FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number 001-13937
ANTHRACITE CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Maryland 13-3978906
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
345 Park Avenue, New York, New York 10154
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number including area code): (212) 409-3333
NOT APPLICABLE
(Former name, former address, and former fiscal year if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
As of August 12, 1998, 20,232,098 shares of voting common stock
($.001 par value) were outstanding.
ANTHRACITE CAPITAL, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
Item 1. Interim Financial Statements .......................................3
Statement of Financial Condition
At June 30, 1998 (Unaudited)........................................3
Statements of Operations
For the Three Months Ended June 30, 1998 and
For the Period March 24, 1998 (Commencement of Operations)
Through June 30, 1998 (Unaudited)...................................4
Statement of Changes in Stockholders' Equity
For the Period March 24, 1998 (Commencement of Operations)
Through June 30, 1998 (Unaudited)...................................5
Statement of Cash Flows
For the Period March 24, 1998 (Commencement of Operations)
Through June 30, 1998 (Unaudited)...................................6
Notes to Financial Statements.......................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................17
Part II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................25
Item 2. Changes in Securities and Use of Proceeds..........................25
Item 3. Defaults Upon Senior Securities....................................25
Item 4. Submission of Matters to a Vote of Security Holders................25
Item 5. Other Information..................................................25
Item 6. Exhibits and Reports on Form 8-K...................................26
SIGNATURES
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
ANTHRACITE CAPITAL, INC.
STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1998 (UNAUDITED)
(in thousands, except per share amounts)
ASSETS
Securities available for sale, at fair value $ 1,046,340
Principal and interest receivable 22,868
Other assets 154
-----------
Total Assets $ 1,069,362
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reverse repurchase agreements $ 699,347
Payable for securities purchased 57,733
Dividends payable 5,769
Accrued interest payable 3,416
Accrued expenses, payables and other liabilities 2,791
Contractual commitments at fair value 1,032
------------
Total Liabilities 770,088
------------
Stockholders' Equity:
Preferred stock, par value $0.001 per share; 100,000 shares
authorized; no shares issued -
Common stock, par value $0.001 per share; 400,000 shares
authorized; 21,365 shares issued and outstanding 21
Additional paid-in capital 296,921
Accumulated other comprehensive income 2,547
Retained earnings (distributions in excess of earnings) (215)
------------
Total Stockholders' Equity 299,274
------------
Total Liabilities and Stockholders' Equity $ 1,069,362
===========
The accompanying notes are an integral part of these financial statements.
ANTHRACITE CAPITAL, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
For the
Period March
24, 1998
(Commencement
For the Three of Operations)
Months Ended Through
June 30, 1998 June 30, 1998
--------------- ---------------
Interest Income:
Securities available for sale $ 10,772 $ 10,890
Cash and cash equivalents
56 154
-------- --------
Total interest income 10,828 11,044
-------- --------
Expenses:
Interest 4,379 4,382
Management fee 849 870
Other expenses 219 238
---------- ----------
Total expenses 5,447 5,490
---------- ----------
Net Income $ 5,381 $ 5,554
======== ========
Net income per share:
Basic $ 0.25 $ 0.26
Diluted $ 0.25 $ 0.26
Weighted average number of shares
outstanding:
Basic 21,365 21,365
Diluted 21,370 21,371
The accompanying notes are an integral part of these financial statements.
ANTHRACITE CAPITAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD MARCH 24, 1998 (COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 1998 (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Retained
Accumulated Earnings
Common Stock Additional Other (Distribution Total
Paid- Comprehensive In Excess Stockholders'
Shares Amount In Capital Income Of Earnings) Equity
------ ------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 24,
1998 13 $ $ 200 $ - $ - $ 200
Issuance of common
stock 21,365 21 296,951 - - 296,972
Net income - - - - 173 173
Change in net
unrealized gain on
securities available
for sale and
contractual commitments - - - 2 - 2
-------- ------- --------- -------- -------- ---------
Balance at March 31,
1998 21,378 21 297,151 2 173 297,347
------- ------- --------- -------- -------- ---------
Net income - - - - 5,381 5,381
Dividends declared
($0.27 per share) - - - - (5,769) (5,769)
Change in net
unrealized gain on
securities available
for sale and
contractual commitments - - - 2,545 - 2,545
Cost of Dividend
Reinvestment and Stock
Purchase Plan offering - - (30) - - (30)
Redemption of common
stock (13) (200) - - (200)
---------- ------- ---------- -------- --------- ----------
Balance at June 30,
1998 21,365 $21 $296,921 $2,547 $ (215) $299,274
========== ======= ========= ======== ========== =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
ANTHRACITE CAPITAL, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD MARCH 24, 1998 (COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 1998 (UNAUDITED)
(IN THOUSANDS)
- ----------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net income $ 5,554
Adjustments to reconcile net income to net cash
provided by operating activities:
Premium amortization (discount accretion), net 3,256
Increase in interest receivable (11,330)
Increase in other assets (154)
Increase in accrued interest payable 3,416
Increase in accrued expenses, payables and other liabilities 2,791
-----------
Net cash provided by operating activities 3,533
-----------
Cash flows from investing activities:
Purchase of securities available for sale (1,086,518)
Principal payments received on securities available for sale 11,830
Proceeds from sales of securities available for sale 17,133
Increase in payable for securities purchased 57,733
-----------
Net cash used in investing activities (999,822)
-----------
Cash flows from financing activities:
Increase in net borrowings from reverse repurchase agreements 699,347
Proceeds from issuance of common stock, net of offering costs 296,972
Other common stock transactions (230)
-----------
Net cash provided by financing activities 996,089
-----------
Net decrease in cash and cash equivalents (200)
Cash and cash equivalents, beginning of period 200
===========
Cash and cash equivalents, end of period $ 0
===========
Supplemental disclosure of cash flow information:
Interest paid $ 968
===========
Noncash financing activities:
Net change in unrealized gain on securities available
for sale and contractual commitments $ 2,547
===========
Dividends declared, not yet paid $ 5,769
===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
ANTHRACITE CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
conformity with the instructions to Form 10-Q and Article 10, Rule 10-01
of Regulation S-X for interim financial statements. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles ("GAAP") for complete financial
statements.
In the opinion of management, the accompanying financial statements
contain all adjustments, consisting of normal and recurring accruals,
necessary for a fair presentation of the financial condition of
Anthracite Capital, Inc. (the "Company") at June 30, 1998, the results of
its operations for the three months ended June 30, 1998 and for the
period March 24, 1998 (commencement of operations) through June 30, 1998,
and the changes in its stockholders' equity and its cash flows for the
period March 24, 1998 (commencement of operations) through June 30, 1998.
Operating results for the period ended June 30, 1998 are not necessarily
indicative of the results that may be expected for any other interim
periods or the period ended December 31, 1998.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the dates of the statements of financial condition and
revenues and expenses for the periods covered. Actual results could
differ from those estimates and assumptions.
NOTE 2 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Company was incorporated in Maryland in November 1997 and commenced
operations on March 24, 1998. The Company's principal business activity
is to invest in a diversified portfolio of multifamily, commercial and
residential mortgage loans, mortgage-backed securities and other real
estate related assets in the U.S. and non-U.S. markets
A summary of the Company's significant accounting policies follows:
SECURITIES AVAILABLE FOR SALE
Certain U.S. Treasury securities, mortgage-backed securities and
mortgage-related securities are designated as assets available for sale
because the Company may dispose of them prior to maturity. Securities
available for sale are carried at estimated fair value with the net
unrealized gains or losses reported as a component of accumulated other
comprehensive income in stockholders' equity. Unrealized losses on
securities that reflect a decline in value which is other than temporary,
if any, are charged to earnings. At disposition the realized net gain or
loss is included in earnings on a specific identification basis. The
amortization of premiums and accretion of discounts are computed using
the effective yield method after considering actual and estimated
prepayment rates, if applicable. Actual prepayment experience is
periodically reviewed and effective yields are recalculated when
differences arise between prepayments originally anticipated and amounts
actually received plus anticipated future prepayments.
INTEREST RATE SWAP AGREEMENTS
As part of its asset/liability management activities, the Company enters
into interest rate swap agreements in order to hedge exposures or modify
the interest rate characteristics of related items in its statement of
financial condition. Revenues and expenses from the interest rate swap
agreements are recognized as a net adjustment to interest expense. During
the term of the interest rate swap agreements, changes in fair value are
recognized on the statement of financial condition as contractual
commitments at fair value and included among assets (if there is a net
unrealized gain) or among liabilities (if there is an unrealized loss). A
corresponding amount is included as a component of accumulated other
comprehensive income in stockholders' equity. In the event that interest
rate swap agreements are terminated, the associated gain or loss is
deferred over the remaining term of the agreement, provided that the
underlying hedged item still exists.
The Company is exposed to credit loss in the event of nonperformance by
any other party to the Company's interest rate swap agreements. However,
the Company does not anticipate nonperformance by any counterparty.
NET INCOME PER SHARE
Net income per share is computed in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, and
is calculated on the basis of the weighted average number of common
shares outstanding during each period plus the additional dilutive effect
of common stock equivalents. The dilutive effect of outstanding stock
options is calculated using the treasury stock method.
INCOME TAXES
The Company intends to elect to be taxed as a Real Estate Investment
Trust ("REIT") and to comply with the provisions of the Internal Revenue
Code of 1986, as amended, with respect thereto. Accordingly, the Company
will not be subjected to Federal income tax to the extent of its
distributions to stockholders and as long as certain asset, income and
stock ownership tests are met.
INCOME RECOGNITION
Income and expenses are recorded on the accrual basis of accounting.
COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, requires the Company to
classify items of "other comprehensive income", such as unrealized gains
and losses on securities available for sale, by their nature in a
financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the stockholders' equity section of the statement of
financial condition. In accordance with SFAS No. 130, cumulative
unrealized gains and losses on securities available for sale and
contractual commitments are classified as accumulated other comprehensive
income in stockholders' equity and current period unrealized gains and
losses are included as a component of comprehensive income. Comprehensive
income for the three months ended June 30, 1998 aggregated $7,926 and was
comprised of net income of $5,381 and the increase in net unrealized gain
on securities available for sale and contractual commitments of $2,545.
Comprehensive income for the period March 24, 1998 through June 30, 1998
aggregated $8,101 and was comprised of net income of $5,554 and the
increase in net unrealized gain on securities available for sale and
contractual commitments of $2,547.
NOTE 3 SECURITIES AVAILABLE FOR SALE
The Company's securities available for sale are carried at estimated fair
value. The amortized cost and estimated fair value of securities
available for sale at June 30, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Security Description Cost Gain Loss Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial mortgage-backed
securities ("CMBS") interests:
Investment grade rated senior interest
only interests $ 91,390 $ 575 $ 31 $ 91,934
Non-investment grade rated subordinated
interests 188,764 3,284 114 191,934
Non-rated subordinated interests 21,738 3 161 21,580
--------------------------------------------------
Total CMBS interests 301,892 3,862 306 305,448
--------------------------------------------------
Single-family residential mortgage-backed
securities ("residential MBS")
interests:
Agency adjustable rate 220,614 399 61 220,952
Agency fixed rate 54,286 66 114 54,238
Agency interest only 17,504 1,410 16,094
Investment grade rated private issuer
fixed rate 386,888 965 179 387,674
-------------------------------------------------
Total residential MBS interests 679,292 1,430 1,764 678,958
-------------------------------------------------
Agency insured project loans 28,034 193 28,227
Investment grade rated asset backed
securities 14,711 152 14,863
Non-investment grade rated non-U.S.
sovereign securities 18,833 11 18,844
================================================
Total securities available for sale $1,042,762 $5,648 $2,070 $1,046,340
================================================
</TABLE>
The aggregate estimated fair value by underlying credit rating of the
Company's securities available for sale at June 30, 1998 is as follows:
Estimated
Security Rating Fair Value %
----------------------------------------------
Agency, agency insured
and U.S. Treasury
securities $ 319,510 30.5
AAA 479,608 45.8
BBB 14,864 1.4
BB+ 31,146 3.0
BB 49,317 4.7
BB- 36,046 3.4
B 65,490 6.3
B- 20,903 2.0
CCC 7,904 0.8
Not rated 21,552 2.1
=================
Total securities
available for sale $1,046,340 100.0
===================
The CMBS interests held by the Company consist of senior interest only
and subordinated securities collateralized by adjustable and fixed rate
commercial and multifamily mortgage loans. The residential MBS interests
held by the Company consist of adjustable rate, fixed rate and interest
only residential pass-through or mortgage-backed securities
collateralized by adjustable and fixed rate single-family residential
mortgage loans. Agency residential MBS were issued by Federal Home Loan
Mortgage Corporation (FHLMC), Federal National Mortgage Association
(FNMA) or Government National Mortgage Corporation (GNMA). Private issuer
residential MBS were issued by entities other than FHLMC, FNMA or GNMA.
The agency insured project loans held by the Company consist of
participation interests in mortgage loans guaranteed by the Federal
Housing Administration (FHA). The asset backed securities held by the
Company consist of pass-through securities collateralized by manufactured
housing installment sale contracts. The non-U.S. sovereign securities
held by the Company consist of unsecured floating rate notes issued by a
foreign government. The Company's securities available for sale are
subject to credit, interest rate and/or prepayment risks.
The yield to maturity on the Company's CMBS interests and residential MBS
interests depends on, among other things, the rate and timing of
principal payments (including prepayments, repurchases, defaults and
liquidations), the pass-through rate and interest rate fluctuations. The
subordinated CMBS interests owned by the Company provided credit support
to the more senior interests of the related commercial securitization.
Cash flow from the mortgages underlying the CMBS interests generally is
allocated first to the senior interests, with the most senior interest
having a priority entitlement to cash flow. Then, any remaining cash flow
is allocated generally among the other CMBS interests in order of their
relative seniority. To the extent there are defaults and unrecoverable
losses on the underlying mortgages, resulting in reduced cash flows, the
most subordinated CMBS interest will bear this loss first. To the extent
there are losses in excess of the most subordinated interest's stated
entitlement to principal and interest, then the remaining CMBS interests
will bear such losses in order of their relative subordination.
The agency adjustable rate residential MBS held by the Company are
subject to periodic and lifetime caps that limit the amount such
securities' interest rates can change during any given period and over
the life of the loan. At June 30, 1998, the average periodic cap on the
agency adjustable rate residential MBS was 1.9% per annum and the average
lifetime cap was equal to 12.3%.
Agency interest only residential MBS are held primarily to reduce the
interest rate sensitivity of the Company's portfolio of securities
available for sale.
The unamortized net discount on securities available for sale (excluding
interest only securities) was $90,469 at June 30, 1998. In May 1998,
$16,750 face amount of U.S. Treasury securities were sold for proceeds
net of termination costs on the related hedge of $17,133, which equaled
the approximate amortized cost of such securities.
NOTE 4 COMMON STOCK
The Company was initially capitalized with the sale of 13,333 shares of
common stock on March 5, 1998, for a total of $200. In April 1998, the
Company redeemed 13,233 of such shares from its initial stockholder at
the then current market price of $15.0625 per share or approximately $200
in the aggregate. The redeemed shares were retired.
The Company received commitments on March 23, 1998 for the purchase, in
private placements, of 1,365,198 shares of common stock at $13.95 per
share for a total of $19,045. The sale of these shares was consummated at
the time of the closing of the Company's initial public offering.
On March 27, 1998, the Company completed its initial public offering of
common stock. The Company issued 20,000,000 shares of common stock at a
price of $15 per share and received proceeds of $279,000, net of
underwriting discounts and commissions. Offering costs in connection with
the public offering amounting to $1,073 have been charged against the
proceeds of the offering.
In June 1998, the Company registered with the Securities and Exchange
Commission up to 2,000,000 shares of common stock in connection with a
new Dividend Reinvestment and Stock Purchase Plan (the "Plan"). The Plan
allows investors the opportunity to purchase additional shares of the
Company's common stock through the reinvestment of the Company's
dividends, optional cash payments and initial cash investments. Offering
costs in connection with the establishment of the Plan amounting to $30
have been charged against additional paid-in capital. As of June 30,
1998, no shares had been issued under the Plan.
On June 15, 1998, the Company declared dividends to its stockholders
totaling $5,769 or $0.27 per share. These dividends were paid on July 15,
1998 to stockholders of record on June 30, 1998. For Federal income tax
purposes, all dividends paid to date are ordinary income to the Company's
stockholders.
NOTE 5 TRANSACTIONS WITH AFFILIATES
The Company has entered into a Management Agreement (the "Management
Agreement") with BlackRock Financial Management, Inc. (the "Manager"), a
majority owned indirect subsidiary of PNC Bank Corp. ("PNC") and the
employer of certain directors and officers of the Company, under which
the Manager manages the Company's day-to-day operations, subject to the
direction and oversight of the Company's Board of Directors. The Company
will pay the Manager an annual base management fee equal to a percentage
of the Average Invested Assets of the Company as further defined in the
Management Agreement. The base management fee is equal to 1% per annum of
the Average Invested Assets rated less than BB- or not rated, 0.75% of
Average Invested Assets rated BB- to BB+, and 0.35% of Average Invested
Assets rated above BB+.
The Company accrued $849 and $870 in base management fees in accordance
with the terms of the Management Agreement for the three months ended
June 30, 1998 and for the period March 24, 1998 through June 30, 1998,
respectively. The amount payable for base management fees is included in
accrued expenses, payables and other liabilities in the statement of
financial condition.
The Company will also pay the Manager, as incentive compensation, an
amount equal to 25% of the Funds from Operations of the Company plus
gains (minus losses) from debt restructuring and sales of property,
before incentive compensation, in excess of the amount that would produce
an annualized Return on Equity equal to 3.5% over the Ten-Year U.S.
Treasury Rate as further defined in the Management Agreement. For
purposes of the incentive compensation calculation, equity is generally
defined as proceeds from issuance of common stock before underwriting
discounts and commissions and other costs of issuance.
The Company did not accrue for or pay the Manager any incentive
compensation for the three months ended June 30, 1998 and for the period
March 24, 1998 through June 30, 1998.
The Company may also grant stock options to the Manager, directors,
officers and any key employees of the Company, directors, officers and
key employees of the Manager and to any other individual or entity
performing services for the Company. Options granted during the three
months ended June 30, 1998 and during the period March 24, 1998 through
June 30, 1998 are disclosed in Note 6.
The Company received a commitment from PNC Investment Corp., a wholly
owned indirect subsidiary of PNC, on March 23, 1998 for the purchase, in
a private placement, of 648,352 shares of common stock at $13.95 per
share for a total of $9,045. The sale of these shares was consummated at
the time of the closing of the Company's initial public offering.
NOTE 6 STOCK OPTIONS
The Company has adopted a stock option plan (the "1998 Stock Option
Plan") that provides for the grant of both qualified incentive stock
options that meet the requirements of Section 422 of the Code, and
non-qualified stock options, stock appreciation rights and dividend
equivalent rights. Stock options may be granted to the Manager,
directors, officers and any key employees of the Company, directors,
officers and key employees of the Manager and to any other individual or
entity performing services for the Company.
The exercise price for any stock option granted under the 1998 Stock
Option Plan may not be less than 100% of the fair market value of the
shares of common stock at the time the option is granted. Each option
must terminate no more than ten years from the date it is granted.
Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the 1998 Stock Option Plan authorizes the grant of
options to purchase an aggregate of up to 2,470,453 shares of common
stock.
On March 27, 1998, pursuant to the 1998 Stock Option Plan, options to
purchase 1,313,967 shares of the Company's common stock were granted to
certain officers, directors and employees of the Company and the Manager
and options to purchase 324,176 shares of the Company's common stock were
granted to PNC Investment Corp. The exercise price of these options is
$15 per share. The remaining contractual life of each option is
approximately 9.7 years. The options vest in four equal installments on
March 27, 1999, March 27, 2000, March 27, 2001 and March 27, 2002.
In addition to the options granted pursuant to the 1998 Stock Option
Plan, on March 27, 1998 options to purchase 246,544 shares of the
Company's common stock were granted to certain officers, directors and
employees of the Company and the Manager. The exercise price of these
options is $13.95 per share. The remaining contractual life of each
option is approximately 0.7 years. The options become exercisable on
September 30, 1998.
No options were granted, exercised or forfeited during the three months
ended June 30, 1998. No options were exercised or forfeited during the
period March 24, 1998 through June 30,1998.
NOTE 7 EARNINGS PER SHARE (EPS)
A reconciliation of the numerator and denominator of the basic EPS
computation and the diluted EPS computation is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Period March 24, 1998
June 30, 1998 Through June 30, 1998
------------- ---------------------
Income Shares Per Share Income Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 5,381 $ 5,554
-------- --------
Basic EPS 5,381 21,365,298 $ 0.25 5,554 21,365,298 $ 0.26
====== =======
Effect of dilutive
securities:
Dilutive
stock options 0 4,229 0 5,451
--------- --------- ------- ----------
Diluted EPS $ 5,381 21,369,527 $ 0.25 $ 5,554 21,370,749 $ 0.26
========= ========== ====== ======= ========== ======
</TABLE>
Options to purchase 1,884,687 shares were outstanding beginning March 27,
1998 (see Note 6). Options with respect to 1,638,143 shares were not
considered dilutive as the exercise price of $15 was greater than the
average stock price for the Company for three months ended June 30, 1998
($14.19) and for the period March 24, 1998 through June 30, 1998
($14.27). Options with respect to the remaining 246,544 shares were
considered dilutive as their exercise price of $13.95 was less than such
average stock prices.
NOTE 8 REVERSE REPURCHASE AGREEMENTS
The Company has entered into reverse repurchase agreements to finance
most of its securities available for sale. The reverse repurchase
agreements are collateralized by most of the Company's securities
available for sale and bear interest rates that have historically moved
in close relationship to the London Interbank Offered Rate (LIBOR).
At June 30, 1998, the Company had outstanding $699,347 of reverse
repurchase agreements with a weighted average borrowing rate of 5.64% and
a weighted average remaining maturity of 49 days. At June 30, 1998,
securities available for sale pledged as collateral for these reverse
repurchase agreements had an estimated fair value of $737,137.
At June 30, 1998, the reverse repurchase agreements had the following
remaining maturities:
Within 30 days $188,889
30 to 59 days 326,498
Over 59 days 183,960
========
$699,347
========
NOTE 9 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the amortized cost and estimated fair values
of the Company's financial instruments at June 30, 1998:
Estimated
Amortized Fair
Cost Value
----------------------
Assets
Securities available
for sale $1,042,762 $1,046,340
Liabilities
Contractual commitments - $ 1,032
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
defines the fair value of a financial instrument as the amount at which
the instrument could be exchanged in a current transaction between
willing parties other than in a forced or liquidation sale.
The fair value of the Company's securities available for sale and
contractual commitments are based on market prices provided by certain
dealers who make markets in these financial instruments. The fair values
reported reflect estimates and may not necessarily be indicative of the
amounts the Company could realize in a current market exchange. The
carrying amounts of all other asset and liability accounts in the
statements of financial condition approximate fair value because of the
short-term nature of these accounts.
NOTE 10 CONTRACTUAL COMMITMENTS
The Company has entered into an interest rate swap transaction with a
notional amount of $70,000. Under the interest rate swap agreement, the
Company will receive quarterly payments of interest based on three-month
LIBOR and will remit semi-annual payments based on a fixed interest rate
of approximately 6.19%, in each case based upon a notional balance of
$70,000. The swap became effective on May 19, 1998 and will terminate on
May 19, 2008. In certain circumstances, the Company may be required to
provide collateral to secure its obligations under the interest rate swap
agreement, or may be entitled to receive collateral from the counterparty
to the swap agreement. At June 30, 1998, no collateral was required under
the interest rate swap agreement. At June 30, 1998, the interest rate
payable to the Company by the counterparty to the swap transaction was
approximately 5.70%.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
GENERAL: The Company was organized in November 1997 to invest in a
diversified portfolio of multifamily, commercial and residential mortgage
loans, mortgage-backed securities and other real estate related assets in
the U.S. and non-U.S. markets. The Company expects to generate income for
distribution to its stockholders primarily from the net earnings derived
from its investments in real estate related assets. The Company intends
to operate in a manner that permits it to maintain its status as a REIT
for Federal income tax purposes.
In March 1998, the Company received $297.0 million of net proceeds from
the initial public offering of 21,365,198 shares of its common stock. As
of June 30, 1998, the Company had invested, net of repayments to date,
$1.1 billion to acquire its initial portfolio of securities available for
sale. The Company is currently performing due diligence on a variety of
assets including CMBS subordinate interests and mezzanine loans and
participating debt opportunities on both stabilized properties and
construction projects.
The following discussion should be read in conjunction with the Interim
Financial Statements and related Notes included in Item 1 hereof. Dollar
amounts are expressed in thousands, other than per share amounts.
RECENT DEVELOPMENTS: On July 15, 1998, the Company's Board of Directors
authorized a program to repurchase up to 10% of the number of then
outstanding shares of the Company's common stock. Through August 12,
1998, the Company had repurchased 1,133,100 shares of its common stock
pursuant to the program at an average price of $11.56 per share. An
additional 1,003,419 shares are currently authorized for potential
repurchase in the future.
On July 24, 1998, the Company committed to provide $35,000 in mezzanine
financing for the construction of two office buildings in Santa Monica,
California, totaling more than 600,000 square feet of prime office space.
On July 29, 1998, the Company purchased subordinated CMBS interests with
a face value of approximately $66,000 and a purchase price of
approximately $40,000. The CMBS were issued in a transaction in which PNC
Bank, N.A., a subsidiary of PNC, contributed a portion of the underlying
commercial loans and Midland Loan Services, Inc., also a subsidiary of
PNC, will act as special servicer and master servicer.
On July 31, 1998, the Company committed to provide $13,000 in mezzanine
financing for the construction of a 327,000 square foot office building
in Kansas City, Missouri.
MARKET CONDITIONS: Changes in market interest rates during the period
March 24, 1998 through June 30, 1998 resulted in a further "inversion" of
the yield curve, that is, the excess of short-term interest rates over
long-term interest rates became more pronounced during such period.
Average one-month LIBOR for the three months ended June 30, 1998 and for
the period March 24, 1998 through June 30, 1998 was 5.65%. The average
ten-year U.S. Treasury yield for the three months ended June 30, 1998 was
5.59% and for the period March 24, 1998 through June 30, 1998 was 5.60%.
The excess of one-month LIBOR over the ten-year U.S. Treasury yield was
0.12% on March 24, 1998, (0.02)% on March 31, 1998 and 0.22% on June 30,
1998.
The Company's earnings depend, in part, on the relationship between
long-term interest rates and short-term interest rates. The Company's
investments bear interest at fixed rates determined by reference to the
yields of medium- or long-term U.S. Treasury securities or at adjustable
rates determined by reference (with a lag) to the yields on various
short-term instruments. The Company's borrowings bear interest rates that
have historically moved in close relationship to LIBOR. To the extent
that interest rates on the Company's borrowings increase without an
offsetting increase in the interest rates earned on the Company's
investments, the Company's earnings could be negatively affected.
FUNDS FROM OPERATIONS: Most industry analysts, including the Company,
consider FFO an appropriate supplementary measure of operating
performance of a REIT. In general, FFO adjusts net income for non-cash
charges such as depreciation, certain amortization expenses and most
non-recurring gains and losses. However, FFO does not represent cash
provided by operating activities in accordance with GAAP and should not
be considered an alternative to net income as an indication of the
results of the Company's performance or to cash flows as a measure of
liquidity.
In 1995, the National Association of Real Estate Investment Trusts
("NAREIT") established new guidelines clarifying its definition of FFO
and requested that REITs adopt this new definition beginning in 1996. The
Company computes FFO in accordance with the definition recommended by
NAREIT.
The Company's FFO for the three months ended June 30, 1998 was $5,396, or
$0.25 per share (basic and diluted), and for the period March 24, 1998
through June 30, 1998 was $5,569, or $0.26 per share (basic and diluted).
For the three months ended June 30, 1998 and for the period March 24,
1998 through June 30, 1998, FFO exceeded reported net income by $15 due
primarily to the exclusion from FFO of certain non-recurring costs
incurred in connection with the termination of hedges relating to
securities sold.
RESULTS OF OPERATIONS
Net income for the three months ended June 30, 1998 was $5,381, or $0.25
per share (basic and diluted), and for the period March 24, 1998 through
June 30, 1998 was $5,554, or $0.26 per share (basic and diluted).
INTEREST INCOME: The following tables sets forth information regarding
the total amount of income from interest-earning assets and the resultant
average yields. Information is based on daily average balances during the
reported periods.
<TABLE>
<CAPTION>
For the Three Months Ended June 30, 1998
---------------------------------------------
Interest Average Annualized
Income Balance Yield
---------------------------------------------
<S> <C> <C> <C>
Securities available for sale $ 10,772 $ 587,943 7.35%
Cash and cash equivalents 56 3,900 5.76
---------------------------------------------
Total $ 10,828 $ 591,843 7.34%
=============================================
For the Period March 24, 1998
Through June 30, 1998
---------------------------------------------
Interest Average Annualized
Income Balance Yield
---------------------------------------------
Securities available for sale $ 10,890 $ 552,497 7.27%
Cash and cash equivalents 154 10,180 5.56
----------------------------------------------
Total $ 11,044 $ 562,677 7.24%
=============================================
EXPENSES: The following tables set forth information regarding the total
amount of interest expense from reverse repurchase agreements (including
the net amount payable under the interest rate swap agreement) and the
resultant average yields. Information is based on daily average balances
during the reported periods.
For the Three Months Ended June 30, 1998
---------------------------------------------
Interest Average Annualized
Expense Balance Yield
---------------------------------------------
Reverse repurchase
agreements $ 4,379 $ 310,862 5.65%
For the Period March 24, 1998
Through June 30, 1998
---------------------------------------------
Interest Average Annualized
Expense Balance Yield
---------------------------------------------
Reverse repurchase
agreements $ 4,382 $ 285,906 5.65%
</TABLE>
Management fees of $849 for the three months ended June 30, 1998 and $870
for the period March 24, 1998 through June 30, 1998 were comprised solely
of the base management fee paid to the Manager for such periods (as
provided pursuant to the management agreement between the Manager and the
Company), as the Manager earned no incentive fee for such periods. Other
expenses of $219 for the three months ended June 30, 1998 and $238 for
the period March 24, 1998 through June 30, 1998 were comprised of
accounting agent fees, custodial agent fees, directors' fees, insurance
premiums and other miscellaneous expenses.
NET INTEREST MARGIN: Net interest margin is annualized net interest
income divided by the average daily balance of interest-earning assets.
Net interest income is total interest income less interest expense
(including the net amount payable under the interest rate swap
agreement). Net interest margin was 4.37% for the three months ended June
30, 1998 and for the period March 24, 1998 through June 30, 1998.
DIVIDENDS DECLARED AND DISTRIBUTIONS IN EXCESS OF EARNINGS: On June 15,
1998, the Company declared dividends to its stockholders totaling $5,769
or $0.27 per share. These dividends were paid on July 15, 1998 to
stockholders of record on June 30, 1998. These dividends covered the
Company's undistributed tax basis income for the period March 24, 1998
through June 30, 1998. As a result of these dividends, the Company
incurred distributions in excess of earnings of $215 as of June 30, 1998.
For Federal income tax purposes, all dividends paid to date are ordinary
income to the Company's stockholders.
TAX BASIS INCOME AND GAAP NET INCOME: Net income as calculated for tax
purposes (tax basis income) was $5,652, or $0.26 per share (basic and
diluted), for the three months ended June 30, 1998 and $5,825, or $0.27
per share (basic and diluted), for the period March 24, 1998 through June
30, 1998, compared to net income as calculated in accordance with
generally accepted accounting principles (GAAP) of $5,381, or $0.25 per
share (basic and diluted), for the three months ended June 30, 1998 and
$5,554, or $0.26 per share (basic and diluted), for the period March 24,
1998 through June 30, 1998. Differences between tax basis income and GAAP
net income arise for various reasons. For example, in computing income
from its subordinated CMBS interests for GAAP purposes, the Company takes
into account estimated credit losses on the underlying loans whereas for
tax basis income purposes, only actual credit losses are taken into
account. In addition, certain general and administrative expenses may
differ due to differing treatment of the deductibility of such expenses
for tax basis income. Also, differences could arise in the treatment of
premium and discount amortization on the Company's securities available
for sale.
A reconciliation of GAAP net income to tax basis income is as follows:
For the Period
For the Three March 24, 1998
Months Ended Through
June 30, 1998 June 30, 1998
----------------- ------------------
GAAP net income $ 5,381 $ 5,554
Subordinate CMBS interests income
differentials 143 143
General and administrative expense
differences 113 113
Other 15 15
================= ==================
Tax basis income $ 5,652 $ 5,825
================= ==================
CHANGES IN FINANCIAL CONDITION
SECURITIES AVAILABLE FOR SALE: At June 30, 1998, an aggregate of $3,579
of net unrealized gains on securities available for sale was included as
a component of accumulated other comprehensive income in stockholders'
equity.
The Company's securities available for sale, which are carried at
estimated fair value, included the following at June 30, 1998:
Estimated
Security Description Fair Value %
-------------------------------------------------------------
Commercial mortgage-backed securities
("CMBS") interests:
Investment grade rated senior interest
only interests $ 91,934 8.8
Non-investment grade rated subordinated
interests 191,934 18.3
Non-rated subordinated interests 21,580 2.1
-------------------
Total CMBS interests 305,448 29.2
-------------------
Single-family residential mortgage-
backed securities ("residential
MBS") interests:
Agency adjustable rate 220,952 21.1
Agency fixed rate 54,238 5.2
Agency interest only 16,094 1.5
Investment grade rated private issuer
fixed rate 387,674 37.1
-------------------
Total residential MBS interests 678,958 64.9
-------------------
Agency insured project loans 28,227 2.7
Investment grade rated asset backed
securities 14,863 1.4
Non-investment grade rated non-U.S.
sovereign securities 18,844 1.8
-------------------
Total securities available for sale $1,046,340 100.0
===================
In May 1998, $16,750 face amount of U.S. Treasury securities were sold
for proceeds net of termination costs on the related hedge of $17,133,
which equaled the approximate amortized cost of such securities.
REVERSE REPURCHASE AGREEMENTS: To date, the Company's debt has consisted
entirely of borrowings collateralized by a pledge of most of the
Company's securities available for sale. These borrowings appear in the
statement of financial condition as reverse repurchase agreements. The
Company has obtained, and believes it will be able to continue to obtain,
short-term financing in amounts and at interest rates consistent with the
Company's financing objectives.
During the three months ended June 30, 1998 and during the period March
24, 1998 through June 30, 1998, the term to maturity of the Company's
borrowings ranged from 1 day to 175 days, with a weighted average
remaining maturity of 49 days at June 30, 1998. At June 30, 1998, the
Company had outstanding $699,347 of reverse repurchase agreements with a
weighted average borrowing rate of 5.64%. At June 30, 1998, securities
available for sale pledged as collateral for these reverse repurchase
agreements had an estimated fair value of $737,137.
CONTRACTUAL COMMITMENTS: The Company has entered into an interest rate
swap transaction with a notional amount of $70,000. Under the interest
rate swap agreement, the Company will receive quarterly payments of
interest based on three-month LIBOR and will remit semi-annual payments
based on a fixed interest rate of approximately 6.19%, in each case based
upon the notional amount of the swap. The swap became effective on May
19, 1998 and will terminate on May 19, 2008. In certain circumstances,
the Company may be required to provide collateral to secure its
obligations under the interest rate swap agreement, or may be entitled to
receive collateral from the counterparty to the swap agreement. At June
30, 1998, no collateral was required under the interest rate swap
agreement. At June 30, 1998, the interest rate payable to the Company by
the counterparty to the swap transaction was approximately 5.70%.
Contractual commitments are carried in the statement of financial
condition at estimated liquidation value. During the three months ended
June 30, 1998 and during the period March 24, 1998 through June 30, 1998,
there were $1,032 in unrealized losses on contractual commitments, which
are included as a component of accumulated other comprehensive income in
stockholders' equity.
CAPITAL RESOURCES AND LIQUIDITY: Liquidity is a measurement of the
Company's ability to meet potential cash requirements, including ongoing
commitments to repay borrowings, fund investments, loan acquisition and
lending activities and for other general business purposes. The primary
sources of funds for liquidity consist of reverse repurchase agreements
and maturities and principal payments on securities available for sale,
and proceeds from sales thereof.
The Company's operating activities provided cash flows of $3,412 during
the period March 24, 1998 through June 30, 1998. During the foregoing
period cash flows from operating activities were used primarily to
purchase securities available for sale.
The Company's investing activities used cash flows totaling $999,701
during the period March 24, 1998 through June 30, 1998. During the
foregoing period, cash flows from investing activities were used
primarily to purchase securities available for sale.
The Company's financing activities provided $996,089 during the period
March 24, 1998 through June 30, 1998 and consisted primarily of net
borrowings under reverse repurchase agreements and net proceeds from the
issuance of 21,365,198 shares of common stock.
As discussed above, the Company is engaged in due diligence with respect
to a variety of investments. In addition, the Company is engaged in
discussions with respect to obtaining various third-party borrowings. To
the extent that either of these two activities come to fruition, the
Company's liquidity and capital resources could be materially affected.
There can be no assurance that the Company will have adequate funds
available to take advantage of all investment opportunities that become
available.
REIT STATUS: The Company intends to elect to be taxed as a REIT and to
comply with the provisions of the Internal Revenue Code of 1986, as
amended, with respect thereto. Accordingly, the Company will not be
subjected to Federal income tax to the extent of its distributions to
stockholders and as long as certain asset, income and stock ownership
tests are met. The Company may, however, be subject to tax at normal
corporate rates on net income or capital gains not distributed.
INVESTMENT COMPANY ACT: The Company intends to conduct its business so as
not to become regulated as an investment company under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). Under the
Investment Company Act, a non-exempt entity that is an investment company
is required to register with the Securities and Exchange Commission
("SEC") and is subject to extensive, restrictive and potentially adverse
regulation relating to, among other things, operating methods,
management, capital structure, dividends and transactions with
affiliates. The Investment Company Act exempts entities that are
"primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate" ("Qualifying
Interests"). Under current interpretation by the staff of the SEC, to
qualify for this exemption, the Company, among other things, must
maintain at least 55% of its assets in Qualifying Interests. Pursuant to
such SEC staff interpretations, certain of the Company's interests in
agency pass-through and mortgage-backed securities and agency insured
project loans are Qualifying Interests. In general, the Company will
acquire subordinated interests in commercial mortgage-backed securities
("subordinated CMBS interests") only when such mortgage securities are
collateralized by pools of first mortgage loans, when the Company can
monitor the performance of the underlying mortgage loans through loan
management and servicing rights, and when the Company has appropriate
workout/foreclosure rights with respect to the underlying mortgage loans.
When such arrangements exist, the Company believes that the related
subordinated CMBS interests constitute Qualifying Interests for purposes
of the Investment Company Act. Therefore, the Company believes that it
should not be required to register as an "investment company" under the
Investment Company Act as long as it continues to invest primarily in
such subordinated CMBS interests and/or in other Qualifying Interests.
However, if the SEC or its staff were to take a different position with
respect to whether the Company's subordinated CMBS interests constitute
Qualifying Interests, the Company could be required to modify its
business plan so that either (i) it would not be required to register as
an investment company or (ii) it would comply with the Investment Company
Act and be able to register as an investment company. In such event, (i)
modification of the Company's business plan so that it would not be
required to register as an investment company would likely entail a
disposition of a significant portion of the Company's subordinated CMBS
interests or the acquisition of significant additional assets, such as
agency pass-through and mortgage-backed securities, which are Qualifying
Interests or (ii) modification of the Company's business plan to register
as an investment company, which would result in significantly increased
operating expenses and would likely entail significantly reducing the
Company's indebtedness (including the possible prepayment of the
Company's reverse repurchase agreement financing), which could also
require it to sell a significant portion of its assets. No assurances can
be given that any such dispositions or acquisitions of assets, or
deleveraging, could be accomplished on favorable terms. Consequently, any
such modification of the Company's business plan could have a material
adverse effect on the Company. Further, if it were established that the
Company were an unregistered investment company, there would be a risk
that the Company would be subject to monetary penalties and injunctive
relief in an action brought by the SEC, that the Company would be unable
to enforce contracts with third parties and that third parties could seek
to obtain recission of transactions undertaken during the period it was
established that the Company was an unregistered investment company. Any
such results would be likely to have a material adverse effect on the
Company.
FORWARD-LOOKING STATEMENTS: Certain statements contained herein are not,
and certain statements contained in future filings by the Company with
the SEC, in the Company's press releases or in the Company's other public
or shareholder communications may not be, based on historical facts and
are "Forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements
which are based on various assumptions (some of which are beyond the
Company's control), may be identified by reference to a future period or
periods, or by the use of forward-looking terminology, such as "may,"
"will," "believe," "expect," "anticipate," "continue," or similar terms
or variations on those terms, or the negative of those terms. Actual
results could differ materially from those set forth in forward-looking
statements due to a variety of factors, including, but not limited to,
those related to the economic environment, particularly in the market
areas in which the Company operates, competitive products and pricing,
fiscal and monetary policies of the U.S. Government, changes in
prevailing interest rates, acquisitions and the integration of acquired
businesses, credit risk management, asset/liability management, the
financial and securities markets and the availability of and costs
associated with sources of liquidity. The Company does not undertake, and
specifically disclaims any obligation, to publicly release the result of
any revisions which may be made to any forward-looking statements to
reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.
OTHER: The Company is currently in the process of evaluating its
information technology infrastructure for Year 2000 compliance. The
Company does not expect that the cost to modify its information
technology infrastructure to be Year 2000 compliant will be material to
its financial condition or results of operations. The Company does not
anticipate any material disruption in its operations as a result of any
failure by the Company to be in compliance. The Company is currently
evaluating Year 2000 compliance status of its suppliers. In the event
that any of the Company's significant suppliers do not successfully and
timely achieve Year 2000 compliance, the Company's business or operations
could be adversely affected.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
At June 30, 1998 there were no pending legal proceedings to which the
Company was a party or of which any of its property was subject.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANTHRACITE CAPITAL, INC.
Dated: August 14, 1998 By: /s/ Hugh R. Frater
______________________
Name: Hugh R. Frater
Title: President and Chief
Executive Officer
(authorized officer
of registrant)
Dated: August 14, 1998 By: /s/ Richard M. Shea
______________________
Name: Richard M. Shea
Title: Chief Operating Officer
and Chief Financial
Officer (principal
accounting officer)
FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JUNE 30, 1998 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 1,046,340
<RECEIVABLES> 22,868
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,069,362
<CURRENT-LIABILITIES> 770,088
<BONDS> 0
0
0
<COMMON> 296,942
<OTHER-SE> 2,332
<TOTAL-LIABILITY-AND-EQUITY> 1,069,362
<SALES> 0
<TOTAL-REVENUES> 10,828
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,068
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,379
<INCOME-PRETAX> 5,381
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,381
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,381
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
