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 March 31, 1999
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.
(1) Yes X No__
(2) Yes X No__
As of May 13, 1999, 20,998,334 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.................................... 4
Statements of Financial Condition
At March 31, 1999 and December 31, 1998 (Unaudited)............. 4
Statements of Operations and Comprehensive Income (Loss)
For the Three Months Ended March 31, 1999 and
For the Period March 24, 1998 (Commencement of Operations)
Through March 31, 1998 (Unaudited).............................. 5
Statement of Changes in Stockholders' Equity
For the Three Months Ended March 31, 1999 (Unaudited)........... 6
Statements of Cash Flows
For the Three Months Ended March 31, 1999 and
For the Period March 24, 1998 (Commencement of Operations)
Through March 31, 1998 (Unaudited).............................. 7
Notes to Financial Statements (Unaudited)....................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 32
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 36
Item 2. Changes in Securities and Use of Proceeds.................. 36
Item 3. Defaults Upon Senior Securities............................ 36
Item 4. Submission of Matters to a Vote of Security Holders........ 36
Item 5. Other Information.......................................... 36
Item 6. Exhibits and Reports on Form 8-K........................... 36
SIGNATURES 37
Financial Data Schedule 38
<TABLE>
<CAPTION>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
ANTHRACITE CAPITAL, INC.
STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
==============================================================================
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 576 $ 1,087
Restricted cash equivalents - 3,243
Deposits with brokers as collateral
for securities sold short 24,713 276,617
Securities available for sale, at
fair value
Subordinated commercial mortgage-backed
securities (CMBS) $ 266,091 $273,018
Other securities 207,743 192,050
----------- ----------
Total securities available for sale 473,834 465,068
Securities held for trading, at fair value - 166,835
Commercial mortgage loans, net 38,969 35,581
Due from brokers 122,440 -
Other assets 8,780 7,964
----------- -----------
Total Assets $ 669,312 $ 956,395
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term borrowings:
Secured by pledge of subordinated CMBS $ 158,655 $ 160,924
Secured by pledge of other securities
available for sale and cash equivalents 151,215 168,963
Secured by pledge of securities held for
trading - 133,163
Secured by pledge of commercial mortgage
loans 23,014 23,014
--------- ----------
Total short-term borrowings $ 332,884 $ 486,064
Securities sold short, at fair value 24,617 275,085
Due to brokers 122,424 -
Distributions payable 6,089 5,796
Other liabilities 2,484 7,721
--------- ---------
Total Liabilities 488,498 774,666
--------- ---------
Commitments and Contingencies
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 share authorized; 22,378
shares issued, 20,998 shares outstanding
in 1999; and 21,365 shares issued,
19,985 shares outstanding in 1998 22 21
Additional paid-in capital 303,562 296,836
Distributions in excess of earnings (19,501) (20,148)
Accumulated other comprehensive loss (87,426) (79,137)
Treasury stock, at cost (1,380 shares) (15,843) (15,843)
--------- ---------
Total Stockholders' Equity 180,814 181,729
--------- ---------
Total Liabilities and Stockholders' Equity $ 669,312 $ 956,395
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
ANTHRACITE CAPITAL, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
==========================================================================================
For the Period
For the Three March 24,1998*
Months Ended Through
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Interest Income:
Securities available for sale $ 11,299 $ 118
Commercial mortgage loans 908 -
Securities held for trading 1,510 -
Cash and cash equivalents 241 97
---------- --------
Total interest income 13,958 215
---------- --------
Expenses:
Interest
Management fee 7,123 -
1,050 21
Other 300 21
---------- --------
Total expenses 8,473 42
---------- --------
Other Gain (Loss):
Gain on sale of securities available for sale 136 -
Gain on securities held for trading 1,181 -
Foreign currency loss (67) -
---------- --------
Total other gain 1,250 -
---------- --------
Net Income 6,735 173
---------- --------
Other Comprehensive Income (Loss):
Unrealized gain (loss) on securities
available for sale:
Unrealized holding gain (loss) arising
during period (8,153) 2
Less: reclassification adjustment for
realized gains included in net income 136 -
---------- --------
Other comprehensive loss (8,289) 2
---------- --------
Comprehensive Income (Loss) $ (1,554) $ 175
========== ========
Net income per share:
Basic $ 0.33 $ 0.01
Diluted 0.33 0.01
Weighted average number of shares outstanding:
Basic 20,279 21,379
Diluted 20,279 21,388
</TABLE>
*Commencement of operations.
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
ANTHRACITE CAPITAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)
================================================================================================================================
Accumulated
Common Additional Distributions Other Treasury Total
Stock, Paid-In In Excess Comprehensive Stock, Stockholders'
Par Value Capital Of Earnings Loss At Cost Equity
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 21 $ 296,836 $ (20,148) $ (79,137) $ (15,843) $ 181,729
Net income 6,735 6,735
Change in net unrealized gain
(loss) on securities available
for sale, net of
reclassification
Adjustment (8,289) (8,289)
Distributions declared (6,088) (6,088)
Shares issued under Dividend
Reinvestment and Stock
Purchase Plan 1 6,726 6,727
-------------------------------------------------------------------------------------------------
Balance at March 31, 1999 $ 22 $ 303,562 $ (19,501) $ (87,426) $ (15,843) $ 180,814
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
ANTHRACITE CAPITAL, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
===================================================================================================
For the Period
For the Three March 24, 1998*
Months Ended Through
March 31, 1999 March 31, 1998
Cash flows from operating activities:
<S> <C> <C>
Net income $ 6,735 $ 173
Adjustments to reconcile net income to net cash
provided by operating activities:
Purchase of securities held for trading (1,458,299) -
Proceed from sales of securities held for trading 1,631,670 -
Premium amortization (discount accretion), net 314 69
Noncash portion of net foreign currency loss 67 -
Net gain on sale of securities (1,317) -
Increase in other assets (816) (2,951)
Increase (decrease) in other liabilities (5,236) 982
------------- ------------------
Net cash provided (used) by operating activities 173,118 (1,727)
------------- ------------------
Cash flows from investing activities:
Purchase of securities available for sale (59,613) (382,958)
Funding of commercial mortgage loan (4,393) -
Maturities of restricted cash equivalents 3,250 -
Principal payments received on securities
available for sale 19,264 -
Proceeds from sales of securities available
for sale 20,113 -
Payable for securities purchased - 72,725
------------- ------------------
Net cash used in investing activities (21,379) (310,233)
------------- ------------------
Cash flows from financing activities:
Increase (decrease) in net short-term borrowings (153,180) 14,787
Proceeds from issuance of common stock, net of
offering costs 6,726 296,972
Distributions on common stock (5,796) -
------------- ------------------
Net cash provided (used) by financing activities (152,250) 311,759
------------- ------------------
Net decrease in cash and cash equivalents (511) (200)
Cash and cash equivalents, beginning of period 1,087 200
------------- ------------------
Cash and cash equivalents, end of period $ 576 $ 0
============ ==================
Supplemental disclosure of cash flow information:
Interest paid $ 9,200 $ -
============ ==================
Noncash financing activities:
Net change in unrealized gain (loss) on securities
available for sale $ (8,289) $ 2
============ ==================
Distributions declared, not yet paid $ 6,089 $ -
============ ==================
</TABLE>
* Commencement of operations.
The accompanying notes are an integral part of these financial statements.
ANTHRACITE CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Anthracite Capital, Inc. (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. The Company is organized and managed as a single business
segment.
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. These financial statements should be read in conjunction
with the annual financial statements and notes thereto included in the
Company's annual report on Form 10-K for 1998 filed with the Securities
and Exchange Commission.
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 results for the interim
periods. Operating results for interim periods are not necessarily
indicative of the results that may be expected for the entire year.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the statements of financial condition and revenues and expenses
for the periods covered. Actual results could differ from those
estimates and assumptions. Significant estimates in the financial
statements include the valuation of the Company's mortgage-backed
securities and certain other investments.
A summary of the Company's significant accounting policies follows:
CASH AND CASH EQUIVALENTS
All highly liquid investments with original maturities of three months
or less are considered to be cash equivalents.
RESTRICTED CASH EQUIVALENTS
At December 31, 1998, $3,243 of the Company's cash equivalents was
pledged to secure its short-term borrowings and was classified as
restricted cash equivalents on the statement of financial condition. At
March 31, 1999, none of the Company's cash equivalents were pledged.
SECURITIES AVAILABLE FOR SALE
The Company has designated its investments in mortgage-backed
securities, mortgage-related securities and certain other securities 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 (loss) in stockholders' equity.
Unrealized losses on securities that reflect a decline in value which is
judged by management to be other than temporary, if any, are charged to
earnings. At disposition the realized net gain or loss is included in
income 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,
and credit losses. Actual prepayment and credit loss experience is
periodically reviewed and effective yields are recalculated when
differences arise between prepayments and credit losses originally
anticipated and amounts actually received plus anticipated future
prepayments and credit losses.
SECURITIES HELD FOR TRADING
The Company has designated certain securities as assets held for trading
because the Company intends to hold them for short periods of time.
Securities held for trading are carried at estimated fair value with net
unrealized gains or losses included in income.
COMMERCIAL MORTGAGE LOANS
The Company purchases and originates certain commercial mortgage loans
to be held as long-term investments. Loans held for long-term investment
are recorded at cost at the date of purchase. Premiums and discounts
related to these loans are amortized over their estimated lives using
the effective interest method. Any origination fee income, application
fee income and direct costs associated with originating or purchasing
commercial mortgage loans have been deferred and the net amount is added
to the basis of the loans on the statement of financial condition. The
Company recognizes impairment on the loans when it is probable that the
Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. The Company measures impairment
based on the present value of expected future cash flows discounted at
the loan's effective interest rate or the fair value of the collateral
if the loan is collateral dependent.
SHORT SALES
As part of its short-term trading strategies (see Note 3), the Company
may sell securities that it does not own ("short sales"). To complete a
short sale, the Company may arrange through a broker to borrow the
securities to be delivered to the buyer. The proceeds received by the
Company from the short sale are retained by the broker until the Company
replaces the borrowed securities, generally within a period of less than
one month. In borrowing the securities to be delivered to the buyer, the
Company becomes obligated to replace the securities borrowed at their
market price at the time of the replacement, whatever that price may be.
A gain, limited to the price at which the Company sold the security
short, or a loss, unlimited as to dollar amount, will be recognized upon
the termination of a short sale if the market price is less than or
greater than the proceeds originally received. The Company's liability
under the short sales is recorded at fair value, with unrealized gains
or losses included in net gain or loss on securities held for trading in
the statement of operations and comprehensive income (loss).
The Company is exposed to credit loss in the event of nonperformance by
any broker that holds a deposit as collateral for securities borrowed.
However, the Company does not anticipate nonperformance by any broker.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's securities available for sale,
securities held for trading, commercial mortgage loans and securities
sold short 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.
FORWARD COMMITMENTS
As part of its short-term trading strategies (see Note 3), the Company
may enter into forward commitments to purchase or sell U.S. Treasury or
agency securities, which obligate the Company to purchase or sell such
securities at a specified date at a specified price. When the Company
enters into such a forward commitment, it will, generally within sixty
days or less, enter into a matching forward commitment with the same or
a different counterparty which entitles the Company to sell (in
instances where the original transaction was a commitment to purchase)
or purchase (in instances where the original transaction was a
commitment to sell) the same or similar securities on or about the same
specified date as the original forward commitment. Any difference
between the specified price of the original and matching forward
commitments will result in a gain or loss to the Company. Changes in the
fair value of open commitments are recognized on the statement of
financial condition and included among assets (if there is an unrealized
gain) or among liabilities (if there is an unrealized loss). A
corresponding amount is included as a component of net gain or loss on
securities held for trading in the statement of operations and
comprehensive income (loss).
The Company is exposed to interest rate risk on these commitments, as
well as to credit loss in the event of nonperformance by any other party
to the Company's forward commitments. However, the Company does not
anticipate nonperformance by any counterparty.
FINANCIAL FUTURES CONTRACTS
As part of its short-term trading strategies (see Note 3), the Company
may enter into financial futures contracts, which are agreements between
two parties to buy or sell a financial instrument for a set price on a
future date. Initial margin deposits are made upon entering into futures
contracts and can be either cash or securities. During the period that
the futures contract is open, changes in the value of the contract are
recognized as gains or losses on securities held for trading by
"marking-to-market" on a daily basis to reflect the market value of the
contract at the end of each day's trading. Variation margin payments are
made or received, depending upon whether gains or losses are incurred.
HEDGING INSTRUMENTS
As part of its asset/liability management activities, the Company may
enter into interest rate swap agreements, forward currency exchange
contracts and other financial instruments in order to hedge interest
rate and foreign currency exposures or to modify the interest rate or
foreign currency characteristics of related items in its statement of
financial condition.
Income and expenses from interest rate swap agreements that are, for
accounting purposes, designated as hedging securities available for sale
are recognized as a net adjustment to the interest income of the hedged
item. During the term of the interest rate swap agreements, changes in
fair value are recognized on the statement of financial condition and
included among assets (if there is an unrealized gain) or among
liabilities (if there is an unrealized loss). A corresponding amount is
included as a component of accumulated other comprehensive income (loss)
in stockholders' equity. If the underlying hedged securities are sold,
the amount of unrealized gain or loss in accumulated other comprehensive
income (loss) relating to the corresponding interest rate swap agreement
is included in the determination of gain or loss on the sale of the
securities. If 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 had no interest rate swap agreements outstanding at March 31,
1999.
Revenues and expenses from forward currency exchange contracts are
recognized as a net adjustment to foreign currency gain or loss. During
the term of the forward currency exchange contracts, changes in fair
value are recognized on the statement of financial condition and
included among assets (if there is an unrealized gain) or among
liabilities (if there is an unrealized loss). A corresponding amount is
included as a component of net foreign currency gain or loss in the
statement of operations and comprehensive income (loss).
The Company is exposed to interest rate and/or currency risk on these
hedging instruments, as well as to credit loss in the event of
nonperformance by any other party to the Company's hedging instruments.
However, the Company does not anticipate nonperformance by any
counterparty.
FOREIGN CURRENCIES
Assets and liabilities denominated in foreign currencies are translated
at the exchange rate in effect on the date of the statement of financial
condition. Revenues, costs, and expenses denominated in foreign
currencies are translated at average rates of exchange prevailing during
the period. Foreign currency gains and losses resulting from this
process are recognized in the statement of operations and comprehensive
income (loss).
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 the period plus the additional dilutive effect
of common stock equivalents. The dilutive effect of outstanding stock
options is calculated using the treasury stock method. For the three
months ended March 31, 1999, all outstanding stock options were
antidilutive.
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
generally will not be subject 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 be subject to Federal
excise tax for the fiscal year ended December 31, 1998. The Company does
not anticipate that any excise tax incurred will have a material effect
on its financial statements.
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 the
financial statements and display the accumulated balance of other
comprehensive income (loss) 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
are classified as accumulated other comprehensive income (loss) in
stockholders' equity and current period unrealized gains and losses are
included as a component of comprehensive income (loss).
RECENT ACCOUNTING PRONOUNCEMENT
During 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that the Company
recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge of the exposure to changes in the fair value of a
recognized asset or liability or a hedge of the exposure to variable
cash flows of a forecasted transaction. The accounting for changes in
the fair value of a derivative (e.g., through earnings or outside of
earnings, through comprehensive income) depends on the intended use of
the derivative and the resulting designation.
The Company is required to implement SFAS 133 by January 1, 2000.
Company management is evaluating the impact that this statement will
have on its hedging strategies and use of derivative instruments and
does not believe that implementation will have a material effect on the
Company's financial statements based on its current hedging strategies.
RECLASSIFICATIONS
Certain amounts from prior periods have been reclassified to conform to
the 1999 presentation.
NOTE 2 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 March 31, 1999 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"):
Non-investment grade rated subordinated securities $315,077 $ (74,845) $ 240,232
Non-rated subordinated securities 37,403 (12,921) 24,482
Non-rated trust certificates 1,377 1,377
-------------- --------------- --------------- ---------------
Total CMBS 353,857 (87,766) 266,091
Single-family residential mortgage-backed securities
("RMBS"):
Agency adjustable rate securities 52,198 $ 9 (79) 52,128
Agency fixed rate securities 12,357 (59) 12,298
Privately issued investment grade rated fixed rate
securities 139,624 556 (109) 140,071
-------------- --------------- --------------- ---------------
Total RMBS 204,179 565 (247) 204,497
Agency insured project loan 3,224 22 3,246
============== =============== =============== ===============
Total securities available for sale $561,260 $ 587 $ (88,013) $473,834
============== =============== =============== ===============
</TABLE>
At March 31, 1999, an aggregate of $375,781 in estimated fair value of
the Company's securities available for sale was pledged to secure its
short-term borrowings.
The amortized cost and estimated fair value of securities available for
sale at December 31, 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"):
Non-investment grade rated subordinated securities $314,209 $ (65,475) $ 248,734
Non-rated subordinated securities 38,200 (13,916) 24,284
-------------- --------------- --------------- ---------------
Total CMBS 352,409 (79,391) 273,018
-------------- --------------- --------------- ---------------
Single-family residential mortgage-backed securities ("RMBS"):
Agency adjustable rate securities 17,977 $ 22 17,999
Agency fixed rate securities 13,022 1 13,023
Privately issued investment grade rated fixed rate
securities 157,571 278 (96) 157,753
-------------- --------------- --------------- ---------------
Total RMBS 188,570 301 (96) 188,775
-------------- --------------- --------------- ---------------
Agency insured project loan 3,226 49 3,275
============== =============== =============== ===============
Total securities available for sale $544,205 $ 350 $ (79,487) $465,068
============== =============== =============== ===============
</TABLE>
At December 31, 1998, an aggregate of $392,831 in estimated fair value
of the Company's securities available for sale was pledged to secure its
short-term borrowings.
The aggregate estimated fair value by underlying credit rating of the
Company's securities available for sale at March 31, 1999 is as follows:
<TABLE>
<CAPTION>
Estimated
Security Rating Fair Value Percentage
---------------------------------------------- ---------------- --------------------
<S> <C> <C>
Agency and agency insured securities $ 67,672 14.3%
AAA 140,071 29.6
BB+ 25,937 5.5
BB 23,737 5.0
BB- 54,115 11.4
B+ 8,094 1.7
B 85,823 18.1
B- 30,018 6.3
CCC 12,508 2.6
Not rated 25,859 5.5
================ ====================
Total securities available for sale $473,834 100.0%
================ ====================
</TABLE>
As of March 31, 1999, the mortgage loans underlying the subordinated
CMBS held by the Company were secured by properties of the types and at
the locations identified below:
<TABLE>
<CAPTION>
Property Type Percentage (1) Geographic Location Percentage (1)
-------------------- ------------------- --------------------------- -------------------
<S> <C> <C> <C>
Multifamily 29.7% California 13.3%
Retail 27.7 Texas 10.2
Office 16.3 New York 9.6
Lodging 9.8 Florida 6.8
Other 16.5 Illinois 5.6
Other (2) 54.5
=================== ===================
Total 100.0% Total 100.0%
=================== ===================
</TABLE>
(1) Based on a percentage of the total unpaid principal balance of the
underlying loans. (2) No other individual state comprises more than 5% of
the total.
At March 31, 1999, three mortgage loans underlying the subordinated CMBS
held by the Company were delinquent. The following table sets forth
certain information relating to the aggregate principal balance and
payment status of these loans:
Past due 30 to 60 days $2,308
Past due 90 days or more 10,306
------
Total past due $12,614
=======
These three mortgage loans comprised 0.145% of the aggregate principal
balance of the mortgage loans underlying the Company's subordinated
CMBS. Subsequent to March 31, 1999, the two loans past due more than 90
days were transferred to special servicing and foreclosure actions were
initiated. The one loan more than 30 days but less than 60 days
delinquent was also transferred to special servicing and a workout plan
is being developed with the borrower. The Company believes that its
current loss estimates with respect to the delinquent loans are
appropriate.
The subordinated CMBS held by the Company consist of subordinated
securities collateralized by adjustable and fixed rate commercial and
multifamily mortgage loans. The commercial mortgage-backed trust
certificates held by the Company represent a 1% beneficial interest in a
trust established by an affiliate (see Note 6). The assets of the trust
consist of commercial mortgage loans originated or acquired by the
affiliate. The RMBS held by the Company consist of adjustable rate and
fixed rate residential pass-through or mortgage-backed securities
collateralized by adjustable and fixed rate single-family residential
mortgage loans. Agency RMBS were issued by Federal Home Loan Mortgage
Corporation (FHLMC), Federal National Mortgage Association (FNMA) or
Government National Mortgage Association (GNMA). Privately issued RMBS
were issued by entities other than FHLMC, FNMA or GNMA. The agency
insured project loan held by the Company consists of a participation
interest in a mortgage loan guaranteed by the Federal Housing
Administration (FHA). The Company's securities available for sale are
subject to credit, interest rate and/or prepayment risks.
The subordinated CMBS owned by the Company provide credit support to the
more senior classes of the related commercial securitization. Cash flow
from the mortgages underlying the CMBS generally is allocated first to
the senior classes, with the most senior class having a priority
entitlement to cash flow. Then, any remaining cash flow is allocated
generally among the other CMBS classes 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 class will bear this loss first. To the extent there
are losses in excess of the most subordinated class' stated entitlement
to principal and interest, then the remaining CMBS classes will bear
such losses in order of their relative subordination.
As of March 31, 1999, the anticipated weighted average unleveraged yield
to maturity for GAAP purposes of the Company's CMBS was 9.50% per annum
and of the Company's other securities available for sale was 6.42% per
annum. The Company's anticipated yields to maturity on its CMBS and
other securities available for sale are based upon a number of
assumptions that are subject to certain business and economic
uncertainties and contingencies. Examples of these include, among other
things, the rate and timing of principal payments (including
prepayments, repurchases, defaults and liquidations), the pass-through
or coupon rate and interest rate fluctuations. Additional factors that
may affect the Company's anticipated yields to maturity on its CMBS
include interest payment shortfalls due to delinquencies on the
underlying mortgage loans, and the timing and magnitude of credit losses
on the mortgage loans underlying the CMBS that are a result of the
general condition of the real estate market (including competition for
tenants and their related credit quality) and changes in market rental
rates. As these uncertainties and contingencies are difficult to predict
and are subject to future events which may alter these assumptions, no
assurance can be given that the anticipated yields to maturity,
discussed above and elsewhere, will be achieved.
The agency adjustable rate RMBS 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 March 31, 1999, the average periodic cap on the agency
adjustable rate RMBS was 2.0% per annum and the average lifetime cap net
of servicing fees was equal to 11.7%.
At March 31, 1999, the unamortized net discount on securities available
for sale was $206,675, which represented 26.9% of the then remaining
face amount of such securities.
During the three months ended March 31, 1999, the Company sold a portion
of its securities available for sale for total proceeds of $20,113,
resulting in a realized gain of $136.
NOTE 3 SECURITIES HELD FOR TRADING
Securities held for trading reflect short-term trading strategies which
the Company employs from time to time, designed to generate economic and
taxable gains. As part of its trading strategies, the Company may
acquire long or short positions in U.S. Treasury or agency securities,
forward commitments to purchase such securities, financial futures
contracts and other fixed income or fixed income derivative securities.
Any taxable gains from such strategies will be applied as an offset
against the tax basis capital loss carryforward that the Company
incurred during 1998 as a result of the sale of a substantial portion of
its securities available for sale.
The Company's securities held for trading are carried at estimated fair
value. At March 31, 1999, the Company did not have any long positions in
securities held for trading. At December 31, 1998, the Company's
securities held for trading consisted of U.S. Treasury securities with
an estimated fair value of $166,835. At March 31, 1999, the Company held
short positions in U.S. Treasury securities with an estimated fair value
of $(24,617). At December 31, 1998, the Company held short positions
consisting of U.S. Treasury securities and an agency fixed rate note
with estimated fair values of $(223,757) and $(51,328), respectively.
During the three months ended March 31, 1999, aggregate net realized and
unrealized gains (losses) on securities held for trading (including
financial futures contracts and forward commitments to purchase or sell
agency RMBS -- see Note 10) were $1,181.
The Company's trading strategies are subject to the risk of
unanticipated changes in the relative prices of long and short positions
in trading securities, but are designed to be relatively unaffected by
changes in the overall level of interest rates.
Amounts due to or from brokers at March 31, 1999 represent amounts
payable or receivable, respectively, from unsettled purchases or sales
of the Company's securities held for trading and related short-term
borrowings. These amounts were paid or received in full on April 1,
1999.
NOTE 4 COMMERCIAL MORTGAGE LOANS
On August 26, 1998, the Company along with a syndicate of other lenders
originated a loan secured by a second lien on five luxury hotels in
London, England and vicinity. The loan has a five-year maturity and may
be prepaid at any time. The loan is denominated in pounds sterling and
bears interest at a rate based upon the London Interbank Offered Rate
(LIBOR) for pounds sterling plus approximately 4%. The Company's
investment in the loan is carried at amortized cost and translated into
U.S. dollars at the exchange rate in effect on the reporting date. The
amortized cost and certain additional information with respect to the
Company's investment in the loan at March 31, 1999 (at the exchange rate
in effect on that date) are summarized as follows:
Interest Principal Unamortized Amortized
Rate Balance Discount Cost
------------- ------------- ------------------ ---------------
9.38% $34,663 $ 86 $ 34,577
The exchange rate for the British pound at March 31, 1999 was
(pound)0.619387 to US$1.00.
At March 31, 1999, the entire principal balance of the Company's
investment in the loan was pledged to secure line of credit borrowings
included in short-term borrowings. The loan was current in payment
status at March 31, 1999.
Through March 31, 1999, the Company had funded $4,393 under a commitment
outstanding to fund a $35,000 floating rate commercial real estate
construction loan secured by a second mortgage. The subject property is
an office complex located in Santa Monica, California. Each extension of
funds under the commitment is subject to satisfaction by the borrower of
various closing conditions. The Company received a $175 commitment fee
relating to the commitment, which is being amortized into income over
the two-and-one-half year life of the loan. At March 31, 1999, the
weighted average interest rate on amounts funded under the commitment
was 11.47% and the borrower had made all payments when due. Subsequent
to March 31, 1999, the Company funded an additional $6,846 of this
commitment.
NOTE 5 COMMON STOCK
On March 17, 1999, the Company declared distributions to its
stockholders of $0.29 per share, which were paid on April 15, 1999 to
stockholders of record on March 31, 1999.
During the three months ended March 31, 1999, the Company issued
1,013,326 shares of common stock under its Dividend Reinvestment and
Stock Purchase Plan and received total proceeds of $6,726.
On March 31, 1999 the Company filed a $200,000 shelf registration
statement with the SEC. The shelf registration statement will permit the
Company to issue a variety of debt and equity securities in the public
markets should appropriate opportunities arise.
NOTE 6 TRANSACTIONS WITH AFFILIATES
The Company has 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 pays 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 $1,050 and $21 in base management fees for the three
months ended March 31, 1999 and for the period March 24, 1998 to March
31, 1998, respectively, in accordance with the terms of the Management
Agreement
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 March 31, 1999, or for the
period March 24, 1998 to March 31, 1998.
On March 17, 1999, the Company's Board of Directors approved an
Administration Agreement with the Manager and the termination of a
previous agreement with an unaffiliated third party. Under the terms of
the Administration Agreement, the Manager will provide financial
reporting, audit coordination and accounting oversight services. The
Company will pay the Manager a monthly administrative fee at an annual
rate of 0.06% of the first $125 million of average net assets, 0.04% of
the next $125 million of average net assets and 0.03% of average net
assets in excess of $250 million subject to a minimum annual fee of
$120. The terms of the Administrative Agreement are substantially
similar to the terms of the previous agreement.
On March 19, 1999, the Company purchased certificates representing a 1%
interest in Midland Commercial Mortgage Owner Trust I (the "Trust") for
a total of $1,377 from Midland Loan Services, Inc. ("Midland"), a wholly
owned indirect subsidiary of PNC and the depositor to the Trust. The
assets of the Trust consist of commercial mortgage loans originated or
acquired by Midland. In connection with this transaction, the Company
entered into a committed line of credit from PNC Funding Corp., a wholly
owned indirect subsidiary of PNC, to borrow up to 90% of the fair market
value of the Company's interest in the Trust, provided that amounts
outstanding under the line at any time may not exceed $4,500.
Outstanding borrowings against this line of credit bear interest at a
LIBOR based variable rate.
NOTE 7 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.
Pursuant to the 1998 Stock Option Plan, certain officers, directors and
employees of the Company and the Manager have been granted options to
purchase 1,163,967 shares of the Company's common stock and PNC
Investment Corp., a wholly owned indirect subsidiary of PNC, has been
granted options to purchase 324,176 shares of the Company's common
stock. The exercise price of these options is $15 per share. The
remaining contractual life of each option is approximately 9 years. One
quarter of these options, representing 372,036 shares, vested on March
27, 1999 and the remaining options vest in three equal installments on
March 27, 2000, March 27, 2001 and March 27, 2002. All of these options
remain outstanding; none were exercised or expired during 1999.
In addition to the foregoing, on March 17, 1999 pursuant to the 1998
Stock Option Plan, options to purchase 270,000 shares of the Company's
common stock were granted to certain officers of the Company and
employees of the Manager who provide services to the Company. The
exercise price of these options is $8.61 per share. The remaining
contractual life of each option is approximately 10 years. The options
vest in two equal installments on March 31, 2000 and March 31, 2001.
None of these options were exercised or expired during 1999.
Options to purchase 246,544 shares of the Company's common stock that
were granted to certain officers, directors and employees of the Company
and the Manager in connection with the Company's initial public offering
expired on March 30, 1999; none were exercised during 1999.
NOTE 8 SHORT-TERM BORROWINGS
The Company's short-term borrowings consist of line of credit borrowings
and reverse repurchase agreements.
During 1998, the Company entered into a Master Assignment Agreement, as
amended, and related Note, which provide financing for the Company's
investments. The agreement, which is with Merrill Lynch Mortgage Capital
Inc., permits the Company to borrow up to $400,000 and terminates August
20, 1999. The agreement requires assets to be pledged as collateral,
which may consist of rated CMBS, rated RMBS, residential and commercial
mortgage loans, and certain other assets. Outstanding borrowings against
this line of credit bear interest at a LIBOR based variable rate.
The Company is subject to various covenants in this line of credit,
including maintaining a minimum GAAP net worth of $140,000 and a
debt-to-equity ratio not to exceed 6 to 1, as well as a covenant that
after September 30, 1998 the Company's GAAP net worth will not decline
by more than 37 percent over any two consecutive fiscal quarters. At
March 31, 1999, the Company was in compliance with all such covenants.
During 1999, the Company entered into a committed line of credit from
PNC Funding Corp. to borrow up to 90% of the fair market value of the
Company's interest in the Trust, provided that amounts outstanding under
the line at any time may not exceed $4,500. Outstanding borrowings
against this line of credit bear interest at a LIBOR based variable
rate. This line of credit terminates on March 17, 2000 and the lender's
recourse is limited to the Company's interest in the Trust.
The Company has entered into reverse repurchase agreements to finance
most of its securities available for sale that are not financed under
its lines of credit. The reverse repurchase agreements are
collateralized by most of the Company's securities available for sale
and bear interest at rates that have historically moved in close
relationship to LIBOR.
Certain information with respect to the Company's short-term borrowings
at March 31, 1999 is summarized as follows:
<TABLE>
<CAPTION>
Reverse Total
Lines of Repurchase Short-Term
Credit Agreements Borrowings
--------------------- ----------------------- -------------------
<S> <C> <C> <C>
Outstanding borrowings $ 65,300 $ 267,584 $ 332,884
Weighted average borrowing rate 6.57% 5.46% 5.68%
Weighted average remaining maturity 142 Days 67 Days 82 Days
Estimated fair value of assets pledged $ 94,001 $307,707 $ 401,708
</TABLE>
At March 31, 1999, $23,014 of borrowings outstanding under the lines of
credit were denominated in pounds sterling.
At March 31, 1999, the Company's short-term borrowings had the following
remaining maturities:
<TABLE>
<CAPTION>
Reverse Repurchase Total
Lines of Credit Agreements Short-Term Borrowings
------------------------- ----------------------------- ------------------------------
<S> <C> <C> <C>
Within 30 days - $ 40,045 $ 40,045
31 to 59 days - 151,215 151,215
Over 59 days $ 65,300 76,324 141,624
========================= ============================= ==============================
$ 65,300 $ 267,584 $ 332,884
========================= ============================= ==============================
</TABLE>
Under the lines of credit and the reverse repurchase agreements, the
respective lender retains the right to mark the underlying collateral to
estimated market value. A reduction in the value of its pledged assets
will require the Company to provide additional collateral or fund margin
calls. From time to time, the Company expects that it will be required
to provide such additional collateral or fund margin calls.
The Company is currently negotiating additional financing facilities to
increase financing flexibility and provide capital to fund future
growth. There is no assurance that such negotiations will be concluded
successfully.
NOTE 9 HEDGING INSTRUMENTS
The Company has entered into forward currency exchange contracts
pursuant to which it has agreed to exchange (pound)7,800 (pounds
sterling) for $12,597 (U.S. dollars) on June 30, 1999. In certain
circumstances, the Company may be required to provide collateral to
secure its obligations under the forward currency exchange contracts, or
may be entitled to receive collateral from the counterparty to the
forward currency exchange contracts. At March 31, 1999, no collateral
was required under the forward currency exchange contracts. The
estimated fair value of the forward currency exchange contracts was $11
at March 31, 1999.
NOTE 10 COMMITMENTS AND CONTINGENCIES
Information with respect to the Company's outstanding forward
commitments to purchase or sell agency RMBS at March 31, 1999 is
summarized as follows:
<TABLE>
<CAPTION>
Estimated
Principal Contract Fair Net
Amount of Price of Value of Gross Gross Unrealized
Subject Subject Subject Unrealized Unrealized Gains
Description Securities Securities Securities Losses Gains (Losses)
- ------------------------- ----------------- ------------------ ------------------ --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Forward
commitments to
purchase $460,000 $453,188 $453,625 $ (148) $ 585 $ 437
Forward
commitments to
sell 380,000 376,916 377,444 (700) 172 (528)
-----------------------------------------------
Total $ (848) $ 757 $ (91)
===============================================
</TABLE>
The gross unrealized gains and gross unrealized losses shown above are
included in other assets and other liabilities, respectively, in the
statement of financial condition. In instances where a forward
commitment has been closed out with the same counterparty and a right of
setoff exists, only the net unrealized gain or loss is reflected in
other assets or liabilities. All of the Company's forward commitments to
purchase or sell agency RMBS at March 31, 1999 related to delivery of
such securities in April 1999. All such commitments were closed out
prior to their respective contractual delivery dates.
At March 31, 1999, the Company had outstanding a short position of 210
ten-year U.S. Treasury Note futures contracts expiring in June 1999 that
represented $21,000 in face amount of U.S. Treasury Notes. The estimated
fair value of these contracts was minimal at March 31, 1999.
Through March 31, 1999, the Company had funded $4,393 under a commitment
outstanding to fund a $35,000 floating rate construction loan. See Note
4.
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 be taxed as a
REIT for Federal income tax purposes.
In March 1998, the Company received $296.9 million of net proceeds from
the initial public offering of 20,000,000 shares and the private
placement of 1,365,198 shares of its common stock, which the Company
used to acquire its initial portfolio of investments. The Company
commenced operations on March 24, 1998.
The following discussion should be read in conjunction with the
financial statements and related notes. Dollar amounts are expressed in
thousands, other than per share amounts.
MARKET CONDITIONS: During the first quarter of 1999 the market for high
yield CMBS and commercial loans was relatively stable. The liquidity
crisis of 1998 has subsided as new capital is being deployed in these
markets and dealer inventories shrink. The continued recovery of
investment grade CMBS prices has yet to be seen in the subordinate
classes that the Company owns but credit fundamentals remain strong.
Delinquencies reported by the ACLI continued to decline to new lows as
the U.S. economy continued to turn in strong performance.
The first quarter of 1999 saw the yield on the ten-year U.S. Treasury
Note increase by 58 basis points from 4.66% to 5.24% while spreads
between credit sensitive sectors of the debt markets and the ten-year
U.S. Treasury Note remained relatively constant. This increase in
interest rates led to a decline in the value of the Company's investment
portfolio since December 31, 1998. The unrealized loss on the Company's
holdings of subordinated CMBS increased from $79,391 at December 31,
1998 to $87,766 at March 31, 1999. However, real estate credit
fundamentals remained solid and the Company believes there has been no
discernible change in the credit quality of its portfolio.
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 at rates
that are determined with reference to the London Interbank Offered Rate
(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.
From December 31, 1998 to March 31, 1999, one-month LIBOR declined from
5.06% to 4.94. The decline in LIBOR during the period had a slight
beneficial impact on the Company's financing costs. At the end of April
1999, the ten-year U.S. Treasury yield had increased from its March 31,
1999 level to 5.34%.
RECENT EVENTS: During the second quarter of 1999, the Company applied a
portion of its cash on hand to fund approximately $6,846 of its
commitment outstanding to originate a $35,000 floating rate commercial
real estate construction loan secured by a second mortgage (see Note 4
to the accompanying financial statements). The Company intends to fund
the remaining portion of the commitment through a combination of
existing cash on hand, new equity, additional borrowings and/or
syndication of a portion of the commitment.
FUNDS FROM OPERATIONS (FFO): Most industry analysts, including the
Company, consider FFO an appropriate supplementary measure of operating
performance of a REIT. In general, FFO adjusts net income for non-cash
charges such as depreciation, certain amortization expenses and gains or
losses from debt restructuring and sales of property. However, FFO does
not represent cash provided by operating activities in accordance with
GAAP and should not be considered an alternative to net income as an
indication of the results of the Company's performance or to cash flows
as a measure of liquidity.
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 believes that the exclusion from FFO of gains or
losses from sales of property was not intended to address gains or
losses from sales of securities as it applies to the Company.
Accordingly, the Company includes gains or losses from sales of
securities in its calculation of FFO.
The Company's FFO for the three months ended March 31, 1999 and for the
period from March 24, 1998 to March 31, 1998 was $6,735 and $173,
respectively, which was the same as its reported GAAP net income for
such periods. The Company reported cash flows provided by operating
activities of $173,118, cash flows used in investing activities of
$21,379 and cash flows used in financing activities of $152,250 in its
statement of cash flows for the three months ended March 31, 1999.
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 1999 was $6,735 or $0.33
per share (basic and diluted), as compared with $173 or $.01 per share
(basic and diluted) for the period March 24, 1998 (commencement of
operations) to March 31, 1998. Because the Company was in the process of
acquiring its investment portfolio during the abbreviated 1998 period,
the results of operations for that period are not comparable to the 1999
results.
INTEREST INCOME: The following table sets forth information regarding
the total amount of income from certain of the Company's
interest-earning assets and the resultant average yields. Information is
based on monthly average balances during the period.
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1999
------------------------------------------------------------
Interest Average Annualized
Income Balance Yield
--------------------- --------------------- ----------------
--------------------- --------------------- ----------------
<S> <C> <C> <C>
CMBS $ 8,357 $351,866 9.46%
Other securities available for sale 2,942 183,991 6.40%
Commercial mortgage loans 908 36,769 9.88%
===================== ===================== ================
Total $ 12,207 $572,646 8.53%
===================== ===================== ================
</TABLE>
In addition to the foregoing, the Company earned $241 in interest income
from cash and cash equivalents and $1,510 in interest income from
securities held for trading during the three months ended March 31,
1999.
INTEREST EXPENSE: The following table sets forth information regarding
the total amount of interest expense from certain of the Company's
short-term borrowings and the resultant average yields. Information is
based on daily average balances during the period.
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1999
-----------------------------------------------------------
Interest Average Annualized
Expense Balance Yield
--------------------- --------------------- ---------------
<S> <C> <C> <C>
Reverse repurchase agreements $3,941 $272,212 5.79%
Line of credit borrowings 1,056 65,300 6.47%
===================== ===================== ===============
Total $4,997 $337,512 5.92%
===================== ===================== ===============
</TABLE>
In addition to the foregoing, the Company incurred $2,126 in interest
expense from short-term borrowings relating to its securities held for
trading and securities sold short during the three months ended March
31, 1999.
NET INTEREST MARGIN FROM OPERATING PORTFOLIO: The Company considers its
operating portfolio to consist of its securities available for sale, its
commercial mortgage loans and its cash and cash equivalents because
these assets relate to its core strategy of acquiring and originating
high yield loans and securities backed by commercial real estate, while
at the same time maintaining a portfolio of liquid investment grade
securities to enhance the Company's liquidity. The Company considers its
trading strategies to be distinct from its operating portfolio. Net
interest margin from the operating portfolio is annualized net interest
income from the portfolio divided by the average monthly balance of
interest-earning assets in the portfolio. Net interest income from the
operating portfolio is total interest income from the portfolio less
interest relating to short-term borrowings secured by investments in the
operating portfolio. For the three months ended March 31, 1999, total
interest income from the operating portfolio was $12,448 and total
related interest expense was $4,997, resulting in net interest income of
$7,451 and net annualized interest margin of 5.32% from the operating
portfolio for the period.
OTHER EXPENSES: Expenses other than interest expense consist primarily
of management fees and general and administrative expenses. Management
fees of $1,050 for the three months ended March 31, 1999 and $21 for the
period March 24, 1998 through March 31, 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 period.
Other expenses of $300 for the three months ended March 31, 1999 were
comprised of accounting agent fees, custodial agent fees, directors'
fees, fees for professional services, insurance premiums and other
miscellaneous expenses.
OTHER GAIN (LOSS): During the three months ended March 31, 1999, the
Company sold a portion of its securities available for sale for total
proceeds of $20,113, resulting in a realized gain of $136. The gain on
securities held for trading of $1,181 for the three months ended March
31, 1999 consisted primarily of realized and unrealized gains and losses
on U.S. Treasury and agency securities, forward commitments to purchase
or sell agency RMBS, and financial futures contracts. The foreign
currency loss of $67 for the three months ended March 31, 1999 relates
to the Company's net investment in a commercial mortgage loan
denominated in pounds sterling.
DISTRIBUTIONS DECLARED: On March 17, 1999, the Company declared
distributions to its stockholders totaling $6,089 or $0.29 per share,
which were paid on April 15, 1999 to stockholders of record on March 31,
1999.
TAX BASIS NET INCOME AND GAAP NET INCOME: Net income as calculated for
tax purposes (tax basis net income) was estimated at $7,853, or $0.39
per share (basic and diluted), for the three months ended March 31,
1999, compared to a net income as calculated in accordance with
generally accepted accounting principles (GAAP) of $6,735, or $0.33 per
share (basic and diluted), for the three months ended March 31, 1999.
Differences between tax basis net income and GAAP net income arise for
various reasons. For example, in computing income from its subordinated
CMBS for GAAP purposes, the Company takes into account estimated credit
losses on the underlying loans whereas for tax basis income purposes,
only actual credit losses are taken into account. 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 net income is as
follows:
For the Three
Months Ended
March 31, 1999
-----------------
GAAP net income $ 6,735
Subordinate CMBS income differences due to credit
loss assumptions 1,102
General and administrative expense differences 16
=================
Tax basis net income $ 7,853
=================
CHANGES IN FINANCIAL CONDITION
SECURITIES AVAILABLE FOR SALE: At March 31, 1999 and December 31, 1998
an aggregate of $87,426 and $79,137, respectively, in unrealized losses
on securities available for sale were included as a component of
accumulated other comprehensive income (loss) in stockholders' equity.
The Company's securities available for sale, which are carried at
estimated fair value, included the following at March 31, 1999:
<TABLE>
<CAPTION>
Estimated
Fair
Security Description Value Percentage
- --------------------------------------------------------------- ----------------------- ------------------------
Commercial mortgage-backed securities:
<S> <C> <C>
Non-investment grade rated subordinated securities $ 240,232 50.7%
Non-rated subordinated securities 24,482 5.2
Non-rated trust certificates 1,377 0.3
----------------------- ------------------------
266,091 56.2
Total CMBS
----------------------- ------------------------
Single-family residential mortgage-backed securities ("RMBS"):
Agency adjustable rate securities 52,128 11.0
Agency fixed rate securities 12,298 2.6
Privately issued investment grade rated fixed rate 140,071 29.6
securities
----------------------- ------------------------
204,497 43.2
Total RMBS
----------------------- ------------------------
Agency insured project loan 3,246 0.6
======================= ========================
$473,834 100.0%
Total securities available for sale
======================= ========================
</TABLE>
The Company's securities available for sale included the following at
December 31, 1998:
<TABLE>
<CAPTION>
Estimated
Fair
Security Description Value Percentage
- --------------------------------------------------------------- ----------------------- ------------------------
Commercial mortgage-backed securities:
<S> <C> <C>
Non-investment grade rated subordinated securities $ 248,734 53.5%
Non-rated subordinated securities 24,284 5.2
----------------------- ------------------------
273,018 58.7
Total CMBS
----------------------- ------------------------
Single-family residential mortgage-backed securities ("RMBS"):
Agency adjustable rate securities 17,999 3.9
Agency fixed rate securities 13,023 2.8
Privately issued investment grade rated fixed rate 157,753 33.9
securities
----------------------- ------------------------
188,775 40.6
Total RMBS
----------------------- ------------------------
Agency insured project loan 3,275 0.7
======================= ========================
$465,068 100.0%
Total securities available for sale
======================= ========================
</TABLE>
During three months ended March 31, 1999, the Company sold a portion of
its securities available for sale for total proceeds of $20,113,
resulting in a realized gain of $136.
SHORT-TERM BORROWINGS: To date, the Company's debt has consisted of line
of credit borrowings and reverse repurchase agreements, which have been
collateralized by a pledge of most of the Company's securities available
for sale, securities held for trading and its commercial mortgage loan
denominated in pounds sterling. The Company's financial flexibility is
affected by its ability to renew or replace on a continuous basis its
maturing short-term borrowings. To date, the Company has obtained
short-term financing in amounts and at interest rates consistent with
the Company's financing objectives.
Under the lines of credit and the reverse repurchase agreements, the
respective lender retains the right to mark the underlying collateral to
market value. A reduction in the value of its pledged assets will
require the Company to provide additional collateral or fund margin
calls. From time to time, the Company expects that it will be required
to provide such additional collateral or fund margin calls.
The following table sets forth information regarding the Company's
short-term borrowings.
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1999
---------------------------------------------------------------
Average Maximum Range of
Balance Balance Maturities
--------------------- --------------------- -------------------
<S> <C> <C> <C>
Reverse repurchase agreements $318,859 $497,820 1 to 151 days
Line of credit borrowings 65,300 65,300 142 days
--------------------- --------------------- -------------------
Total $384,159 $563,120 1 to 151 days
===================== ===================== ===================
</TABLE>
HEDGING INSTRUMENTS: The Company has entered into forward currency
exchange contracts pursuant to which it has agreed to exchange
(pound)7,800 (pounds sterling) for $12,597 (U.S. dollars) on June 30,
1999. In certain circumstances, the Company may be required to provide
collateral to secure its obligations under the forward currency exchange
contracts, or may be entitled to receive collateral from the
counterparty to the forward currency exchange contracts. At March 31,
1999, no collateral was required under the forward currency exchange
contracts. The estimated fair value of the forward currency exchange
contracts was $11 at March 31, 1999.
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 short-term borrowings,
principal and interest payments on and maturities of securities
available for sale, securities held for trading and commercial mortgage
loans, and proceeds from sales thereof.
On March 31, 1999 the Company filed a $200,000 shelf registration
statement with the SEC. The shelf registration statement will permit the
Company to issue a variety of debt and equity securities in the public
markets should appropriate opportunities arise.
The Company's operating activities provided cash flows of $173,118
during the three months ended March 31, 1999, primarily through sales of
trading securities in excess of purchases.
The Company's investing activities used cash flows totaling $21,379
during the three months ended March 31, 1999, primarily to purchase
securities available for sale and to fund a commercial mortgage loan.
The Company's financing activities used $152,250 during the three months
ended March 31, 1999, primarily to reduce the level of short-term
borrowings related to the Company's trading portfolio.
Although the Company's portfolio of securities available for sale was
acquired at a net discount to the face amount of such securities, the
Company has received to date and expects to continue to receive
sufficient coupon income in cash from its portfolio to fund
distributions to stockholders as necessary to maintain its REIT status.
The Company is subject to various covenants in its existing lines of
credit, including maintaining a minimum GAAP net worth of $140,000 and a
debt-to-equity ratio not to exceed 6 to 1, as well as a covenant that
after September 30, 1998 the Company's GAAP net worth will not decline
by more than 37 percent over any two consecutive fiscal quarters. At
March 31, 1999, the Company was in compliance with all such covenants.
The Company is currently negotiating additional financing facilities to
increase financing flexibility and provide capital to fund future
growth. There is no assurance that such negotiations will be concluded
successfully.
The Company's ability to execute its business strategy depends to a
significant degree on its ability to obtain additional capital. Factors
which could affect the Company's access to the capital markets, or the
costs of such capital, include changes in interest rates, general
economic conditions and perception in the capital markets of the
Company's business, covenants under the Company's current and future
credit facilities, results of operations, leverage, financial conditions
and business prospects. Current conditions in the capital markets for
REITs such as the Company have made permanent financing transactions
difficult and more expensive than at the time of the Company's initial
public offering. Consequently, there can be no assurance that the
Company will be able to effectively fund future growth. Except as
discussed herein, management is not aware of any other trends, events,
commitments or uncertainties that may have a significant effect on
liquidity.
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 generally will
not be subject 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 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") only when such mortgage
securities are collateralized by pools of first mortgage loans, when the
Company can monitor the performance of the underlying mortgage loans
through loan management and servicing rights, and when the Company has
appropriate workout/foreclosure rights with respect to the underlying
mortgage loans. When such arrangements exist, the Company believes that
the related subordinated CMBS constitute Qualifying Interests for
purposes of the Investment Company Act. Therefore, the Company believes
that it should not be required to register as an "investment company"
under the Investment Company Act as long as it continues to invest
primarily in such subordinated CMBS and/or in other Qualifying
Interests. However, if the SEC or its staff were to take a different
position with respect to whether the Company's subordinated CMBS
constitute Qualifying Interests, the Company could be required to modify
its business plan so that either (i) it would not be required to
register as an investment company or (ii) it would comply with the
Investment Company Act and be able to register as an investment company.
In such event, (i) modification of the Company's business plan so that
it would not be required to register as an investment company would
likely entail a disposition of a significant portion of the Company's
subordinated CMBS or the acquisition of significant additional assets,
such as agency pass-through and mortgage-backed securities, which are
Qualifying Interests or (ii) modification of the Company's business plan
to register as an investment company would result in significantly
increased operating expenses and would likely entail significantly
reducing the Company's indebtedness (including the possible prepayment
of the Company's short-term borrowings), which could also require it to
sell a significant portion of its assets. No assurances can be given
that any such dispositions or acquisitions of assets, or deleveraging,
could be accomplished on favorable terms. Consequently, any such
modification of the Company's business plan could have a material
adverse effect on the Company. Further, if it were established that the
Company were an unregistered investment company, there would be a risk
that the Company would be subject to monetary penalties and injunctive
relief in an action brought by the SEC, that the Company would be unable
to enforce contracts with third parties and that third parties could
seek to obtain recission of transactions undertaken during the period it
was established that the Company was an unregistered investment company.
Any such results would be likely to have a material adverse effect on
the Company.
YEAR 2000 READINESS DISCLOSURE: The Company is currently in the process
of evaluating its information technology infrastructure and other
systems for Year 2000 compliance. Substantially all of the Company's
infrastructure and systems are supplied by the Manager. The Manager has
advised the Company that it is currently evaluating whether such systems
are Year 2000 compliant.
The Manager has advised the Company that it has established a plan for
minimizing the risks posed by the Year 2000 problem. For its internal
systems, the Manager established a plan to test systems for Year 2000
compliance, remediate such systems where necessary, and validate its
remediation efforts to confirm Year 2000 compliance. With respect to
products and services provided by third parties, the Manager established
a plan to learn from the third parties whether their products and
services are Year 2000 compliant and upgrade to Year 2000 compliant
products and services where necessary. In addition, the Manager has
developed contingency plans for all mission critical systems. Finally,
the Manager and the Company will participate in industry-wide Year 2000
testing of its systems where available and appropriate.
The Manager has advised the Company that, it has completed the testing,
remediation and validation of its internal systems for Year 2000
compliance. The Manager has advised the Company that it has communicated
with substantially all of the Manager's and the Company's suppliers of
products and services to determine their Year 2000 compliance status and
the extent to which the Manager or the Company could be affected by any
supplier's Year 2000 compliance issues. The Manager has received
responses from substantially all such suppliers with respect to their
Year 2000 compliance. Some suppliers have indicated that an upgrade of
their products or services will be necessary in order to make such
products or services Year 2000 compliant. The Manager expects to
complete such upgrades for critical third party software by June 30,
1999 and for the remaining third party software by September 30, 1999.
Despite assurances from such suppliers, however, there can be no
assurance that the products and services of such suppliers, who are
beyond the Company's control, will be Year 2000 compliant. 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.
The Manager has advised the Company that it expects to incur costs of up
to $500 to complete the evaluation and modification of its systems as
may be necessary to achieve Year 2000 compliance. The Company may be
required to bear a portion of the costs incurred by the Manager in this
regard. Approximately $250 has been expended by the Manager as of March
31, 1999. There can be no assurance that the costs will not exceed the
amount referred to above.
The Manager has advised the Company that it has completed a contingency
plan for the possible Year 2000 failure of its mission critical systems
or suppliers and is in the process of implementing the contingency plan.
In addition to the contingency plan, the Manager has informed the
Company that it intends to develop a plan for checking its critical
systems during the first two days of the year 2000 to determine whether
such systems will continue to operate on Monday, January 3, 2000 when
business resumes. There can be no assurance that such a plan or the
Manager's contingency plan will be successful in preventing a disruption
of the Company's operations.
The Manager has advised the Company that it does not anticipate any
material disruption in the operations of the Company as a result of any
failure by the Manager to achieve Year 2000 compliance. There can be no
assurance, however, that the Company will not experience a disruption in
operations caused by Year 2000 problems.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK: Market risk is the exposure to loss resulting from changes
in interest rates, credit curve spreads, foreign currency exchange
rates, commodity prices and equity prices. The primary market risks to
which the Company is exposed are interest rate risk and credit curve
risk. Interest rate risk is highly sensitive to many factors, including
governmental, monetary and tax policies, domestic and international
economic and political considerations and other factors beyond the
control of the Company. Credit curve risk is highly sensitive to
dynamics of the markets for commercial mortgage securities and other
loans and securities held by the Company. Excessive supply of these
assets combined with reduced demand will cause the market to require a
higher yield. This demand for higher yield will cause the market to use
a higher spread over the U.S. Treasury securities yield curve, or other
benchmark interest rates, to value these assets. Changes in the general
level of the U.S. Treasury yield curve can have significant effects on
the market value of the Company's portfolio. The majority of the
Company's assets are fixed rate securities valued based on a market
credit spread to U.S. Treasuries. As U.S. Treasury securities are priced
to a higher yield and/or the spread to U.S. Treasuries used to price the
Company's assets is increased, the market value of the Company's
portfolio may decline. Conversely, as U.S. Treasury securities are
priced to a lower yield and/or the spread to U.S. Treasuries used to
price the Company's assets is decreased, the market value of the
Company's portfolio may increase. Changes in the market value of the
Company's portfolio may affect the Company's net income or cash flow
directly through their impact on unrealized gains or losses on
securities held for trading or indirectly through their impact on the
Company's ability to borrow. Changes in the level of the U.S. Treasury
yield curve can also affect, among other things, the prepayment
assumptions used to value certain of the Company's securities and the
Company's ability to realize gains from the sale of such assets. In
addition, changes in the general level of LIBOR money market rates can
affect the Company's net interest income. The majority of the Company's
liabilities are floating rate based on a market spread to U.S. LIBOR. As
the level of LIBOR increases or decreases, the Company's interest
expense will move in the same direction.
The Company may utilize a variety of financial instruments, including
interest rate swaps, caps, floors and other interest rate exchange
contracts, in order to limit the effects of fluctuations in interest
rates on its operations. The use of these types of derivatives to hedge
interest-earning assets and/or interest-bearing liabilities carries
certain risks, including the risk that losses on a hedge position will
reduce the funds available for payments to holders of securities and,
indeed, that such losses may exceed the amount invested in such
instruments. A hedge may not perform its intended purpose of offsetting
losses or increased costs. Moreover, with respect to certain of the
instruments used as hedges, the Company is exposed to the risk that the
counterparties with which the Company trades may cease making markets
and quoting prices in such instruments, which may render the Company
unable to enter into an offsetting transaction with respect to an open
position. If the Company anticipates that the income from any such
hedging transaction will not be qualifying income for REIT income test
purposes, the Company may conduct part or all of its hedging activities
through a to-be-formed corporate subsidiary that is fully subject to
federal corporate income taxation. The profitability of the Company may
be adversely affected during any period as a result of changing interest
rates.
The following tables quantify the potential changes in the Company's net
portfolio value and net interest income under various interest rate and
credit spread scenarios. Net portfolio value is defined as the value of
interest-earning assets net of the value of interest-bearing
liabilities. It is evaluated using an assumption that interest rates, as
defined by the U.S. Treasury yield curve, increase or decrease 300 basis
points and the assumption that the yield curves of the rate shocks will
be parallel to each other. Net interest income in this set of scenarios
is calculated using the assumption that the U.S.
LIBOR curve remains constant.
Net interest income is defined as interest income earned from
interest-earning assets net of the interest expense incurred by the
interest bearing liabilities. It is evaluated using the assumptions that
interest rates, as defined by the U.S. LIBOR curve, increase or decrease
by 200 basis points and the assumption that the yield curve of the LIBOR
rate shocks will be parallel to each other. Market value in this
scenario is calculated using the assumption that the U.S. Treasury yield
curve remains constant.
All changes in income and value are measured as percentage changes from
the respective values calculated in the scenario labeled as "Base Case".
The base interest rate scenario assumes interest rates as of March 31,
1999. Actual results could differ significantly from these estimates.
PROJECTED PERCENTAGE CHANGE IN PORTFOLIO NET MARKET VALUE
GIVEN U.S. TREASURY YIELD CURVE MOVEMENTS
Change in Projected Change in
Treasury Yield Curve, Portfolio
+/- Basis Points Net Market Value
------------------------------------- -------------------------------
-300 32.8%
-200 21.6%
-100 10.4%
Base Case 0
+100 (11.9)%
+200 (23.1)%
+300 (34.3)%
PROJECTED PERCENTAGE CHANGE IN PORTFOLIO NET MARKET VALUE
GIVEN CMBS CREDIT SPREAD MOVEMENTS
Change in Projected Change in
Credit Spreads, Portfolio
+/- Basis Points Net Market Value
------------------------- --------------------------
-300 36.5%
-200 22.9%
-100 10.8%
Base Case 0
+100 (9.6)%
+200 (18.3)%
+300 (26.1)%
PROJECTED PERCENTAGE CHANGE IN PORTFOLIO NET INTEREST INCOME
GIVEN LIBOR MOVEMENTS
Projected Change
Change in LIBOR, in Portfolio
+/- Basis Points Net Interest Income
------------------------------- ---------------------------
-200 10.1%
-100 5.2%
Base Case 0
+100 (6.3)%
+200 (13.0)%
ASSET AND LIABILITY MANAGEMENT: Asset and liability management is
concerned with the timing and magnitude of the repricing and or maturing
of assets and liabilities. It is the objective of the Company to attempt
to control risks associated with interest rate movements. In general,
management's strategy is to match the term of the Company's liabilities
as closely as possible with the expected holding period of the Company's
assets. This is less important for those assets in the Company's
portfolio considered liquid as there is a very stable market for the
financing of these securities.
The Company uses interest rate duration as its primary measure of
interest rate risk. This metric, expressed when considering any existing
leverage, allows the Company's management to approximate changes in the
net market value of the Company's portfolio given potential changes in
the U.S. Treasury yield curve. Interest rate duration considers both
assets and liabilities. As of March 31, 1999, the Company's duration on
equity was approximately 11.5 years. This implies that a parallel shift
of the U.S. Treasury yield curve of 100 basis points would cause the
Company's net asset value to increase or decrease by approximately
11.5%. Because the Company's assets, and their markets, have other, more
complex sensitivities to interest rates, the Company's management
believes that this metric represents a good approximation of the change
in portfolio net market value in response to changes in interest rates,
though actual performance may vary due to changes in prepayments, credit
spreads and the cost of increased market volatility. Other methods for
evaluating interest rate risk, such as interest rate sensitivity "gap"
(defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time
period), are used but are considered of lesser significance in the daily
management of the Company's portfolio. The majority of the Company's
assets pay a fixed coupon and the income from such assets are relatively
unaffected by interest rate changes. The majority of the Company's
liabilities are borrowings under its line of credit or reverse
repurchase agreements that bear interest at variable rates that reset
monthly. Given this relationship between assets and liabilities, the
Company's interest rate sensitivity gap is highly negative. This implies
that a period of falling short-term interest rates will tend to increase
the Company's net interest income while a period of rising short-term
interest rates will tend to reduce the Company's net interest income.
Management considers this relationship when reviewing the Company's
hedging strategies. Because different types of assets and liabilities
with the same or similar maturities react differently to changes in
overall market rates or conditions, changes in interest rates may affect
the Company's net interest income positively or negatively even if the
Company were to be perfectly matched in each maturity category.
The Company currently has positions in forward currency exchange
contracts to hedge currency exposure in connection with its commercial
mortgage loan denominated in pounds sterling. The purpose of the
Company's foreign currency hedging activities is to protect the Company
from the risk that the eventual U.S. dollar net cash inflows from the
commercial mortgage loan will be adversely affected by changes in
exchange rates. The Company's current strategy is to roll these
contracts from time to time to hedge the expected cash flows from the
loan. Fluctuations in foreign exchange rates are not expected to have a
material impact on the Company's net portfolio value or net interest
income.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
At March 31, 1999 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: May 17, 1999 By: /s/ Hugh R. Frater
-----------------------------------
Name: Hugh R. Frater
Title:
President and Chief Executive Officer
(authorized officer of registrant)
Dated: May 17, 1999 By: /s/ Richard M. Shea
----------------------------------
Name: Richard M. Shea
Title:
Chief Operating Officer and Chief
Financial Officer (principal
accounting officer)
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 31, 1999 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1999
<PERIOD-END> Mar-31-1999
<PERIOD-TYPE> 3-MOS
<CASH> 576
<SECURITIES> 537,516
<RECEIVABLES> 131,220
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 699,312
<CURRENT-LIABILITIES> 488,498
<BONDS> 0
0
0
<COMMON> 303,584
<OTHER-SE> (122,770)
<TOTAL-LIABILITY-AND-EQUITY> 669,312
<SALES> 0
<TOTAL-REVENUES> 15,208
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,350
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,123
<INCOME-PRETAX> 6,735
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,735
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,735
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
