period from
August 20, 1997 (date of inception) through December 31, 1997................................................... 23
Consolidated Statements of Changes in Shareholders' Equity (Deficiency) for the years ended December 31, 1999
and 1998 and for the period from August 20, 1997 (date of inception) through December 31, 1997.................. 24
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998 and for the period from
August 20, 1997 (date of inception) through December 31, 1997................................................... 25
Notes to Consolidated Financial Statements...................................................................... 26-37
Schedule IV -- Mortgage Loans on Real Estate
All other schedules are not applicable or are omitted since either (i) the required information is not material or
(ii) the information required is included in the consolidated financial statements and notes thereto ........... 38
</TABLE>
20
<PAGE>
[Grant Thornton Letterhead]
Report of Independent Certified Public Accountants
Board of Trustees
Resource Asset Investment Trust
We have audited the accompanying consolidated balance sheets of
Resource Asset Investment Trust and Subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, changes in
shareholders' equity (deficiency) and cash flows for the years ended December
31, 1999 and 1998 and for the period from August 20, 1997 (date of inception)
through December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Resource Asset Investment Trust and Subsidiaries as of December 31, 1999 and
1998, and the consolidated results of their operations and their cash flows for
the years ended December 31, 1999 and 1998 and for the period from August 20,
1997 (date of inception) through December 31, 1997, in conformity with generally
accepted accounting principles.
We have also audited Schedule IV as of December 31, 1999. In our
opinion this schedule presents fairly, in all material respects, the information
required to be set forth therein.
/s/ Grant Thornton LLP
- ----------------------------
Philadelphia, Pennsylvania
January 24, 2000
21
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 11,323,301 $ 5,011,666
Restricted cash 5,283,886 ---
Tenant escrows 164,378 ---
Accrued interest receivable 1,544,984 1,057,919
Investments in real estate loans, net 160,485,767 126,273,069
Investments in real estate, net 89,936,339 68,244,109
Furniture, fixtures, and equipment, net 88,243 108,885
Prepaid expenses and other assets 1,001,775 563,443
------------ ------------
Total Assets $269,828,673 $201,259,091
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued liabilities $ 332,040 $ 142,067
Accrued interest payable 1,033,484 674,047
Deferred interest payable 788,841 115,568
Tenant security deposits 270,908 144,830
Borrowers' escrows 5,308,136 418,402
Deferred income 693,162 24,000
Senior indebtedness secured by real estate underlying the
Company's wraparound loans 78,478,730 46,936,032
Long term debt secured by real estate owned 82,685,074 67,267,925
Secured line of credit 14,000,000 ---
------------ ------------
Total Liabilities 183,590,375 115,722,871
Minority interest --- 17,761
Shareholders' Equity
Preferred Shares, $.01 par value; 25,000,000 authorized shares --- ---
Common Shares, $.01 par value; 200,000,000 authorized shares;
issued and outstanding, 6,199,126 and 6,165,334 shares, respectively 61,991 61,654
Additional paid-in-capital 86,159,238 85,817,332
Retained earnings (accumulated deficit) 17,069 (360,527)
------------ -------------
Total Shareholders' Equity 86,238,298 85,518,459
------------- -------------
Total Liabilities and Shareholders' Equity $ 269,828,673 $ 201,259,091
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
22
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the period
August 20, 1997 (date of
For the Year Ended For the Year Ended inception) through
December 31, 1999 December 31, 1998 December 31, 1997
------------------ ------------------ ------------------------
REVENUES
<S> <C> <C> <C>
Mortgage interest income $20,011,207 $10,544,689 $ ----
Rental income 12,386,251 4,609,534 ----
Fee income and other 684,207 153,440 ----
Investment income 311,631 928,448 ----
Gain on sale of loan (participation) 131,125 940,448 ----
Income from loan satisfaction 597,742 ---- ----
----------- ---------- -----------
Total Revenues 34,122,163 17,176,559 ----
COSTS AND EXPENSES
Interest 11,104,947 4,309,248 ----
Property operating expenses 6,344,473 2,348,386 ----
Salaries and related benefits 1,407,955 865,638
General and administrative 433,239 232,682 ----
Depreciation and amortization 1,887,560 795,577 ----
Provision for loan losses ---- 226,157 ----
Start-up costs ---- ---- 45,617
----------- ----------- -----------
Total Costs and Expenses 21,178,174 8,777,688 45,617
----------- ----------- -----------
Net Income (loss) before minority interest $12,943,989 $ 8,398,871 (45,617)
Minority interest 17,761 74,935 ----
----------- ----------- -----------
Net Income (loss) $12,961,750 $ 8,473,806 $ (45,617)
=========== ============ ===========
Net Income per common share-basic $ 2.10 $ 1.82 nm
=========== ============ ===========
Weighted average common shares
outstanding-basic 6,168,248 4,655,633 100
=========== ============ ===========
Net income per common share-diluted $ 2.09 $ 1.81 nm
=========== ============ ===========
Weighted average common shares
outstanding-diluted 6,192,656 4,685,229 100
=========== ============ ===========
</TABLE>
nm Per share amounts would be based on the pre-offering amount of 100 shares
outstanding, and accordingly, would not be comparable to amounts shown
after the Company's two public offerings
The accompanying notes are an integral part of these consolidated
financial statements
23
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (Deficiency)
For the Years Ended December 31, 1999 and
1998 and For the Period from August 20, 1997 (Date of
Inception) to December 31, 1997
<TABLE>
<CAPTION>
Retained Earnings
Preferred Additional (Accumulated Total Shareholders'
Stock Common Stock Paid-in Capital Deficit) Equity (Deficiency)
------------ ------------ --------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 20,1997 $ --- $ --- $ --- $ --- $ ---
Issuance of Common Shares --- 1 999 --- 1,000
Net loss for the period ended --- --- --- (45,617) (45,617)
------------ ---------- ------------ --------- ------------
Balance, December 31, 1997 --- 1 999 (45,617) (44,617)
------------ ---------- ------------ --------- ------------
Issuance of Common Shares,
net of expenses --- 61,653 85,816,333 --- 85,877,986
Net income --- --- --- 8,473,806 8,473,806
Cash dividends --- --- --- (8,788,716) (8,788,716)
------------ ---------- ------------ --------- ------------
Balance, December 31, 1998 --- 61,654 85,817,332 (360,527) 85,518,459
------------ ---------- ------------ --------- ------------
Net income --- --- --- 12,961,750 12,961,750
Dividends --- 337 341,906 (12,584,154) (12,241,911)
------------ ---------- ------------ --------- ------------
Balance, December 31, 1999 $ --- $ 61,991 $ 86,159,238 $ 17,069 $ 86,238,298
============ ========== ============ ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
24
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the period
August 20, 1997 (date
For the Year Ended For the Year Ended of inception) through
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net Income (loss) $12,961,750 $8,473,806 $ (45,617)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Gain on sale of loan/loan participation (131,125) (940,448) ---
Income from loan satisfaction (597,742) --- ---
Minority interest (17,761) (74,935) ---
Depreciation and amortization 1,887,560 795,577 ---
Provision for loan losses --- 226,157 ---
Amortization of original issue discount --- (5,001) ---
Accretion of loan discounts (3,206,162) (249,696) ---
Increase in tenant escrows (164,378) --- ---
Increase in accrued interest receivable (487,065) (1,057,919) ---
Increase in prepaid expenses and other assets (461,064) (512,340) (2,105,642)
Increase in accounts payable and accrued liabilities 189,973 33,544 657,751
Increase in accrued interest payable 359,437 674,047 ---
Increase in deferred interest payable 673,273 115,568 ---
Increase in tenant security deposits 126,078 144,830 ---
Increase in deferred income 669,162 --- ---
(Decrease) increase in borrowers' escrows (394,154) 418,402 ---
Increase in reimbursement due affiliate --- --- 1,579,330
----------- ---------- ----------
Net cash provided by operating activities 11,407,782 8,041,592 85,822
----------- ---------- ----------
Cash flows from investing activities
Purchase of furniture, fixtures and equipment (5,460) (117,712) (8,766)
Real estate loans purchased (24,005,000) (79,461,384) ---
Real estate loans originated (37,159,648) (40,986,200) ---
Proceeds from sale of loan/loan participation 2,481,782 4,000,000 ---
Principal repayments from real estate loans 28,768,535 38,412,212 ---
Purchase of real estate and improvements (3,976,651) (2,406,220) ---
Other --- 92,698 (78,056)
----------- ---------- ----------
Net cash used in investing activities (33,896,442) (80,466,606) (86,822)
----------- ---------- ----------
Cash flows from financing activities
Advances on secured line of credit 14,000,000 --- ---
Issuance of common stock, net --- 85,877,986 1,000
Payment of cash dividends (12,241,911) (8,788,716) ---
Principal repayments on senior indebtedness (374,941) (335,780) ---
Principal repayments on long-term debt (443,078) (416,810) ---
Proceeds of long-term debt 27,860,225 1,100,000 ---
----------- ---------- ----------
Net cash provided by financing activities 28,800,295 77,436,680 1,000
----------- ---------- ----------
Net change in cash and cash equivalents 6,311,635 5,011,666 ---
----------- ---------- ----------
Cash and cash equivalents, beginning of period 5,011,666 --- ---
----------- ---------- ----------
Cash and cash equivalents, end of period $11,323,301 $5,011,666 $ ---
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
25
<PAGE>
NOTE 1 -- FORMATION AND BUSINESS ACTIVITY
Resource Asset Investment Trust ("RAIT"), together with its
wholly-owned subsidiaries, RAIT Partnership, L.P. (the "Operating Partnership"),
RAIT General, Inc. (the "General Partner"), the General Partner of the Operating
Partnership, and RAIT Limited, Inc. (the "Initial Limited Partner"), the Initial
Limited Partner of the Operating Partnership, (together the "Company") were each
formed in August 1997. RAIT, the General Partner and the Initial Limited Partner
were organized in Maryland, and the Operating Partnership was organized as a
Delaware limited partnership.
The Company's principal business activity is to provide or acquire
loans (or participation interests in such loans) secured by mortgages on
commercial real property or similar instruments in situations that, generally,
do not conform to the underwriting standards of institutional lenders or sources
that provide financing through securitization. The Company emphasizes
subordinated (or "mezzanine") financing, including wraparound financing, with
principal amounts generally between $1.0 million and $10.0 million. The Company
also provides short-term bridge financing in excess of the targeted size range
where the borrower has committed to obtain take-out financing (or the Company
believes that it can arrange such financing) to reduce the Company's investment
to an amount within the targeted size range. The Company also acquires real
properties, or interests therein. The Operating Partnership undertakes the
business of the Company, including the origination and acquisition of financing
and the acquisition of property interests.
The Company principally competes with banks, insurance companies,
savings and loan associations, mortgage bankers, pension funds, investment
bankers, and other public or private real estate investment trusts for
origination or acquisition of real estate loans.
The Company emphasizes financing with respect to properties located in
metropolitan areas of the United States, and has identified certain areas in
which it may concentrate its investments, particularly the Philadelphia,
Pennsylvania metropolitan area (two properties owned and fourteen properties
underlying loans as of December 31, 1999 and one property owned and eighteen
properties underlying loans as of December 31, 1998 were located in this area)
and in the Baltimore/Washington, D.C. corridor (one property owned and five
properties underlying loans as of December 31, 1999 and four properties
underlying loans at December 31, 1998) related to properties located in this
area.)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles. The consolidated
financial statements include the accounts of the Company and its majority-owned
subsidiaries. All material intercompany balances and transactions have been
eliminated in consolidation.
In preparing the consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities, and the reported
amounts of revenue and expenses. Actual results could differ from those
estimates.
The principal estimate that is particularly susceptible to significant
change in the near term relates to the provision for loan losses. The evaluation
of the adequacy of the provision for loan losses includes an analysis of the
individual investment in real estate loans and overall risk characteristics and
size of the different loan portfolios, and takes into consideration current
economic and market conditions, the capability of specific borrowers to pay
specific loan obligations, and current loan collateral values. However, actual
losses on specific loans, which also are encompassed in the analysis, may vary
from estimated losses.
In 1998 the Company adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." This statement redefines how
operating segments are determined and requires disclosures of certain financial
and descriptive information about the Company's operating segments. Under
current conditions, the Company is reporting one segment.
26
<PAGE>
Investments in Real Estate Loans
Investments in real estate loans consists of loans that are originated
at par or acquired at face value ("Par Loans") and certain mortgage loans, for
which the borrower is not current as to original contractual principal and
interest payments, that are acquired at a discount from both the face value of
the loan and the appraised value of the property underlying the loan
("Discounted Loans"). For Discounted Loans, the difference between the Company's
cost basis in the loan and the sum of projected cash flows from, and the
appraised value of, the underlying property (up to the amount of the loan) is
accreted into interest income over the estimated life of the loan using a method
which approximates the level interest method. Projected cash flows and appraised
values of the property are reviewed on a regular basis and changes to the
projected amounts reduce or increase the amounts accreted into interest income
over the remaining life of the loan. The Company has the ability and the intent
to hold these loans to maturity.
Par Loans are originated or purchased at face value and are stated at
amortized cost, less any provision for loan losses, because the Company has the
ability and the intent to hold them for the foreseeable future or until maturity
or payoff. Interest income is accrued as it is earned. In some instances, the
borrower pays additional interest ("points") at the time the loan is closed. The
points are recognized over the term of the loan to which it relates. The Company
will place loans on non-accrual status after being delinquent greater than 89
days, or earlier if the borrower is deemed by management to be unable to
continue performance. When a loan is placed on non-accrual status, interest
accrued but not received is reversed. While a loan is on non-accrual status,
interest is recognized only as cash is received. Loans are returned to accrual
status only when the loan is reinstated and ultimate collectibility of future
interest is no longer in doubt (none of the Company's loans is on non-accrual
status). Gains and losses on disposal of such assets are computed on a specific
identification basis.
Management's periodic evaluation of the adequacy of the provision for
loan losses is based on known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral, and current economic conditions and trends. Such
estimates are susceptible to change, and actual losses on specific loans may
vary from estimated losses. The provision for loan losses will be increased by
charges to income and decreased by charge-offs (net of recoveries).
The Company accounts for the impairment of loans under SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan: Income Recognition and
Disclosures." These statements require that a creditor measure impairment based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair value
of the collateral if the loan is collateral dependent. Regardless of the
measurement method, a creditor must measure impairment based on the fair value
of the collateral when the creditor determines that foreclosure is probable. At
December 31, 1999 and 1998, the Company had no such loans.
The Company accounts for its transfers of financial assets under SFAS
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," as amended by SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of SFAS No. 125". This standard provides
accounting guidance on transfers of financial assets, servicing of financial
assets and extinguishments of liabilities. Adoption of this statement did not
have a material impact on the Company's consolidated financial position or
results of operations.
Investments in Real Estate
Investments in real estate are carried at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over an
estimated useful life of 39 years (non-residential) and 27.5 years
(residential). The Company reviews its investment in real estate for impairment
as defined in SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
27
<PAGE>
Restricted Cash and Borrowers' Escrows
Restricted cash and borrowers' escrows represent borrowers' funds held
by the Company to fund certain expenditures or to be released at the Company's
discretion upon the occurrence of certain pre-specified events, and to serve as
additional collateral for the loans.
Depreciation and Amortization
Furniture, fixtures and equipment are carried at cost less accumulated
depreciation. Furniture and equipment are depreciated using the straight-line
method over an estimated useful life of five years. Leasehold improvements are
amortized using the straight-line method over the life of the related lease.
Stock Option Plans
The Company accounts for its stock option grants under the provisions
of FASB No. 123, "Accounting for Stock-Based Compensation," which contains a
fair value-based method for valuing stock-based compensation that entities may
use, and measures compensation cost at the grant date based on the fair value of
the award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, the standard permits entities to
continue accounting for employee stock options and similar instruments under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net income and
earnings per share as if the fair value- based method of accounting defined in
SFAS No. 123 had been applied. The Company accounts for its stock options under
APB Opinion No. 25.
Federal Income Taxes
The Company qualifies and has elected to be taxed as a Real Estate
Investment Trust ("REIT") under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended, commencing with its taxable year ending December 31,
1998. If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its taxable income that is
distributed to its shareholders. A REIT is subject to a number of organizational
and operational requirements, including a requirement that it currently
distribute at least 95% of its annual taxable income.
Earnings per Share
The Company follows the provisions of SFAS No. 128, "Earnings per
Share". This statement eliminates primary and fully diluted earnings per share
and requires presentation of basic and diluted earnings per share ("EPS") in
conjunction with the disclosure of the methodology used in computing such
earnings per share. Basic earnings per share excludes dilution and is computed
by dividing income available to common shares by the weighted average common
shares outstanding during the period. Diluted earnings per share takes into
account the potential dilution that could occur if securities or other contracts
to issue common stock were exercised and converted onto common stock. EPS is
computed based on the weighted average number of shares of common stock
outstanding.
Consolidated Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
non-interest earning deposits and interest earning deposits. Cash paid for
interest was $9.9 million and $3.5 million for the years ended December 31, 1999
and 1998, respectively. Senior indebtedness incurred in conjunction with the
acquisition and origination of real estate loans was $34.5 million and $49.7
million for the years ended December 31, 1999 and 1998, respectively. Long-term
debt assumed in conjunction with the acquisition of an investment in real estate
was $860,000 and $66.5 million for the years ended December 31, 1999 and 1998,
respectively.
28
<PAGE>
During 1999, the Company converted two loans with a combined book value
of $19.5 million to an 100% equity interest in a property worth $20.1 million,
which resulted in income from loan satisfaction of approximately $600,000.
NOTE 3-INVESTMENTS IN REAL ESTATE LOANS
The Company's portfolio of investments in real estate loans consisted
of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Long-term first mortgages and senior loan participations $ 11,030,530 $ 35,111,995
Mezzanine (including wraparound) loans 115,762,704 81,334,701
Short-term bridge loans 33,860,161 9,881,200
Loan costs 58,529 171,330
Less: Provision for loan losses (226,157) (226,157)
------------- -------------
Investments in real estate loans 160,485,767 126,273,069
------------- -------------
Less: Senior indebtedness secured by real estate
underlying the Company's wraparound loans (78,478,730) (46,936,032)
------------- -------------
Net investments in real estate loans $ 82,007,037 $ 79,337,037
============= =============
</TABLE>
The following is a summary description of the assets contained in the Company's
portfolio of investments in real estate loans as of December 31, 1999:
<TABLE>
<CAPTION>
Average
Number of Loan-to- Yield Range of
Type of Loan Loans Value Range Maturities
------------ ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Long-term first mortgages and senior loan
participations...................................... 6 44% 10-15% 3/28/01-7/14/09
Mezzanine (including wraparound) loans................ 12 86% 11-18% 2/1/02-1/31/09
Short term bridge loans............................... 5 78% 15-30% 5/31/00-12/2/00
</TABLE>
At December 31, 1999, approximately $60.1 million of the loans were
secured by multi-family residential properties and $100.5 million of the loans
were secured by commercial properties. At December 31, 1998, approximately $77.6
million of the loans were secured by multi-family residential properties and
$48.7 million were secured by commercial properties.
As of December 31, 1999, ten of the Company's purchased loans (fourteen
at December 31, 1998) were still subject to forbearance agreements or other
contractual restructurings that existed at the time the Company acquired the
loans. During the year ending December 31, 1999, all payments under the
agreements were timely made and all borrowers were otherwise in full compliance
with the terms of the agreements. The remaining thirteen loans in the Company's
portfolio were performing in accordance with their terms as originally
underwritten by the Company and were current as to payments as of December 31,
1999.
As of December 31, 1999 and 1988, senior indebtedness secured by real
estate underlying the Company's wraparound loans consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C> <C> <C>
Loan payable, secured by real estate, monthly installments of $13,789, including
interest at 7.08%, remaining principal due December 1, 2008 $ 1,909,721 $ 1,937,000
Loan payable, secured by real estate, monthly installments of $17,051, including
interest at 6.83%, remaining principal due December 1, 2008 2,413,958 2,450,000
Loan payable, secured by real estate, monthly installments of $10,070, including
interest at 6.83%, remaining principal due December 1, 2008 1,525,356 1,540,000
Loan payable, secured by real estate, monthly installments of $116,964, including
interest at 9.00%, remaining principal originally due March 1, 2003. This loan
was repaid in June, 1999. -- 12,813,559
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Loan payable, secured by real estate, monthly installments of $80,427, including
interest at 6.95%, remaining principal due July 1, 2008 $11,970,859 $12,099,125
Loan payable, secured by real estate, monthly installments of $28,090, including
interest at 6.82%, remaining principal due November 1, 2008 4,250,351 4,296,348
Loan payable, secured by real estate, monthly installments of $72,005, including
interest at 7.55%, remaining principal due December 1, 2008 9,877,287 10,000,000
Loan payable, secured by real estate, monthly installments of interest only at
10% until July, 1999 at which time amortization on a 20-year schedule, including
interest at 10% begins. This loan was repaid in September, 1999. -- 1,800,000
Loan payable, secured by Company's interest in first mortgage bridge loan of
$17,576,712, interest only at 8.25% due monthly, principal balance due
May 31, 2000 12,000,000 --
Loan payable, secured by real estate, monthly installments of $249,497, including
interest at 7.625%, remaining principal due November 1, 2007 34,531,198 --
----------- -----------
78,478,730 46,936,032
=========== ===========
</TABLE>
As of December 31, 1999 the senior indebtedness secured by real estate
underlying the Company's wraparound loans maturing over the next five years, and
the aggregate indebtedness maturing thereafter is as follows:
2000 $12,765,475
2001 823,871
2002 886,730
2003 954,396
2004 1,027,235
Thereafter 62,021,023
-----------
$78,478,730
NOTE 4-INVESTMENTS IN REAL ESTATE
Investments in real estate are comprised of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Land $ 7,169,710 $ 5,159,710
Office buildings and improvements 65,065,326 63,826,492
Apartment buildings(1) 20,169,320 --
----------- -----------
Subtotal 92,404,356 68,986,202
Less: Accumulated depreciation (2,468,017) (742,093)
----------- ------------
Investments in real estate, net $89,936,339 $ 68,244,109
=========== ============
</TABLE>
(1) Includes $1.5 million investment or 25% interest in a limited liability
company which owns an apartment building.
Included in office buildings and improvements and apartment buildings
are escrow balances totaling $2.6 million and $1.7 million at December 31, 1999
and 1998, respectively, which represent escrows for real estate taxes, insurance
premiums, repair and replacement, tenant improvements and leasing commissions
reserves.
As of December 31, 1999 and 1998 long term debt secured by the
Company's above referenced real estate investments consisted of the following:
30
<PAGE>
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C> <C> <C>
Loan payable, secured by real estate, monthly installments of $8,008, including
interest at 7.33%, remaining principal due August 1, 2008 $ 1,078,418 $ 1,094,799
Loan payable, secured by real estate, monthly installments of $288,314,
interest at 6.85%, remaining principal due August 1, 2008(1) 43,440,360 43,867,057
Loan payable, secured by real estate, monthly payments of interest only at 10%,
principal due August 1, 2008(1) 4,860,161 4,430,910
Loan payable, secured by partnership interests in a real estate partnership,
monthly payments of interest only at 8.19%, additional interest of 3.81% is
deferred and payable from net cash flow, principle and deferred interest due
September 1, 2008(1) 18,306,135 17,875,159
Loan payable, secured by real estate, monthly installments of $107,255,
including interest at 7.73%, remaining principal due December 1, 2009 15,000,000 --
----------- -----------
$82,685,074 $67,267,925
=========== ===========
</TABLE>
(1) These loans all relate to a single investment in real estate.
As of December 31, 1999 the amount of long-term debt secured by the
Company's above-referenced real estate investments which mature over the next
five years, and the aggregate indebtedness maturing thereafter, is as follows:
2000 $ 607,095
2001 651,809
2002 699,823
2003 751,382
2004 806,748
Thereafter 79,168,217
-----------
$82,685,074
-----------
Expenditures for repairs and maintenance are charged to operations as
incurred. Significant renovations are capitalized. Fees and costs incurred in
the successful negotiation of leases are deferred and amortized on a
straight-line basis over the terms of the respective leases. Rental revenue is
reported on a straight-line basis over the terms of the respective leases.
Depreciation expense relating to the Company's real estate investments for the
years ended December 31, 1999 and 1998 was $1.8 million and $742,000,
respectively.
The Company leases space in the buildings it owns to several tenants.
Approximate future minimum lease payments under noncancellable leasing
arrangements as of December 31, 1999 are as follows:
2000 $ 9,123,000
2001 9,063,000
2002 7,922,000
2003 7,684,000
2004 7,637,000
Thereafter 29,492,000
-----------
$70,921,000
31
<PAGE>
NOTE 5 -- SECURED LINE OF CREDIT
In April 1999, the Company established a $20.0 million secured line of
credit bearing interest at the Wall Street Journal Prime Rate. The facility has
a two-year term with a one-year extension option, and an 11-month non-renewal
notice requirement. The line of credit is secured by the Company's long-term
first mortgages and senior loan participations and one short term bridge loan.
As of December 31, 1999, $14.0 million was outstanding on the line of credit at
8.50%, interest due monthly.
NOTE 6 -- SHAREHOLDERS' EQUITY
The Company filed a registration statement with respect to the public
offering and sale of 2,833,334 Common Shares that became effective January 8,
1998. The public offering closed on January 14, 1998. In addition to the public
offering, Resource America, Inc. ("RAI") purchased 500,000 Common Shares, as
sponsor of the Company, at a price of $13.95, which was the offering price net
of underwriting discounts. The initial public offering price of the Common
Shares was $15.00. The net proceeds received by the Company in connection with
the public offering were approximately $44.4 million. Total offering costs
approximated $5.3 million, including underwriting discounts.
The Company issued warrants to purchase 141,667 Common Shares to the
underwriters at an exercise price of $15.00, the initial offering price. The
warrants are exercisable for a period of four years commencing on January 14,
1999.
The Company filed a second registration statement with respect to the
public offering and sale of 2,800,000 Common Shares that became effective June
23, 1998. The public offering closed on June 29, 1998. The offering price of the
Common Shares was $15.75. The net proceeds received by the Company in connection
with the public offering were approximately $41.1 million. Total offering costs
approximated $2.5 million, including underwriting discounts.
On July 24, 1998, the underwriters exercised their over-allotment
option to purchase, at the initial offering price less underwriting discounts
and commissions, 31,900 Common Shares. The net proceeds received by the Company
in connection with the exercise of the over-allotment option were approximately
$475,000.
NOTE 7 -- EARNINGS PER SHARE
The Company's calculation of earnings per share in accordance with SFAS No. 128
is as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1999
-------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
<S> <C> <C> <C>
Net income available to common shareholders $12,961,750 6,168,248 $ 2.10
Effect of dilutive securities
Options ........................................ -- 24,408 (0.01)
---------- --------- -------
Net income available to common shareholders
Plus assumed conversions .................. $12,961,750 6,192,656 $ 2.09
=========== =========== =======
Options to purchase 387,500 shares at $15.00 per share and warrants to purchase
141,667 shares at $15.00 were outstanding during 1999. They were not included in
the computation of diluted earnings per share because the option exercise price
was greater than the average market price.
Year ended December 31, 1998
-------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common
shareholders ............................ $8,473,806 4,655,633 $ 1.82
Effect of dilutive securities
Options ........................................ -- 29,208 (0.01)
Warrants ....................................... -- 1,403 --
---------- --------- -------
Net income available to common shareholders
Plus assumed conversions .................. $8,473,806 4,686,244 $ 1.81
========== ========= =======
</TABLE>
32
<PAGE>
NOTE 8 -- OPTION PLAN
The Company has adopted a qualified share option plan (the "Option
Plan"). The maximum aggregate number of Common Shares that may be issued
pursuant to options granted under the Option Plan is 800,000. The purpose of the
Option Plan is to provide a means of performance-based incentive compensation
for the Company's key employees.
The Company has granted to certain of its officers options to acquire
an aggregate of 385,000 Common Shares at an exercise price of $15.00 per share.
The options are not exercisable immediately; rather, 25% of each option becomes
exercisable on each January 14 during the period 1999 through 2002. The options
will terminate on January 14, 2008. The Company has also granted to its Trustees
who are not executive officers options to acquire an aggregate of 2,500 Common
Shares under substantially the same terms, except that the options were
immediately exercisable.
The Company issued to the underwriters of the public offering warrants
to purchase up to 141,667 Common Shares at an exercise price of $15.00 per
share. See Note 6 -- Shareholders' Equity.
On October 9, 1998, the Company granted to certain of its officers
options to acquire an aggregate of 62,500 Common Shares at an exercise price of
$9.00 per share (fair value on date of grant). The options are not exercisable
immediately; rather, 25% of each option becomes exercisable on each October 9
during the period 1999 through 2002. The options will terminate on October 9,
2008.
On November 9, 1999, the Company granted to its officers and trustees
options to acquire an aggregate of 180,000 Common Shares at an exercise price of
$10.75 per share (fair value on date of grant). The options are not exercisable
immediately; rather 50% of each option becomes exercisable on each November 9 of
2000 and 2001. The options will terminate on November 9, 2009.
Had compensation cost for the Option Plan been determined based on the
fair value of the options at the grant dates consistent with SFAS No. 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below.
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Net income.................................. As reported $12,962,000 $ 8,474,000
Pro forma $12,477,000 $ 8,057,000
Net income per common share---basic ........ As reported $ 2.10 $ 1.82
Pro forma $ 2.02 $ 1.73
Net income per common share---diluted ...... As reported $ 2.09 $ 1.81
Pro forma $ 2.01 $ 1.73
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used for grants in 1999 and 1998, respectively: dividend
yield of 14.7% and 11.5%; expected volatility of 19% and 55%; risk-free
interest rate of 6.09% and 5.29%; and expected lives of five years.
33
<PAGE>
<TABLE>
<CAPTION>
1999 1998
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C>
Outstanding, January 1,................................. 450,000 $ 14.17 ---
Granted................................................. 180,000 $ 10.75 450,000 $ 14.17
Exercised............................................... --- ---
Terminated.............................................. --- ---
------- -------
Outstanding, December 31,............................... 630,000 $ 13.19 450,000 $ 14.17
======= ===== ======= =====
Options exercisable at December 31,.................... 112,500 ---
=======
Weighted average fair value of options granted during year. $ 3.37 $ 4.14
======= =======
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------- ------------------------------------
Weighted Weighted
Weighted Average Average Average
Range of Number Outstanding at Remaining Exercise Number Outstanding at Exercise
Exercise Prices December 31, 1999 Contractual Life Price December 31, 1999 Price
--------------- ----------------- ---------------- -------- ----------------- --------
$9.00-10.75 242,500 9.04 years $ 10.30 15,625 $ 9.00
$15.00 387,500 8.04 years $ 15.00 96,875 $15.00
------- -------
630,000 112,500
======= =======
</TABLE>
NOTE 9 -- COMMITMENTS
Lease Obligations
The Company sub-leases office space under an operating lease with
Hudson United Bancorp, as successor in interest to JeffBanks, Inc., at an annual
rental of $24,000 and $22,000 plus an allocation of building operating expenses.
The sub-lease expires May 14, 2008 and contains two five-year renewal options.
Rental expense was $24,000 for the years ended December 31, 1999 and 1998,
respectively.
Employment Agreements
The Company has entered into automatically renewing, one-year
employment agreements with its Chairman and Chief Executive Officer and the
President and Chief Operating Officer. In the event of termination other than
for cause, the contracted employee will receive a lump sum benefit equal to
"average compensation" which is defined as the average compensation in the three
most highly compensated years during the previous five years. In addition, upon
termination, all options to acquire Common Shares vest on the later of the
effective date of termination or six months after the options were granted.
Indemnifications
The Company has indemnified the senior lender in three loans underlying
the Company's wraparound loans from and against those items for which the senior
lender customarily has recourse against the owner of the property, limited to
fraud, misappropriation of rents, environmental obligations and other similar
matters. The Company received substantially all of the proceeds from these
loans.
NOTE 10 -- TRANSACTIONS WITH AFFILIATES
In connection with the public offering, RAI acquired 15% of the
Company's outstanding Common Shares. The Chairman and Chief Executive Officer of
the Company is the spouse of the Chairman and Chief Executive Officer of RAI and
a parent of the President of RAI. A trustee of the Company is their son, who is
also employed by RAI. RAI advanced approximately $1.6 million to the Company for
organization, start-up and offering expenses. Simultaneously with the closing of
the public offering, the Company purchased certain investments (the "Initial
Investments") from RAI as described below. The Company anticipates that it will
purchase additional investments from RAI subject to a maximum limit of 30% of
the Company's investments, excluding the Initial Investments. The Company may
also from time to time retain RAI to perform due diligence investigations on
properties underlying proposed investments (except investments acquired from
RAI).
34
<PAGE>
The 12 Initial Investments were acquired from RAI at Closing at an
aggregate investment of approximately $18.1 million together with certain senior
debt relating to four of the Initial Investments from third parties at a cost of
approximately $2.5 million. Two of the Initial Investments were originated by
the Company and were purchased from RAI at cost. Eight of the Initial
Investments were acquired at a discount to the outstanding balance due from the
borrower on the loan and to the appraised value of the underlying property.
During 1999 the Company engaged in the following transactions with RAI:
The Company and RAI jointly acquired a loan at a purchase price of
$14.6 million, $10.0 million (balance of $10.0 million at December 31, 1999) of
which was contributed by the Company. The Company's interest is subordinate to
the $58.6 million (at December 31, 1999) interest of an unaffiliated party, but
senior to RAI's interest.
The Company repurchased a $4.0 million junior lien interest from RAI
for $4,135,000. This loan was converted to a property interest as of December
31, 1999.
The Company sold a $2.5 million first mortgage to RAI and recognized a
gain on sale of $131,000.
The Company purchased from RAI two loans totaling $44.4 million
(balance of $44.0 million at December 31, 1999), which included a $34.5 million
(balance of $34.5 million at December 31,1999) senior lien interest of an
unaffiliated party.
During 1998, the Company engaged in the following transactions with
RAI subsequent to the purchase of the Initial Investments:
The Company purchased senior lien interests in three loans from RAI at
an aggregate purchase price of $18.0 million (balance of $7.7 million and $17.9
million at December 31, 1999 and 1998, respectively).
The Company and RAI jointly acquired a loan at a purchase price of
$85.5 million, $10.0 million (balance of $10.5 million and $10.1 million as of
December 31, 1999 and 1998, respectively) of which was contributed by the
Company. The Company's interest is subordinate to the $69.5 million ($68.5
million and $69.3 million as of December 31, 1999 and 1998, respectively)
interest of an unaffiliated party, but senior to RAI's interest.
The Company and RAI jointly originated a loan in the amount of $17.3
million, $4.0 million of which was contributed by the Company. The Company's
interest is senior to RAI's interest and subordinate to the $12.2 million
(balance of $12.0 million and $12.1 million as of December 31, 1999 and 1998,
respectively) interest of an unaffiliated party.
The Company purchased an 89% interest in a limited partnership, which
owns a property in Philadelphia, PA, for $750,000. The property was subject to a
loan payable to RAI, existing at the time of the Company's acquisition of its
interest, of approximately $65.0 million. The loan bore interest at 10%. The
limited partnership obtained senior financing from an unaffiliated party in the
original principal amount of $44.0 million ($43.4 million and $43.9 million at
December 31, 1999 and 1998, respectively) to reduce the loan to approximately
$22.9 million and to restructure it into two loans, one with an original
principal balance of $18.4 million ($18.3 million and $17.9 million at December
31, 1999 and 1998, respectively) and the other with an original principal
balance of $4.5 million ($4.9 million and $4.4 million at December 31, 1999and
1998, respectively), both of which are subordinate to the senior financing.
The Company purchased a $5.8 million (balance of $0 and $5.8 million at
December 31, 1999 and 1998, respectively) lien interest from RAI, which included
a $1.8 million (balance of $0 and $1.8 million as of December 31, 1999 and 1998,
respectively) senior lien interest of an unaffiliated party.
The Company sold a $4.0 million junior lien interest to RAI and
recognized a gain on sale of $940,000.
35
<PAGE>
The Company anticipates that it will purchase and sell additional loans
and lien interests in loans to and from RAI, and participate with it in other
transactions.
Brandywine Construction & Management, Inc. ("Brandywine"), an affiliate
of RAI, provided real estate management services to two properties owned by the
Company and twelve properties underlying the Company's loans at December 31,
1999 (one property and fourteen properties underlying the Company's loans at
December 31, 1998). Management fees in the amount of $422,000 and $58,000 were
paid to Brandywine for the years ended December 31, 1999 and 1998, respectively,
relating to the properties owned by the Company.
The Company places its temporary excess cash in short-term money market
instruments with Hudson United Bancorp, as successor in interest to JeffBanks,
Inc. The Chairman and Chief Executive Officer of the Company is a director of
Hudson United Bancorp and the Chairman of the Jefferson Bank Division of Hudson
United Bank (Hudson United Bancorp's banking subsidiary). As of December 31,
1999 the Company had $10.4 million ($5.0 million at December 31, 1998) in
deposits at Hudson United Bancorp, of which approximately $10.3 million ($4.9
million at December 31, 1998) is over the FDIC insurance limit.
In 1999, the Company originated a loan in the amount of $950,000 to the
son of the Chairman and Chief Executive Officer of the Company, who is also the
President of RAI. The loan yields 15.0% and is secured by the partnership
interests in the partnership that owns the underlying properties.
NOTE 11 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an
entity's assets and liabilities considered to be financial instruments. For the
Company, the majority of its assets and liabilities are considered financial
instruments as defined in SFAS No. 107. However, many such instruments lack an
available trading market, as characterized by a willing buyer and seller
engaging in an exchange transaction. Also, it is the Company's general practice
and intent to hold its financial instruments to maturity and not to engage in
trading or sales activities, except for certain loans. Therefore, the Company
has used significant assumptions and present value calculations in estimating
fair value.
Changes in the assumptions or methodologies used to estimate fair
values may materially affect the estimated amounts. Also, there may not be
reasonable comparability between institutions due to the wide range of permitted
assumptions and methodologies in the absence of active markets. This lack of
uniformity gives rise to a high degree of subjectivity in estimating financial
instrument fair values.
Estimated fair values have been determined by the Company using the
best available data and an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used, the estimated fair
values, and recorded book balances at December 31, 1999 and 1998 are outlined
below.
For cash and cash equivalents the recorded book value of $11.3 million
and $5.0 million as of December 31, 1999 and 1998, respectively, approximated
fair value. The book value of restricted cash of $5.3 million approximated fair
value at December 31, 1999. The recorded book value of the secured line of
credit totaling $14.0 million at December 31, 1999 approximated its fair value.
The net loan portfolio, senior indebtedness secured by real estate
underlying the Company's wraparound loans, and long term debt secured by real
estate owned at December 31, 1999 and 1998 have been valued using a present
value of expected future cash flows. The discount rate used in these
calculations is the estimated current market rate adjusted for credit risk. The
carrying value of accrued interest approximates fair value.
The following tables describe the carrying amounts and fair value
estimates of the Company's investments in real estate loans and long term debt
underlying the Company's wraparound loans and property interests:
36
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1999
--------------------
Carrying Estimated Discount
Amount Fair Value Rate
------ ---------- ----
<S> <C> <C> <C>
First mortgages and senior loan participations .......... $ 11,030,530 $ 12,127,973 9.0%
Mezzanine (including wraparound) loans................... $115,762,704 $137,153,418 11.5%
Bridge loans ............................................ $ 33,860,161 $ 36,233,126 11.0%
Senior indebtedness secured by real estate underlying
the company's wraparound loans........................ $ 78,478,730 $ 72,421,984 8.4%
Long term debt secured by real estate owned.............. $ 82,685,074 $ 74,253,733 9.3%
At December 31, 1998
--------------------
Carrying Estimated Discount
Amount Fair Value Rate
------ ---------- ----
First mortgages and senior loan participations........... $ 35,111,995 $ 36,125,331 11.6%
Mezzanine (including wraparound) loans................... $ 81,334,701 $ 81,575,302 11.1%
Bridge loans ............................................ $ 9,881,200 $ 9,881,200 10.2%
Senior indebtedness secured by real estate underlying
the company's wraparound loans........................ $ 46,936,032 $ 45,937,238 7.7%
Long term debt secured by real estate owned.............. $ 67,267,925 $ 59,933,809 8.4%
</TABLE>
37
<PAGE>
SCHEDULE IV
Resource Asset Investment Trust
And Subsidiaries
Mortgage Loans on Real Estate
December 31, 1999
<TABLE>
<CAPTION>
Periodic Payment Face Amount Book Value
Loan Type/Property Type Maturity Date Terms Senior Liens of Loans Of Loans
- ----------------------- ------------- ----- ------------ -------- --------
Long term first mortgages and
senior loan participations
- --------------------------
<S> <C> <C> <C> <C> <C>
12 yr amortization,
Multifamily 31-Aug-05 $3,499,310 balloon $ --- $ 5,675,463 $ 5,675,463
All other 3/28/01-7/14/09 --- 7,778,102 5,355,067
----------- ----------- ------------
Total long term first
mortgages and senior loan
participations $ --- $13,453,565 $ 11,030,530
Mezzanine
(including wraparound loans)
- ----------------------------
Commercial n/a interest only $ 68,523,621 $12,488,189 $ 12,488,189
Commercial n/a interest only 58,621,141 10,000,000 10,000,000
Multifamily 31-Jul-08 interest only 11,970,859 16,150,000 16,150,000
Multifamily 31-Oct-08 interest only 4,250,351 5,675,000 5,675,000
Commercial 30-Nov-08 interest only 9,877,287 12,731,594 12,731,594
Commercial 01-Dec-02 interest only 34,531,198 44,401,197 44,401,197
All other 2/1/02-1/31/09 26,757,616 21,730,801 14,316,724
------------ ------------ ------------
Total mezzanine
(including wraparound loans) $214,532,073 $123,176,781 $115,762,704
------------ ------------ ------------
Short term bridge loans
- -----------------------
Multifamily/commercial 31-May-00 interest only $12,000,000 $ 17,591,712 $ 17,591,712
Commercial 29-Jul-00 interest only 24,000,000 12,200,000 12,200,000
All other 4/1/00-12/2/00 13,905,000 4,068,449 4,068,449
------------ ------------ ------------
Total short term bridge loans $49,905,000 $ 33,860,161 $ 33,860,161
------------ ------------ ------------
Grand Total $264,437,073 $170,490,507 $160,653,395
============ ============ ============
</TABLE>
38
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Trustees and Executive Officers of the Registrant.
The information required by this item will be set forth in Company's
definitive proxy statement with respect to its 2000 annual meeting of
shareholders, to be filed on or before April 29, 2000 (the "Proxy Statement"),
and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item will be set forth in the Proxy
Statement, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be set forth in the Proxy
Statement, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be set forth in the Proxy
Statement, and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) Listed below are all financial statements, financial statement schedules,
and exhibits filed as part of this 10-K and herein included.
(1) Financial Statements
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December
31, 1999 and 1998 and for the period from August 20, 1997 (date of
inception) through December 31, 1997
Consolidated Statements of Changes in Shareholders' Equity (Deficiency)
for the years ended December 31, 1999 and 1998 and for the period from
August 20, 1997 (date of inception) through December 31, 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998 and for the period from August 20, 1997 (date of
inception) through December 31, 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule IV - Mortgage Loans on Real Estate
All other schedules are not applicable or are omitted since either (i)
the required information is not material or (ii) the information
required is included in the consolidated financial statements and notes
thereto.
39
<PAGE>
(3) Exhibits
3.1 Form of Amended and Restated Declaration of Trust(1)
3.1.1 Articles of Amendment of Amended and Restated Declaration of
Trust(2)
3.2 By-laws of the Company(1)
3.3 Articles of Incorporation of RAIT General, Inc.(1)
3.4 By-laws of RAIT General, Inc.(1)
3.5 Articles of Incorporation of RAIT Limited, Inc.(1)
3.6 By-laws of RAIT Limited, Inc.(1)
3.7 Certificate of Limited Partnership of RAIT Partnership, L.P.(1)
3.8 Limited Partnership Agreement of RAIT Partnership, L.P.(1)
4 Form of Certificate for Common Shares of the Company (1)
10.1 Form of Indemnification Agreement (1)
10.2 Form of Agreement between Company and Resource America, Inc. (1)
10.3 Employment Agreement between Betsy Z. Cohen and Registrant (1)
10.4 Employment Agreement between Jay J. Eisner and Registrant (1)
21 List of Subsidiaries
23 Consent of Grant Thornton LLP
(1) Filed previously as an Exhibit to the Company's Registration
Statement on Form S-11 (Registration No. 333-35077)
(2) Filed previously as an Exhibit to the Company's Registration
Statement on Form S-11 (Registration No. 333-53067)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
fourth quarter of 1999.
(c) Exhibits
EXHBIT 21--LIST OF SUBSIDIARIES
EXHIBIT 21 -- LIST OF SUBSIDIARIES
State of
Subsidiary incorporation/organization
- ------------------------- ----------------------------
RAIT Partnership, L.P. Delaware
RAIT General, Inc. Maryland
RAIT Limited, Inc. Maryland
OSEB GP, Inc. Delaware
OSEB Associates, L.P. Pennsylvania
RAIT Rohrerstown, L.P. Delaware
SLH Apartments, Inc. Delaware
SL Bonds, Inc. Delaware
DP Associates, LLC Maryland
RAIT SLH, L.P. Pennsylvania
RAIT SLH, Inc. Pennsylvania
RP XXXVII, Inc. Delaware
27 Financial Data Schedule
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 30, 2000 /s/ Jay J. Eisner
------------------------------
Jay J. Eisner
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Betsy Z. Cohen Chairman, Chief Executive Officer and Trustee March 30, 2000
------------------
Betsy Z. Cohen
/s/ Jay J. Eisner President and Chief Operating Officer March 30, 2000
-----------------
Jay J. Eisner
/s/ Ellen J. DiStefano Vice President and Chief Financial Officer March 30, 2000
----------------------
Ellen J. DiStefano
/s/ Jay R. Cohen Executive Vice President March 30, 2000
----------------
Jay R. Cohen
/s/ Jonathan Z. Cohen Secretary and Trustee March 30, 2000
---------------------
Jonathan Z. Cohen
/s/ Edward S. Brown Trustee March 30, 2000
-------------------
Edward S. Brown
/s/ Joel R. Mesznik Trustee March 30, 2000
-------------------
Joel R. Mesznik
/s/ Daniel Promislo Trustee March 30, 2000
-------------------
Daniel Promislo
/s/ Jack L. Wolgin Trustee March 30, 2000
------------------
Jack L. Wolgin
</TABLE>
41
<PAGE>
Exhibit 23
Consent of Independent Certified Accountants
--------------------------------------------
We have issued our report dated January 24, 2000 accompanying the consolidated
financial statements of Resource Asset Investment Trust and subsidiaries on
Form 10-K for the year ended December 31, 1999. We hereby consent to the
incorporation by reference of said reports in the Registration Statement of
Resource Asset Investment Trust on Form S-3 (File No. 333-78519, effective
May 14, 1999)
/s/ Grant Thornton LLLP
- ---------------------------
Philadelphia, Pennsylvania
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,323,301
<SECURITIES> 0
<RECEIVABLES> 1,544,984
<ALLOWANCES> 226,157
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 131,927
<DEPRECIATION> 43,695
<TOTAL-ASSETS> 269,828,673
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 61,991
<OTHER-SE> 86,238,298
<TOTAL-LIABILITY-AND-EQUITY> 269,828,673
<SALES> 0
<TOTAL-REVENUES> 34,122,163
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,073,227
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,104,947
<INCOME-PRETAX> 12,961,750
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,961,750
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,961,750
<EPS-BASIC> 2.10
<EPS-DILUTED> 2.09
</TABLE>
