SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(X)
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended March 31, 2007
OR
( )
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from: ________ to ________
Commission
File Number 001-13937
ANTHRACITE
CAPITAL, INC.
(Exact
name of registrant as specified in its charter)
Maryland
(State
or other jurisdiction of
incorporation
or organization)
|
13-3978906
(I.R.S.
Employer
Identification
No.)
|
40
East 52nd
Street, New York, New York
(Address
of principal executive offices)
|
10022
(Zip
Code)
|
(Registrant's
telephone number including area code): (212)
810-3333
NOT
APPLICABLE
(Former
name, former address, and for new fiscal year; if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
|
Accelerated
filer þ
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
At
May 9,
2007, 58,370,881 shares of common stock ($.001 par value per share) were
outstanding.
ANTHRACITE
CAPITAL, INC.
FORM
10-Q
INDEX
PART
I –
FINANCIAL
INFORMATION
|
Page
|
|
|
|
Item
1.
|
Financial
Statements
|
4
|
|
|
|
|
Consolidated
Statements of Financial Condition (Unaudited) At March 31, 2007
and
December 31, 2006
|
4
|
|
|
|
|
Consolidated
Statements of Operations (Unaudited) For the Three Months Ended
March 31,
2007 and 2006
|
5
|
|
|
|
|
Consolidated
Statement of Changes in Stockholders' Equity (Unaudited) For the
Three
Months Ended March 31, 2007
|
6
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited) For the Three Months Ended
March 31,
2007 and 2006
|
7
|
|
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
9
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
26
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
53
|
|
|
|
Item
4.
|
Controls
and Procedures
|
57
|
|
|
|
Part
II –
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
58
|
|
|
|
Item
1A.
|
Risk
Factors
|
61
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
61
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
61
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
61
|
|
|
|
Item
5.
|
Other
Information
|
61
|
|
|
|
Item
6.
|
Exhibits
|
61
|
|
|
|
SIGNATURES
|
63
|
Cautionary
Statement Regarding Forward-Looking Statements
Certain
statements contained herein constitute "forward-looking statements" within
the
meaning of the Private Securities Litigation Reform Act of 1995 with respect
to
future financial or business performance, strategies or expectations.
Forward-looking statements are typically identified by words or phrases such
as
“trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,”
“anticipate,” “current,” “intention,” “estimate,” “position,” “assume,”
“potential,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,”
“achieve” and similar expressions, or future or conditional verbs such as
“will,” “would,” “should,” “could,” “may” or similar expressions. Anthracite
Capital, Inc. (the “Company”) cautions that forward-looking statements are
subject to numerous assumptions, risks and uncertainties, which change over
time. Forward-looking statements speak only as of the date they are made, and
the Company assumes no duty to and does not undertake to update forward-looking
statements. Actual results could differ materially from those anticipated in
forward-looking statements and future results could differ materially from
historical performance.
In
addition to factors previously disclosed in Anthracite’s SEC reports and those
identified elsewhere in this report, the following factors, among others, could
cause actual results to differ materially from forward-looking statements or
historical performance:
(1)
the
introduction, withdrawal, success and timing of business initiatives and
strategies;
(2)
changes in political, economic or industry conditions, the interest rate
environment or financial and capital markets, which could result in changes
in
the value of Anthracite’s assets;
(3)
the
relative and absolute investment performance and operations of BlackRock
Financial Management, Inc. (“BlackRock”), Anthracite’s Manager;
(4)
the
impact of increased competition;
(5)
the
impact of future acquisitions or divestitures;
(6)
the
unfavorable resolution of legal proceedings;
(7)
the
impact of legislative and regulatory actions and reforms and regulatory,
supervisory or enforcement actions of government agencies relating to Anthracite
or BlackRock;
(8)
terrorist activities and international hostilities, which may adversely affect
the general economy, domestic and global financial and capital markets, specific
industries, and Anthracite;
(9)
the
ability of BlackRock to attract and retain highly talented professionals;
(10)
fluctuations in foreign currency exchange rates; and
(11)
the
impact of changes to tax legislation and, generally, the tax position of the
Company.
Anthracite’s
Annual Report on Form 10-K for the year ended December 31, 2006 and Anthracite’s
subsequent reports filed with the SEC, accessible on the SEC's website at
www.sec.gov,
identify additional factors that can affect forward-looking
statements.
Part
I –
FINANCIAL INFORMATION
Item
1. Financial
Statements
Anthracite
Capital, Inc. and Subsidiaries
Consolidated
Statements of Financial Condition
(in
thousands, except share data)
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
53,816
|
|
|
|
|
$
|
66,388
|
|
Restricted
cash equivalents
|
|
|
|
|
|
8,627
|
|
|
|
|
|
59,801
|
|
Securities
available-for-sale, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
commercial mortgage-backed securities (“CMBS”)
|
|
$
|
990,226
|
|
|
|
|
$
|
883,432
|
|
|
|
|
Investment
grade CMBS
|
|
|
1,607,096
|
|
|
|
|
|
1,588,284
|
|
|
|
|
RMBS
|
|
|
138,471
|
|
|
|
|
|
144,140
|
|
|
|
|
Total
securities available-for-sale
|
|
|
|
|
|
2,735,793
|
|
|
|
|
|
2,615,856
|
|
Commercial
mortgage loan pools, at amortized cost
|
|
|
|
|
|
1,257,631
|
|
|
|
|
|
1,271,014
|
|
Securities
held-for-trading, at estimated fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS
|
|
|
21,492
|
|
|
|
|
|
22,383
|
|
|
|
|
RMBS
|
|
|
1,001
|
|
|
|
|
|
132,204
|
|
|
|
|
Total
securities held-for-trading
|
|
|
|
|
|
22,493
|
|
|
|
|
|
154,587
|
|
Commercial
mortgage loans, net
|
|
|
|
|
|
674,094
|
|
|
|
|
|
481,745
|
|
Equity
investments
|
|
|
|
|
|
211,475
|
|
|
|
|
|
182,147
|
|
Derivative
instruments, at fair value
|
|
|
|
|
|
356,982
|
|
|
|
|
|
317,574
|
|
Other
assets
|
|
|
|
|
|
67,475
|
|
|
|
|
|
69,151
|
|
Total
Assets
|
|
|
|
|
$
|
5,388,386
|
|
|
|
|
$
|
5,218,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
debt obligations (“CDOs”)
|
|
$
|
1,828,168
|
|
|
|
|
$
|
1,812,574
|
|
|
|
|
Secured
by pledge of subordinated CMBS
|
|
|
81,763
|
|
|
|
|
|
48,628
|
|
|
|
|
Secured
by pledge of other securities available-for-sale
and
cash equivalents
|
|
|
634,396
|
|
|
|
|
|
666,275
|
|
|
|
|
Secured
by pledge of commercial mortgage loan pools
|
|
|
1,243,124
|
|
|
|
|
|
1,256,897
|
|
|
|
|
Secured
by pledge of securities held-for-trading
|
|
|
-
|
|
|
|
|
|
127,249
|
|
|
|
|
Secured
by pledge of commercial mortgage loans
|
|
|
116,810
|
|
|
|
|
|
26,570
|
|
|
|
|
Senior
unsecured notes
|
|
|
75,000
|
|
|
|
|
|
75,000
|
|
|
|
|
Junior
subordinated notes to subsidiary trust issuing preferred
Securities
|
|
|
180,477
|
|
|
|
|
|
180,477
|
|
|
|
|
Total
borrowings
|
|
|
|
|
|
4,159,738
|
|
|
|
|
|
4,193,670
|
|
Payable
for investments purchased
|
|
|
|
|
|
75,920
|
|
|
|
|
|
23,796
|
|
Distributions
payable
|
|
|
|
|
|
18,742
|
|
|
|
|
|
17,669
|
|
Derivative
instruments, at fair value
|
|
|
|
|
|
350,730
|
|
|
|
|
|
304,987
|
|
Other
liabilities
|
|
|
|
|
|
34,161
|
|
|
|
|
|
22,032
|
|
Total
Liabilities
|
|
|
|
|
|
4,639,291
|
|
|
|
|
|
4,562,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, par value $0.001 per share; 400,000,000 shares
authorized;
58,322,480
shares issued and outstanding in 2007;
57,830,964
shares issued and outstanding in 2006
|
|
|
|
|
|
58
|
|
|
|
|
|
58
|
|
9.375%
Series C Preferred stock, liquidation preference $57,500
|
|
|
|
|
|
55,435
|
|
|
|
|
|
55,435
|
|
8.25%
Series D Preferred stock, liquidation preference $86,250
|
|
|
|
|
|
83,306
|
|
|
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
|
|
|
635,766
|
|
|
|
|
|
629,785
|
|
Distributions
in excess of earnings
|
|
|
|
|
|
(113,888
|
)
|
|
|
|
|
(120,976
|
)
|
Accumulated
other comprehensive income
|
|
|
|
|
|
88,418
|
|
|
|
|
|
91,807
|
|
Total
Stockholders’ Equity
|
|
|
|
|
|
749,095
|
|
|
|
|
|
656,109
|
|
Total
Liabilities and Stockholders’ Equity
|
|
|
|
|
$
|
5,388,386
|
|
|
|
|
$
|
5,218,263
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Anthracite
Capital, Inc. and Subsidiaries
Consolidated
Statements of Operations (Unaudited)
(in
thousands, except share and per share data)
|
|
For
the three months ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Income:
|
|
|
|
|
|
Interest
from securities available-for-sale
|
|
$
|
46,674
|
|
$
|
38,897
|
|
Interest
from commercial mortgage loans
|
|
|
11,166
|
|
|
8,015
|
|
Interest
from commercial mortgage loan pools
|
|
|
13,132
|
|
|
13,227
|
|
Interest
from securities held-for-trading
|
|
|
1,506
|
|
|
1,925
|
|
Earnings
from equity investments
|
|
|
9,956
|
|
|
9,342
|
|
Interest
from cash and cash equivalents
|
|
|
924
|
|
|
337
|
|
Total
Income
|
|
|
83,358
|
|
|
71,743
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Interest
|
|
|
54,365
|
|
|
44,632
|
|
Interest
- securities held-for-trading
|
|
|
1,474
|
|
|
1,893
|
|
Management
and incentive fees
|
|
|
6,953
|
|
|
4,219
|
|
General
and administrative expense
|
|
|
1,305
|
|
|
1,104
|
|
Total
Expenses
|
|
|
64,097
|
|
|
51,848
|
|
|
|
|
|
|
|
|
|
Other
gains:
|
|
|
|
|
|
|
|
Sale
of securities available-for-sale
|
|
|
6,750
|
|
|
34
|
|
Securities
held-for-trading
|
|
|
(17
|
)
|
|
950
|
|
Foreign
currency gain
|
|
|
1,484
|
|
|
44
|
|
Loss
on impairment of assets
|
|
|
(1,198
|
)
|
|
(781
|
)
|
Total
Other Gains
|
|
|
7,019
|
|
|
247
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
26,280
|
|
|
20,142
|
|
|
|
|
|
|
|
|
|
Dividends
on Preferred Stock
|
|
|
(2,277
|
)
|
|
(1,348
|
)
|
Net
income available to Common Stockholders
|
|
$
|
24,003
|
|
$
|
18,794
|
|
|
|
|
|
|
|
|
|
Net
income per common share, basic
|
|
$
|
0.41
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
Net
income per common share, diluted
|
|
$
|
0.41
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
57,853,694
|
|
|
56,671,961
|
|
Diluted
|
|
|
58,139,455
|
|
|
56,677,680
|
|
|
|
|
|
|
|
|
|
Dividend
declared per share of Common Stock
|
|
$
|
0.29
|
|
$
|
0.28
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Anthracite
Capital, Inc. and Subsidiaries
Consolidated
Statement of Changes in Stockholders' Equity (Unaudited)
For
the Three Months Ended March 31, 2007
(in
thousands)
|
|
Common
Stock,
Par
Value
|
|
Series
C
Preferred
Stock
|
|
Series
D
Preferred
Stock
|
|
Additional
Paid-In
Capital
|
|
Distributions
In
Excess
Of
Earnings
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
Comprehensive
Income
|
|
Total
Stockholders'
Equity
|
|
Balance
at January 1, 2007
|
|
$
|
58
|
|
$
|
55,435
|
|
|
|
|
$
|
629,785
|
|
$
|
(120,976
|
)
|
$
|
91,807
|
|
|
|
|
$
|
656,109
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,280
|
|
|
|
|
$
|
26,280
|
|
|
26,280
|
|
Unrealized
gain on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,920
|
)
|
|
(4,920
|
)
|
|
(4,920
|
)
|
Reclassification
adjustments from cash flow hedges included in net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
408
|
|
|
408
|
|
|
408
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
61
|
|
|
61
|
|
Change
in net unrealized gain on securities available-for-sale, net of
reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,062
|
|
|
1,062
|
|
|
1,062
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,389
|
)
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,891
|
|
|
|
|
Dividends
declared-common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,915
|
)
|
|
|
|
|
|
|
|
(16,914
|
)
|
Dividends
on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,277
|
)
|
|
|
|
|
|
|
|
(2,278
|
)
|
Issuance
of common stock
|
|
|
-
|
|
|
|
|
|
|
|
|
5,981
|
|
|
|
|
|
|
|
|
|
|
|
5,981
|
|
Issuance
of preferred stock
|
|
|
|
|
|
|
|
$
|
83,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2007
|
|
$
|
58
|
|
$
|
55,435
|
|
$
|
83,306
|
|
$
|
635,766
|
|
$
|
(113,888
|
)
|
$
|
88,418
|
|
|
|
|
$
|
749,095
|
|
Disclosure
of reclassification adjustment:
|
|
For
the three months
ended
March 31,
|
|
|
|
2007
|
|
Unrealized
holding gain (loss) on securities available-for-sale
|
|
$
|
(5,688
|
)
|
Reclassification
for realized gains previously recorded as unrealized
|
|
|
6,750
|
|
|
|
$
|
1,062
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Anthracite
Capital, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows (Unaudited)
(in
thousands)
|
|
For
the Three
Months
Ended
March
31,2007
|
|
For
the Three
Months
Ended
March
31, 2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
26,280
|
|
$
|
20,142
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Decrease
in trading securities
|
|
|
132,076
|
|
|
11,904
|
|
Net
(gain) on sale of securities
|
|
|
(6,733
|
)
|
|
(984
|
)
|
Earnings
from subsidiary trust
|
|
|
(103
|
)
|
|
(79
|
)
|
Distributions
from subsidiary trust
|
|
|
105
|
|
|
51
|
|
Earnings
from equity investments
|
|
|
(9,956
|
)
|
|
(9,342
|
)
|
Distributions
of earnings from equity investments
|
|
|
3,637
|
|
|
6,862
|
|
Amortization
of collateralized debt obligation issuance costs
|
|
|
819
|
|
|
553
|
|
Amortization
of junior subordinated note issuance costs
|
|
|
46
|
|
|
30
|
|
Amortization
of senior unsecured notes issuance costs
|
|
|
34
|
|
|
-
|
|
(Discount
accretion) Premium amortization, net
|
|
|
(634
|
)
|
|
136
|
|
Loss
on impairment of assets
|
|
|
1,198
|
|
|
781
|
|
Unrealized
net foreign currency gain
|
|
|
(563
|
)
|
|
(390
|
)
|
Non-cash
management and incentive fees
|
|
|
709
|
|
|
351
|
|
Proceeds
from sale of interest rate swap agreements
|
|
|
1,693
|
|
|
-
|
|
Decrease
in other assets
|
|
|
1,590
|
|
|
16,329
|
|
Increase
(decrease) in other liabilities
|
|
|
15,853
|
|
|
(3,445
|
)
|
Net
cash provided by operating activities
|
|
|
166,051
|
|
|
42,899
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of securities available-for-sale
|
|
|
(125,060
|
)
|
|
(322,642
|
)
|
Proceeds
from sale of securities available-for-sale
|
|
|
48,984
|
|
|
-
|
|
Principal
payments received on securities available-for-sale
|
|
|
14,504
|
|
|
12,538
|
|
Repayments
received from commercial mortgage loan pools
|
|
|
10,064
|
|
|
2,115
|
|
Purchase
of real estate held-for-sale
|
|
|
-
|
|
|
(5,435
|
)
|
Funding
of commercial mortgage loans
|
|
|
(194,509
|
)
|
|
(48,883
|
)
|
Repayments
received from commercial mortgage loans
|
|
|
9,478
|
|
|
48,385
|
|
Decrease
in restricted cash equivalents
|
|
|
51,174
|
|
|
117
|
|
Return
of capital from equity investments
|
|
|
-
|
|
|
11,857
|
|
Investment
in equity investments
|
|
|
(23,009
|
)
|
|
(48,216
|
)
|
Net
cash used in investing activities
|
|
|
(208,374
|
)
|
|
(350,104
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
(decrease) increase in borrowings under reverse repurchase agreements
and
credit
facilities
|
|
|
(36,630
|
)
|
|
210,619
|
|
Repayments
of borrowings secured by commercial mortgage loan pools
|
|
|
(10,140
|
)
|
|
(1,908
|
)
|
Issuance
of collateralized debt obligations
|
|
|
11,476
|
|
|
-
|
|
Repayments
of collateralized debt obligations
|
|
|
(851
|
)
|
|
(603
|
)
|
Issuance
costs for collateralized debt obligations
|
|
|
(838
|
)
|
|
-
|
|
Issuance
of junior subordinated notes to subsidiary trust
|
|
|
-
|
|
|
100,000
|
|
Issuance
costs of junior subordinated notes
|
|
|
-
|
|
|
(3,075
|
)
|
Dividends
paid on preferred stock
|
|
|
(1,348
|
)
|
|
(1,348
|
)
|
Proceeds
from issuance of preferred stock, net of offering costs
|
|
|
83,306
|
|
|
-
|
|
Proceeds
from issuance of common stock, net of offering costs
|
|
|
1,548
|
|
|
6,329
|
|
Dividends
paid on common stock
|
|
|
(16,772
|
)
|
|
(15,775
|
)
|
Net
cash provided by financing activities
|
|
|
29,751
|
|
|
294,239
|
|
Net
decrease in cash and cash equivalents
|
|
|
(12,572
|
)
|
|
(12,966
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
66,388
|
|
|
40,556
|
|
Cash
and cash equivalents, end of period
|
|
$
|
53,816
|
|
$
|
27,590
|
|
|
|
2007
|
|
2006
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
Interest
paid
|
|
$
|
52,910
|
|
$
|
44,129
|
|
Investments
purchased not settled
|
|
$
|
54,562
|
|
$
|
20,660
|
|
Commercial
mortgage loans purchased not settled
|
|
$
|
21,358
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
Investment
in subsidiary trust
|
|
|
-
|
|
$
|
3,097
|
|
Incentive
fees paid by the issuance of common stock
|
|
$
|
4,433
|
|
$
|
1,287
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Anthracite
Capital, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(Dollar
amounts in thousands, except share and per share data)
Note
1 ORGANIZATION
AND SIGNIFICANT ACCOUNTING POLICIES
Anthracite
Capital, Inc., a Maryland corporation, and its subsidiaries (the "Company")
is a
specialty finance company that invests in commercial real estate assets on
a
global basis. The Company primarily generates income based on the spread between
the interest income, gains and net operating income on its commercial real
estate assets and the interest expense from borrowings to finance its
investments. The Company seeks to earn high returns on a risk-adjusted basis
to
support a consistent quarterly dividend. The Company has elected to be taxed
as
a real estate investment trust (“REIT”) under the United States Internal Revenue
Code of 1986, as amended (the "Code") and, therefore, its income is largely
exempt from corporate taxation. The Company commenced operations on March 24,
1998.
The
Company’s ongoing investment activities primarily encompass three core
investment activities:
1) Commercial
Real Estate Securities
2) Commercial
Real Estate Loans
3) Commercial
Real Estate Equity
The
accompanying March 31, 2007 unaudited consolidated financial statements have
been prepared in conformity with the instructions to Form 10-Q and Article
10,
Rule 10-01 of Regulation S-X for interim financial statements. Accordingly,
they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America (“GAAP”) for
complete financial statements. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and changes in cash flows have
been made. These consolidated financial statements should be read in conjunction
with the annual audited financial statements and notes thereto included in
the
Company’s annual report on Form 10-K for the year ended December 31, 2006 filed
with the Securities and Exchange Commission (the “SEC”).
In
preparing the consolidated financial statements, management is required to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates
of
the statements of financial condition and revenues and expenses for the periods
covered. Actual results could differ from those estimates and assumptions.
Significant estimates in the financial statements include the valuation and
credit analysis related to certain of the Company's mortgage-backed securities,
commercial mortgage loans, and certain other investments.
Recent
Accounting Developments
Fair
Value Accounting
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities.
SFAS
No. 159 permits entities to choose to measure eligible financial instruments
at
fair value. The unrealized gains and losses on items for which the fair value
option has been elected should be reported in earnings. The decision to elect
the fair value options is determined on an instrument-by-instrument basis,
it
should be applied to an entire instrument, and it is irrevocable. Assets and
liabilities measured at fair value pursuant to the fair value option should
be
reported separately in the balance sheet from those instruments measured using
another measurement attribute. SFAS No. 159 is effective as of the beginning
of
the first fiscal year that begins after November 15, 2007. The Company is
currently analyzing the potential impact of adoption of SFAS No.
159.
Reverse
Repurchase Agreements
Accounting
standard setters are currently reviewing the
treatment of transactions where mortgage-backed securities purchased from a
particular counterparty are financed via a repurchase agreement with the same
counterparty. Currently, the Company records such assets and the related
financing gross on its consolidated statement of financial condition, and the
corresponding interest income and interest expense gross on the consolidated
statement of operations. Any change in fair value of the security is reported
through other comprehensive income pursuant to SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities,
because
the security is classified as available-for-sale. However, in a transaction
where the mortgage-backed securities are acquired from and financed under a
repurchase agreement with the same counterparty, the acquisition may not qualify
as a sale from the seller's perspective under the provisions of SFAS No. 140.
In
such cases, the seller may be required to continue to consolidate the assets
sold to the Company, based on their continuing involvement with such
investments. Depending on the ultimate outcome of the accounting
standard setters’ deliberations,
the Company may be precluded from presenting the assets gross on the Company’s
consolidated statement of financial condition and should instead be treating
the
Company’s net investment in such assets as a derivative. If it is
determined that these transactions should be treated as investments in
derivatives, the derivative instruments entered into by the Company to hedge
the
Company's interest rate exposure with respect to the borrowings under the
associated repurchase agreements may no longer qualify for hedge accounting,
and
would then, as with the underlying asset transactions, also be marked to market
through the consolidated statement of operations. This potential change in
accounting treatment does not affect the economics of the transactions but
does
affect how the transactions would be reported on the Company’s consolidated
financial statements. The Company's cash
flows, liquidity and ability to pay a dividend would be unchanged, and the
Company does not believe its REIT taxable income or REIT status would be
affected. The Company believes net equity would not be materially affected.
At
March 31, 2007, the Company has identified available-for-sale securities with
a
fair value of approximately $49,007 which had been purchased from and financed
with reverse repurchase agreements totaling approximately $37,962 with the
same
counterparty since their purchase. If the Company were to change the
current accounting treatment for these transactions at March 31, 2007, total
assets and total liabilities would be reduced by approximately
$37,962.
Variable
Interest Entities
The
consolidated financial statements include the financial statements of Anthracite
Capital, Inc. and its subsidiaries, which are wholly owned or controlled by
the
Company or entities which are variable interest entitites (“VIEs”) in which the
Company is the primary beneficiary under FASB Interpretation No. 46,
Consolidation
of Variable Interest Entities
(revised
December 2003) (“FIN 46R”). FIN 46R requires a VIE to be consolidated by its
primary beneficiary. The primary beneficiary is the party that absorbs the
majority of the VIE’s anticipated losses and/or the majority of the expected
returns. All inter-company balances and transactions have been eliminated in
consolidation.
The
Company considers the CMBS securities where it maintains the right to influence
the foreclosure/workout process on the underlying loans its controlling class
CMBS (“Controlling Class”). The Company has analyzed the governing pooling and
servicing agreements for each of its Controlling Class CMBS and believes that
the terms are industry standard and are consistent with the qualifying
special-purpose entity (“QSPE”) criteria. However, there is uncertainty with
respect to QSPE treatment due to ongoing review by accounting standard setters,
potential actions by various parties involved with the QSPE, as well as varying
and evolving interpretations of the QSPE criteria under SFAS No. 140.
Future guidance from the accounting standard setters may require the Company
to
consolidate CMBS trusts in which the Company has invested.
Certain
Hybrid Financial Instruments
In
February 2006, the FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments,
which
amends SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities,
and SFAS
No. 140. The Statement provides, among other things, that:
· For
embedded derivatives which would otherwise be required to be bifurcated from
their host contracts and accounted for at fair value in accordance with SFAS
No.
133, an irrevocable election may be made on an instrument-by-instrument basis,
to be measured as hybrid financial instrument at fair value in its entirety,
with changes in fair value recognized in earnings.
· Concentrations
of credit risk in the form of subordination are not considered embedded
derivatives.
· Clarification
regarding interest-only strips and principal-only strips are not subject to
the
requirements of SFAS No. 133.
SFAS
No.
155 is effective for all financial instruments acquired, issued or subject
to
remeasurement after the beginning of an entity’s first fiscal year that begins
after September 15, 2006. Upon adoption, differences between the total carrying
amount of the individual components of an existing bifurcated hybrid financial
instrument and the fair value of the combined hybrid financial instrument should
be recognized as a cumulative effect adjustment to beginning retained earnings.
Prior periods should not be restated. The adoption of SFAS No. 155 on January
1,
2007 did not have a material impact on the Company’s consolidated financial
statements.
Accounting
for Uncertainty in Income Taxes
In
July
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes and Related Implementation
Issues
(“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in a Company’s financial statements in accordance with SFAS No. 109,
Accounting
for Income Taxes.
FIN 48
prescribes a threshold and measurement attribute for recognition in the
financial statements of an asset or liability resulting from a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance
on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective as of the beginning
of
fiscal years that begin after December 15, 2006. The adoption of FIN 48 on
January 1, 2007 did not have a material impact on the Company’s consolidated
financial statements.
Fair
Value Measurements
In
September 2006, the FASB issued SFAS No. 157 which defines fair value,
establishes a framework for measuring fair value and requires enhanced
disclosures about fair value measurements. SFAS No. 157 requires companies
to
disclose the fair value of its financial instruments according to a fair value
hierarchy (i.e., levels 1, 2, and 3, as defined). Additionally, companies are
required to provide enhanced disclosure regarding instruments in the level
3
category (which require significant management judgment), including a
reconciliation of the beginning and ending balances separately for each major
category of assets and liabilities. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and all
interim periods within those fiscal years. The Company is currently evaluating
the impact of adopting SFAS No. 157.
Note
2 NET
INCOME PER SHARE
Net
income per share is computed in accordance with SFAS No. 128, Earnings
Per Share
(“SFAS
No. 128”). Basic income per share is calculated by dividing net income available
to common stockholders by the weighted average number of shares of Common Stock
outstanding during the period. Diluted income per share is calculated using
the
weighted average number of shares of Common Stock 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,
|
|
|
|
2007
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
24,003
|
|
$
|
18,794
|
|
Numerator
for basic and diluted earnings per share
|
|
$
|
24,003
|
|
$
|
18,794
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share—weighted average
common
shares outstanding
|
|
|
57,853,694
|
|
|
56,671,961
|
|
Dilutive
effect of stock options
|
|
|
3,032
|
|
|
5,718
|
|
Dilutive
effect of stock based incentive fee
|
|
|
282,729
|
|
|
-
|
|
Denominator
for diluted earnings per share—weighted average common shares outstanding
and common stock equivalents outstanding
|
|
|
58,139,455
|
|
|
56,677,680
|
|
Basic
net income per weighted average common share:
|
|
$
|
0.41
|
|
$
|
0.33
|
|
Diluted
net income per weighted average common stock
and
common stock equivalents:
|
|
$
|
0.41
|
|
$
|
0.33
|
|
Total
anti-dilutive stock options and warrants excluded from the calculation of net
income per share were 1,380,151 and 1,384,151 for the three months ended March
31, 2007, and 2006, respectively.
Note
3 SECURITIES
AVAILABLE-FOR-SALE
The
Company's securities available-for-sale are carried at estimated fair value.
The
amortized cost and estimated fair value of securities available-for-sale at
March 31, 2007 are summarized as follows:
Security
Description
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
Loss
|
|
Estimated
Fair
Value
|
|
CMBS:
|
|
|
|
|
|
|
|
|
|
CMBS
interest only securities (“IOs”)
|
|
$
|
65,365
|
|
$
|
1,023
|
|
$
|
(1,848
|
)
|
$
|
64,541
|
|
Investment
grade CMBS
|
|
|
780,874
|
|
|
48,518
|
|
|
(8,265
|
)
|
|
821,126
|
|
Non-investment
grade rated subordinated securities
|
|
|
747,042
|
|
|
54,299
|
|
|
(8,418
|
)
|
|
792,924
|
|
Non-rated
subordinated securities
|
|
|
116,473
|
|
|
9,509
|
|
|
(435
|
)
|
|
125,547
|
|
Credit
tenant leases
|
|
|
24,292
|
|
|
438
|
|
|
(443
|
)
|
|
24,288
|
|
Investment
grade REIT debt
|
|
|
247,870
|
|
|
5,671
|
|
|
(2,380
|
)
|
|
251,161
|
|
Multifamily
agency securities
|
|
|
447,547
|
|
|
3,302
|
|
|
(4,869
|
)
|
|
445,980
|
|
CDO
investments
|
|
|
69,763
|
|
|
4,652
|
|
|
(2,659
|
)
|
|
71,755
|
|
Total
CMBS
|
|
|
2,499,226
|
|
|
127,412
|
|
|
(29,317
|
)
|
|
2,597,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
adjustable rate securities
|
|
|
1,659
|
|
|
18
|
|
|
-
|
|
|
1,677
|
|
Residential
CMOs
|
|
|
126,173
|
|
|
582
|
|
|
(807
|
)
|
|
125,948
|
|
Hybrid
adjustable rate mortgages (“ARMs”)
|
|
|
11,062
|
|
|
-
|
|
|
(217
|
)
|
|
10,846
|
|
Total
RMBS
|
|
|
138,894
|
|
|
600
|
|
|
(1,024
|
)
|
|
138,471
|
|
Total
securities available-for-sale
|
|
$
|
2,638,120
|
|
$
|
128,012
|
|
$
|
(30,341
|
)
|
$
|
2,735,793
|
|
At
March
31, 2007, the Company’s securities available-for-sale included non-U.S. dollar
denominated assets with an estimated fair value of $259,463.
At
March
31, 2007, an aggregate of $2,445,033 in estimated fair value of the Company's
securities available-for-sale was pledged to secure its collateralized
borrowings.
The
following table shows the Company’s fair value and gross unrealized losses,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at March 31,
2007.
|
|
Less
than 12 Months
|
|
12
Months or More
|
|
Total
|
|
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
CMBS
IOs
|
|
$
|
18,429
|
|
$
|
(337
|
)
|
$
|
24,785
|
|
$
|
(1,511
|
)
|
$
|
43,214
|
|
$
|
(1,848
|
)
|
Investment
grade CMBS
|
|
|
54,859
|
|
|
(1,190
|
)
|
|
140,229
|
|
|
(7,075
|
)
|
|
195,088
|
|
|
(8,265
|
)
|
Non-investment
grade rated subordinated securities
|
|
|
155,106
|
|
|
(4,037
|
)
|
|
127,679
|
|
|
(4,381
|
)
|
|
282,785
|
|
|
(8,418
|
)
|
Non-rated
subordinated securities
|
|
|
12,277
|
|
|
(397
|
)
|
|
2,505
|
|
|
(38
|
)
|
|
14,782
|
|
|
(435
|
)
|
Credit
tenant leases
|
|
|
-
|
|
|
-
|
|
|
15,796
|
|
|
(443
|
)
|
|
15,796
|
|
|
(443
|
)
|
Investment
grade REIT debt
|
|
|
15,460
|
|
|
(33
|
)
|
|
73,323
|
|
|
(2,347
|
)
|
|
88,783
|
|
|
(2,380
|
)
|
Multifamily
agency securities
|
|
|
-
|
|
|
-
|
|
|
277,631
|
|
|
(4,869
|
)
|
|
277,631
|
|
|
(4,869
|
)
|
CDO
investments
|
|
|
35,821
|
|
|
(2,659
|
)
|
|
-
|
|
|
-
|
|
|
35,821
|
|
|
(2,659
|
)
|
Residential
CMOs
|
|
|
-
|
|
|
-
|
|
|
86,599
|
|
|
(807
|
)
|
|
86,599
|
|
|
(807
|
)
|
Hybrid
ARMs
|
|
|
-
|
|
|
-
|
|
|
10,845
|
|
|
(217
|
)
|
|
10,845
|
|
|
(217
|
)
|
Total
temporarily impaired securities
|
|
$
|
291,952
|
|
$
|
(8,653
|
)
|
$
|
759,392
|
|
$
|
(21,688
|
)
|
$
|
1,051,344
|
|
$
|
(30,341
|
)
|
The
temporary impairment of the available-for-sale securities results from the
fair
value of the securities falling below the amortized cost basis. These unrealized
losses are primarily the result of market factors other than credit impairment
and the Company believes the carrying value of the securities are fully
recoverable over their expected holding period. Management possesses both the
intent and the ability to hold the securities until the Company has recovered
the amortized cost. As such, management does not believe any of the securities
are other than temporarily impaired.
The
CMBS
held by the Company consist of subordinated securities collateralized by
adjustable and fixed rate commercial and multifamily mortgage loans. The CMBS
provide credit support to the more senior classes of the related commercial
securitization. The Company generally does not own the senior classes of its
below investment grade CMBS. Cash flows 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,
the remaining CMBS classes will bear such losses in order of their relative
subordination.
At
March
31, 2007, the anticipated weighted average unlevered yield based upon the
adjusted cost of the Company's entire subordinated CMBS portfolio was 10.2%
per
annum. The anticipated reported yield of the Company's investment grade
securities available-for-sale was 6.2%. The Company's anticipated yields to
maturity on its subordinated 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, liquidations, and related expenses), the pass-through
or
coupon rate, and interest rate fluctuations. Additional factors that may affect
the Company's anticipated yields to maturity on its Controlling Class 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 Controlling Class 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 that may alter these assumptions, no assurance can be given that
the anticipated yields to maturity, discussed above and elsewhere, will be
achieved.
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. All of the Company’s RMBS
were issued by FHLMC, FNMA or GNMA. The Company does not have any subprime
exposure. The Company's securities available-for-sale are subject to credit,
interest rate, and/or prepayment risks. The agency adjustable rate RMBS held
by
the Company are subject to periodic and lifetime caps that limit the amount
the
interest rates of such securities can change during any given period and over
the life of the loan. At March 31, 2007, adjustable rate RMBS with an estimated
fair value of $138,471 was included in securities available-for-sale on the
consolidated statements of financial condition.
During
the first quarter of 2007, the Company sold securities available-for-sale for
total proceeds of $48,984, resulting in a realized gain of $6,630. During the
first quarter of 2006, the Company realized gains of $34 on securities
available-for-sale
Note
4 IMPAIRMENTS
- CMBS
The
Company updates its estimated cash flows for securities subject to Emerging
Issues Task Force Issue 99-20, Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial Interests
in Securitized Financial Assets
(“EITF
99-20”) on a quarterly basis. The Company compares the yields resulting from the
updated cash flows to the current accrual yields. An impairment charge is
required under EITF 99-20 if the updated yield is lower than the current accrual
yield and the security has a market value less than its adjusted purchase price.
The Company carries all these securities at their market value on its
consolidated statement of financial condition.
For
the
three months ended March 31, 2007, the Company had fifteen CMBS that required
an
impairment of $1,198. For the three months ended March 31, 2006, the Company
had
two CMBS that required an impairment of $781. The decline in the updated yields
that caused the impairments is not related to increases in losses but rather
changes in the timing of credit losses and prepayments. Based on current
economic conditions, the Company believes the impairments will be recovered
over
the remaining life of the bonds.
Note
5 COMMERCIAL
MORTGAGE LOAN POOLS
During
the second quarter of 2004, the Company acquired subordinated CMBS in a trust
establishing a Controlling Class interest. The Company obtained a greater degree
of influence over the disposition of the commercial mortgage loans than is
typically granted to the special servicer. As a result of this expanded
influence, the trust was not a QSPE and FIN 46R required the Company to
consolidate the net assets and results of operations of the trust.
Approximately
45% of the par amount of the commercial mortgage loan pool is comprised of
investment grade loans and the remaining 55% are unrated. For income recognition
purposes, the Company considers the investment grade and unrated commercial
mortgage loans in the pool as single assets reflecting the credit assumptions
made in establishing loss adjusted yields for Controlling Class securities.
The
Company has taken into account the credit quality of the underlying loans in
formulating its loss assumptions. Credit losses assumed on the entire pool
are
1.40% of the principal balance, or 2.53% of the unrated principal balance.
Over
the
life of the commercial mortgage loan pools, the Company reviews and updates
its
loss assumptions to determine the impact on expected cash flows to be collected.
A decrease in estimated cash flows will reduce the amount of interest income
recognized in future periods and may result in a loan loss reserve depending
upon the severity of the cash flow reductions. An increase in estimated cash
flows will first reduce the loan loss reserve and any additional cash will
increase the amount of interest income recorded in future periods.
Note
6 COMMERCIAL
MORTGAGE LOANS
The
following table summarizes the Company’s commercial real estate loan portfolio
by property type at March 31, 2007 and December 31, 2006:
|
|
Loan
Outstanding
|
|
Weighted
Average
|
|
|
|
March
31, 2007
|
|
|
December
31, 2006
|
|
Yield
|
|
Property
Type
|
|
Amount
|
|
%
|
|
|
Amount
|
|
%
|
|
2007
|
|
2006
|
|
Office
|
|
$
|
133,449
|
|
|
19.8
|
%
|
|
$
|
130,016
|
|
|
27.0
|
%
|
|
8.3
|
%
|
|
8.2
|
%
|
Residential
|
|
|
121,572
|
|
|
18.0
|
|
|
|
57,917
|
|
|
12.0
|
|
|
9.4
|
|
|
10.7
|
|
Retail
|
|
|
319,632
|
|
|
47.4
|
|
|
|
194,938
|
|
|
40.5
|
|
|
7.2
|
|
|
7.7
|
|
Hotel
|
|
|
38,402
|
|
|
5.7
|
|
|
|
38,899
|
|
|
8.1
|
|
|
10.1
|
|
|
10.0
|
|
Storage
|
|
|
33,912
|
|
|
5.0
|
|
|
|
34,009
|
|
|
7.1
|
|
|
9.0
|
|
|
9.0
|
|
Industrial
|
|
|
19,360
|
|
|
2.9
|
|
|
|
19,317
|
|
|
4.0
|
|
|
9.1
|
|
|
9.1
|
|
Other
Mixed Use
|
|
|
7,767
|
|
|
1.2
|
|
|
|
6,649
|
|
|
1.3
|
|
|
8.7
|
|
|
8.7
|
|
Total
|
|
$
|
674,094
|
|
|
100.0
|
%
|
|
$
|
481,745
|
|
|
100.0
|
%
|
|
8.1
|
%
|
|
8.6
|
%
|
Included
in the table above are non-U.S. dollar denominated commercial real estate loans
with a carrying value of $380,810 and $243,377 at March 31, 2007 and December
31, 2006, respectively. The Company finances its non-U.S. dollar denominated
loans by borrowing in the applicable local currency and hedging the un-financed
portion.
Reconciliation
of commercial mortgage loans:
|
|
Book
Value
|
|
Balance
at December 31, 2006
|
|
$
|
481,745
|
|
Adjustment
for discount accretion and foreign currency
|
|
|
7,318
|
|
Proceeds
from repayment of mortgage loans
|
|
|
(9,478
|
)
|
Investments
in commercial mortgage loans
|
|
|
194,509
|
|
Balance
at March 31, 2007
|
|
$
|
674,094
|
|
There
were no loans that were delinquent in payment of principal or interest at March
31, 2007 or December 31, 2006.
Note
7 EQUITY INVESTMENTS
The
following table is a summary of the Company’s equity investments for the three
months ended March 31, 2007:
|
|
BlackRock
Diamond
|
|
Carbon
I
|
|
Carbon
II
|
|
Dynamic
India
Fund
IV *
|
|
Total
|
|
Balance
at December
31, 2006
|
|
$
|
105,894
|
|
$
|
3,144
|
|
$
|
69,259
|
|
$
|
3,850
|
|
$
|
182,147
|
|
Contributions
to Investments
|
|
|
7,397
|
|
|
-
|
|
|
15,612
|
|
|
-
|
|
|
23,009
|
|
Distributions
from Investments
|
|
|
(894
|
)
|
|
-
|
|
|
(2,743
|
)
|
|
-
|
|
|
(3,637
|
)
|
Equity
earnings
|
|
|
5,970
|
|
|
840
|
|
|
3,146
|
|
|
-
|
|
|
9,956
|
|
Balance
at March
31, 2007
|
|
$
|
118,367
|
|
$
|
3,984
|
|
$
|
85,274
|
|
$
|
3,850
|
|
$
|
211,475
|
|
*
The Company neither controls nor has significant influence over the
Dynamic India Fund IV and accounts for this investment using the cost method
of
accounting.
The
Company has a $100,000 commitment to acquire shares of BlackRock
Diamond Property Fund (“BlackRock Diamond”).
At
March 31, 2007, the commitment was fully funded and the Company owned
approximately 18% of BlackRock Diamond. The Company’s investment in BlackRock
Diamond at March 31, 2007 was $118,367.
The
Company recorded $5,970 of income related to its ownership in BlackRock Diamond
for the three months ended March 31, 2007, as reported by BlackRock Diamond.
Of
the $5,970 in income, $214 represented current income and $5,756 represented
unrealized capital appreciation. The Company’s investment represents a 18%
interest in a portfolio of 54 assets with a total market value of approximately
$829,141. BlackRock Diamond carries its real estate investments at estimated
fair values based upon valuations performed internally and upon appraisal
reports prepared annually by independent real estate appraisers. The estimated
fair values of real estate may differ significantly from those that could be
realized if the real estate were actually offered for sale in the market place.
At
March
31, 2007, the Company owned approximately 20% of Carbon
Capital, Inc. (“Carbon I”).
The
Company also owned approximately 26% of Carbon
Capital II, Inc. (“Carbon II”, and collectively with Carbon I, the “Carbon
Capital Funds”) at
March
31, 2007. Collectively, the Carbon Capital Funds are private commercial real
estate income opportunity funds managed by the Manager (see Note 11 of the
consolidated financial statements).
The
Company entered into a $50,000 commitment on July 20, 2001 to acquire shares
of
Carbon I. On July 12, 2005, the investment period expired and as repayments
occur, capital will be returned to investors. The Company’s investment in Carbon
I at March 31, 2007 was $3,984.
The
Company entered into an aggregate commitment of $100,000 to acquire shares
of
Carbon II. The Company’s investment in Carbon II at March 31, 2007 was $85,274.
The Company’s remaining commitment to Carbon II at March 31, 2007 was
$14,726.
As
previously reported, investments held by Carbon II, of which the Company owns
26%, include a $24,546 commercial real estate mezzanine loan which defaulted
during July 2006. The default was subsequently cured. The underlying
property is a hotel located in the South Beach area of Miami, Florida. The
loan matured in March 2007, and the borrower failed to repay the loan triggering
a maturity default. The borrower is in advanced discussions with a lender
regarding a refinance. Based on credit analysis performed for this
property, the
loan
to value of this loan is less than 60% and Carbon II believes a loan loss
reserve is not necessary at this time.
As
previously reported, two other loans held by Carbon II have defaulted. The
aggregate carrying value of the two loans on Carbon II’s consolidated financial
statements is $24,000 ($12,000 per loan). The underlying properties,
located in Orlando and Boynton Beach, Florida, are multi-family assets being
converted to condominiums. Regarding the 336-unit property in Orlando,
Carbon II is negotiating a workout arrangement with the borrower, whereby Carbon
II will forebear from taking title and will make all advances necessary to
operate the property and service the first mortgage. The borrower will
continue to hold title and implement its new sales strategy. Since its
implementation in March 2007, 15 units have been sold and closed. An
additional 65 units are under contract with deposits and 75 contracts are being
prepared. Based on credit analysis performed for this property, Carbon II
believes a loan loss reserve is not necessary at this time.
Regarding
the 216-unit property in Boynton Beach, the borrower was not able to achieve
sufficient condominium sales to complete the condominium conversion. The
borrower defaulted on its loan. Carbon II has taken title to the property,
hired independent managing agent and intends to operate it as a rental property
while preparing the property for sale. Based on the credit analysis
performed for this property, at December 31, 2006, Carbon II established a
loan
loss reserve of $5,180 for the loan, of which the Company’s share is
$1,361. Carbon II determined that no change to the loan loss reserve was
necessary at March 31, 2007. All other commercial real estate loans in the
Carbon Capital Funds are performing as expected.
On
December 22, 2005, the Company entered into an $11,000 commitment to acquire
shares of Dynamic India Fund IV. On February 13, 2006, the Company received
a
notice calling 35% of its commitment.
Note
8
BORROWINGS
The
Company's borrowings consist of reverse repurchase agreements, credit
facilities, CDOs, senior unsecured notes, trust preferred securities, and
commercial mortgage loan pools.
Certain
information with respect to the Company's borrowings at March 31, 2007 is
summarized as follows:
|
|
Reverse
Repurchase
Agreements
|
|
Credit
Facilities
|
|
Commercial
Mortgage
Loan
Pools
|
|
CDOs
|
|
Senior
Unsecured
Notes
|
|
Trust
Preferred
Securities
|
|
Total
Borrowings
|
|
Outstanding
borrowings
|
|
$
|
683,050
|
|
$
|
156,237
|
|
$
|
1,236,806
|
|
$
|
1,828,168
|
|
$
|
75,000
|
|
$
|
180,477
|
|
$
|
4,159,738
|
|
Weighted
average borrowing rate
|
|
|
5.40
|
%
|
|
6.35
|
%
|
|
3.99
|
%
|
|
5.85
|
%
|
|
7.20
|
%
|
|
7.64
|
%
|
|
5.34
|
%
|
Weighted
average remaining maturity
|
|
|
76
days
|
|
|
135
days
|
|
|
5.6
years
|
|
|
7.2
years
|
|
|
9.8
years
|
|
|
28.9
years
|
|
|
6.3
years
|
|
Estimated
fair value of assets pledged
|
|
$
|
743,688
|
|
$
|
252,056
|
|
$
|
1,257,631
|
|
$
|
2,151,645
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,405,020
|
|
At
March
31, 2007, the Company's borrowings had the following remaining
maturities:
|
|
Reverse
Repurchase
Agreements
|
|
Credit
Facilities
|
|
Commercial
Mortgage
Loan
Pools
|
|
CDOs*
|
|
Senior
Unsecured
Notes
|
|
Trust
Preferred
Securities
|
|
Total
Borrowings
|
|
Within
30 days
|
|
$
|
68,196
|
|
$
|
73,380
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
141,576
|
|
31
to 59 days
|
|
|
-
|
|
|
24,525
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
24,525
|
|
60
days to less than 1 year
|
|
|
614,854
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
614,854
|
|
1
year to 3 years
|
|
|
-
|
|
|
58,332
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
58,332
|
|
3
years to 5 years
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Over
5 years
|
|
|
-
|
|
|
-
|
|
|
1,236,806
|
|
|
1,828,168
|
|
|
75,000
|
|
|
180,477
|
|
|
3,320,451
|
|
|
|
$
|
683,050
|
|
$
|
156,237
|
|
$
|
1,236,806
|
|
$
|
1,828,168
|
|
$
|
75,000
|
|
$
|
180,477
|
|
$
|
4,159,738
|
|
*
At March 31, 2007, CDOs are comprised of $405,751 of CDO debt
with a weighted average remaining maturity of 5.5 years, $302,632 of CDO debt
with a weighted average remaining maturity of 5.4 years, $365,547 of CDO debt
with a weighted average remaining maturity of 6.2 years, $401,833 of CDO debt
with a weighted average remaining maturity of 10.2 years and $352,405 of CDO
debt with a weighted average remaining maturity of 7.5 years.
Reverse
Repurchase Agreements and Credit Facilities
The
Company has entered into reverse repurchase agreements to finance most of its
securities available-for-sale that are not financed under its credit facilities
or CDOs. The reverse repurchase agreements bear interest at a LIBOR-based
variable rate.
Under
the
credit facilities and the reverse repurchase agreements, the respective lender
retains the right to mark the underlying collateral to estimated fair value.
A
reduction in the value of pledged assets would require the Company to provide
additional collateral or fund margin calls. From time to time, the Company
may
be required to provide additional collateral or fund margin calls. See “Item 3 -
Quantitative and Qualitative Disclosures About Market Risk” for a discussion of
the Company’s exposure to potential margin calls. At March 31, 2007, more than
ten percent of the Company’s net assets were held as collateral for reverse
repurchase agreements with Citigroup Global Markets, Inc. and Lehman Brothers,
Inc.
The
Company’s credit facilities can be used to replace existing reverse repurchase
agreement borrowings and to finance the acquisition of mortgage-backed
securities and commercial real estate loans. Outstanding borrowings bear
interest at a variable rate. The following table summarizes the Company’s credit
facilities at March 31, 2007:
|
|
|
|
March
31, 2007
|
|
|
|
Maturity
Date
|
|
Facility
Amount
|
|
Total
Borrowings
|
|
Unused
Borrowing
Capacity
|
|
Greenwich
Capital, Inc. (1)
|
|
|
7/7/07
|
|
$
|
75,000*
|
|
$
|
12,064
|
|
$
|
-
|
|
Deutsche
Bank, AG (2)
|
|
|
12/20/07
|
|
$
|
200,000
|
|
$
|
87,111
|
|
$
|
112,889
|
|
Bank
of America, N.A.(3)
|
|
|
9/17/08
|
|
$
|
100,000
|
|
$
|
-
|
|
$
|
100,000
|
|
Morgan
Stanley Bank (3)
(4)
|
|
|
2/16/08
|
|
$
|
200,000
|
|
$
|
57,062
|
|
$
|
142,938
|
|
|
|
|
|
|
$
|
575,000
|
|
$
|
156,237
|
|
$
|
418,763
|
|
*Commitment expired December 23, 2006. No new borrowings permitted.
(1)
USD
only
(2)Multicurrency
(3)
Non-USD
only
(4)
Can be
increased up to $15,000 based on the change in exchange rates of the non-U.S.
dollar loans. However, any amounts drawn under this provision must be repaid
in
ninety days.
During
the second quarter of 2007, the Company entered into a $150 million committed
dollar and non-dollar credit faculty with Lehman Commercial Paper Inc.
Outstanding borrowings bear interest at LIBOR based variable rates. The facility
matures in 60-days with two 30-day extensions available.
The
Company is subject to various covenants in its credit facilities, including
maintaining a minimum net worth measured on a book value of $400,000 in
accordance with generally accepted accounting principles in the United States
of
America (“GAAP”), a maximum recourse debt-to-equity of 3.0 to 1, a minimum cash
requirement of $10,000 based upon certain debt-to-equity ratios. During the
first quarter of 2007, the Company amended the debt service coverage ratio
covenant on its committed debt facilities. The terms of the calculation were
revised and the debt service coverage ratio was reduced from 1.75 to 1.20.
The
revised calculation better reflects the Company’s ability to service debt on a
cash basis. At March 31, 2007, the Company was in compliance with all covenants.
Junior
Subordinated Notes
During
April 2007, the Company issued €50 million junior subordinated notes due in
2022. The notes bear interest at a rate equal to 3-month Euribor plus 2.6%.
The
notes can be redeemed in whole by the Company subject to certain provisions.
The
Company has the option to redeem all or a portion of the Notes at any time
on or
after April 30, 2012 at a redemption price equal to 100% of the principal amount
thereof plus accrued and unpaid interest through but excluding the redemption
date.
Note
9 PREFERRED
STOCK
On
February 12, 2007, the Company authorized and issued 3,450,000 shares of Series
D Preferred Stock, including 450,000 shares of Series D Preferred Stock issued
pursuant to an option granted to the underwriters to cover over-allotments.
The
Series D Preferred Stock is perpetual, carries a 8.25% coupon and has a
preference in liquidation of $86,250. The aggregate net proceeds to the Company
(after deducting underwriting fees and expenses) were approximately $83,306.
Note
10 COMMON
STOCK
The
following table summarizes Common Stock issued by the Company for the three
months ended March 31, 2007:
|
|
Shares
|
|
Net
Proceeds
|
|
Dividend
Reinvestment Plan
|
|
|
15,363
|
|
$
|
201
|
|
Sales
agency agreement
|
|
|
111,700
|
|
|
1,347
|
|
Incentive
fees*
|
|
|
75,298
|
|
|
963
|
|
Incentive
fee - stock based*
|
|
|
289,155
|
|
|
3,470
|
|
Total
|
|
|
491,516
|
|
$
|
5,981
|
|
* See Note 11 of the consolidated financial statements, Transactions
With
Affiliates, for a further description of the Company’s Management
Agreement.
On
March
6, 2007, the Company declared dividends to its common stockholders of $0.29
per
share, payable on April 30, 2007 to stockholders of record on March 30, 2007.
For U.S. federal income tax purposes, the dividends are expected to be ordinary
income to the Company’s stockholders.
Note
11 TRANSACTIONS
WITH AFFILIATES
The
Company has a Management Agreement, an administrative services agreement and
an
accounting services agreement with the Manager, the employer of certain
directors and all of the officers of the Company, under which the Manager and
the Company’s officers manage the Company’s day-to-day investment operations,
subject to the direction and oversight of the Company’s Board of Directors.
Pursuant to the Management Agreement and these other agreements, the Manager
and
the Company’s officers formulate investment strategies, arrange for the
acquisition of assets, arrange for financing, monitor the performance of the
Company’s assets and provide certain other advisory, administrative and
managerial services in connection with the operations of the Company. For
performing certain of these services, the Company pays the Manager under the
Management Agreement a base management fee equal to 2.0% of the quarterly
average total stockholders’ equity for the applicable quarter.
To
provide an incentive, the Manager is entitled to receive an incentive fee under
the Management Agreement equal to 25% of the amount by which the rolling
four-quarter GAAP net income before the incentive fee exceeds the greater of
8.5% or 400 basis points over the ten-year Treasury note multiplied by the
adjusted per share issue price of the Company’s Common Stock ($11.37 per common
share at March 31, 2007). Additionally, up to 30% of the incentive fees earned
in 2006 or after may be paid in shares of the Company’s Common Stock subject to
certain provisions under a compensatory deferred stock plan approved by the
stockholders of the Company in 2006. The Board of Directors also authorized
a
stock based incentive plan where one-half of one percent of common shares
outstanding as of December 31st
is paid
to the Manager.
The
Company’s unaffiliated directors approved an extension of the Management
Agreement to March 31, 2008 at the Board’s March 2007 meeting.
The
following is a summary of management and incentive fees incurred for the three
months ended March 31, 2007, and 2006:
|
|
For
the Three Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Management
fee
|
|
$
|
3,520
|
|
$
|
3,050
|
|
Incentive
fee
|
|
|
2,724
|
|
|
1,169
|
|
Incentive
fee- stock based
|
|
|
709
|
|
|
-
|
|
Total
management and incentive fees
|
|
$
|
6,953
|
|
$
|
4,219
|
|
At
March
31, 2007 and 2006, respectively, management and incentive fees of $11,248
and $4,014,
remain
payable to the Manager and are included on the accompanying consolidated
statement of financial condition as a component of other liabilities.
In
accordance with the provisions of the Management Agreement, the Company recorded
reimbursements to the Manager of $117 and $100 for certain expenses incurred
on
behalf of the Company during the three months ended March 31, 2007, and 2006,
respectively.
The
Company also has administration and accounting services agreements with the
Manager. Under the terms of the administration services agreement, the Manager
provides financial reporting, audit coordination and accounting oversight
services to the Company. Under the terms of the accounting services agreement,
the Manager provides investment accounting services to the Company. For the
three months ended March 31, 2007, and 2006, the Company recorded administration
and accounting service fees of $181, and $58, respectively, which are included
in general and administrative expense on the accompanying statement of
operations.
The
special servicer on 28 of the Company's 33 Controlling Class trusts is Midland
Loan Services, Inc. ("Midland"), a wholly owned indirect subsidiary of The
PNC
Financial Services Group, Inc. (“PNC Bank”), and therefore a related party of
the Manager. The Company's fees for Midland’s services are at market rates.
On
December 13, 2005, the Company entered into a $75,000 commitment to acquire
shares of BlackRock Diamond. BlackRock Diamond is a private REIT managed by
BlackRock Realty Advisors, Inc., a subsidiary of the Manager. On
February
21, 2006, the Company increased its capital commitment by an additional $25,000,
resulting in a total capital commitment of $100,000.
At
March
31, 2007, the commitment was fully funded and the Company owned approximately
18% of BlackRock Diamond. The Company does not incur any additional management
or incentive fees to the Manager related to its investment in BlackRock Diamond.
The Company’s investment in BlackRock Diamond at March 31, 2007 was $118,367.
During
2001, the Company entered into a $50,000 commitment to acquire shares of Carbon
I, a private commercial real estate income opportunity fund managed by the
Manager. The Carbon I investment period ended on July 12, 2004 and the Company’s
investment in Carbon I at March 31, 2007 was $3,984. The Company does not incur
any additional management or incentive fees to the Manager related to its
investment in Carbon I. On March 31, 2007, the Company owned approximately
20%
of the outstanding shares of Carbon I.
The
Company entered into an aggregate commitment of $100,000 to acquire shares
of
Carbon II, a private commercial real estate income opportunity fund managed
by
the Manager. At March 31, 2007, the Company’s investment in Carbon II was
$85,274 and the Company’s remaining commitment to Carbon II is $14,726. The
Company does not incur any additional management or incentive fees to the
Manager related to its investment in Carbon II. On March 31, 2007, the Company
owned approximately 26% of the outstanding shares of Carbon II.
The
Company’s unaffiliated directors approved the investments in BlackRock Diamond
and the Carbon Capital Funds prior to the investments being made.
During
2000, the Company completed the acquisition of CORE Cap, Inc. At the time of
the
CORE Cap, Inc. acquisition, the Manager agreed to pay GMAC (CORE Cap, Inc.’s
external advisor) $12,500 over a ten-year period (“Installment Payment”) to
purchase the right to manage the Core Cap, Inc. assets under the existing
management contract (“GMAC Contract”). The GMAC Contract had to be terminated in
order to allow the Company to complete the merger, as the Company’s management
agreement with the Manager did not provide for multiple managers. As a result
the Manager offered to buy-out the GMAC Contract as the Manager estimated it
would receive incremental fees above and beyond the Installment Payment, and
thus was willing to pay for, and separately negotiate, the termination of the
GMAC Contract. Accordingly, the value of the Installment Payment was not
considered in the Company’s allocation of its purchase price to the net assets
acquired in the acquisition of CORE Cap, Inc. The Company agreed that should
the
Management Agreement with its Manager be terminated, not renewed or not extended
for any reason other than for cause, the Company would pay to the Manager an
amount equal to the Installment Payment less the sum of all payments made by
the
Manager to GMAC. At March 31, 2007, the Installment Payment would be $4,000
payable over four years. The Company does not accrue for this contingent
liability.
Note
12 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The
Company accounts for its derivative investments under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities,
as
amended, which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the consolidated
statement of financial condition at estimated fair value. If the derivative
is
designated as a cash flow hedge, the effective portions of change in the
estimated fair value of the derivative are recorded in other comprehensive
income (“OCI”) and are recognized in the income statement when the hedged item
affects earnings. Ineffective portions of changes in the estimated fair value
of
cash flow hedges are recognized in earnings. If the derivative is designated
as
a fair value hedge, the changes in the estimated fair value of the derivative
and of the hedged item attributable to the hedged risk are recognized in
earnings.
The
Company uses interest rate swaps to manage exposure to variable cash flows
on
portions of its borrowings under reverse repurchase agreements and the floating
rate debt of its CDOs and as trading derivatives intended to offset changes
in
estimated fair value related to securities held as trading assets. On the date
in which the derivative contract is entered, the Company designates the
derivative as either a cash flow hedge or a trading derivative.
Occasionally,
counterparties will require the Company or the Company will require
counterparties to provide collateral for the interest rate swap agreements
in
the form of margin deposits. Net deposits are recorded as a component of either
other assets, other liabilities or restricted cash. Should the counterparty
fail
to return deposits paid, the Company would be at risk for the estimated fair
value of that asset. At March 31, 2007, the Company did not have any of these
deposits.
At
March
31,
2007,
the Company had interest rate swaps with notional amounts aggregating $1,568,941
designated as cash flow hedges of borrowings under reverse repurchase agreements
and the floating rate debt of its CDOs. Cash flow hedges with an estimated
fair
value of $20,723 are included in derivative assets on the consolidated statement
of financial condition and cash flow hedges with an estimated fair value of
$12,271 are included in derivative liabilities on the consolidated statement
of
financial condition. For the three months ended March
31,
2007,
the net change in the estimated fair value of the interest rate swaps was a
decrease of $4,811, of which $109 was deemed ineffective and is included as
a
decrease of interest expense and $4,920 was recorded as a reduction of OCI.
At
March
31,
2007,
the $1,568,941 notional of swaps designated as cash flow hedges had a weighted
average remaining term of 7.3 years.
During
the three months ended March
31,
2007,
the Company terminated one of its interest rate swaps with a notional amount
of
$41,000 that was designated as a cash flow hedge of borrowings under reverse
repurchase agreements. The Company will reclassify the $16 gain in value
incurred from OCI to interest expense over 8.8 years, which was the remaining
term of the swap at the time it was closed out. At March
31,
2007,
the Company has, in aggregate, $7,780 of net losses related to terminated swaps
in OCI. For the quarter ended March
31,
2007,
$408 was reclassified as an increase to interest expense and $1,619 will be
reclassified as an increase to interest expense for the next twelve
months.
At
March
31, 2007, the Company had interest rate swaps with notional amounts aggregating
$1,446,606 designated as trading derivatives. Trading derivatives with an
estimated fair value of $520 are included in derivative assets on the
consolidated statement of financial condition and trading derivatives with
an
estimated fair value of $293 are included in derivative liabilities on the
consolidated statement of financial condition. For the three months ended March
31, 2007, the change in estimated fair value for these trading derivatives
was
an increase of $275 and is included as a reduction of loss on securities
held-for-trading on the consolidated statement of operations. At March 31,
2007,
the $1,446,606 notional of swaps designated as trading derivatives had a
weighted average remaining term of 2.6 years.
At
March
31, 2007, the Company had a forward LIBOR cap with a notional amount of $85,000
and an estimated fair value at March 31, 2007 of $131 which is included in
derivative assets, and the change in estimated fair value related to this
derivative is included as a component of gain (loss) on securities
held-for-trading on the consolidated statements of operations.
Foreign
Currency
The
U.S.
dollar is considered the functional currency for certain of the Company’s
international subsidiaries. Foreign currency transaction gains or losses are
recognized in the period incurred and are included in foreign currency gain
(loss) in the consolidated statement of operations. Gains and losses on foreign
currency forward commitments are included in foreign currency gain (loss) in
the
consolidated statement of operations. The Company recorded foreign currency
gains of $1,484 and $44 for the three months ended March 31, 2007 and 2006,
respectively.
Foreign
currency agreements at March 31, 2007 consisted of the following:
|
|
At
March 31, 2007
|
|
|
|
Estimated
Fair
Value
|
|
Unamortized
Cost
|
|
Average
Remaining
Term
|
|
Currency
swaps
|
|
|
(410
|
)
|
|
-
|
|
|
9.0
years
|
|
CDO
currency swaps
|
|
|
537
|
|
|
-
|
|
|
11.8
years
|
|
Forwards
|
|
|
(2,685
|
)
|
|
-
|
|
|
18
days
|
|
Consistent
with SFAS No. 52, Foreign
Currency Translation
(“SFAS
No. 52”), SFAS No. 133 allows hedging of the foreign currency risk of a net
investment in a foreign operation. The Company primarily uses foreign currency
forward contracts to manage the foreign exchange risk associated with the
Company’s investment in its non-U.S. dollar functional currency foreign
subsidiary. In accordance with SFAS No. 52, the Company records the change
in
the carrying amount of this investment in the cumulative translation adjustment
account within accumulated OCI. Simultaneously, the effective portion of the
hedge of this exposure is also recorded in the cumulative translation adjustment
account and any ineffective portion of net investment hedges is recorded in
income.
Note
13 NET INTEREST INCOME
The
following is a presentation of the Company net interest income for the three
months ended March 31, 2007 and 2006:
|
|
2007
|
|
2006
|
|
Interest
Income:
|
|
|
|
|
|
|
|
Interest
from securities available-for-sale
|
|
$
|
46,674
|
|
$
|
38,897
|
|
Interest
from commercial mortgage loans
|
|
|
11,166
|
|
|
8,015
|
|
Interest
from commercial mortgage loan pools
|
|
|
13,132
|
|
|
13,227
|
|
Interest
from securities held-for-trading
|
|
|
1,506
|
|
|
1,925
|
|
Interest
from cash and cash equivalents
|
|
|
924
|
|
|
337
|
|
Total
interest income
|
|
|
73,402
|
|
|
62,401
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
Interest
|
|
|
54,365
|
|
|
44,632
|
|
Interest
- securities held-for-trading
|
|
|
1,474
|
|
|
1,893
|
|
Total
interest expense
|
|
|
55,839
|
|
|
46,525
|
|
Net
interest income
|
|
$
|
17,563
|
|
$
|
15,876
|
|
ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
All
dollar figures expressed herein are expressed in thousands, except share and
per
share amounts.
I. General
Anthracite
Capital, Inc., a Maryland corporation, and subsidiaries (collectively, the
"Company") is a specialty finance company that invests in commercial real estate
assets on a global basis. The Company seeks to generate income from the spread
between the interest income, gains and net operating income on its commercial
real estate assets and the interest expense from borrowings to finance its
investments. The Company's primary activities are investing in high yielding
commercial real estate debt and equity. The Company combines traditional real
estate underwriting and capital markets expertise to maximize the opportunities
arising from the continuing integration of these two disciplines. The Company
focuses on acquiring pools of performing loans in the form of commercial
mortgage-backed securities ("CMBS"), issuing secured debt backed by CMBS and
providing strategic capital for the commercial real estate industry in the
form
of mezzanine loan financing. The Company also began investing in diversified
portfolios of commercial real estate in the United States during December 2005.
The Company commenced operations on March 24, 1998.
The
Company's common stock is traded on the New York Stock Exchange under the symbol
"AHR". The Company's primary long-term objective is to distribute dividends
supported by earnings. The Company establishes its dividend by analyzing the
long-term sustainability of earnings given existing market conditions and the
current composition of its portfolio. This includes an analysis of the Company's
credit loss assumptions, general level of interest rates and projected hedging
costs.
The
Company is managed by BlackRock Financial Management, Inc. (the "Manager"),
a
subsidiary of BlackRock, Inc., a publicly traded (NYSE:BLK) asset management
company with approximately $1.154 trillion of assets under management, including
more than $25 billion in real estate equity and debt, at March 31, 2007. The
Manager provides an operating platform that incorporates significant asset
origination, risk management, operational and property management
capabilities.
The
Company’s ongoing investment activities primarily encompass three core
investment activities:
1) Commercial
Real Estate Securities
2) Commercial
Real Estate Loans
3)
Commercial Real Estate Equity
The
commercial real estate securities portfolio provides diversification and high
yields that are adjusted for anticipated losses over a period of time
(typically, a ten-year weighted average life) and can be financed through the
issuance of secured debt that matches the life of the investment. Commercial
real estate loans provide attractive risk adjusted returns over shorter periods
of time through strategic investments in specific property types or regions.
The
Company’s equity strategy is to invest in a diverse portfolio of commercial real
estate with the objective of repositioning the property to maximize its value.
The return objective is to provide strong returns over a medium term period
of
four to seven years through a combination of real estate operating income and
capital gains. It is expected that, over the short term, current returns will
fluctuate as gains and losses are reported based on a valuation process each
quarter. The Company believes that the combination of these activities will
result in moderate income and dividend growth for its stockholders.
The
Company’s fixed income investment activity continues to be managed to maintain a
positive, though controlled, exposure to both long- and short-term interest
rates through its active hedging strategies. See “Item 3 - Quantitative and
Qualitative Disclosures About Market Risk” for a discussion of interest rates
and their effect on earnings and book value.
The
following table illustrates the mix of the Company’s asset types at March 31,
2007 and December 31, 2006:
|
|
Carrying
Value at
|
|
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities
|
|
$
|
2,618,814
|
|
|
53.4
|
%
|
$
|
2,494,100
|
|
|
53.0
|
%
|
Commercial
mortgage loan pools(1)
|
|
|
1,257,631
|
|
|
25.7
|
|
|
1,271,014
|
|
|
27.0
|
|
Commercial
real estate loans(2)
|
|
|
763,352
|
|
|
15.6
|
|
|
554,148
|
|
|
11.8
|
|
Commercial
real estate equity
|
|
|
122,217
|
|
|
2.5
|
|
|
109,744
|
|
|
2.3
|
|
Total
commercial real estate assets
|
|
|
4,762,014
|
|
|
97.2
|
|
|
4,429,006
|
|
|
94.1
|
|
Residential
mortgage-backed securities
|
|
|
139,472
|
|
|
2.8
|
|
|
276,343
|
|
|
5.9
|
|
Total
|
|
$
|
4,901,486
|
|
|
100.0
|
%
|
$
|
4,705,349
|
|
|
100.0
|
%
|
|
(1)
|
Represents
a Controlling Class CMBS that is consolidated for accounting purposes.
See
Note 5 of the consolidated financial
statements.
|
|
(2)
|
Includes
equity investments and real estate joint
ventures.
|
During
the three months ended March
31,
2007,
the
Company purchased a total of $315,980 of commercial real estate assets. Included
in this amount is $136,878 of non-U.S. dollar denominated assets as the Company
continues to expand its global investment activities. Commercial real estate
assets purchased were comprised of: $127,288 of CMBS, $181,298 of commercial
real estate loans and $7,397 of real estate equity. During the three months
ended March 31, 2007, the Company sold CMBS with an adjusted purchase price
of
$43,022, resulting in a gain of $6,630. In addition, the Company sold eight
RMBS
with an adjusted purchase price of $128,135. These sales resulted in a gain
of
$546 from six securities and a loss of $15 from the remaining two
securities.
Summary
of Commercial Real Estate Assets
A
summary
of the Company’s commercial real estate assets with estimated fair values in
local currencies at March
31,
2007
is as
follows:
|
|
Commercial
Real
Estate
Securities
|
|
Commercial
Real
Estate
Loans
(1)
|
|
Commercial
Real
Estate
Equity
|
|
Commercial
Mortgage
Loan
Pools
|
|
Total
Commercial
Real
Estate
Assets
|
|
Total
Commercial
Real
Estate
Assets
(USD)
|
|
USD
|
|
$
|
2,359,351
|
|
$
|
382,542
|
|
$
|
118,367
|
|
$
|
1,257,631
|
|
$
|
4,117,890
|
|
$
|
4,117,890
|
|
GBP
|
|
|
£42,086
|
|
|
£25,342
|
|
|
-
|
|
|
-
|
|
|
£67,428
|
|
|
132,733
|
|
EURO
|
|
|
€102,761
|
|
|
€232,760
|
|
|
-
|
|
|
-
|
|
|
€335,521
|
|
|
448,725
|
|
Swiss
Francs
|
|
|
-
|
|
|
CHF23,804
|
|
|
-
|
|
|
-
|
|
|
CHF23,804
|
|
|
19,630
|
|
Canadian
Dollars
|
|
$
|
45,180
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
45,180
|
|
|
39,185
|
|
Indian
Rupees
|
|
|
-
|
|
|
-
|
|
|
Rs165,935
|
|
|
-
|
|
|
Rs165,935
|
|
|
3,850
|
|
Total
USD Equivalent
|
|
$
|
2,618,814
|
|
$
|
763,352
|
|
$
|
122,217
|
|
$
|
1,257,631
|
|
$
|
4,762,014
|
|
$
|
4,762,014
|
|
(1)
Includes
the
Company’s investments in the Carbon Capital Funds of $89,258 at March 31,
2007.
A
summary
of the Company’s commercial real estate assets with estimated fair values in
local currencies at December 31, 2006 is as follows:
|
|
Commercial
Real
Estate
Securities
|
|
Commercial
Real
Estate
Loans
(1)
|
|
Commercial
Real
Estate
Equity
|
|
Commercial
Mortgage
Loan
Pools
|
|
Total
Commercial
Real
Estate
Assets
|
|
Total
Commercial
Real
Estate
Assets
(USD)
|
|
USD
|
|
$
|
2,312,503
|
|
$
|
310,771
|
|
$
|
105,894
|
|
$
|
1,271,014
|
|
$
|
4,000,182
|
|
$
|
4,000,182
|
|
GBP
|
|
|
£27,532
|
|
|
£28,977
|
|
|
-
|
|
|
-
|
|
|
£56,509
|
|
|
110,681
|
|
Euro
|
|
|
€80,923
|
|
|
€141,422
|
|
|
-
|
|
|
-
|
|
|
€222,345
|
|
|
293,408
|
|
Canadian
Dollars
|
|
$
|
24,339
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
24,339
|
|
|
20,885
|
|
Indian
Rupees
|
|
|
-
|
|
|
-
|
|
|
Rs169,823
|
|
|
-
|
|
|
Rs169,823
|
|
|
3,850
|
|
Total
USD Equivalent
|
|
$
|
2,494,100
|
|
$
|
554,148
|
|
$
|
109,744
|
|
$
|
1,271,014
|
|
$
|
4,429,006
|
|
$
|
4,429,006
|
|
(1)
Includes
the
Company’s investments in the Carbon Capital Funds of $72,402 at December 31,
2006.
The
Company has foreign currency rate exposure related to its non-U.S. dollar
denominated assets. The Company’s primary currency exposures are Euro and
British pound. Changes in currency rates can adversely impact the estimated
fair
value and earnings of the Company’s non-U.S. holdings. The Company mitigates
this impact by utilizing local currency-denominated financing on its foreign
investments and foreign currency forward commitments and swaps to hedge the
net
exposure. Foreign currency gain was $1,484 and $44 for the three months ended
March
31,
2007
and
2006, respectively.
Commercial
Real Estate Assets Portfolio Activity
The
following table details the par, estimated fair value, adjusted purchase price,
and loss adjusted yield of the Company’s commercial real estate securities
included in as well as outside of the Company’s CDOs at March 31, 2007. The
dollar price (“Dollar Price”) represents the estimated fair value or adjusted
purchase price of a security, respectively, relative to its par value.
Commercial
real estate securities outside CDOs
|
|
Par
|
|
Carrying
Value
|
|
Dollar
Price
|
|
Adjusted
Purchase
Price
|
|
Dollar
Price
|
|
Expected
Yield
|
|
Investment
grade CMBS
|
|
$
|
39,947
|
|
$
|
39,772
|
|
|
99.56
|
|
$
|
39,812
|
|
|
99.66
|
|
|
5.30
|
%
|
Investment
grade REIT debt
|
|
|
23,121
|
|
|
21,930
|
|
|
94.85
|
|
|
22,978
|
|
|
99.38
|
|
|
5.49
|
%
|
CMBS
rated BB+ to B
|
|
|
234,666
|
|
|
187,874
|
|
|
80.06
|
|
|
191,540
|
|
|
81.62
|
|
|
8.46
|
%
|
CMBS
rated B- or lower
|
|
|
267,899
|
|
|
110,967
|
|
|
41.42
|
|
|
104,242
|
|
|
38.91
|
|
|
7.61
|
%
|
CDO
Investments
|
|
|
348,912
|
|
|
71,755
|
|
|
20.57
|
|
|
69,763
|
|
|
19.99
|
|
|
19.05
|
%
|
CMBS
Interest Only securities (“IOs”)
|
|
|
2,884,027
|
|
|
64,540
|
|
|
2.24
|
|
|
65,365
|
|
|
2.27
|
|
|
7.64
|
%
|
Multifamily
agency securities
|
|
|
442,589
|
|
|
445,981
|
|
|
100.77
|
|
|
447,547
|
|
|
101.12
|
|
|
5.07
|
%
|
Commercial
mortgage loan pools
|
|
|
1,191,835
|
|
|
1,257,631
|
|
|
105.52
|
|
|
1,257,631
|
|
|
105.52
|
|
|
4.14
|
%
|
Total
commercial real estate assets outside CDOs
|
|
|
5,432,996
|
|
|
2,200,450
|
|
|
40.50
|
|
|
2,198,878
|
|
|
40.47
|
|
|
5.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate loans and equity outside CDOs
|
|
|
|
|
|
|
Commercial
real estate loans
|
|
|
204,364
|
|
|
293,193
|
|
|
|
|
|
290,684
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
103,850
|
|
|
122,217
|
|
|
|
|
|
103,850
|
|
|
|
|
|
|
|
Total
commercial real estate loans and equity outside CDOs
|
|
|
308,214
|
|
|
415,410
|
|
|
|
|
|
394,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate assets included in CDOs
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
807,629
|
|
|
800,929
|
|
|
99.17
|
|
|
761,559
|
|
|
94.30
|
|
|
7.04
|
%
|
Investment
grade REIT debt
|
|
|
223,324
|
|
|
229,231
|
|
|
102.64
|
|
|
224,891
|
|
|
100.70
|
|
|
5.92
|
%
|
CMBS
rated BB+ to B
|
|
|
638,930
|
|
|
543,777
|
|
|
85.11
|
|
|
498,739
|
|
|
78.06
|
|
|
9.53
|
%
|
CMBS
rated B- or lower
|
|
|
193,215
|
|
|
77,771
|
|
|
40.25
|
|
|
70,779
|
|
|
36.63
|
|
|
14.96
|
%
|
Credit
tenant lease
|
|
|
23,655
|
|
|
24,288
|
|
|
102.68
|
|
|
24,292
|
|
|
102.69
|
|
|
5.67
|
%
|
Commercial
real estate loans
|
|
|
478,783
|
|
|
470,158
|
|
|
98.20
|
|
|
450,357
|
|
|
94.06
|
|
|
8.31
|
%
|
Total
commercial real estate assets included in CDOs
|
|
|
2,365,536
|
|
|
2,146,154
|
|
|
90.73
|
|
|
2,030,617
|
|
|
85.84
|
|
|
8.07
|
%
|
Total
commercial real estate assets
|
|
$
|
8,106,746
|
|
$
|
4,762,014
|
|
|
|
|
$
|
4,624,029
|
|
|
|
|
|
|
|
The
following table details the par, carrying value, adjusted purchase price and
expected yield of the Company’s commercial real estate assets included in as
well as outside its CDOs at December 31, 2006:
Commercial
real estate securities outside CDOs
|
|
Par
|
|
Carrying
Value
|
|
Dollar
Price
|
|
Adjusted
Purchase
Price
|
|
Dollar
Price
|
|
Expected
Yield
|
|
Investment
grade CMBS
|
|
$
|
20,989
|
|
$
|
21,426
|
|
|
102.09
|
|
$
|
21,753
|
|
|
103.64
|
|
|
5.51
|
%
|
Investment
grade REIT debt
|
|
|
23,121
|
|
|
21,566
|
|
|
93.28
|
|
|
22,973
|
|
|
99.36
|
|
|
5.49
|
%
|
CMBS
rated BB+ to B
|
|
|
106,979
|
|
|
86,677
|
|
|
81.02
|
|
|
87,486
|
|
|
81.78
|
|
|
8.01
|
%
|
CMBS
rated B- or lower
|
|
|
147,465
|
|
|
50,165
|
|
|
34.02
|
|
|
46,043
|
|
|
31.22
|
|
|
9.06
|
%
|
CDO
Investments
|
|
|
406,605
|
|
|
117,246
|
|
|
28.84
|
|
|
114,482
|
|
|
28.16
|
|
|
14.19
|
%
|
CMBS
Interest Only securities (“IOs”)
|
|
|
2,980,467
|
|
|
69,352
|
|
|
2.33
|
|
|
69,183
|
|
|
2.32
|
|
|
7.36
|
%
|
Multifamily
agency securities
|
|
|
447,191
|
|
|
449,827
|
|
|
100.59
|
|
|
452,781
|
|
|
101.25
|
|
|
5.07
|
%
|
Commercial
mortgage loan pools
|
|
|
1,207,212
|
|
|
1,271,014
|
|
|
105.29
|
|
|
1,271,014
|
|
|
105.29
|
|
|
4.14
|
%
|
Total
commercial real estate assets outside CDOs
|
|
|
5,340,029
|
|
|
2,087,273
|
|
|
39.06
|
|
|
2,085,715
|
|
|
39.06
|
|
|
5.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate loans and equity outside CDOs
|
|
|
|
|
|
|
Commercial
real estate loans
|
|
|
69,183
|
|
|
140,985
|
|
|
|
|
|
141,951
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
96,453
|
|
|
109,744
|
|
|
|
|
|
96,453
|
|
|
|
|
|
|
|
Total
commercial real estate loans and equity outside CDOs
|
|
|
165,636
|
|
|
250,729
|
|
|
|
|
|
238,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate assets included in CDOs
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
797,678
|
|
|
794,622
|
|
|
99.62
|
|
|
750,662
|
|
|
94.11
|
|
|
7.00
|
%
|
Investment
grade REIT debt
|
|
|
223,324
|
|
|
227,678
|
|
|
101.95
|
|
|
224,964
|
|
|
100.73
|
|
|
5.92
|
%
|
CMBS
rated BB+ to B
|
|
|
650,202
|
|
|
554,185
|
|
|
85.23
|
|
|
508,908
|
|
|
78.27
|
|
|
9.31
|
%
|
CMBS
rated B- or lower
|
|
|
193,236
|
|
|
77,038
|
|
|
39.87
|
|
|
70,727
|
|
|
36.60
|
|
|
14.87
|
%
|
Credit
tenant lease
|
|
|
23,793
|
|
|
24,318
|
|
|
102.20
|
|
|
24,439
|
|
|
102.71
|
|
|
5.67
|
%
|
Commercial
real estate loans
|
|
|
424,973
|
|
|
413,163
|
|
|
97.22
|
|
|
400,559
|
|
|
94.25
|
|
|
8.36
|
%
|
Total
commercial real estate assets included in CDOs
|
|
|
2,313,206
|
|
|
2,091,004
|
|
|
90.39
|
|
|
1,980,259
|
|
|
85.61
|
|
|
8.01
|
%
|
Total
commercial real estate assets
|
|
$
|
7,818,871
|
|
$
|
4,429,006
|
|
|
|
|
$
|
4,304,378
|
|
|
|
|
|
|
|
The
Company’s CDO offerings allow the Company to match fund its commercial real
estate portfolio by issuing long-term debt to finance long-term assets. The
CDO
debt is non-recourse to the Company; therefore, the Company’s losses are limited
to its equity investment in the CDO. The CDO debt is also hedged to protect
the
Company from an increase in short-term interest rates. At March 31, 2007, over
67% of the estimated fair value of the Company’s subordinated CMBS was match
funded in the Company's CDOs in this manner. The Company retained 100% of the
equity of CDOs I, II, III, HY3 and Euro (each as defined below) and recorded
the
transactions on its consolidated financial statements as secured
financing.
The
table
below summarizes the Company’s CDO collateral and debt at March 31,
2007.
|
|
Collateral
at March 31, 2007
|
|
Debt
at March 31, 2007
|
|
|
|
|
|
Adjusted
Purchase
Price
|
|
Loss
Adjusted
Yield
|
|
Adjusted
Issue
Price
|
|
Weighted
Average
Cost
of
Funds *
|
|
Net
Spread
|
|
CDO
I
|
|
$
|
456,839
|
|
|
7.99
|
%
|
$
|
405,490
|
|
|
7.23
|
%
|
|
0.77
|
%
|
CDO
II
|
|
|
287,941
|
|
|
7.60
|
%
|
|
291,261
|
|
|
5.76
|
%
|
|
1.85
|
%
|
CDO
III
|
|
|
345,156
|
|
|
7.18
|
%
|
|
366,019
|
|
|
5.22
|
%
|
|
1.96
|
%
|
CDO
HY3
|
|
|
416,706
|
|
|
9.74
|
%
|
|
402,089
|
|
|
6.31
|
%
|
|
3.43
|
%
|
Euro
CDO
|
|
|
330,448
|
|
|
7.79
|
%
|
|
347,715
|
|
|
4.50
|
%
|
|
3.29
|
%
|
Total
**
|
|
$
|
1,837,090
|
|
|
8.14
|
%
|
$
|
1,812,574
|
|
|
5.68
|
%
|
|
2.28
|
%
|
*
Weighted Average Cost of Funds is the current cost of funds plus hedging
expenses.
**
The
Company chose not to sell $13,069 of par of CDO III debt rated BB and $12,500
of
par of Euro CDO debt rated BB
Real
Estate Credit Profile of Below Investment Grade CMBS
The
Company views its below investment grade CMBS investment activity as two
portfolios: Controlling Class CMBS and other below investment grade CMBS. The
Company considers the CMBS securities where it maintains the right to influence
the foreclosure/workout process on the underlying loans its controlling class
CMBS (“Controlling Class”). The distinction between the two is in the rights the
Company obtains with its investment in Controlling Class CMBS. Controlling
Class
rights allow the Company to influence the workout and/or disposition of defaults
that occur in the underlying loans. These securities absorb the first losses
realized in the underlying loan pools. The coupon payment on the non-rated
security also can be reduced for special servicer fees charged to the trust.
The
next highest rated security in the structure then generally will be downgraded
to non-rated and become the first to absorb losses and expenses from that point
on. At March 31, 2007, the Company owned 33
trusts
where it is in the first loss position and is designated as the controlling
class representative by owning the lowest rated or non-rated CMBS class. The
total par of the loans underlying these securities was $49,811,289. At March
31,
2007, subordinated Controlling Class CMBS with a par of $1,115,314 were included
on the Company’s consolidated statement of financial condition and subordinated
Controlling Class CMBS with a par of $694,727 were held as collateral for CDO
HY1 and CDO HY2.
The
Company’s other below investment grade CMBS have more limited rights associated
with its ownership to influence the workout and/or disposition of underlying
loan defaults. The total par of the Company’s other below investment grade CMBS
at March 31, 2007 was $170,020; the average credit protection, or subordination
level, of this portfolio is 1.08%.
The
Company’s investment in its subordinated Controlling Class CMBS securities by
credit rating category at March 31, 2007 was as follows:
|
|
Par
|
|
Estimated
Fair
Value
|
|
Dollar
Price
|
|
Adjusted
Purchase
Price
|
|
Dollar
Price
|
|
Weighted
Average
Subordination
Level
|
|
BB+
|
|
|
194,947
|
|
|
175,003
|
|
|
89.77
|
|
|
162,197
|
|
|
83.18
|
|
|
3.49
|
%
|
BB
|
|
|
146,805
|
|
|
122,031
|
|
|
83.12
|
|
|
121,075
|
|
|
82.46
|
|
|
2.56
|
%
|
BB-
|
|
|
148,236
|
|
|
114,141
|
|
|
77.00
|
|
|
107,356
|
|
|
72.41
|
|
|
2.93
|
%
|
B+
|
|
|
78,006
|
|
|
54,858
|
|
|
70.33
|
|
|
52,259
|
|
|
66.67
|
|
|
2.21
|
%
|
B
|
|
|
107,961
|
|
|
72,523
|
|
|
67.18
|
|
|
65,873
|
|
|
60.60
|
|
|
1.80
|
%
|
B-
|
|
|
86,759
|
|
|
49,202
|
|
|
56.71
|
|
|
44,870
|
|
|
51.70
|
|
|
1.24
|
%
|
CCC
|
|
|
22,314
|
|
|
8,412
|
|
|
37.70
|
|
|
8,260
|
|
|
37.02
|
|
|
0.88
|
%
|
NR
|
|
|
330,286
|
|
|
108,188
|
|
|
32.76
|
|
|
98,862
|
|
|
29.93
|
|
|
n/a
|
|
Total
|
|
|
1,115,314
|
|
|
704,359
|
|
|
63.15
|
|
|
660,752
|
|
|
59.17
|
|
|
|
|
The
Company’s investment in its subordinated Controlling Class CMBS securities by
credit rating category at December 31, 2006 was as follows:
|
|
Par
|
|
Estimated
Fair
Value
|
|
Dollar
Price
|
|
Adjusted
Purchase
Price
|
|
Dollar
Price
|
|
Weighted
Average
Subordination
Level
|
|
BB+
|
|
$
|
158,220
|
|
$
|
142,415
|
|
|
90.01
|
|
$
|
130,966
|
|
|
82.77
|
|
|
3.51
|
%
|
BB
|
|
|
135,874
|
|
|
116,085
|
|
|
85.44
|
|
|
111,000
|
|
|
81.69
|
|
|
2.81
|
%
|
BB-
|
|
|
120,226
|
|
|
94,256
|
|
|
78.40
|
|
|
86,317
|
|
|
71.80
|
|
|
3.13
|
%
|
B+
|
|
|
71,277
|
|
|
51,030
|
|
|
71.59
|
|
|
47,861
|
|
|
67.15
|
|
|
2.05
|
%
|
B
|
|
|
88,217
|
|
|
60,237
|
|
|
68.28
|
|
|
52,988
|
|
|
60.07
|
|
|
1.88
|
%
|
B-
|
|
|
66,160
|
|
|
37,680
|
|
|
56.95
|
|
|
35,001
|
|
|
52.90
|
|
|
1.28
|
%
|
CCC
|
|
|
9,671
|
|
|
3,823
|
|
|
39.53
|
|
|
3,596
|
|
|
37.19
|
|
|
0.88
|
%
|
NR
|
|
|
260,332
|
|
|
81,480
|
|
|
31.30
|
|
|
73,842
|
|
|
28.36
|
|
|
n/a
|
|
Total
|
|
$
|
909,977
|
|
$
|
587,006
|
|
|
64.51
|
|
$
|
541,571
|
|
|
59.54
|
|
|
|
|
Future
delinquencies and losses may cause the par reductions and cause the Company
to
conclude that a change in loss adjusted yield is required along with a
write-down of the adjusted purchase price through the income statement as
required by EITF 99-20. During the three months ended March 31, 2007, the loan
pools were paid down by $377,855. Pay down proceeds are distributed to the
highest rated CMBS class first and reduce the percent of total underlying
collateral represented by each rating category.
As
the
portfolio matures and expected losses occur, subordination levels of the lower
rated classes of a CMBS investment will be reduced. This may cause the lower
rated classes to be downgraded, which would negatively affect their estimated
fair value and therefore the Company’s net asset value. Reduced estimated fair
value would negatively affect the Company’s ability to finance any such
securities that are not financed through a CDO or similar matched funding
vehicle. In some cases, securities held by the Company may be upgraded to
reflect seasoning of the underlying collateral and thus would increase the
estimated fair value of the securities. During the three months ended March
31,
2007, three securities in 33 of the Company’s Controlling Class CMBS were
upgraded by at least one rating agency and none were downgraded. Additionally,
at least one rating agency upgraded 26 of the Company’s non-Controlling Class
commercial real estate securities.
As
part
of its underwriting process, the Company assumes a certain amount of loans
will
incur losses over time. In performing continuing credit reviews on the 33
Controlling Class trusts, the Company estimates that specific losses totaling
$580,164 related to principal of the underlying loans will not be recoverable,
of which $255,486 is expected to occur over the next five years. The total
loss
estimate of $580,164 represents 1.2% of the total underlying loan pools. Due
to
falling delinquency rates in the CMBS market, the Company no longer assumes
an
additional layer of unassigned losses. Previously, the Company assumed ten
to
forty basis points of additional defaults would occur with a 35% loss severity
and a one-year recovery period. The effect of this change is to reduce total
losses assumed by 15 to 62 basis points, depending on the transaction.
The
Company considers delinquency information from the Lehman Brothers Conduit
Guide
to be the most relevant benchmark to measure credit performance and market
conditions applicable to its Controlling Class CMBS holdings. The year of
issuance, or vintage year, is important, as older loan pools will tend to have
more delinquencies than newly underwritten loans. The Company owns Controlling
Class CMBS issued in 1998, 1999, and 2001 through 2007. Comparable delinquency
statistics referenced by vintage year as a percentage of par outstanding at
March 31, 2007 are shown in the table below:
Vintage
Year
|
|
Underlying
Collateral
|
|
Delinquencies
Outstanding
|
|
Lehman
Brothers
Conduit
Guide
|
|
1998
|
|
$
|
5,035,941
|
|
|
0.59
|
%
|
|
0.85
|
%
|
1999
|
|
|
563,316
|
|
|
1.13
|
%
|
|
0.93
|
%
|
2001
|
|
|
826,673
|
|
|
0.00
|
%
|
|
0.76
|
%
|
2002
|
|
|
1,061,800
|
|
|
1.43
|
%
|
|
0.94
|
%
|
2003
|
|
|
2,078,722
|
|
|
0.89
|
%
|
|
0.33
|
%
|
2004
|
|
|
6,529,492
|
|
|
0.22
|
%
|
|
0.21
|
%
|
2005
|
|
|
12,084,033
|
|
|
0.05
|
%
|
|
0.17
|
%
|
2006
|
|
|
13,704,496
|
|
|
0.21
|
%
|
|
0.06
|
%
|
2007
|
|
|
7,926,816
|
|
|
0.00
|
%
|
|
0.00
|
%
|
Total
|
|
$
|
49,811,289
|
|
|
0.24
|
%*
|
|
0.23
|
%* |
* Weighted average based on current principal balance.
Delinquencies
on the Company’s CMBS collateral as a percent of principal are in line with
expectations and are consistent with comparable data provided in the Lehman
Brothers Conduit Guide. These seasoning criteria generally will adjust for
the
lower delinquencies that occur in newly originated collateral. See Item 7A
-
"Quantitative and Qualitative Disclosures About Market Risks" for a detailed
discussion of how delinquencies and loan losses affect the Company.
The
following table sets forth certain information relating to the aggregate
principal balance and payment status of delinquent commercial mortgage loans
underlying the Controlling Class CMBS held by the Company at March 31,
2007:
|
|
March
31, 2007
|
|
|
|
Principal
|
|
Number
of
Loans
|
|
%
of
Collateral
|
|
Past
due 30 days to 60 days
|
|
$
|
14,699
|
|
|
3
|
|
|
0.03
|
%
|
Past
due 60 days to 90 days
|
|
|
37,845
|
|
|
6
|
|
|
0.08
|
%
|
Past
due 90 days or more
|
|
|
33,957
|
|
|
10
|
|
|
0.07
|
%
|
Real
Estate owned
|
|
|
29,226
|
|
|
12
|
|
|
0.06
|
%
|
Foreclosure
|
|
|
4,236
|
|
|
1
|
|
|
0.01
|
%
|
Total
Delinquent
|
|
$
|
119,963
|
|
|
32
|
|
|
0.24
|
%
|
Total
Collateral Balance
|
|
$
|
49,811,289
|
|
|
|
|
|
|
|
Of
the 32
delinquent loans at March 31, 2007, 12 loans were real estate owned and being
marketed for sale, one loan was in foreclosure and the remaining 19 loans were
in some form of workout negotiations. The Controlling Class CMBS owned by the
Company have a delinquency rate of 0.24%, which is consistent with industry
averages. During 2007, the underlying collateral experienced early payoffs
of
$377,885 representing 0.76% of the year-end pool balance. These loans were
paid
off at par with no loss. Aggregate losses related to the underlying collateral
of $11,849 were realized during three months ended March 31, 2007. This brings
cumulative realized losses to $121,298, which is 2.04% of total estimated
losses. These losses include special servicer and other workout expenses. This
experience to date is in line with the Company's loss expectations. Realized
losses and special servicer expenses are expected to increase on the underlying
loans as the portfolio matures. Special servicer expenses are also expected
to
increase as portfolios mature.
To
the
extent that realized losses differ from the Company’s original loss estimates,
it may be necessary to reduce or increase the projected yield on the applicable
CMBS investment to better reflect such investment’s expected earnings net of
expected losses, from the date of purchase. While realized losses on individual
assets may be higher or lower than original estimates, the Company currently
believes its aggregate loss estimates and yields remain
appropriate.
The
Company manages its credit risk through disciplined underwriting,
diversification, active monitoring of loan performance and exercise of its
right
to influence the workout process for delinquent loans as early as possible.
The
Company maintains diversification of credit exposures through its underwriting
process and can shift its focus in future investments by adjusting the mix
of
loans in subsequent acquisitions. The comparative profiles of the loans
underlying the Company’s CMBS by property type at March 31, 2007 and December 31
2006 were as follows:
|
|
March
31, 2007 Exposure
|
|
December
31, 2006 Exposure
|
|
Property
Type
|
|
Collateral
Balance
|
|
%
of
Total
|
|
Collateral
Balance
|
|
%
of
Total
|
|
Office
|
|
$
|
16,223,902
|
|
|
32.6
|
%
|
$
|
13,415,671
|
|
|
31.6
|
%
|
Retail
|
|
|
14,596,980
|
|
|
29.3
|
|
|
13,217,676
|
|
|
31.2
|
|
Multifamily
|
|
|
11,190,345
|
|
|
22.4
|
|
|
8,978,823
|
|
|
21.2
|
|
Industrial
|
|
|
3,778,795
|
|
|
7.6
|
|
|
3,332,194
|
|
|
7.9
|
|
Lodging
|
|
|
3,155,024
|
|
|
6.3
|
|
|
2,726,441
|
|
|
6.4
|
|
Healthcare
|
|
|
438,207
|
|
|
0.9
|
|
|
305,612
|
|
|
0.7
|
|
Other
|
|
|
428,036
|
|
|
0.9
|
|
|
422,284
|
|
|
1.0
|
|
Total
|
|
$
|
49,811,289
|
|
|
100
|
%
|
$
|
42,398,701
|
|
|
100
|
%
|
At
March
31, 2007, the estimated fair value of the Company’s holdings of subordinated
Controlling Class CMBS is $44,405 higher than the adjusted cost for these
securities which consists of a gross unrealized gain of $53,174 and a gross
unrealized loss of $8,769. The adjusted purchase price of the Company’s
subordinated Controlling Class CMBS portfolio at March 31, 2007 represents
approximately 59.2% of its par amount. The estimated fair value of the Company’s
subordinated Controlling Class CMBS portfolio at March 31, 2007 represents
approximately 63.2% of its par amount. As the portfolio matures, the Company
expects to recoup the $8,769 of unrealized loss, provided that the credit losses
experienced are not greater than the credit losses assumed in the projected
cash
flow analysis. At March 31, 2007, the Company believed there has been no
material deterioration in the credit quality of its portfolio below current
expectations.
The
Company’s interest income calculated in accordance with EITF 99-20 for its CMBS
is computed based upon a yield, which assumes credit losses will occur. The
yield to compute the Company’s taxable income does not assume there would be
credit losses, as a loss can only be deducted for tax purposes when it has
occurred. This is the primary difference between the Company’s income in
accordance with accounting principles generally accepted in the United States
of
America (“GAAP”) and taxable income. As a result, for the years 1998 through
2007, the Company’s GAAP income was approximately $44,431 lower than its taxable
income.
Commercial
Real Estate Loan Activity
The
Company's commercial real estate loan portfolio generally emphasizes larger
transactions located in metropolitan markets located in the United States and
Europe, as compared to the typical loan in the CMBS portfolio.
The
following table summarizes the Company’s commercial real estate loan portfolio
by property type at March 31, 2007 and December 31, 2006:
|
|
Loan
Outstanding
|
|
Weighted
Average
|
|
|
|
March
31, 2007
|
|
December
31, 2006
|
|
Yield
|
|
Property
Type
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
2007
|
|
2006
|
|
Office
|
|
$
|
133,449
|
|
|
19.8
|
%
|
$
|
130,016
|
|
|
27.0
|
%
|
|
8.3
|
%
|
|
8.2
|
%
|
Residential
|
|
|
121,572
|
|
|
18.0
|
|
|
57,917
|
|
|
12.0
|
|
|
9.4
|
|
|
10.7
|
|
Retail
|
|
|
319,632
|
|
|
47.4
|
|
|
194,938
|
|
|
40.5
|
|
|
7.2
|
|
|
7.7
|
|
Hotel
|
|
|
38,402
|
|
|
5.7
|
|
|
38,899
|
|
|
8.1
|
|
|
10.1
|
|
|
10.0
|
|
Storage
|
|
|
33,912
|
|
|
5.0
|
|
|
34,009
|
|
|
7.1
|
|
|
9.0
|
|
|
9.0
|
|
Industrial
|
|
|
19,360
|
|
|
2.9
|
|
|
19,317
|
|
|
4.0
|
|
|
9.1
|
|
|
9.1
|
|
Other
Mixed Use
|
|
|
7,767
|
|
|
1.2
|
|
|
6,649
|
|
|
1.3
|
|
|
8.7
|
|
|
8.7
|
|
Total
|
|
$
|
674,094
|
|
|
100.0
|
%
|
$
|
481,745
|
|
|
100.0
|
%
|
|
8.1
|
%
|
|
8.6
|
%
|
Included
in the table above are non-U.S. dollar denominated commercial real estate loans
with a carrying value of $380,810 and $243,377 at March 31, 2007 and December
31, 2006, respectively. The Company finances its non-U.S. dollar denominated
loans by borrowing in the applicable local currency and hedging the un-financed
portion.
During
the first quarter of 2007, the Company purchased two U.S dollar denominated
commercial real estate loans with a total cost of $52,663 and a principal
balance of $52,725, three Euro denominated commercial real estate loans with
a
total cost of €75,502 ($98,296) and a principal balance totaling €76,727, one
Swiss Franc denominated loan with a cost of CHF23,804 ($14,724) and a principal
balance of CHF23,923,and an additional investment in Carbon II of $15,615.
During the quarter ended March 31, 2007, the Company received repayments of
commercial real estate loans in the aggregate amount of $9,478.
The
Company's investments in Carbon Capital Funds also invest in commercial real
estate loans. For the quarter ended March 31, 2007, the Company recorded $3,986
of income for the Carbon Capital Funds. Carbon II increased its investment
in
U.S. commercial real estate loans by originating three loans for a total
investment of $95,168 during the first quarter of 2007. Paydowns in Carbon
Capital Funds during the quarter totaled $130,545 and Carbon II sold one loan
with a carrying value of $24,500. As loans are repaid or sold, Carbon II has
redeployed capital into acquisitions of additional loans for the portfolio.
The
Carbon I investment period has expired and no new portfolio additions are
expected.
The
Company's investments in the Carbon Capital Funds are as follows:
|
|
March
31,
2007
|
|
December
31,
2006
|
|
Carbon
I
|
|
$
|
3,984
|
|
$
|
3,144
|
|
Carbon
II
|
|
|
85,274
|
|
|
69,259
|
|
|
|
$
|
89,258
|
|
$
|
72,403
|
|
At
March
31, 2007, all commercial real estate loans owned directly by the Company were
performing in line with expectations. As previously reported, investments
held by Carbon II include a $24,546 commercial real estate mezzanine loan which
defaulted during July 2006. The default was subsequently cured. The
underlying property is a hotel located in the South Beach area of Miami,
Florida. The loan matured in March 2007, and the borrower failed to repay
the loan triggering a maturity default. The borrower is in advanced
discussions with a lender regarding a refinance. Based on credit analysis
performed for this property, Carbon II believes a loan loss reserve is not
necessary at this time.
As
previously reported, two other loans held by Carbon II defaulted. The
aggregate carrying value of the two loans on Carbon II’s consolidated financial
statements is $24,000 ($12,000 per loan). The underlying properties are
Florida multi-family assets being converted to condominiums. Regarding the
336-unit property in Orlando, Carbon II is negotiating a workout arrangement
with the borrower, whereby Carbon II will forebear from taking title and will
make all advances necessary to operate the property and service the first
mortgage. The borrower will continue to hold title and implement its new
sales strategy. Since its implementation in March, 15 units have been sold
and closed. An additional 65 units are under contract with deposits and 75
contracts are being prepared. Based on credit analysis performed for this
property, Carbon II believes a loan loss reserve is not necessary at this time.
Regarding
the 216-unit property in Boynton Beach, the borrower was not able to achieve
sufficient condominium sales to complete the condominium conversion. The
borrower defaulted on its loan. Carbon II has taken title to the property,
hired independent managing agent and intends to operate it as a rental property
while preparing the property for sale. Based on the credit analysis
performed for this property, at December 31, 2006, Carbon II established a
loan
loss reserve of $5,180 for the loan, of which the Company’s share is
$1,361. Carbon II determined that no change to the loan loss reserve was
necessary at March 31, 2007. All financial information with respect to the
Carbon Capital Funds was reported by the Carbon Capital Funds.
Commercial
Real Estate
At
March
31, 2007, the Company had invested an aggregate of $100,000 in BlackRock Diamond
Property Fund, Inc. (“BlackRock Diamond”). BlackRock Diamond is a private real
estate investment trust (“REIT”) managed by BlackRock Realty Advisors, Inc., a
subsidiary of the Company’s Manager. BlackRock Diamond's investment objective is
to seek a high risk adjusted return through "value-added" capital appreciation
and current income on properties throughout the United States. This means that
BlackRock Diamond focuses on operating properties that will be repositioned,
renovated, or expanded to achieve maximum returns. Part of the investment
strategy includes a budgeted amount of capital expenditures that are used to
improve the value of the investment and realize the full value potential of
a
given property. BlackRock Diamond relies on its manager's extensive
relationships in the real estate markets to source opportunities. BlackRock
Diamond focuses on large urban locations where it believes the real estate
equity markets will outperform.
BlackRock
Diamond is an open-end fund. As such, it may allow shares to be redeemed at
a
price equal to its quarter-end net asset value upon 60 days’ notice. The assets
are subject to quarterly appraisals with one independent appraisal done
annually. The Company does not pay a separate management or incentive fee to
the
Manager for management services associated with its investment in BlackRock
Diamond.
The
Company had a 18% ownership in BlackRock Diamond at March 31, 2007 and recorded
$5,970 of income during the three months ended March 31, 2007 with respect
to
this investment under the equity method. At March 31, 2007, the Company had
no
remaining capital commitments to BlackRock Diamond.
For
the
quarter ended March 31, 2007, the Company recorded $5,970 of income, consisting
of $214 of current income and $5,756 of unrealized gains on the underlying
portfolio assets. At March 31, 2007, BlackRock Diamond’s portfolio consisted of
54 assets with a total estimated market value of approximately $829,141. All
financial information relating to this investment was reported by BlackRock
Diamond.
The
Company has an indirect investment in a commercial real estate development
fund
located in India. At March 31, 2007, the Company’s capital committed was
$11,000, of which $3,850 had been drawn. The entity conducts its operations
in
the local currency, Indian Rupees.
II. Results
of Operations
Interest
Income: The
following tables set forth information regarding interest income from certain
of
the Company’s interest-earning assets.
|
|
For
the Three Months
Ended
March 31,
|
|
Variance
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
%
|
|
Commercial
real estate securities
|
|
$
|
45,881
|
|
$
|
37,791
|
|
$
|
8,090
|
|
|
21.4
|
%
|
Commercial
mortgage loan pools
|
|
|
13,132
|
|
|
13,227
|
|
|
(95
|
)
|
|
(0.7
|
)
|
Commercial
real estate loans
|
|
|
11,166
|
|
|
8,015
|
|
|
3,151
|
|
|
39.3
|
|
RMBS
|
|
|
2,299
|
|
|
3,030
|
|
|
(731
|
)
|
|
24.1
|
|
Cash
and cash equivalents
|
|
|
924
|
|
|
337
|
|
|
587
|
|
|
174.2
|
|
Total
|
|
$
|
73,402
|
|
$
|
62,400
|
|
$
|
11,002
|
|
|
17.6
|
%
|
The
following table reconciles interest income and total income for the three months
ended March 31, 2007, and 2006.
|
|
For
the Three Months
Ended
March
31,
|
|
Variance
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
%
|
|
Interest
income
|
|
$
|
73,402
|
|
$
|
62,400
|
|
$
|
11,002
|
|
|
17.6
|
%
|
Earnings
from BlackRock Diamond
|
|
|
5,970
|
|
|
5,542
|
|
|
428
|
|
|
7.7
|
|
Earnings
from Carbon I
|
|
|
840
|
|
|
706
|
|
|
134
|
|
|
19.0
|
|
Earnings
from Carbon II
|
|
|
3,146
|
|
|
3,095
|
|
|
51
|
|
|
1.6
|
|
Total
Income
|
|
$
|
83,358
|
|
$
|
71,743
|
|
$
|
11,615
|
|
|
16.2
|
%
|
For
the
three months ended March 31, 2007 versus 2006, interest income increased
$11,002, or 17.6%. The Company continued to increase its investments in
commercial real estate securities and loans, resulting in an increase of
$11,241, or 24.5%, during the three months ended March 31, 2007. Interest income
from RMBS decreased by $731, or 24.1%, due to the sale of the Company’s RMBS
positions. Income from BlackRock Diamond was $5,970 and $5,542 for the quarter
ended March, 2007 and 2006, respectively. The Company began investing in
BlackRock Diamond in the fourth quarter of 2005. BlackRock Diamond maintains
its
financial records on a fair value basis. The Company has retained such
accounting in its consolidated financial statements pursuant to EITF Issue
85-12, Retention
of Specialized Accounting for Investments in Consolidation.
Interest
Expense:
The
following table sets forth information regarding the total amount of interest
expense from certain of the Company’s borrowings and cash flow
hedges.
|
|
For
the Three Months Ended 31,
|
|
Variance
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
%
|
|
Collateralized
debt obligations
|
|
$
|
26,671
|
|
$
|
16,134
|
|
$
|
10,537
|
|
|
65.3
|
%
|
Commercial
mortgage loan pools
|
|
|
12,400
|
|
|
12,620
|
|
|
(220
|
)
|
|
1.7
|
|
Commercial
real estate securities*
|
|
|
8,362
|
|
|
8,123
|
|
|
239
|
|
|
2.9
|
|
Commercial
real estate loans
|
|
|
1,002
|
|
|
2,964
|
|
|
(1,962
|
)
|
|
66.2
|
|
RMBS
|
|
|
3,324
|
|
|
3,596
|
|
|
(272
|
)
|
|
7.6
|
|
Senior
unsecured notes
|
|
|
1,347
|
|
|
-
|
|
|
1,347
|
|
|
n/a
|
|
Junior
subordinated notes - net
|
|
|
3,280
|
|
|
2,220
|
|
|
1,060
|
|
|
47.7
|
|
Cash
flow hedges
|
|
|
(438
|
)
|
|
1,483
|
|
|
(1,921
|
)
|
|
(129.5
|
)
|
Hedge
ineffectiveness**
|
|
|
(109
|
)
|
|
(615
|
)
|
|
506
|
|
|
82.3
|
|
Total
Interest Expense
|
|
$
|
55,839
|
|
$
|
46,525
|
|
$
|
9,314
|
|
|
20.0
|
%
|
*
Includes $71 and $46 of interest expense for the three months ended
March 31, 2007 and 2006 from short-term financings of securities related to
the
consolidation of commercial mortgage loan pools.
**See
Note 11 of the consolidated financial statements, Derivative Instruments and
Hedging Activities, for a further description of the Company’s hedge
ineffectiveness.
For
the
three months ended March 31, 2007, interest expense increased $9,314, or 20.0%,
from the same three month period in 2006. The issuance of two additional CDOs
increased interest expense $10,537, or 65.3%, from the same three month period
of 2006. Hedging expenses not related to the CDOs decreased $1,921, or 129.5%,
from 2006 levels. This decrease is primarily the result of the fourth quarter
2006 de-designation of certain cash flow hedges and the resulting
reclassification of amounts in OCI that were previously being amortized. The
issuance of $75,000 of senior unsecured notes in October 2006 increased interest
expense $1,347 as compared to 2006. Interest expense from junior subordinated
notes increased $1,060, or 47.7%, because the $180,447 of junior subordinated
notes were outstanding for a full quarter in 2007.
Net
Interest Margin and Net Interest Spread from the Portfolio:
The
Company considers its interest generating portfolio to consist of its securities
available-for-sale, securities held-for-trading, commercial mortgage loans,
and
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 investment grade
securities to enhance the Company's liquidity. The Company’s equity investments,
which include the Carbon Capital Funds and BlackRock Diamond, also generate
a
significant portion of the Company’s income.
The
Company believes interest income and expense related to these assets excluding
the effects of hedge ineffectiveness and the consolidation of a VIE better
reflect the Company’s net interest margin and net interest spread from its
portfolio. Adjusted interest income and adjusted interest expense are better
indicators for both management and investors of the Company’s financial
performance over time.
The
following tables reconcile interest income and expense to adjusted interest
income and adjusted interest expense.
|
|
For
the Three Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Interest
income
|
|
$
|
73,402
|
|
$
|
62,400
|
|
Interest
expense related to the consolidation of commercial mortgage loan
pools
|
|
|
(12,400
|
)
|
|
(12,620
|
)
|
Adjusted
interest income
|
|
$
|
61,002
|
|
$
|
49,780
|
|
|
|
For
the Three Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Interest
expense
|
|
$
|
55,839
|
|
$
|
46,525
|
|
Interest
expense related to the consolidation of commercial mortgage loan
pools
|
|
|
(12,400
|
)
|
|
(12,620
|
)
|
Hedge
ineffectiveness
|
|
|
109
|
|
|
615
|
|
Adjusted
interest expense
|
|
$
|
43,548
|
|
$
|
34,520
|
|
Net
interest margin from the portfolio is annualized net interest income divided
by
the average estimated fair value of interest-earning assets. Net interest income
is total interest income less interest expense related to collateralized
borrowings. Net interest spread equals the yield on average assets for the
period less the average cost of funds for the period. The yield on average
assets is interest income divided by average amortized cost of interest earning
assets. The average cost of funds is interest expense from the portfolio divided
by average outstanding collateralized borrowings.
The
ratios below are also presented including the income from equity investments.
The Company believes the ratios including income from equity investments are
indicative of the performance of the Company’s entire portfolio.
The
following table describes the adjusted interest income, adjusted interest
expense, net interest margin and net interest spread for the Company’s
portfolio. The following interest income and interest expense amounts exclude
income and expense related to hedge ineffectiveness, and the gross-up effect
of
the consolidation of a VIE that includes commercial mortgage loan pools. The
Company believes interest income and expense excluding the effects of these
items better reflects the Company’s net interest margin and net interest spread
from the portfolio.
|
|
For
the Three Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Adjusted
interest income
|
|
$
|
61,002
|
|
$
|
49,780
|
|
Adjusted
interest expense
|
|
$
|
43,548
|
|
$
|
34,520
|
|
Adjusted
net interest income ratios
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
2.1
|
%
|
|
2.2
|
%
|
Average
yield
|
|
|
7.4
|
%
|
|
7.2
|
%
|
Cost
of funds
|
|
|
5.9
|
%
|
|
6.1
|
%
|
Net
interest spread
|
|
|
1.5
|
%
|
|
1.1
|
%
|
Ratios
including income from equity investments
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
3.1
|
%
|
|
3.4
|
%
|
Average
yield
|
|
|
8.1
|
%
|
|
8.2
|
%
|
Cost
of funds
|
|
|
5.9
|
%
|
|
6.1
|
%
|
Net
interest spread
|
|
|
2.3
|
%
|
|
2.1
|
%
|
Net
interest margin has remained relatively constant as the yield curve remained
flat and the Company continues to maintain a consistent spread between the
yield
of its assets and cost of its liabilities
Other
Expenses:
Expenses
other than interest expense consist primarily of management fees, incentive
fees
and general and administrative expenses. The table below summarizes those
expenses for the three months ended March 31, 2007 and 2006,
respectively.
|
|
For
the Three Months
Ended
March 31,
|
|
Variance
|
|
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
%
|
|
Management
fee
|
|
$
|
3,520
|
|
$
|
3,050
|
|
$
|
470
|
|
|
15.4
|
%
|
Incentive
fee
|
|
|
2,724
|
|
|
1,169
|
|
|
1,555
|
|
|
133.0
|
|
Incentive
fee- stock based
|
|
|
709
|
|
|
-
|
|
|
709
|
|
|
n/a
|
|
General
and administrative expense
|
|
|
1,305
|
|
|
1,104
|
|
|
201
|
|
|
18.2
|
|
Total
other expenses
|
|
$
|
8,258
|
|
$
|
5,323
|
|
$ |
2,935
|
|
|
55.1
|
%
|
Management
fees are based on 2% of average quarterly stockholders’ equity. The increase of
$470, or 15.4%, is due to the increase in the Company’s stockholders’ equity.
The Manager earned an incentive fee of $2,724 for the quarter ended March
31,
2007, 30% of which was paid in Common Stock, as the Company achieved the
necessary performance goals specified in the Management Agreement. The increase
in incentive fee - stock based of $709 is due to the commencement of the fee
in
the second quarter of 2006 . The fee is based on the number of common shares
outstanding as of year end. The Company accrues the incentive fee - stock based
expense each quarter based on the shares outstanding at the end of the
quarter.
General
and administrative expense is comprised of accounting agent fees, custodial
agent fees, directors' fees, fees for professional services,
insurance premiums, broken deal expenses, and due diligence costs. The increase
in general and administrative expense for the quarter ended March 31, 2007
is
primarily attributable to the Company’s new investment accounting system and
costs associated with the Company’s global expansion.
Other
Gains (Losses): During
the three months ended March 31, 2007, the
Company sold a retained CDO bond with an adjusted purchase price of $43,022,
resulting in a gain of $6,630. In addition, the Company sold eight RMBS with
an
adjusted purchase price of $128,135. These sales resulted in a gain of $546
from
six securities and a loss of $15 from the remaining two securities.
Dividends
Declared: On
March
6, 2007, the Company declared distributions to its stockholders of $0.29 per
share, payable on April 30, 2007 to stockholders of record on March 30,
2007.
Changes
in Financial Condition
Securities
available-for-sale:
The
Company's securities available-for-sale, which are carried at estimated fair
value, included the following at March 31, 2007 and December 31,
2005:
Security
Description
|
|
March
31,
2007
Estimated
Fair
Value
|
|
Percentage
|
|
December
31,
2006
Estimated
Fair
Value
|
|
Percentage
|
|
Commercial
mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS
IOs
|
|
$
|
64,541
|
|
|
2.4
|
%
|
$
|
69,352
|
|
|
2.7
|
%
|
Investment
grade CMBS
|
|
|
821,126
|
|
|
30.0
|
|
|
795,543
|
|
|
30.4
|
|
Non-investment
grade rated subordinated securities
|
|
|
792,924
|
|
|
29.0
|
|
|
686,019
|
|
|
26.2
|
|
Non-rated
subordinated securities
|
|
|
125,547
|
|
|
4.6
|
|
|
80,167
|
|
|
3.1
|
|
Credit
tenant lease
|
|
|
24,288
|
|
|
0.9
|
|
|
24,318
|
|
|
0.9
|
|
Investment
grade REIT debt
|
|
|
251,161
|
|
|
9.2
|
|
|
249,244
|
|
|
9.5
|
|
Multifamily
agency securities
|
|
|
445,980
|
|
|
16.3
|
|
|
449,827
|
|
|
17.2
|
|
CDO
investments
|
|
|
71,755
|
|
|
2.6
|
|
|
117,246
|
|
|
4.5
|
|
Total
CMBS
|
|
|
2,597,322
|
|
|
95.0
|
|
|
2,471,716
|
|
|
94.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
adjustable rate securities
|
|
|
1,677
|
|
|
0.1
|
|
|
1,774
|
|
|
0.1
|
|
Residential
CMOs
|
|
|
125,948
|
|
|
4.5
|
|
|
130,850
|
|
|
5.0
|
|
Hybrid
adjustable rate mortgages (“ARMs”)
|
|
|
10,846
|
|
|
0.4
|
|
|
11,516
|
|
|
0.4
|
|
Total
RMBS
|
|
|
138,471
|
|
|
5.0
|
|
|
144,140
|
|
|
5.5
|
|
Total
securities available-for-sale
|
|
$
|
2,735,793
|
|
|
100.0
|
%
|
$
|
2,615,856
|
|
|
100.0
|
%
|
Borrowings: As
of
March 31, 2007 and December 31, 2006, the Company's debt consisted of reverse
repurchase agreements, credit facilities, CDOs, senior unsecured notes, trust
preferred securities, and commercial mortgage loans pools collateralized by
a
pledge of most of the Company's securities available-for-sale, securities
held-for-trading, and its commercial mortgage loans. The Company's financial
flexibility is affected by its ability to renew or replace on a continuous
basis
its maturing short-term borrowings. At March 31, 2007 and December 31, 2006,
the
Company obtained financing in amounts and at interest rates consistent with
the
Company's short-term financing objectives.
Under
the
credit facilities and reverse repurchase agreements the lender retains the
right
to mark the underlying collateral to its estimated fair value. A reduction
in
the value of its pledged assets would 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
borrowings:
|
|
For
the Three Months Ended
March
31, 2007
|
|
|
|
March
31, 2007
Balance
|
|
Maximum
Balance
|
|
Range
of
Maturities
|
|
CDO
debt*
|
|
$
|
1,828,168
|
|
$
|
1,828,168
|
|
|
5.4
to 10.2 years
|
|
Commercial
mortgage loan pools
|
|
|
1,236,806
|
|
|
1,278,058
|
|
|
1.8
to 11.7 years
|
|
Reverse
repurchase agreements
|
|
|
683,050
|
|
|
808,847
|
|
|
2
to 275 days
|
|
Credit
facilities
|
|
|
156,237
|
|
|
179,799
|
|
|
12
to 321 days
|
|
Senior
unsecured notes**
|
|
|
75,000
|
|
|
75,000
|
|
|
9.8
years
|
|
Junior
subordinated notes***
|
|
|
180,477
|
|
|
180,477
|
|
|
28.9
years
|
|
*
Disclosed as adjusted issue price. Total par of the Company’s CDO debt at March
31, 2007 was $1,837,902.
**
The
senior unsecured notes can be redeemed at par by the Company beginning April
2012.
**
The
junior subordinated notes can be redeemed at par by the Company beginning in
October 2010.
The
table
above does not include interest payments on the Company’s borrowings. Such
disclosure of interest payments has been omitted because certain borrowings
require variable rate interest payments. The Company’s total interest payments
for the three months ended March 31, 2007 were $52,910.
At
March
31, 2007, the Company's borrowings had the following weighted average yields
and
range of interest rates and yields:
|
|
Reverse
Repurchase
Agreements
|
|
Lines
of
Credit
|
|
Commercial
Mortgage
Loan
Pools
|
|
Collateralized
Debt
Obligations
|
|
Junior
Subordinated
Notes
|
|
Senior
Unsecured
Notes
|
|
Total
Collateralized
Borrowings
|
|
Weighted
average yield
|
|
|
5.40
|
%
|
|
6.35
|
%
|
|
3.99
|
%
|
|
5.85
|
%
|
|
7.64
|
%
|
|
7.20
|
%
|
|
5.34
|
%
|
Interest
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
-
|
%
|
|
-
|
%
|
|
3.99
|
%
|
|
6.79
|
%
|
|
7.64
|
%
|
|
7.20
|
%
|
|
5.80
|
%
|
Floating
|
|
|
5.40
|
%
|
|
6.35
|
%
|
|
-
|
%
|
|
5.57
|
%
|
|
-
|
%
|
|
-
|
%
|
|
5.57
|
%
|
Effective
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
-
|
%
|
|
-
|
%
|
|
3.99
|
%
|
|
7.27
|
%
|
|
7.64
|
%
|
|
7.20
|
%
|
|
6.06
|
%
|
Floating
|
|
|
5.40
|
%
|
|
6.35
|
%
|
|
-
|
%
|
|
5.57
|
%
|
|
-
|
%
|
|
-
|
%
|
|
5.57
|
%
|
Hedging
Instruments:
The
Company may modify its exposure to market interest rates by entering into
various financial instruments that adjust portfolio duration. These financial
instruments are intended to mitigate the effect of changes in interest rates
on
the value of the Company’s assets and the cost of borrowing.
Interest
rate hedging instruments at March 31, 2007 and December 31, 2006 consisted
of
the following:
|
|
At
March 31, 2007
|
|
|
|
Notional
Value
|
|
Estimated
Fair
Value
|
|
Unamortized
Cost
|
|
Average
Remaining
Term
(years)
|
|
Cash
flow hedges
|
|
$
|
679,700
|
|
|
2,926
|
|
|
-
|
|
|
7.9
|
|
CDO
cash flow hedges
|
|
|
889,241
|
|
|
5,526
|
|
|
-
|
|
|
7.0
|
|
Trading
swaps
|
|
|
1,188,727
|
|
|
(39
|
)
|
|
-
|
|
|
1.9
|
|
CDO
trading swaps
|
|
|
257,879
|
|
|
266
|
|
|
-
|
|
|
5.6
|
|
CDO
LIBOR cap
|
|
|
85,000
|
|
|
131
|
|
|
1,407
|
|
|
6.2
|
|
|
|
At
December 31, 2006
|
|
|
|
Notional
Value
|
|
Estimated
Fair
Value
|
|
Unamortized
Cost
|
|
Average
Remaining
Term
(years)
|
|
Cash
flow hedges
|
|
$
|
644,200
|
|
$
|
5,048
|
|
|
-
|
|
|
7.9
|
|
CDO
cash flow hedges
|
|
|
895,499
|
|
|
8,230
|
|
|
-
|
|
|
7.2
|
|
Trading
swaps
|
|
|
1,220,000
|
|
|
2,033
|
|
|
-
|
|
|
2.1
|
|
CDO
timing swaps
|
|
|
223,445
|
|
|
212
|
|
|
-
|
|
|
6.1
|
|
CDO
LIBOR cap
|
|
|
85,000
|
|
|
(38
|
)
|
|
1,407
|
|
|
6.4
|
|
Foreign
currency agreements at March 31, 2007 and December 31, 2006 consisted of the
following:
|
|
At
March 31, 2007
|
|
|
|
Estimated
Fair
Value
|
|
Unamortized
Cost
|
|
Average
Remaining
Term
|
|
Currency
swaps
|
|
|
(410
|
)
|
|
-
|
|
|
9.0
years
|
|
CDO
currency swaps
|
|
|
537
|
|
|
-
|
|
|
11.8
years
|
|
Forwards
|
|
|
(2,685
|
)
|
|
-
|
|
|
18
days
|
|
|
|
At
December 31, 2006
|
|
|
|
Estimated
Fair
Value
|
|
Unamortized
Cost
|
|
Average
Remaining
Term
|
|
Currency
swaps
|
|
$
|
1,179
|
|
|
-
|
|
|
12.5
|
|
CDO
currency swaps
|
|
|
(1,418
|
)
|
|
-
|
|
|
12.5
|
|
Forwards
|
|
|
(2,659
|
)
|
|
-
|
|
|
10
days
|
|
Capital
Resources and Liquidity
The
Company requires capital to fund its investment activities and operating
expenses. The Company believes it currently has sufficient access to capital
resources to fund its existing business plan. The Company's capital sources
include cash flow from operations, borrowings under reverse repurchase
agreements, credit facilities, CDOs, and the issuance of preferred and common
equity securities.
The
distribution requirements under the REIT provisions of the Code limit the
Company's ability to retain earnings and thereby replenish or increase capital
committed to its operations. However, the Company believes that its access
to
significant capital resources and financing will enable the Company to meet
current and anticipated capital requirements.
The
Company believes that its existing sources of funds will be adequate for
purposes of meeting its short- and long-term liquidity needs. The Company's
ability to meet its long-term (i.e., beyond one year) liquidity requirements
is
subject to obtaining additional debt and equity financing. Any decision by
the
Company's lenders and investors to provide the Company with financing will
depend upon a number of factors, such as the Company's compliance with the
terms
of its existing credit arrangements, the Company's financial performance,
industry or market trends, the general availability of and rates applicable
to
financing transactions, such lenders' and investors' resources and policies
concerning the terms under which they make capital commitments and the relative
attractiveness of alternative investment or lending opportunities.
Certain
information with respect to the Company's borrowings at March 31, 2007 is
summarized as follows:
|
|
Reverse
Repurchase
Agreements
|
|
Credit
Facilities
|
|
Commercial
Mortgage
Loan
Pools
|
|
CDOs
|
|
Senior
Unsecured
Notes
|
|
Trust
Preferred
Securities
|
|
Total
Borrowings
|
|
Outstanding
borrowings
|
|
$
|
683,050
|
|
$
|
156,237
|
|
$
|
1,236,806
|
|
$
|
1,828,168
|
|
$
|
75,000
|
|
$
|
180,477
|
|
$
|
4,159,738
|
|
Weighted
average borrowing rate
|
|
|
5.40
|
%
|
|
6.35
|
%
|
|
3.99
|
%
|
|
5.85
|
%
|
|
7.20
|
%
|
|
7.64
|
%
|
|
5.34
|
%
|
Weighted
average remaining maturity
|
|
|
76
days
|
|
|
135
days
|
|
|
5.6
years
|
|
|
7.2
years
|
|
|
9.8
years
|
|
|
28.9
years
|
|
|
6.3
years
|
|
Estimated
fair value of assets pledged
|
|
$
|
743,688
|
|
$
|
252,056
|
|
$
|
1,257,631
|
|
$
|
2,151,645
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,405,020
|
|
At
March
31, 2007, the Company's borrowings had the following remaining
maturities:
|
|
Reverse
Repurchase
Agreements
|
|
Credit
Facilities
|
|
Commercial
Mortgage
Loan
Pools
|
|
CDOs*
|
|
Senior
Unsecured
Notes
|
|
Trust
Preferred
Securities
|
|
Total
Borrowings
|
|
Within
30 days
|
|
$
|
68,196
|
|
$
|
73,380
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
141,576
|
|
31
to 59 days
|
|
|
-
|
|
|
24,525
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
24,525
|
|
60
days to less than 1 year
|
|
|
614,854
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
614,854
|
|
1
year to 3 years
|
|
|
-
|
|
|
58,332
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
58,332
|
|
3
years to 5 years
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Over
5 years
|
|
|
-
|
|
|
-
|
|
|
1,236,806
|
|
|
1,828,168
|
|
|
75,000
|
|
|
180,477
|
|
|
3,320,451
|
|
|
|
$
|
683,050
|
|
$
|
156,237
|
|
$
|
1,236,806
|
|
$
|
1,828,168
|
|
$
|
75,000
|
|
$
|
180,477
|
|
$
|
4,159,738
|
|
* At March 31, 2007, CDOs are comprised of $405,751 of CDO debt with
a
weighted average remaining maturity of 5.5 years, $302,632 of CDO debt with
a
weighted average remaining maturity of 5.4 years, $365,547 of CDO debt with
a
weighted average remaining maturity of 6.3 years, $401,833 of CDO debt with
a
weighted average remaining maturity of 10.2 years and $352,405 of CDO debt
with
a weighted average remaining maturity of 7.5 years.
Reverse
Repurchase Agreements and Credit Facilities
Reverse
repurchase agreements are secured loans generally with a term of 90 days. The
interest rate is based on 90-day LIBOR plus a spread that is determined based
on
the asset pledged as security. The terms include a daily mark to market
provision that requires the posting of additional collateral if the value of
the
pledged asset declines. After the 90-day period expires, there is no obligation
for the lender to extend credit for an additional period. This type of financing
generally is available only for more liquid securities. The interest rate
charged on reverse repurchase agreements is usually the lowest relative to
the
alternatives due to the lower risk inherent in these transactions.
Committed
financing facilities represent multi-year agreements to provide secured
financing for a specific asset class. These facilities include a mark to market
provision requiring the Company to repay borrowings if the value of the pledged
asset declines in excess of a threshold amount. A significant difference between
committed financing facilities and reverse repurchase agreements is the term
of
the financing. A committed facility provider generally is required to provide
financing for the full term of the agreement, usually two to three years, rather
than ninety days as generally used in the reverse repurchase market. This longer
term makes the financing of less liquid assets viable.
During
the second quarter of 2007, the Company entered into a $150 million committed
dollar and non-dollar credit faculty with Lehman Commercial Paper Inc.
Outstanding borrowings bear interest at LIBOR based variable rates. The facility
matures in 60-days with two 30-day extensions available.
CDOs
Issuance
of secured term debt is generally done through a CDO offering in a private
placement. This entails creating a special purpose entity that holds assets
used
to secure the payments required of the debt issued. Asset cash flows generally
are matched with the debt service requirements over their respective lives
and
an interest rate swap is used to match the fixed or floating rate nature of
the
coupon payments where necessary. This type of transaction is usually referred
to
as "match funding" or "term financing" the assets. There is no mark to market
requirement in this structure and the debt cannot be called or terminated by
the
bondholders. Furthermore, the debt issued is non-recourse to the issuer; and
therefore permanent reductions in asset value do not affect the liquidity of
the
Company. However, since the Company expects to earn a positive spread between
the income generated by the assets and the expense of the debt issued, a
permanent impairment of any of the assets would negatively affect the spread
over time.
Junior
Subordinate Notes
During
April 2007, the Company announced the private placement of €50 million junior
subordinated notes due in 2022. The notes bear interest at a rate equal to
3-month Euribor plus 2.6%. The notes can be redeemed in whole by the Company
subject to certain provisions. The Company has the option to redeem all or
a
portion of the Notes at any time on or after April 30, 2012 at a redemption
price equal to 100% of the principal amount thereof plus accrued and unpaid
interest through but excluding the redemption date.
Preferred
Equity Issuances
The
Company may issue preferred stock from time to time as a source of long-term
or
permanent capital. Preferred stock generally has a fixed coupon and may have
a
fixed term in the form of a maturity date or other redemption or conversion
features. The preferred stockholder typically has the right to a preferential
distribution for dividends and any liquidity proceeds.
On
February 12, 2007, the Company issued $86,250 of Series D Cumulative Redeemable
Preferred Stock (“Series D Preferred Stock”), including $11,250 of Series D
Preferred Stock sold to underwriters pursuant to an over-allotment option.
The
Series D Preferred Stock will pay an annual dividend of 8.25%.
Common
Equity Issuances
Another
source of permanent capital is the issuance of common stock through a follow-on
offering. This allows investors to purchase a large block of common stock in
one
transaction. A common stock issuance can be accretive to the Company's book
value per share if the issue price per share exceeds the Company’s book value
per share. It also can be accretive to earnings per share if the Company deploys
the new capital into assets that generate a risk adjusted return that exceeds
the return of the Company's existing assets. Furthermore, earnings accretion
also can be achieved at reinvestment rates that are lower than the return on
existing assets if common stock is issued at a premium to book
value.
The
Company continuously evaluates the market for follow-on common stock offerings
as well as the available opportunities to deploy new capital on an accretive
basis. For the three months ended March 31, 2007, the Company issued 15,363
shares of Common Stock under its Dividend Reinvestment Plan. Net proceeds to
the
Company under the Dividend Reinvestment Plan were approximately
$201.
For
the
three months ended March 31, 2007, the Company issued 111,700 shares of Common
Stock in connection with a sales agency agreement with Brinson Patrick
Securities Corporation. Net proceeds to the Company were approximately $1,347.
Off-Balance
Sheet Arrangements
The
Company’s ownership of the subordinated classes of CMBS from a single issuer
gives it the right to influence the foreclosure/workout process on the
underlying loans (“Controlling Class CMBS”). FASB Staff Position FIN 46(R)-5,
Implicit
Variable Interests under FASB Interpretation No. 46
(“FIN
46(R)-5”) has certain scope exceptions, one of which provides that an enterprise
that holds a variable interest in a QSPE does not consolidate that entity unless
that enterprise has the unilateral ability to cause the entity to liquidate.
SFAS No. 140 provides the requirements for an entity to be considered a
QSPE. To maintain the QSPE exception, the trust must continue to meet the QSPE
criteria both initially and in subsequent periods. A trust’s QSPE status can be
impacted in future periods by activities by its transferors or other involved
parties, including the manner in which certain servicing activities are
performed. To the extent its CMBS investments were issued by a trust that meets
the requirements to be considered a QSPE, the Company records the investments
at
the purchase price paid. To the extent the underlying trusts are not QSPEs
the
Company follows the guidance set forth in FIN 46(R)-5 as the trusts would be
considered VIEs.
The
Company has analyzed the governing pooling and servicing agreements for each
of
its Controlling Class CMBS and believes that the terms are consistent with
the
QSPE criteria and are industry standard. However, there is uncertainty with
respect to QSPE treatment due to ongoing review by accounting standard setters,
potential actions by various parties involved with the QSPE, as discussed above,
as well as varying and evolving interpretations of the QSPE criteria under
SFAS
No. 140. Additionally, the standard setters continue to review the FIN 46(R)-5
provisions related to the computations used to determine the primary beneficiary
of a VIE. Future guidance from the standard setters may require the Company
to
consolidate CMBS trusts in which the Company has invested.
At
March
31, 2007, the Company owned securities of 33 Controlling Class CMBS trusts
with
a par of $1,115,314. The total par amount of CMBS issued by the 33 trusts was
$49,811,289. One of the Company’s 33 Controlling Class trusts does not qualify
as a QSPE and has been consolidated by the Company.
The
Company’s maximum exposure to loss as a result of its investment in these VIEs
totaled $870,833 and $762,567 at March 31, 2007 and December 31, 2006,
respectively.
In
addition, the Company has completed two securitizations that qualify as QSPE’s
under SFAS No. 140. Through CDO HY1 and CDO HY2 the Company issued non-recourse
liabilities secured by commercial related assets including portions of 17
Controlling Class CMBS. Should future guidance from the standard setters
determine that Controlling Class CMBS are not QSPE’s, the Company would be
required to consolidate the assets, liabilities, income and expense of CDO
HY1
and CDO HY2.
The
Company’s total maximum exposure to loss as a result of its investment in CDO
HY1 and CDO HY2 at March 31 2007 and December 31, 2006, respectively, was
$66,654 and $111,076.
The
Company also owns non-investment debt and preferred securities in LEAFs CMBS
I
Ltd (“Leaf”), a QSPE under SFAS No. 140. Leaf issued non-recourse liabilities
secured by investment grade commercial real estate securities. At March 31,
2007
and December 31, 2006, the Company’s total maximum exposure to loss as a result
of its investment in Leaf was $6,518 and $6,796.
Cash
Flows
Cash
provided by operating activities is net income adjusted for certain non-cash
items and changes in assets and liabilities including the Company’s trading
securities. Operating activities provided cash flows of $166,051 and $42,899
for
the three months ending March 31, 2007, and 2006, respectively. Operating cash
flow is affected by the purchase and sale of fixed income securities classified
as trading securities. Proceeds received from repayment of trading securities
also increases operating cash flows. The Company received $132,076 and $11,904
from trading securities for the three months ended March 31, 2007 and 2006,
respectively.
The
Company’s investing cash flow consists primarily of the purchase, sale, and
repayments on securities activities available for sale, commercial loan pools,
commercial mortgage loans and equity investments. The Company’s investing
activities used cash flows of $(208,374) and $(350,104), during the three months
ended March 2007 and 2006, respectively.
Net
cash
flow provided by financing activities was $29,751 and $294,239 for the three
months ended March 31, 2007 and 2006, respectively. During the three months
ended March 31, 2007, net cash provided by financing activities primarily
represented the issuance of preferred stock. During the three months ended
March
31, 2006, net cash provided by financing activities primarily represented the
issuance of junior subordinated notes and significant borrowings under reverse
repurchase agreements and credit facilities. Partially offsetting these cash
inflows during the three months ended March 31, 2007 and 2006 was, repayments
under reverse repurchase agreements and credit facilities and dividends
payments.
Transactions
with Affiliates
The
Company has a Management Agreement with the Manager, the employer of certain
directors and all of the 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. Pursuant to the Management
Agreement, the Manager formulates investment strategies, arranges for the
acquisition of assets, arranges for financing, monitors the performance of
the
Company’s assets and provides certain other advisory and managerial services in
connection with the operations of the Company. For performing these services,
the Company pays the Manager a base management fee equal to 2.0% of the
quarterly average total stockholders’ equity for the applicable
quarter.
To
provide an incentive, the Manager is entitled to receive a quarterly incentive
fee equal to 25% of the amount by which the rolling four-quarter GAAP net income
before the incentive fee exceeds the greater of 8.5% or 400 basis points over
the ten-year Treasury note multiplied by the adjusted per share issue price
of
the common stock ($11.37 per common share at March 31, 2007). Additionally,
pursuant to a resolution of the Company’s Board of Directors adopted at the
February 2006 meeting, 30% of the incentive fees earned in 2005 or after may
be
paid in shares of the Company’s Common Stock subject to certain provisions. The
Board of Directors also authorized a stock based incentive plan where one-half
of one percent of common shares outstanding at December 31st
is paid
to the Manager.
The
Company’s unaffiliated directors approved an extension of the Management
Agreement to March 31, 2008 at the Board’s March 2007 meeting.
The
following is a summary of management and incentive fees incurred for the three
months ended March 31, 2007 and 2006:
|
|
For
the Three Months
Ended
March 31,
|
|
|
|
2007
|
|
2006
|
|
Management
fee
|
|
$
|
3,520
|
|
$
|
3,050
|
|
Incentive
fee
|
|
|
2,724
|
|
|
1,169
|
|
Incentive
fee - stock based
|
|
|
709
|
|
|
-
|
|
Total
management and incentive fees
|
|
$
|
6,953
|
|
$
|
4,219
|
|
At
March
31,
2007
and 2006, respectively, management and incentive fees of $11,248 and $4,014
remain payable to the Manager and are included on the accompanying consolidated
statement of financial condition as a component of other liabilities.
In
accordance with the provisions of the Management Agreement, the Company recorded
reimbursements to the Manager of $117 for certain expenses incurred on behalf
of
the Company for the three months ended March 31, 2007, and $100 for the three
months ended March 31 2006, which are included in general and administrative
expense on the accompanying consolidated statements of operations.
The
Company has administration and accounting services agreements with the Manager.
Under the terms of the administration services agreement, the Manager provides
financial reporting, audit coordination and accounting oversight services to
the
Company. Under the terms of the accounting services agreement, the Manager
provides investment accounting services to the Company. For the three months
ended March 31, 2007 and 2006, the Company recorded administration and
investment accounting fees of $181 and $58, respectively, which are included
in
general and administrative expense on the accompanying consolidated statements
of operations.
The
special servicer on 28 of the Company's 33 Controlling Class trusts is Midland
Loan Services, Inc. ("Midland"), a wholly owned indirect subsidiary of PNC
Bank.
Midland therefore may be presumed to be an affiliate of the Manager. The
Company's fees for Midland’s services are at market rates.
On
December 13, 2005, the Company entered into a $75,000 commitment to
acquire shares of BlackRock
Diamond Property Fund (“BlackRock Diamond”).
On
February
21, 2006, the Company increased its capital commitment by an additional $25,000,
resulting in a total capital commitment of $100,000. BlackRock Diamond is a
private REIT managed by BlackRock Realty Advisors, Inc., a subsidiary of the
Manager. At
March
31, 2007, 100% of the commitment
has been called and the Company owned approximately 18% of BlackRock Diamond.
The Company does not incur any additional management or incentive fees to the
Manager as a result of its investment in BlackRock Diamond. The Company’s
investment in BlackRock Diamond at March
31,
2007
was $118,367. The Company’s unaffiliated directors approved this transaction in
September 2005.
During
2001, the Company entered into a $50,000 commitment to acquire shares of Carbon
I, a private commercial real estate income opportunity fund managed by the
Manager. The Carbon I investment period ended on July 12, 2004 and the Company’s
investment in Carbon I at March 31, 2007 was $3,984. The Company does not incur
any additional management or incentive fees to the Manager as a result of its
investment in Carbon I. On March
31,
2007,
the Company owned approximately 20% of the outstanding shares of Carbon I.
The
Company’s unaffiliated directors approved this transaction in July
2001.
The
Company entered into an aggregate commitment of $100,000 to acquire shares
of
Carbon II, a private commercial real estate income opportunity fund managed
by
the Manager. At March
31,
2007, the Company’s investment in Carbon II was $85,274 and the Company’s
remaining commitment to Carbon II is $14,726. The Company does not incur any
additional management or incentive fees to the Manager as a result of its
investment in Carbon II. The Company’s unaffiliated directors approved this
transaction in September 2004.
REIT
Status:
The
Company has elected to be taxed as a REIT and therefore must comply with the
provisions of the Code with respect thereto. Accordingly, the Company generally
will not be subject to U.S. 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 or at excise tax rates on net income or capital gains not
distributed.
During
the first quarter of 2006, the Company and certain subsidiaries elected to
have
the subsidiaries treated as taxable REIT subsidiaries. This election
permits the subsidiaries to enter into activities related to foreign investments
that may not have constituted qualifying assets generating qualifying income
for
the REIT tests.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market
Risk:
Market
risk includes 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, credit curve risk and foreign currency 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 the dynamics of the markets for commercial real estate 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 estimated fair 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 estimated fair 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 estimated fair value of the Company’s portfolio may
increase. Changes in the estimated fair 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 the LIBOR money market rates can affect the Company’s net
interest income. At March 31, 2007, all of the Company’s short-term
collateralized liabilities outside of the CDOs are floating rate based on a
market spread to 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 that such losses may exceed the amount invested in
such instruments. A hedge may not perform its intended purpose of offsetting
losses or rising interest rates. 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 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
Company monitors and manages interest rate risk based on a method that takes
into consideration the interest rate sensitivity of the Company’s assets and
liabilities, including preferred stock. The Company’s objective is to acquire
assets and match fund the purchase so that interest rate risk associated with
financing these assets is reduced or eliminated. The primary risks associated
with acquiring and financing these assets under 90-day repurchase agreements
and
committed borrowing facilities are mark-to-market risk and short-term rate
risk.
Certain secured financing arrangements provide for an advance rate based upon
a
percentage of the estimated fair value of the asset being financed. Market
movements that cause asset values to decline would require a margin call or
a
cash payment to maintain the relationship between asset value and amount
borrowed. A cash flow based CDO is an example of a secured financing vehicle
that does not require a mark-to-market to establish or maintain a level of
financing. When financed assets are subject to a mark-to-market margin call,
the
Company carefully monitors the interest rate sensitivity of those assets. The
duration of the assets financed which are subject to a mark-to-market margin
call was 2.0 years based on net asset value at March 31, 2007. This means that
a
100 basis point increase in interest rates would cause a margin call of
approximately $15,000.
Net
interest income sensitivity to changes in interest rates is analyzed using
the
assumptions that interest rates, as defined by the LIBOR curve, increase or
decrease and that the yield curves of the LIBOR rate shocks will be parallel
to
each other.
Regarding
the table below, all changes in net interest income 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 at March
31,
2007.
Actual
results could differ significantly from these estimates.
Projected
Percentage Change In Earnings
Per
Share Given LIBOR Movements
|
Change
in LIBOR,
+/-
Basis Points
|
Projected
Change in
Earnings
per Share
|
-200
|
$(0.01)
|
-100
|
$(0.01)
|
-50
|
$(0.00)
|
Base
Case
|
|
+50
|
$0.00
|
+100
|
$0.01
|
+200
|
$0.01
|
The
Company’s GAAP book value incorporates the estimated fair value of the Company’s
interest bearing assets but it does not incorporate the estimated fair value
of
the Company’s interest bearing fixed rate liabilities and preferred stock. The
fixed rate liabilities and preferred stock generally will reduce the actual
interest rate risk of the Company from an economic perspective even though
changes in the estimated fair value of these liabilities are not reflected
in
the Company’s reported book value. The Company focuses on economic risk in
managing its sensitivity to interest rates and maintains an economic duration
within a band of 2.0 to 5.0 years. At March 31, 2007, economic duration for
the
Company’s entire portfolio was 2.3 years. This implies that for each 100 basis
points of change in interest rates the Company’s economic value will change by
approximately 2.3%. At March 31, 2007 the Company estimates its economic value,
or net asset value of its common stock to be $723,340.
A
reconciliation of the economic duration of the Company to the duration of the
reported book value of the Company’s common stock is as follows:
Duration
- GAAP book value at March 31, 2007
|
7.8
|
Less:
|
|
|
Duration
contribution of CDO I liabilities
|
(1.1)
|
|
Duration
contribution of CDO II liabilities
|
(1.0)
|
|
Duration
contribution of CDO III liabilities
|
(0.9)
|
|
Duration
contribution of CDO HY3 liabilities
|
(0.7)
|
|
Duration
contribution of Euro CDO liabilities
|
(0.1)
|
|
Duration
contribution of Series C Preferred Stock
|
(0.0)
|
|
Duration
contribution of Series D Preferred Stock
|
(0.4)
|
|
Duration
contribution of junior subordinated notes
|
(0.7)
|
|
Duration
contribution of senior unsecured notes
|
(0.6)
|
Economic
duration at March 31, 2007
|
2.3
|
The
GAAP
book value of the Company’s common stock is $10.38 per share. As indicated in
the table above a 100 basis point change in interest rates will change reported
book value by approximately 7.8%, or $58,000. However, the duration of the
Company’s portfolio not financed with match funded debt is 2.0. This means that
a 100 basis point increase in interest rates or credit spreads would cause
a
margin call of approximately $15,000.
Credit
Risk: The
Company’s portfolios of commercial real estate assets are subject to a high
degree of credit risk. Credit risk is the exposure to loss from loan defaults.
Default rates are subject to a wide variety of factors, including, but not
limited to, property performance, property management, supply/demand factors,
construction trends, consumer behavior, regional economics, interest rates,
the
strength of the U.S. economy, and other factors beyond the control of the
Company.
All
loans
are subject to a certain probability of default. Before acquiring a Controlling
Class security, the Company will perform an analysis of the quality of all
of
the loans proposed. As a result of this analysis, loans with unacceptable risk
profiles are either removed from the proposed pool or the Company receives
a
price adjustment. The Company underwrites its Controlling Class CMBS investments
assuming the underlying loans will suffer a certain dollar amount of defaults
and these defaults will lead to some level of realized losses. Loss adjusted
yields are computed based on these assumptions and applied to each class of
security supported by the cash flow on the underlying loans. The most
significant variables affecting loss adjusted yields include, but are not
limited to, the number of defaults, the severity of loss that occurs subsequent
to a default and the timing of the actual loss. The different rating levels
of
CMBS will react differently to changes in these assumptions. The lowest rated
securities (B- or lower) are generally more sensitive to changes in timing
of
actual losses. The higher rated securities (B or higher) are more sensitive
to
the severity of losses and timing of cash flows.
The
Company generally assumes that all of the principal of a non-rated security
and
a significant portion, if not all, of CCC and a portion of B- rated securities
will not be recoverable over time. The loss adjusted yields of these classes
reflect that assumption; therefore, the timing of when the total loss of
principal occurs is the most important assumption in determining value. The
interest coupon generated by a security will cease when there is a total loss
of
its principal regardless of whether that principal is paid. Therefore, timing
is
of paramount importance because the longer the principal balance remains
outstanding, the more interest coupon the holder receives; which results in
a
larger economic return. Alternatively, if principal is lost faster than
originally assumed, there is less opportunity to receive interest coupon; which
results in a lower or possibly negative return.
If
actual
principal losses on the underlying loans exceed estimated loss assumptions,
the
higher rated securities will be affected more significantly as a loss of
principal may not have been assumed. The Company generally assumes that all
principal will be recovered by classes rated B or higher. The Company manages
credit risk through the underwriting process, establishing loss assumptions
and
careful monitoring of loan performance. After the securities have been acquired,
the Company monitors the performance of the loans, as well as external factors
that may affect their value.
Factors
that indicate a higher loss severity or acceleration of the timing of an
expected loss will cause a reduction in the expected yield and therefore reduce
the earnings of the Company. Furthermore, the Company may be required to
write-down a portion of the adjusted purchase price of the affected assets
through its consolidated statements of operations.
For
purposes of illustration, a doubling of the losses in the Company’s Controlling
Class CMBS, without a significant acceleration of those losses, would reduce
GAAP income by approximately $0.99 per share of Common Stock per year and cause
a significant write-down at the time the loss assumption is changed. The amount
of the write-down depends on several factors, including which securities are
most affected at the time of the write-down, but is estimated to be in the
range
of $0.08 to $0.28 per share based on a doubling of expected losses. A
significant acceleration of the timing of these losses would cause the Company's
net income to decrease. The Company’s exposure to a write-down is mitigated by
the fact that most of these assets are financed on a non-recourse basis in
the
Company’s CDOs, where a significant portion of the risk of loss is transferred
to the CDO bondholders. At March 31, 2007, securities with a total estimated
fair value of $2,158,105 are collateralizing the CDO borrowings of $1,822,871;
therefore, the Company’s preferred equity interest in the five CDOs is $335,234
($5.75 per share).
Asset
and Liability Management:
Asset
and liability management is concerned with the timing and magnitude of the
re-pricing and/or maturing of assets and liabilities. It is the Company’s
objective 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.
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 re-pricing within a given time period),
are used but are considered of lesser significance in the daily management
of
the Company’s portfolio. 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.
Currency
Risk:
The
Company has foreign currency rate exposures related to certain CMBS and
commercial real estate loans. The Company’s principal currency exposures are to
the Euro and British pound. Changes in currency rates can adversely impact
the
fair values and earnings of the Company’s non-U.S. holdings. The Company
mitigates this impact by utilizing local currency-denominated financings on
its
foreign investments and foreign currency forward commitments and swaps to hedge
the net exposure.
ITEM
4. CONTROLS
AND PROCEDURES
The
Company, under the direction and with the participation of its management,
including the Chief Executive Officer and the Chief Financial Officer, evaluated
the effectiveness of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of the end of the period covered by this report. Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
at March 31, 2007.
No
change
in internal control over financial reporting (as defined in Rule 13a-15(f)
under
the Exchange Act) occurred during the quarter ended March 31, 2007 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Part
II –
OTHER INFORMATION
Item
1. LEGAL
PROCEEDINGS
At
March
31, 2007, there were no pending legal proceedings in which the Company was
a
defendant or of which any of its property was subject.
Item
1A.
Risk Factors
Certain
factors may have a material adverse effect on the Company’s business, financial
condition and results of operations. For discussion of the Company’s potential
risks, refer to Part I, "Item 1A., Risk Factors", included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2006 as filed with
the U.S. Securities and Exchange Commission on March 16, 2007.
Item
2.
Unregistered Sales of Equity Securities and Use of Proceeds
During
the three months ended March 31, 2007, the Company issued 364,453 shares
of unregistered Common Stock with an aggregate value of $4,433. Pursuant to
the Management Agreement which authorizes that a portion of incentive fees
earned by the Manager may be paid in shares of the Company’s Common
Stock, the Company issued 75,298 shares to the Manager as payment of a
portion of the Manager's incentive fees. Pursuant to the portion of the
Management Agreement which authorizes that a stock based incentive plan where
one-half of one percent of common shares outstanding as of December
31st
be paid
to the Manager, 289,155 shares were issued in March 2007. The issuances of
common stock were made in reliance upon the exemption from registration under
Section 4(2) of the Securities Act.
Item
3.
Defaults Upon Senior Securities
None.
Item
4.
Submission of Matters to a Vote of Security Holders
None.
Item
5.
Other Information
None.
Item
6.
Exhibits
Exhibit
No.
|
Description |
|
|
4.1
|
Indenture, dated as of October 4, 2006,
between Anthracite Capital, Inc. and Wells Fargo Bank, N.A., as
trustee |
4.2
|
Indenture, dated as of October 17,
2006, between Anthracite Capital, Inc. and Wells Fargo Bank, N.A.,
as
trustee |
31.1
|
Certification of Chief Executive
Officer |
31.2
|
Certification of Chief Financial
Officer |
32.1
|
Section 1350 Certification of Chief
Executive Officer and Chief Financial
Officer |
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. |
|
|
|
Date: May
10, 2007 |
By: |
/s/ Christopher
A. Milner |
|
Name:
Christopher A. Milner |
|
Title:
Chief Executive Officer
(duly
authorized representative)
|
|
|
|
|
|
|
|
|
Date: May
10,
2007 |
By: |
/s/ James
J.
Lillis |
|
Name:
James J. Lillis |
|
Title:
Chief Financial Officer |